NZD holds up across a backdrop of weaker risk appetite. NZ rates fall to record low levels. NZD/AUD reverses course

A slight risk-off feel has pervaded markets for the last day of trading for the month of April, with global equities weaker and global rates lower. Commodity currencies have underperformed overnight, but the NZD is the best of the pack and is hanging in there around 0.6140.

There has been plenty of news to digest and the market has taken on a slightly more cautious tone to wrap up a very good month for risk assets. The S&P500 is currently down 1.2%, but on track for a monthly gain of over 12%, the best result since January 1987.

On the policy front, the ECB made no change to its bond buying programme (worth over €1000b through to the end of the year) but ECB President Lagarde said that the Bank was fully prepared to increase the size of the programme and to adjust its composition by as much as necessary and for as long as needed. The Bank cut the cost of funding for banks in the TLTRO – enabling them to borrow from the ECB at a rate as low as minus 1% for lending to businesses and households. GDP for the euro-area area showed a record slump of 3.8% q/q in Q1, in line with expectations, and Lagarde warned that growth could fall to as low as 12% for the full year. She also probed European governments for “an ambitious and coordinated” fiscal response, something that has been lacking so far through the current crisis.

The weak GDP data across the euro area and the ECB announcement helped support a rally in European bonds, seeing Germany’s 10-year rate down 9bps to minus 0.59%. EUR initially fell after the ECB was out of the way, but rallied hard into the London 4pm fix and has held up since, around 1.0950. GBP showed a similar move in pushing up to 1.26.

For the US, initial jobless claims last week rose by 3.8m, showing further evidence of moderating over recent weeks, but still taking the running six-week total past 30m, an epic increase that highlights the severity of the sudden stop in the economy.

The Fed expanded the scope and eligibility for the Main Street Lending Programme, now including larger companies with up to 15,000 employees or up to $5b in revenue (more than 40% of the S&P500), while the minimum loan size was halved to $500k. The programme can support lending of up to $600b.

Alongside European bonds, US Treasuries have been well supported, seeing the 10-year rate fall back below 0.60% to a low of 0.58%.

Against the backdrop of lower risk appetite, the NZD has fared relatively well, largely tracking sideways. It was well bid going into the London 4pm fix, stretching up to 0.6175 before retreating back down to 0.6140, taking its monthly gain for April to just over 3%.

The AUD met some resistance at 0.6570 soon after the NZ close yesterday and trades down at 0.6520 this morning. Some profit-taking on short NZD/AUD positions might have been a factor in seeing the cross showing a notable rise back up through 0.94. After the sharp fall through April, some consolidation was expected and a further extension up to 0.95 would offer another chance to reinitiate short positions, on our view that the cross can fall further over the second half of the year.

Despite weaker risk appetite, JPY has been on the soft side, with USD/JPY tracking up through 107, with month-end flows likely to be the key driver. PM Abe indicated that he would extend a national state of emergency, with reports that it could last another month, extending into June. This comes as other nationals are easing restrictions.

Chinese PMI data released yesterday showed that the economy was in recovery mode, although driven from the domestic side at this point supported by government policy, with export orders evidently very weak.

The ANZ’s NZ business outlook survey confirmed that confidence and business conditions were woeful in April, even if the readings in the latter part of the month were slightly better than the early part – with the own-activity indicator improving from -61% to -47%. That reflected a glimmer of hope later in the month that lockdown restrictions would ease, as they indeed did. The Chinese proverb "A journey of a thousand miles begins with a single step" seems apt here as the economy faces a long road to recovery (unless you’re a supplier of lettuce to McDonalds or chicken to KFC, following reports of shortages due to unprecedented pent-up demand as NZ’s lockdown restrictions eased).

The RBNZ confirmed that LVR restrictions would be removed from 1 May, albeit with a review of the policy in 12 months-time.

The NZGB 2031 bond ended the month at a record low of 0.88%, down 8bps on the day and a hefty 43bps for the month, evidence of the strong impact that the RBNZ’s massive QE programme is having on the domestic rates market. NZ 5 and 10 year swap rates fell 3bps for the day, both at record lows of 0.36% and 0.78% respectively.