NZD subdued – second-narrowest monthly trading range in 20 years. NZ Government signals “significant” fiscal package – expect NZ rates to open higher

Friday again saw limited moves across asset classes (oil excluded) with market participation and trading activity lighter than usual after Thanksgiving.  Friday brought to an end an exceptionally quiet November in the FX market, with the NZD recording its second-narrowest trading range in 20 years.  There is more on the cards for this week, with the final outcome from the RBNZ bank capital review announced, the US ISM surveys, payrolls, and Australian GDP all released.  Over the weekend NZ Finance Minister Grant Robertson foreshadowed a “significant” fiscal stimulus, so rates should open higher and steeper this morning. 

There’s not too much to report from Friday’s post-Thanksgiving session, with US market participation substantially reduced on a shortened trading day.  Equity markets closed modestly lower on the day (S&P500 -0.4%), perhaps due to some nervousness ahead of the December 15th deadline for the next scheduled round of US tariffs on Chinese imports.  A spokesperson for the Chinese Foreign Ministry reiterated China’s opposition to the recent legislation supporting the Hong Kong protestors.  Still, it was a good November for risk assets, with the S&P500 increasing 3.4% and hitting a new record high in the process.  US Treasury yields barely moved on Friday.

Risk markets, the NZD and AUD might be supported to start the week by the release of better-than-expected official Chinese PMI surveys released on Saturday.  The manufacturing PMI rebounded to above 50 for the first time since April while the non-manufacturing equivalent rebounded strongly to 54.4, its highest level since March.  Encouragingly, new export orders bounced to a seven-month high of 48.8, although the sub-50 reading suggests the export sector remains in contraction (albeit less so than previously).  The better Chinese data is another indicator suggesting that the manufacturing cycle has bottomed over the past few months and that global growth has reached an inflection point.  On Friday, Eurozone core inflation surprised on the upside although, at 1.3%, it remains substantially below the ECB’s 2% target and there was no market reaction. 

The only major market mover on Friday was oil, with WTI falling 5% and Brent 4.4% lower.  The expectation is that OPEC+ will delay any further supply cuts at its meeting this week and media reported that Saudi Arabia would tell other members it was no longer willing reduce its own production to compensate for above-quota production from others in the group.  The reduced liquidity on Friday might have exaggerated the moves however, and oil prices remain mid-range over the past six and twelve months.  Oil prices had reached a 2½ month high earlier in the week, consistent with the more positive signals on global growth suggested by recent data and equity markets. 

Currencies were again becalmed, with all the G10 currencies (with the exception of the oil-sensitive Norwegian krona) closing within 0.2% of the levels from 24 hours beforehand.  The USD hit a six-week high in the London afternoon, before reversing course and ending narrowly lower on the day.  All-up, the USD was around 1% stronger over the course of November. 

The NZD traded another very tight range on Friday (0.6409 – 0.6438) and closed unchanged near 0.6420.  On the month, the NZD was the second-best performing currency, up just over 1% despite the broad-based USD strength, and only lagging the Swedish krona by a small amount.  The AUD was the worst performing currency, down 1.5%, with Governor Lowe’s clarification that the effective lower bound in Australia was 0.25% and QE would be considered after that point weighing on the currency. 

The narrow NZD trading range on Friday was reflective of the extremely low volatility environment through November.  Over the course of November, the NZD/USD recorded its second smallest trading range in percentage terms over the past 20 years (0.6322 – 0.6466, just 2.24%), even after another significant RBNZ monetary policy surprise at the MPS.  NZD/USD 3-month implied currency volatility also closed at its lowest levels in 20 years on Friday while the CVIX measure of implied volatility for nine major currencies was hovering near its lowest levels on record.  Some might interpret the historically low volatility readings as a sign of market complacency, especially given the obvious risks around US-China trade relations, but for now the FX market remains in a slumber. 

There was little movement in NZ rates on Friday, with the market looking ahead to the release of the final outcome from the RBNZ bank capital review on Thursday.  The 2 year swap rate closed the week unchanged at 1.14%. 

We expect NZ rates to open higher and the curve steeper on Monday morning however after NZ Finance Minister grant Robertson signalled a major fiscal stimulus package, focused on infrastructure, in a speech to the Labour Party annual conference over the weekend.  Robertson said "we are currently finalising the specific projects that the package will fund but I can tell you this - it will be significant."  The details will be released at the Half-Year Economic and Fiscal Update (HYEFU) on 11th of December although Jacinda Ardern revealed that the government will provide $400m for state schools to upgrade their property.  Some of the questions include to what extent the government will be able to meet its infrastructure wishlist, given tight capacity constraints in the economy, especially in construction, the size of infrastructure investment planned, and whether it is funded on the Core Crown balance sheet or not. 

The domestic case for OCR cuts has weakened considerably over recent times amidst the upturn in the housing market and improvement in activity indicators in the business surveys and PMI/PSI.  The prospect of fiscal stimulus will further increase the hurdle for any additional OCR cuts and, from a rates market perspective, is likely to put supply-driven upward pressure on NZGB yields and especially the long-end of the curve.  The main risk for future OCR cuts now seems to rest on global developments, including the RBA monetary policy outlook and where the NZD ends up. 

The main event for the NZ market this week is the RBNZ bank capital review.  The market will be watching to see if the original proposal is softened in any way, possibly through a longer implementation period than the 5 years initially proposed or through the inclusion of hybrid debt to meet the new requirements.  Governor Orr and his RBNZ colleagues are also scheduled to speak Parliament’s Finance and Expenditure Committee on Wednesday morning, and there may be some monetary-policy relevant comments that emerge. 

In Australia, the RBA is expected to keep its cash rate on hold at 0.75% on Tuesday.  Our NAB colleagues look for a below-consensus 0.3% quarterly GDP growth reading on Wednesday.  Offshore, the ISM surveys are released (including manufacturing tonight), the Caixin manufacturing PMI is today, and payrolls is Friday.  We should expect more noise around US-China trade talks as well.