US and UK on holiday; a fittingly dull end to a dull month. PBoC signals some discomfort with pace of CNY strength. NZD and AUD push higher against the backdrop of weaker USD

Markets have been quiet with the UK and US on holiday. US equity futures are slightly weaker while the USD is weaker across the board, seeing the NZD and AUD start the week on a positive note.

US and UK markets are closed for holidays, but the Euro Stoxx 600 index closed down 0.5% after posting a record high on Friday. S&P500 futures are down 0.3%. Global rates showed little movement and the same can be said for US Treasury futures.

And so ends May, which to be honest was mostly dull and uneventful for financial markets. The global reflation trade chugged along but at a reduced clip so that global equity markets were only modestly higher (the MSCI World index up around 1%). Global 10-year rates ended May within 5bps of their end-April levels across 11 markets on our watchlist spanning the G10 and Australia. Against that backdrop NZ bonds underperformed, with higher NZ-global rate spreads and the 10-year NZGB up 15bps for the month. Many commodity prices showed solid gains for the month, while in currency markets the USD was broadly weaker, with JPY the only currency to weaken against the greenback.

In overnight data, annual Euro area CPI inflation picked up in May, with readings for German, Spain and Italy showing an increase. Germany’s lift to 2.4% y/y was the highest rate since 2018 and was slightly ahead of expectations. Inflation for the Euro area is released tonight and is expected to show inflation at 1.9% but the core rate lifting to only 0.9%, still low enough to encourage the ECB to keep pedal-to-the-metal on its policy stance.

Yesterday, China PMI indicators were broadly as expected, showing signs of stability in May and at levels consistent with economic recovery.

The PBoC set the daily reference rate for CNY at a slightly weaker level than expected, hinting that its tolerance for further rapid strength in the currency is fading. This was confirmed later in the session when the PBoC raised the reserve ratio for foreign currencies by two percentage points, the first increase since 2007.  Banks will now need to hold 7% of their foreign currency in reserve, which will reduce the market supply of foreign currency held onshore. USD/CNY took a peek below 6.36 yesterday, a fresh three-year low, before weakening and ending the session close to 6.37.

The USD has begun the week on a soft note, a pullback from some month-end buying that was evident over the previous couple of sessions. Moves haven’t been particularly significant. The NZD is up 0.4% to 0.7280. Last week’s high near 0.7315 reinforced that mark as a key resistance level, but we are expecting an upward break sometime in June. Our current short-term fair value model estimate is 0.74, the same level as our end-June target, which we haven’t felt the urge to change since our last forecast revision in December, an eternity in the game of currency forecasting.

The AUD is up 0.35% to around 0.7740 and NZD/AUD is back just above 0.94. EUR, GBP and JPY show gains of 0.1-0.3% against the USD to start the week, with NZD crosses flat to slightly higher.

In yesterday’s ANZ NZ business outlook survey, activity indicators for May were slightly lower compared to the early estimates but were still higher than in April. Indicators are at levels which suggest reasonable rates of growth but the key constraint will be on the economy’s capacity to meet demand. The survey continued to show heightened cost and inflationary pressure, while inflation expectations at 2.22% were at their highest level in 2½-years.

For another session the NZ rates market danced to a different tune to global markets, with NZGBs down 4-6bps across the curve, with the 10-year rate down 5bps to 1.80%. The RBNZ is buying more bonds than being issued this week, which is driving yields lower, with reluctant sellers at current spreads. Market participants will be hoping that the RBNZ is monitoring the situation and will reduce its bond buying activity next week accordingly. In the swap market the 5-year rate remained the key pivot point, with the yield further retracing last week’s sharp upward move post MPS, down 4bps to 1.32%. Other swap rates fell 1-2bps.

The economic calendar for the day ahead is full. We wouldn’t expect the RBA to change its view at its policy update this afternoon as the Bank has already alluded to July as an important meeting for any possible tweaks to policy. The most important releases tonight are Euro-area CPI inflation, expected to be higher but remain soft, Canada GDP, expected to show strong growth in Q1, and the US ISM manufacturing indicator, expected to be flat-to-higher in May.