NZD gains post RBNZ MPS but no further progress overnight. Global rates push higher; NZ rates up 10bps or so. EUR remains under pressure

The NZD has held onto its gains made post the RBNZ MPS, but not made any further progress overnight, even with a backdrop of further improvement in risk sentiment. The other commodity currencies have seen the best gains overnight, while safe-havens underperformed. US equities have powered on to a fresh high while US rates are slightly higher.

For a change we can lead off with a different story than the coronavirus outbreak, with the NZD and rates the biggest movers over the last 24 hours. These came after The RBNZ left the OCR unchanged, but delivered a more hawkish Statement than the market expected. The Bank moved to a neutral policy bias, evidenced by a steady projected OCR track through at least the next year and removing previous language about adding further monetary stimulus if needed. While near term growth is held back by the impact of the coronavirus, projected growth from the second half of the year looks very strong, driven by the fiscal stimulus, strong house prices, low interest rates and elevated terms of trade.

The market expected the Bank to keep its policy options wide open, including the possibility of a further easing, given the uncertainty about the coronavirus. But the Bank assumed a fairly quick, temporary impact of the virus on the economy and Governor Orr sounded upbeat about the outlook, with forecasts to match.

The market was poorly positioned for the slightly more hawkish statement and the NZD is up 1% since this time yesterday and trades this morning at 0.6460, making no progress overnight, apart from touching a high of0.6488. The 0.65 mark is a level of resistance, close to the 200-day moving average. NZ swap rates were much higher across the curve, with the 2-year rate up 10bps to 1.18% and the 10-year rate up 11bps to 1.53%. While these seem like chunky moves, they should be seen in light of recent market volatility and these levels are back to where they were a couple of weeks ago, so we shouldn’t see any follow-through into retail rates. The OIS market still prices in some chance of further easing this year, with an implied cash rate of 0.90% by the end of the year. This likely reflects the risk of negative global news that drives lower rates around the world. Our projection for the OCR to be on hold all year remains unchanged.

The AUD saw some spillover from the stronger NZD and has made further gains overnight on better risk sentiment, trading this morning at 0.6740. NZD/AUD has hovered around the 0.96 mark since the RBNZ announcement, back to where it was earlier this week.

Back to news on the coronavirus – of which there hasn’t been much in the way of fresh developments – the number of cases and deaths continue to rise but their daily rate of increase continues to fall. This is giving the market some comfort that the number of cases will peak over the next couple of weeks and ultimately the economic impact will be short-lived. A Chinese drugmaker said that it has started mass-producing an experimental drug from US company Gilead Sciences that has the potential to fight the coronavirus, synthesising the active ingredient.  Never mind the potential infringement of the intellectual property “acquired” and the recently signed US-China trade agreement that was meant to change this sort of behaviour.

US equities are up 0.5%, so it’s a case of another day, another new high. Consistent with the improved risk sentiment theme, US rates are 1-3bps higher across the curve, with the 10-year Treasury yield pushing up to 1.63%. Getting some media coverage is the Greek 10-year government bond yield, rated at a junk level of BB, falling below 1% for the first time, a sign of the desperation in investors’ reach for yield in this unusual investment climate.

EUR is down 0.3%, falling as low as 1.0877, moving beyond last year’s low and trading at its lowest level since 2017.  EUR remains the funding currency of choice given its negative yields and the recent flow of economic data isn’t helping. Euro-area industrial production slumped by over 4% y/y in December and speculation has grown recently that the run of poor data will see the Governing Council consider further policy easing. NZD/EUR is up 1.2% for the day to 0.5940. Higher risk appetite sees JPY underperform, with USD/JPY back above 110.

In other news, OPEC slashed its growth estimate for global oil demand by about a third to 440,000 barrels per day for Q1 and some 230,000 barrels per day for 2020 as a whole. OPEC+ cut back on production in January but has yet to agree of new further production cuts, with Russia putting up some resistance. Reported inventory levels were also on the high side but in a sign that the fall in oil prices might have run its course for now, the key benchmarks are higher. Brent crude is up over 3% to just under USD56 per barrel.

The day ahead looks fairly quiet, with RBNZ Governor Orr speaking at Parliament’s finance and expenditure committee first up. The only data of note is the US CPI tonight, expected to show a nudge down in annual core inflation.