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Dire US economic data helps trigger a reality check. US equities, US rates lower; USD in strong demand. NZD slips back below 0.60

Currencies
Dire US economic data helps trigger a reality check. US equities, US rates lower; USD in strong demand. NZD slips back below 0.60

Risk sentiment has soured, evident in lower equity markets, lower US Treasury yields and broadly based USD strength, with the commodity currencies significantly underperforming.

After the strong run in risk assets of late, a bit of a reality check has set in.  This has felt overdue, but some poor US economic data and a focus on the US earnings season has helped kick-start the process. The S&P500 is currently down about 2%, eating into yesterday’s gains, while the Euro Stoxx 600 index fell 3.3%. The US 10-year Treasury rate is down over 11bps to 0.64%, Germany’s 10 year rate is down 9bps to minus 0.47% and, in a classic risk-off move, yields for the troubled euro-area nations such as Italy and Spain are higher, with the lack of support for jointly issued “corona bonds” not helping.

Energy shares are leading the way for the fall in US equities, as oil prices probe a fresh 18-year low. The EIA reported that US crude inventories surged by almost 20m barrels, while gasoline consumption dropped to its lowest on record. The data highlighted that production was far too high amidst the collapse in global demand, and reminded traders that the production cuts by OPEC+ only go partway towards correcting the current excess supply conditions. WTI crude fell to a fresh low of USD19.20, but has settled around $20.

Bank of America and Citigroup shares dropped after their earnings reports, even as they recorded strong trading profits, joining other banks in provisioning for big loan losses. A new accounting standard requires banks to set aside provisions earlier in a cycle.

US data showed the pummelling being dealt to the economy from the stay-at-home orders, with record falls across a number of indicators. Retail sales collapsed by a record 8.7% m/m in March, driven by autos, industrial production plunged 5.4% m/m in March and business survey indicators also showed record plunges, with the Empire State index (NY) down to minus 78 and the NAHB housing index dropping to 30. The only positive take-out was the control measure of retail sales that feeds into GDP increasing, as panic buying saw a 25% increase in food sales. The Fed’s Beige Book reported that “economic activity contracted sharply and abruptly across all regions”.

The risk-off mood sees the USD the best performing major currency, with broadly based gains overnight and for the full trading day. The commodity currencies are the worst performing.  The NZD has extended the losses seen during the local trading session and is now down 1.8% for the day at around 0.60, having fallen as low as 0.5955. Notwithstanding our bullish medium to long term view of the NZD outlook, we have had a cautious near-term view, wanting to see how the US earnings season fares before being more comfortable in declaring that the low in the NZD for the cycle has been reached.

The AUD is down a similar amount to 0.6330, having dipped below 0.63 overnight. After a steady decline over recent weeks, the NZD/AUD cross found some support around 0.9460.

USD/CAD is up 1.4% for the day to 1.4080. The Bank of Canada left its policy rate at the historical low of 0.25% but expanded its plans to purchase investment grade bonds and provincial bonds, with the objective of bringing more order to financial markets. Governor Poloz’s comments on QE were interesting. He noted that it was pointless to implement large scale QE now to drive longer term interest rates lower – it is better left until during the recovery phase of the cycle. The economy is expected to be 15-30% smaller by the end of Q2 compared to the end of 2019.

Falls in EUR, GBP and JPY have been more modest, which sees NZD crosses more than 1% lower for the day, after extending losses seen during the local trading session.

NZ swap rates were mildly lower across the curve yesterday, although notably the 2-year fell by 4bps to a record low of 0.42%, with lower OIS rates for the year-ahead, moving decisively below 0.2% for the second half of the year. This would imply the market expecting a tweak lower to the current OCR of 0.25%.

This morning at 11:30am RBNZ Governor Orr will be facing NZ Parliament’s Epidemic Response Committee, where he will be questioned on the Bank’s policy response and outlook and it will be livestreamed here: https://www.parliament.nz/en/pb/sc/scl/epidemic-response/news-archive/watch-public-meetings-of-the-epidemic-response-committee/.

This afternoon sees the release of the Australian labour market report, the first one that captures the early beginning of the country’s lockdown, but still too early in the process to capture its full extent. US housing market data and jobless claims figures are released tonight, the latter expected to be another huge number, taking total jobless claims over the past few weeks to around the 20m mark.

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Source: CoinDesk

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