Opinion: NZ$ drops a cent as oil, gold tumble. Euro slumps; US$ firm despite weak jobs; NZ bond yields drop on insatiable bond demand

 

By Kymberly Martin

 

The NZD/USD declined overnight as the USD benefited from EUR weakness, and commodity prices tumbled. The NZD/USD shifted down from around 0.7930 to below 0.7830.

Further heavy falls (around 5%) were seen from the CRB global commodity index, taking it back to mid March lows. The WTI oil price also fell around 10%.

 

While the NZD and AUD both fell versus a strong USD, the NZD/AUD made some further gains, trading up from around 0.7370 to above 0.7410. The NZD likely gained some support from yesterday’s strong Q1 Household Labour Force Survey. Employment rebounded, unemployment fell and participation in the labour market surged.

 

The EUR suffered heavy losses overnight as the ECB left rates on hold as expected, but comments from president Trichet pared market expectations for future rate hikes. The NZD/EUR traded up from around 0.5320 to close to 0.5400.

 

In the near-term, the NZD continues to look vulnerable to any further down-shift in global risk appetite and commodity prices. Previous currency strength has seen the currency run ahead of domestic ‘fundamentals’.  Our NZD/USD ‘fair value’ remains in the 0.7400-0.7600 range.

 

Majors

 

The USD strengthened on the back of a heavy fall in the EUR, as markets revised down ECB rate expectations after the ECB meeting. The only currency able to withstand USD strength in the past 24 hours was the JPY.

 

The EUR fell sharply after the ECB kept rates at 1.5% as expected, but president Trichet dampened speculation of a further rate hike as soon as the next meeting. The market responded to Trichet’s code words on inflation. He said the ECB would monitor inflation ‘very closely’ as opposed to using the words ‘strong vigilance’. Markets revised down expectations for rate hikes by about 20bp to around 76bp for the next 12months. The EUR/USD fell from around 1.4900 to below 1.4550.

 

The USD index benefited from EUR weakness, making a steep climb from around 73.00 to above 74.00. USD data itself was something of a mixed bag with Q1 non-farm productivity surprising to the upside at 1.6% (1.1% expected). Despite this unit labour costs rose more than expected by 1.0% (0.8% expected). Weekly initial jobless claims also ticked up to 474K (410K expected).

 

The GBP/USD also slumped, dragged down by EUR weakness, and also weighed on by yet another disappointing data release. The UK services PMI for April came in at 54.3 (65.0 expected). The Bank of England kept rates on hold at the historic low of 0.50%, as expected. The GBP declined from around 1.6540 to close to 1.6370.

 

The VIX index (a proxy for risk aversion) has moved higher again, to close to 19.00. Equities had another tough night with the Euro Stoxx 50 and the S&P500 down about 0.9%. A now familiar pattern of materials and oil and gas sectors dragging down the index can be seen. The WTI oil price is down around 10% now below $100, with the silver price falling around 13% .The broad CRB global commodity index has fallen around 5% to 340, now close to levels seen in mid March.

 

Consequently, ‘commodity linked’ currencies remained under pressure again overnight with the AUD/USD falling from around 1.0750 to around 1.0560.

In the day ahead, US non-farm payrolls will be the key data focus for markets, as the benchmark indicator of the health of the US labour market. Movements in risk appetite and commodity prices will also continue to be critical.

 

Fixed Interest Markets

 

The DMO auction was again the focus for NZ interest rate markets, with demand apparently insatiable at current supply levels. Yields fell further.

Yesterday’s DMO auction was once again extremely overbid at about 8x the offer. $100m 17s saw $915m worth of bids, while $300m 19s saw $2.2b worth of bids. Interest rate markets rallied further, unable to maintain a short-lived sell off after the strong employment data yesterday morning.

 

21s yield declined another 17bp taking yields back to 5.25%. Yields on 19s fell almost 19bp to around 5.07%, while 13s yield fell around 9bp to close to 3.21%. The curve has flattened further, as a result. The yield on 21s is now back at levels seen in October last year, after precipitous falls over the last 2 weeks. Swap yields also moved lower with 10 years down around 8bp to 5.22% and 5 years down around 3bp to 4.48%. The short end continues to be quite well anchored around with the 2 year around 3.37%.

 

Overall bond yields fell further than swaps, at the long end, resulting in EFP moving back toward positive territory, now at around just -5bp. At these levels we believe there is unlikely to be EFP payers on the swap curve, so the recent flattening bias is likely to continue.

 

The rally in interest rate markets also continues to be supported by a general waning in risk appetite globally and further fall in US 10 year bond yields. They are now back at their mid-March lows around 3.16%. Markets have inched down their expectations for Fed hikes, and grapple with concerns about the robustness of the global recovery.

 

See our interactive swap rates charts here.

 

See our interactive exchange rate chart below.