NZDUSD traded in a 25pip range and sits at around 0.7160; EU political risk remains in focus as centrist candidate withdraws from French election; Strong demand for AU bonds, 11bln bond issue attracts bids of 20bln

By Jason Wong

Financial markets are fairly steady, with little movement across currencies, equity markets and bonds.  Everything is pretty much flat.  Just to labour the point, the daily changes for the USD major currency TWI, the NZD, the Euro Stoxx 600 and the S&P 500 are all within 0.1% of the previous close.  The US 10-year yield is up less than 1bp to 2.44%.  Yes, markets are open but one could be forgiven for thinking otherwise.  The Fed releases minutes of its last FOMC meeting at 8am this morning but that shouldn’t rock the boat, given Yellen’s testimony and a series of key Fed speakers since that meeting providing timelier colour.

That said, don’t delete just yet, there is some news to report.  The economic data flow remains positive, with Citigroup’s economic surprise indices across many regions probing fresh highs.  Stronger than expected US housing market data, German business confidence data and UK GDP data were the highlights, although the latter showed some downward revisions and a fall in business investment.

Political risk in Europe remains a focus for the market.  Recent polls have been showing Marine Le Pen’s chances of winning the French Presidential election increasing towards the 40% mark and beyond, making investors nervous.  The France-Germany 10-year government bond spread blew out to 84bps, before buying interest in French bonds saw the spread close back in to 75bps.   Germany 2-year yields reached a record low of minus 0.915% before settling around minus 0.88%.  And EUR/USD dipped below the 1.05 mark before recovering to 1.0550.  NZD/EUR reached around 0.6830, but has since fallen back to 0.6790.

The positive intra-day turnaround has been attributed to centrist candidate Bayrou pulling out of the race to support independent candidate Macron.  In a sign of the fickleness of the market, the deal has little implication for the likely final outcome of the election race, with Bayrou supporters likely to back Macron rather than Le Pen in a head-to-head battle anyway.  Nevertheless, the announcement was worth around 50pips for EUR.

The only other newsworthy event to report was the massive support for Australian bonds at yesterday’s syndicated deal.  Australia’s government sold AUD 11 billion of 11-year bonds in the country’s biggest-ever bond transaction, with estimated demand said to be around the AUD 20 billion mark.  The outcome suggests a lack of concern about the country’s worsening fiscal accounts and the risk around the tenure of its AAA rating.

Demand for the AUD to settle the bonds might have been a factor in pushing NZD/AUD down to a low of 0.9303 late yesterday.  That’s the lowest level since October last year.  The 0.93 level is an area of strong support, having tested that mark many times dating back to June last year and not sustainably breaking through.  The cross this morning sits around 0.9320.

NZD/USD has traded in a tight 25pip range over the past 24 hours and sits around 0.7160.  Enough said.  There’s nothing exciting on the NZ or US economic calendar to round out the week so directionless range-trading for the rest of the week might be in order.  We really need Trump to hit the headlines again to jolt the market.

The down then up move in German bond rates flowed through into the US market.  After reaching 2.39% earlier in the session, the US 10-year rate is now back up to 2.43%, about the level at the NZ close.  Any movement post the FOMC minutes is likely to be fleeting.

Local rates were little changed yesterday across the curve, with the tight ranges of late continuing.  Today, there might be some spillover from the big Australian bond sale yesterday….or not.  The NZ government tenders $150m of 2037 bonds this afternoon, which should meet solid demand.

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