NZD and AUD push higher, driven by better risk sentiment. Governor Orr hoses down imminent move to a negative OCR

Risk sentiment is positive again, with global equity markets higher and the NZD and AUD continuing to push higher. The rates market hasn’t really joined in, with government bond yields flat to slightly lower overnight.

Newsflow has been light but there’s a hint of positivity in the air as countries emerge from their lockdowns and case growth in the spread of COVID19 continues to edge lower – more so for developed nations, with still worrying hotspots in the likes of Brazil and Mexico. Yesterday’s late swoon in US equities has more than recovered overnight, with the S&P500 up over 1½%. The Euro Stoxx 600 index closed up 1%.

Fed minutes of its late-April meeting have just been released and added a little more colour to what we’ve heard from Fed officials since that meeting, with no material market reaction. Some FOMC members noted that it could make forward guidance more explicit, such as “outcome-based” forward guidance, tying macroeconomic outcomes achieved before considering any raising of the Fed Funds rate, or considering “date-based” forward guidance. Several members highlighted the need to give more details on the asset purchase programmes. There was a hint of a possible move to yield curve control, with the comment “a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low”.

Global rates have nudged lower overnight, but not by much, down no more than 2bps in the key markets. The US 10-year Treasury rate is currently slightly lower at 0.68%.

In currency markets, GBP is the weakest, down 0.2% to 1.2235. We’re guessing that the focus on negative rates has been the key driver rather than UK-EU trade deal concerns.

BoE Governor Bailey told lawmakers that he is not ruling out negative interest rates, “keeping the tools under active review in the current situation”. He added “we do not rule things out as a matter of principle. That would be a foolish thing to do. That doesn’t mean we rule things in either”. It’s pretty much the line being run by the RBNZ, where a negative policy rate is not imminent but it is a tool it would like to have in the toolbox in case needed”, while other central banks like the RBA, Fed and Bank of Canada have no appetite to even consider a negative policy rate at this stage.

With some focus on negative rates in the UK recently, the market has been willing to price in an increased chance of a negative UK policy rate compared to a week ago, with a slightly negative rate priced from late this year into early next year. The UK government sold negative yielding government bonds for the first time, selling £3.8b 3-year gilts at minus 0.003%. Earlier, UK CPI inflation fell to a 4-year low of 0.8% y/y in April, while the core rate was 1.4% y/y, in line with expectations.

CAD has also underperformed overnight, despite oil prices continuing to show signs of recovery, with Brent and WTI pricing up 2-4% for the day. Canada’s CPI fell by 0.2% y/y in April, the lowest since the GFC, driven by lower petrol prices, while core inflation was steady at 1.8% y/y.

Against a backdrop of improved risk appetite, the NZD and AUD continue to show signs of recovery this week, alongside a soft USD. The NZD has pushed on up to 0.6150, getting ever-closer to the high around 0.6175 posted at the end of April. This is the first level of resistance we’d see ahead of the 0.62 mark. Last week’s post-MPS fall and weak risk appetite-induced fall is already a distant memory.

RBNZ Governor Orr’s comments in a Bloomberg interview yesterday echoed those of his colleagues Bascand and Hawkesby the previous day, when queried on taking the OCR negative.  He said “We don’t want to go negative at this point; we’re prepared to if we have to but not until a lot later. It’s got to jump the hurdles. It’s got to be seen to be necessary. It’s got to be seen to be effective, efficient and operationally capable”. Bank officials have made it crystal clear that they want the option of a negative policy rate in the toolkit, but that doesn’t necessarily mean it would be used. Our projection remains that the RBNZ won’t cut the OCR into negative territory and will keep to its word in keeping the OCR unchanged this year.

The OIS market nudged rates higher, with the November meeting up 2bps to 0.16%, still willing to bet that the RBNZ will renege on its commitment to keep the OCR unchanged through to at least March 2021. The market continues to see a negative OCR priced from May next year, although over recent days reduced conviction in that call is evident as it digests recent RBNZ comments.  Otherwise, it was a fairly lacklustre day in the NZ domestic rates market, with little change in swap rates and slightly higher government rates.

The AUD temporarily broke up through 0.66 overnight and sits close to that level this morning. NZD/AUD has sustained the move up through 0.93 and sits at 0.9320.

Higher risk appetite sees another 1% move in NZD/JPY, now up through 66, while the weak GBP sees NZD/GBP up over 1% to 0.5025. EUR failed to break 1.10 overnight (it got to 1.0999) and remains just below that mark, with NZD/EUR touching 0.56 overnight.