Higher risk appetite evident in currency markets. NZD up more than 1%; breaks 0.61. RBNZ offers more clarity on policy guidance

There hasn’t been much follow-through from yesterday’s surge in equity prices, with the S&P500 only slightly higher, following a 0.6% fall in the Euro Stoxx 600 index, while global rates are slightly lower. However, the currency market is trading like risk appetite is notably higher, with the NZD and AUD near the top of the leaderboard and safe-haven currencies underperforming.

Yesterday’s euphoria has given way to a more cautious tone, at least for bond and equity markets. There hasn’t been a great deal of newsflow overnight. Fed Chair Powell appeared before a Senate Banking Committee where focus was on the Q&A after his opening statement was released yesterday, where he reiterated that the Fed would use its full range of tools to support the economy. He appeared reluctant to get into a political debate on the need for the government step up with more fiscal stimulus, compared to his comments a few weeks ago where he said that “this is the time to use the great fiscal power of the US”. He noted that all Fed emergency lending programmes would be up and running by the end of the month.

Treasury Secretary Mnuchin appeared before the same committee and he noted that there was not enough demand to justify offerings of 50-100 year bonds. His intention was to expand offerings in 10-20-30 year bonds to lock in low interest rates. US rates have shown little movement for the day, with Treasury yields slightly lower, no more than 2bps across the curve.

In economic news, UK jobless claims surged by 857k in April to 2 million, taking the claimant count rate to 5.8%, its highest in more than two decades. US housing starts and permits plunged by record amounts, but were in line with expectations.

ECB President Lagarde said that the ECB would continue its QE programme despite the ruling from Germany’s top court questioning the legality of the programme, saying “each national central bank in the euro area is independent and cannot take instructions from governments. This is laid down in the treaty”.

The GDT dairy auction price index gained 1%, a slightly better outcome than the small fall in pricing we expected. Wholemilk powder fell 0.5% while skim milk powder rose by 6.7%. This was the last auction before Fonterra sets the opening milk price for the FY2021 season. Futures for this milk price are around $6.15, up from the sub-$6 level seen earlier in the month, although well down from the current season at $7.20.

Compared to lacklustre bond and equity markets, the currency market has shown a bit more price action, with a distinct risk-on feel. This sees, JPY, CHF and the USD at the bottom of the leaderboard. Against this backdrop, the NZD has been one of the best performers of the majors, second only to NOK overnight. This sees the NZD up 1.2% for the day to breach the 0.61 mark. Still, the currency remains well within its familiar range of the past six weeks, with resistance around the 0.6175 mark.

Alongside higher risk appetite, the NZD might have got a little boost after the market digested comments from the RBNZ yesterday, after senior staff did a round of media interviews. Deputy Governor Bascand’s comments to Stuff got our attention, where he made it crystal clear to the market not to expect any change to the OCR before March 2021. The OIS market has been toying with the prospect of a rate cut this year, leading on to a negative OCR next year, but Bascand’s comments hosed that expectation down. He said "We are very conscious that our word matters and the credibility of what we say is very important to the Reserve Bank…we are confident we won't be moving to negative interest rates before March next year."

This saw OIS rates for this year push higher, with the November meeting up 4bps to 0.14%. Bascand couldn’t have been any clearer and if the market took him at his word then the OIS rate for this last meeting of the year should really be at the current OCR of 0.25%. The 2-year swap rate rose by 3bps to 0.14%, while longer term bond yields were well contained, even with the pressure of higher global rates.

In earlier comments to Reuters, Bascand ‘s comments suggested an open mind to its QE policy, saying the Bank could re-evaluate whether it needed to do more, or less, in three-months-time. Assistant Governor Hawkesby told Bloomberg that all options for alternative monetary policy remain open, including purchases of foreign bonds to drive the NZD lower – a path that we think the Bank is unlikely to go down anytime soon. He added that in deciding to use a negative cash rate (beyond March 2021), it would need a “compelling story” that explains how that tool would return inflation and unemployment to normal levels, and also be temporary.

The AUD has also pushed higher against the backdrop of a soft USD, seeing it trade up to 0.6580 this morning.  There was no real damage from a Bloomberg report that suggested China was considering targeting more Australian exports including wine, seafood, oatmeal, fruit and dairy that could be subject to more checks at the border following a diplomatic spat between the two countries. This follows a ban on meat from four factories for technical reasons and an 80% tariff on barley after a long running dispute. This could play into NZ’s hands as long as the NZ government doesn’t go down the same path and treads carefully when considering the investigation into China’s role in the COVID19 pandemic. This Bloomberg report alongside the RBNZ comments have helped push the NZD/AUD cross higher, up through 0.93 overnight and now just under that level.

Other key crosses are all higher, with the biggest gain against the weak yen, seeing NZD/JPY up 1.6% to 65.9. NZD/EUR is up 0.9% to 0.5585 and NZD/GBP is up 0.5% to 0.4975.