NZ$ breaks post float highs for US$ and GBP, driven by strong expected local growth and increased risk appetite.

By Mike Burrowes and Kymberly Martin

The twin tailwinds of improving global risk sentiment and further signs of underlying strength in the NZ economy propelled NZD/USD to fresh post-float highs yesterday around 0.8320. Overnight NZD/USD has drifted lower but still remains near the post-float high at 0.8270 currently.

NZD/USD made a run to the post-float high after the release of an encouraging NBNZ survey. Notably the own-activity indictor was 38.7, insignificantly different to May’s 39.7 and so still broadly consistent with GDP growth picking up to a 4-5% pace over the coming 12 months. This, in turn, remains in keeping with our upbeat economic forecasts.

NZD/GBP has continued to forge new post-float highs over the past 24 hours with the high now standing around 0.5190. NZD/GBP continues to be supported by widening NZ-UK interest rate differentials and relative growth differentials moving in NZ’s favour. NZD/EUR fell sharply during the evening from 0.5720 down to around 0.5690. The currency partially recovered these losses early this morning to be trading around 0.5700 currently.

Looking to the day ahead, there is no data due for release in NZ so expect sentiment to be driven by offshore markets. In this regard the focus will be on the release of Australian and Chinese PMIs for any signs global growth is slowing.

For the day, expect initial resistance around 0.8320 and support around 0.8250.

Majors

The USD has drifted lower overnight against most of the major currencies. Again, risk sentiment was driven by news the Greek government had passed the second austerity vote. This ensures Greece will not default in the near-term.

EUR/USD spent most of the evening on the back-foot after German retail sales for April fell 4.8% y/y. News the Greek austerity implementation bill had passed early this morning bolstered investor sentiment and has seen EUR/USD more than reverse the earlier losses.

Providing further support to the EUR was comments from the German Finance Minister Schaeuble. He noted German financial institutions will contribute €3.2bn to a rescue for Greece and is confident a solution would be announced on Sunday. This is when Eurozone finance ministers meet in Brussels.

During the evening EUR/USD dropped from around 1.4510 down to around 1.4450. EUR/USD is currently trading around 1.4520. Strong month-end buying demand for the EUR has been noted, in particular against the GBP. We are also hearing of sovereign names looking to sell EUR/USD around 1.4550.

The GBP has continued to languish overnight after data suggested the UK economy has stalled. In response to the data and German retail sales, GBP/USD nose-dived from around 1.6100 down to around 1.5980. GBD/USD has partially recovered the losses early this morning to be trading around 1.6070 currently. Interest rate markets are now pricing only 20bps of hikes from the BOE over the next 12 months, down from 40bps a month ago.  

Risk sentiment was given a further shot in the arm early this morning after a stronger-than-expected Chicago PMI for June (61.1 vs 54.0 m/m expected). The data served to buoy risk sentiment, leading to USD selling. While US long rates jumped higher after the data, we think a move in US short-end interest rate differentials is needed for the USD to stage a sustained recovery. Given the current Fed stance this could be some way off.

For the night ahead, the market will be scrutinising PMI outturns for Europe, UK and US for signs of a slowdown in global growth. The University of Michigan consumer confidence survey is also likely to garner some attention given the accumulating signs of a slowdown in US growth.

Fixed Interest Markets

NZ interest rate markets continued their sell-off yesterday following the lead of their off-shore counterparts. Curves also steepened. Overnight, off-shore yields continued to rise as Greece passed its second austerity vote and US data surpassed expectations.

Yesterday, attention returned to local data with a strong NBNZ business survey. A combination of the positive data release, and continued pressure from rising off-shore yields, saw NZ swap yields rise around 3bps at the short-end, and 5bps at the long-end. 2-year swap yields now sit at 3.36% and 5-year yields at 4.38%.

NZ bonds also sold-off yesterday, with the yield on 21s rising 7bps to 5.07%. The yield on 13s remained relatively well anchored at 3.20% as demand for this tenor remained strong at the DMO auction. The auction saw $905m bids for $300m of 13s offered, $295m bids for 50m of 15s and $140m for 50m of 17s. The combined bid-to-cover ratio was 3.35x. The DMO over-accepted bids for 13s. $416m bids were successful at an average yield of 3.20%, while the DMO released only $20m 17s.

Overnight, US 10-year yields spiked from 3.09% to 3.22% before settling back at 3.14%. German 10-year yields also rose from 2.97% to 3.03% as risk appetite improved. Our risk appetite index (scale 0-100%) has moved up to 70% from 53% at the start of the week. Risk appetite has been buoyed by the 2nd successful Greek austerity vote. In addition, US data resulted in positive surprises, the first in some time.

There are no NZ data releases today but NZ yields should continue to feel upward pressure given global developments overnight. Today’s Chinese, UK, EU and US manufacturing PMIs should provide evidence of whether global industrial activity is stabilising after its 2Q slump.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes and Kymberly Martin are part of the BNZ research team. 

All its research is available here.