Strong recovery in NZD overnight after lower NZ rates drove it weaker yesterday. US equities see rotation into value/small caps. UST yields push lower overnight

It has been a fairly uneventful overnight session, but notably the USD shows broadly based losses, while commodity currencies have outperformed. This sees the NZD regain its losses seen during the local trading session, following a sharp fall in domestic interest rates. US Treasury yields have pushed lower, with the 10-year rate reversing course and heading back down towards 0.60%.

There hasn’t been a great deal of news to digest overnight.  Countries continue to prepare to ease lockdown restrictions, with France re-opening shops from 11 May and Spain outlining a gradual easing of restrictions through the next eight weeks. Case numbers, deaths and hospitalisation rates from COVID-19 continue to move in the right direction across much of Europe and the US – downwards. Yesterday, New Zealander’s flocked to McDonalds and KFC as the country’s restrictions eased from Level 4 and Level 3, while golfers returned to the greens.  If you can’t contact me later this morning, you’ll know why.

In economic news, we’ve seen another couple of record-setting reports out of the US. Exports plunged 6.7% m/m in March, the sharpest decline since the GFC, led by autos (down 17.8%). US consumer confidence weakened significantly in April, driven by a severe deterioration in current conditions, with the massive 90-point drop in the Present Situation Index the largest on record. The expectations component rose 7 points on hope that lockdowns will soon ease. Tonight sees the release of US Q1 GDP data, expected to show the very early signs of the outbreak of COVID-19, with a 4% annualised contraction in the economy picked by the consensus and a wide dispersion of economist estimates (-10% to 0).

The US 10-year rate has trended lower overnight, but we doubt that has been driven by the economic reports and it just looks like a reversal of the upward move through the previous session. It is currently down 5bps to 0.61% after dipping below 0.60% again.

The S&P500 opened up 1.5% but is currently showing more moderate gains.  In a positive sign, there is a rotation out of the tech and growth heavyweights and into small cap and value stocks, with Energy, Industrials and Materials leading the way, while the Russell 200 index of small caps is up over 2%, following an 8.2% gain over the previous four trading sessions. Europe’s Stoxx 600 index ended the day up 1.7%.

The oil market remains jittery with the WTI June contract trading a 35% range between around USD10.10-13.70. S&P, which runs the popular GSCI Commodity Index, changed its investment policy, doing an unscheduled roll out of the June contract to avoid the same issues that happened with the May contract – oil prices going negative – as storage for physical delivery remains limited. There has been some spillover into Brent crude, which has also traded a wide range, albeit much less than that of WTI, between USD18.70-21.30.

In the currency market the USD shows broadly based losses overnight, led by gains in the commodity currencies. The NZD has touched 0.6070, without threatening the mid-month high of 0.6130. This is a marked changed of fortunes from yesterday’s local trading session, which saw the currency under downward pressure and falling below 0.60 after Westpac became the first bank to forecast the OCR going into negative territory, calling a minus 0.5% rate by November (Capital Economics, an overseas-based independent research house which likes to stand out from the consensus had already forecast the OCR going to minus 0.75%).

Westpac’s call had a significant impact on the domestic rates market, seeing November OIS fall by 7bps to 0.08% and the 2-year swap rate fall 11bps to 0.18%. There was also a strong rally across the government curve, with the RBNZ’s “go hard” QE policy having a significant impact in dragging down yields, with the 2031 bond down 10bps to a record low of 0.93%. We are sceptical of the RBNZ taking the OCR into negative territory for a number of reasons. In any case, if the Bank were to go down that treacherous path, a more likely date would be sometime after Q1 2021.

Back to the NZD, it was lower on all the key crosses yesterday, but its strong rebound overnight sees those moves reversing.  AUD has topped the 0.65 mark, meeting some resistance just above that level. The low in NZD/AUD of 0.9301 came just after the NZ close and it is back to 0.9225 this morning.

Against a soft USD, EUR climbed up to reach almost 1.0890, but has since reversed course and is back down to 1.0830. USD/JPY fell below 106.60 and has recovered to 106.90.

After US GDP data tonight, tomorrow morning the FOMC releases its latest policy announcement. There is some speculation the FOMC might move to a monthly purchasing programme for both USTs and mortgage backed securities. Up to now it has set daily targets each Friday for the week ahead. It’s hard to imagine any fresh policy initiatives to support the economy when the Fed has already gone beyond the call of duty, diving deep into areas of the market that it didn’t touch during the GFC.