NZDUSD is back hovering around the 0.7250 technical reistance level; local rate curve flattens; lower oil prices drag down US Treasury yields as inflation expectations lower; GBP lower on BoE Governor's speech

By Jason Wong

With no global economic releases of note, traders were focused on central bank speakers, with the BoE’s Carney’s comments helping drive a weaker GBP.  The only other point of interest overnight was a further fall in oil prices.

Oil is under the pump, with WTI crude down over 3% at one stage, taking it below USD 43 per barrel, the lowest level since November.  Rising production in countries that are not part of the OPEC supply agreement, including the US and Libya, are more than offsetting the OPEC-led curb on production, and traders are therefore nervous.  Lower oil prices were a drag on the S&P500, which is currently down 0.4%.

Lower oil prices are also dragging down US Treasury yields, with the 2-year rate down 1bp to 1.35% and the 10-year rate down 3bps to 2.16%.  Lower oil prices are leading to lower inflation expectations, with the implied break-even inflation rate on US 10-year inflation-protected bonds down to 1.67%, the lowest level since October.  It’s an added complication to the inflation outlook and the appropriate path of monetary policy.

Fed Vice-Chair Fischer didn’t comment on US monetary policy in his speech, but yesterday Evans (voter) did.  Overnight he was interviewed on CNBC where he commented that he still thought that inflation will go up to 2% but added “I will say that the most recent inflation data make me a little nervous about that”. Evans said that the Fed could “go until December” before making judgment on another rate hike, which aligns with our expectation.  In the meantime though, the Fed is likely to kick off its balance sheet reduction programme.

Bank of England Governor Carney triggered a fall in GBP in his keenly awaited Mansion House speech.  In contrast to three of his fellow MPC members who voted for a rate increase last week, he signalled no urgency to raise interest rates anytime soon, owing to concerns about the impact Brexit will have on the economy.  GBP lost 80pips on that message to 1.2670 and was hit again after S&P said that they “don’t have to wait” until the end of the Brexit talks to review the UK’s credit standing.  GBP is now down 0.9% for the day to 1.2625, helping drive NZD/GBP up to 0.5740.

EUR has slipped alongside GBP, albeit to a much lesser extent, down only 0.2% to 1.1125.  In addition to the softer CAD on falling oil prices, the USD majors index has managed to lift about 0.25%, taking the cumulative gain since last week’s FOMC statement to 1.1%.

The NZD is up on all the major crosses, although apart from NZD/GBP, gains have been contained to within 0.1-0.5%, with much of that occurring during NZ trading hours.  NZD/USD is back hovering around the key technical resistance level of 0.7250.  The GDT dairy auction overnight was broadly in line with expectations, with average prices down by 0.8%, following the stronger-than-expected run over the last couple of months.

Yesterday, the local rates market saw small rises across the curve and a flattening bias, with the 2-year swap rate up 2.5bps to 2.23% and the 10-year rate less than 1bp higher at 3.16%.  A flow of paying interest at the short end was still working its way through the market.  This was triggered by offshore traders nervous ahead of Thursday’s OCR Review in light of the Fed, BoE and Bank of Canada’s hawkish vibes last week.

While we expect only minor tweaks to the RBNZ’s statement and no change to its neutral policy guidance, the bigger risk is that the Statement reads more dovish, than more hawkish, compared to the May MPS.  Falling oil prices and the stronger NZD will give the Bank more confidence that the recent run-up in inflation to over 2% is just a temporary phenomenon.  Softer Q1 GDP data will also be in the mix, although we’d argue that economic momentum remains sound, as indicated by recent positive business and consumer surveys, while an easing in fiscal policy has made us more optimistic on the growth path ahead.  Much stronger terms of trade – a combination of rising export prices and lower oil prices – are another added source of optimism about the NZ economic outlook.

The day ahead is another quiet one, with a sparse economic calendar.  As we go to press, the Fed’s Harker (voter) is about to deliver a speech and apart from that there isn’t much else to look forward to.

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