After what was an exceptionally quiet November, there have already been some big moves to kick off December. Global rates have increased sharply, on increased talk of fiscal stimulus. Meanwhile, equity markets and the USD have declined after a weaker-than-expected ISM manufacturing survey. The NZD is up more than 1% against the USD and has risen on all the crosses, with NZD/AUD breaking above 0.95, after Grant Robertson signalled a “significant” fiscal stimulus over the weekend.
We noted in this report yesterday that last month had been exceptionally quiet for the FX market, with November recording the narrowest trading range for the NZD since 2002, and 3-month implied currency volatility in the NZD/USD reaching its lowest level in 20 years. That stability has been broken over the past 24 hours, with the NZD rising 1.2% against the USD, to 0.65, its highest level since the start of August. Across-the-board weakness in the USD over the past 24 hours, after a weaker-than-expected US ISM survey, has contributed to the rise in the NZD. In addition, Finance Minister Grant Robertson’s speech over the weekend, in which he signalled a “significant” fiscal stimulus, has led to NZD outperformance on the crosses. The prospect of a major fiscal stimulus in NZ should reduce the risk that the RBNZ needs to cut the OCR again, at least for domestic reasons.
The NZD/AUD cross has appreciated to 0.9535, a new three-month high and its tenth consecutive daily increase. Besides the shift in NZ-AU interest rate differentials in favour of the NZD (there is a much higher likelihood of more RBA than RBNZ easing), relative commodity price movements have supported the move in the cross. The increase in NZ commodity prices in world price terms over the past few months is in the order of 8%, while in NZD terms the increase is around 11%. In contrast, the RBA’s November commodity price index released yesterday showed a 3.5% fall in SDR terms, bringing its cumulative fall since its July 2019 peak to 11.5%.
The prospect of a major NZ fiscal stimulus to be announced at the Half-Year Economic and Fiscal Update (HYEFU) next week helped drive a material increase in NZ rates yesterday. Year-ahead OCR rate cut expectations were pared back by around 5bps, with the market now pricing around a 50% chance that the RBNZ might cut the OCR again. Further along the curve, the 2-year swap rate was up 5bps, to 1.18%, and the 10-year swap rate 7bps to 1.55%, near four-month highs. The move higher in NZ rates was aided by higher global rates during yesterday’s trading session, after the upside surprise to the Chinese PMIs over the weekend.
We can expect the NZ rates move to extend further when the market opens this morning after a chunky move higher in global rates overnight. The 10 year German yield has increased 8bps to -0.28%, due both to the better-than-expected Chinese PMIs over the weekend, which should be positive for the European growth outlook, and political changes in Germany, which some see as increasing the chances of fiscal stimulus. Over the weekend, two grass-roots leftist members of the SPD (the junior coalition partner of Merkel’s CDU) were elected as co-leaders of the party. The new leaders want to raise the minimum wage and move away from the ‘balanced budget’ rule to allow for more spending on infrastructure and welfare. While Merkel has said the coalition agreement is not up for negotiation, and there is a growing risk now that the coalition falls apart, triggering new elections, the market perceives the change in SPD leadership as increasing the chance of fiscal stimulus in the future. Likewise, the Nikkei reported over the weekend that the Japanese government was preparing a fiscal stimulus package worth more than JPY10t (~$90b).
A weaker-than-expected ISM manufacturing survey, which fell to 48.1 in November, kept short-end rates reasonably anchored but had little impact on the long-end of the curve. The 2 year US Treasury yield is unchanged on the day while the 10 year yield is 5bps higher, at 1.83%. In contrast to the ISM survey, the final reading of the lesser-followed US PMI survey was higher than expected, at 52.6. The global PMI has risen above the 50 mark for the first time since April, providing further evidence, despite the ISM downside surprise, that global growth has bottomed.
US equity markets have fallen reasonably sharply over the past 24 hours, albeit from what were near-record highs. The S&P500 is down 0.8%, with the downside surprise to the ISM survey contributing to the fall, while European indices had earlier closed around 2% lower. Also lingering in the background is the December 15th deadline when US tariffs are scheduled to rise on Chinese imports. Wilbur Ross told Fox news that “if nothing happens between now and then, the president has made quite clear he’ll put the tariffs in – the increased tariffs." Trump said China still wanted to make a deal, “but we’ll see what happens.”
Separately, Trump reimposed aluminium and steel tariffs on Argentina and Brazil, purportedly for “presiding over a massive devaluation of their currencies” which hurts American farmers. The move looks aimed at Trump’s domestic support base, as it’s likely the Argentinean government would happily take some currency strength to help control the country’s super high inflation rate.
In FX markets, the USD has weakened across the board (with the exception of the CAD). The BBDXY is 0.25% weaker, its biggest daily move in a month. The fall in the USD overnight comes after it reached a six week high on Friday, before closing lower. The USD remains in its broader uptrend for now.
As mentioned earlier, the NZD has led the charge in the G10, followed by the AUD, which is 0.8% stronger to 0.6815. USD/JPY has been caught between the cross-currents of higher US Treasury yields and weaker equity markets but has fallen 0.4% to around 109. Meanwhile, the GBP has underperformed, rising only 0.1% against the USD, after weekend polls showed Labour narrowing the gap on the Conservatives heading into the election.
The RBA meets today and is expected to keep its cash rate on hold at 0.75% and maintain an easing bias. There is also another Global Dairy Trade auction tonight and we are looking for a modest (~2%) rise. Later this week, Fonterra will be providing a business update on Thursday and it is possible they could change their milk price forecast given recent moves in dairy prices. Our milk price forecast, of $7.40, is 35 cents above the midpoint of Fonterra’s current range of estimates.