USD reverses course, shows broad based gains. NZD back below 0.66 but outperforms on the crosses. RBNZ speech this morning

The USD has shown some broadly based gains for the day, extending its gains after the Fed’s minutes of the July meeting were released, even though there was little news. NZD/USD is back below 0.66, but the currency has generally done better on the crosses.

The S&P500 pushed on higher after closing at a record high yesterday, although volumes remain low during the current Northern Hemisphere summer holiday season. Earnings results remained a supporting factor, with household names Target and Lowes reporting stronger than expected results, the former reporting quarterly growth sales growth of 24% y/y, the strongest in its 58-year history. Apple became the first US company to break up through the $2Tn mark for market capitalisation after hitting the $1Tn mark in 2018.

However, the modest gain in the S&P500 was reversed after the release of the minutes of the Fed’s July meeting were released. The key takeouts were (i) some consensus building for further forward guidance. In the minutes, “a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point”. And (ii) there is little consensus to adopt a yield curve control strategy, as “many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the Committee could reassess in the future if circumstances changed”.

Bloomberg reported that US-China talks on the six-month review of the phase 1 trade deal will soon take place, after their recent postponement. Last week Trump’s economic advisor Kudlow said that the trade deal was going well, while MNI Market News reports that China has recently ramped up US soybean purchases to improve the optics, even as its purchases of US agricultural products remain well below target. The deal is said to remain safely in place ahead of the US presidential election. 

UK inflation data were much stronger than expected but, like the US data released last week, the jump higher was seen to be short-lived and driven by special factors.

An auction of 20-year US Treasury bonds didn’t go down well, with a 1bp tail from the prevailing market yield, which had already embedded a 2bps concession going into the auction, and a low 2.26 bid/cover ratio. This was a contrast to Germany’s 30-year bond auction, which met record demand for the zero-coupon bond with a bid/cover ratio of 2.9 at a “juicy” yield of minus 0.05%. Strong demand here could reflect general disdain for the USD and the lack of attraction of investing at shorter maturities at much more negative rates (5-year at minus 0.68% and 10-year at minus 0.47%).

US Treasury yields pushed a little higher overnight, hitting almost 0.69% after the Fed’s minutes, but peeling back down to broadly flat for the day at 0.67%.

In currency markets, some profit-taking has been evident, with EUR and GBP dragging the chain after reaching highs against the USD. The USD is higher against all the majors, with the BBDXY index up 0.5%. EUR is back down to 1.850, while GBP is down about 1% for the day to 1.3110. The NZD has done better than most, even as it has slipped back below the 0.66 mark to 0.6580.  NZD/AUD has nudged up to 0.9140, with the AUD down to 0.7200. NZD/GBP is up 0.7% for the day to 0.5020, while NZD/EUR is up 0.3% to 0.5550.

Yesterday, the NZ swaps curve showed a small flattening bias, with 2-year swap up 1bp to 0.09% and the 10-year rate down 3bps to 0.56%. All the major banks now see the RBNZ cutting the OCR into negative territory next year. The stalling of the short-end move lower in rates should be simply seen as market positioning, with rates likely to grind lower as the year progresses. BNZ sees a 50bps cut in the OCR to minus 0.25% from April. The government curve showed a small steepening bias. NZ Debt Management is set to launch the tap of the 2027 bond next week.

This morning the RBNZ will be publishing a speech by Assistant Governor Hawkesby, outlining how the Bank is using its balance sheet to achieve its monetary policy and financial stability objectives.