The market remains on edge after Russia’s military excursion into Eastern Ukraine but there have been few fresh developments overnight and market movements have been well contained. US and European equities show small falls, the US 10-year rate trades just under 2% and currency moves have been modest. The NZD has made another modest gain overnight, temporarily going up through 0.68, following the more hawkish than expected RBNZ, that resulted in a chunky lift in domestic rates.
All eyes remain on Russia-Ukraine developments, which have been a key driver of financial markets over the past couple of weeks. After we went to press yesterday, the US laid out its “first tranche” of sanctions against Russia, which targeted the country’s sovereign debt markets to add to its borrowing costs. Canada, Japan and Australia imposed sanctions, adding to those already announced by the EU and UK. These are all considered light-touch, but further sanctions will depend on Putin’s next move.
Ukraine is preparing for a full-on invasion by Russia by declaring a state of emergency, mobilising reservists and telling its citizens to immediately leave Russia. President Putin said Russia is ready for dialogue and denies plans to invade Ukraine. He called the move of forces into Eastern Ukraine as “peacekeepers”.
Potential war between Russia-Ukraine adds to the burden of central banks to bring inflation lower. BoE MPC members addressed lawmakers. Governor Bailey noted the sharp lift in oil and gas prices that will add at least £700 to the average UK household energy bill and warned of an even tighter living standard squeeze due to the escalating crisis in Ukraine. External MPC member Haskel noted the material upside risk of further increases in global gas prices, adding to the already considerable rise in CPI inflation. The ECB asked banks for stress-tests on their Russian exposures, looking at liquidity, loan books, trading and currency positions.
With no material developments overnight on the Ukraine situation and no key economic releases, market movements have been well-contained. The S&P500 opened stronger but has since fallen back, and currently down 0.4%. The Euro Stoxx 600 index closed down 0.3%.
The US 10-year rate has traded between 1.94% and just under 2%, and is currently up 4bps for the day to 1.98%, making the move earlier in the week down to 1.85% look like an over-reaction to Putin’s initial act of aggression. European 10-year rates are little changed for the day.
In currency markets, overnight movements have been contained to within plus or minus 0.3% against the USD for the key majors we follow. The NZD, AUD and CAD all show gains of about 0.3%, suggesting commodity currencies are in favour on the back of widespread lifts in commodity prices in the recent environment, more than offsetting any effect of soft risk appetite.
The NZD temporarily breached the 0.68 level in the early hours of the morning, since settling below that mark. It is higher on all the key crosses and is up 0.7% from this time yesterday, gaining favour after the more hawkish than expected RBNZ MPS yesterday (see below). NZD/AUD has sustained about a 0.3% lift since the MPS, indicative of how much the hawkish MPS was “worth” to the NZD’s performance, a fairly modest reaction we’d suggest.
NZD/AUD trades this morning at 0.9360. Earlier in the day, there was little reaction to Australian wage price index data, coming in line at 0.7% q/q, not strong enough to compel the RBA to capitulate on its policy outlook yet.
The largest movement on the crosses for the day is about a 1% lift in NZD/GBP to trade back to a 0.50 handle. NZD/EUR is back to 0.60, while NZD/JPY is up through 78.
As widely expected, the RBNZ raised the OCR by 25bps for a third successive meeting to 1.0%. Factoring in the recent much higher inflationary impulse, the surprise in the Bank’s projection was that the OCR would need to be raised to as high as 3.35% to bring inflation safely back to the mid-point of the 1-3% target range. Market pricing for the terminal rate was closer to 3% heading into the meeting.
One sure way to lose money is to trade based on the RBNZ’s projections, but the market was wrong-footed and this led to an unusually large sell-off in swaps, led by the short end. This wasn’t helped by the RBNZ’s rhetoric around the “finely balanced” view of whether to hike by 25bps or 50bps at this meeting and keeping optionality for a 50bps lift at some meeting in the future. The RBNZ’s projections imply about a 25bps hike at every meeting this year, with some risk of a pause later in the year. The market sell-off saw the market price in an increased chance of a 50bps move at some meeting this year (more likely earlier than later), even though RBNZ’s actions so far this cycle – it’s so-called revealed preference – have been consistent with 25bps clips.
The 2-year swap rate closed the day 14bps higher at 2.70%, with 11bps of that coming post-MPS. There was some significant curve flattening, with 5-year swap up 10bps to 2.95% and the 10-year rate up 8bps to 2.99%.
The RBNZ also said it intends to not reinvest maturing NZGBs from its LSAP programme and would sell $5b per year of its holdings to NZDM, which will naturally flow through into increased government bond issuance forecasts. This came as no surprise and the upward movement in NZGB yields for the day wasn’t significantly out of line with swap rates, with the 10-year NZGB up 9bps to 2.79%.
In the day ahead, only second tier data are released, including NZ trade and US jobless claims, the second estimate of Q4 GDP and new home sales.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.