By Mike Burrowes and Kymberly Martin
NZD/USD spent most of the Friday evening treading water but was given a boost higher in the early hours of the morning as risk sentiment improved across the board. Since Friday morning, NZD/USD is marginally lower at 0.8270 currently.
Weaker-than-expected European data Friday evening pushed NZD/USD down to a low of 0.8240. These losses were pared back after the US data encouraged risk appetite. Over the week, NZD/USD charged 2.40% higher and made a fresh post-float high around 0.8320. The NZ trade-weighted index ended the week up 0.85%.
NZD/AUD was the major mover amongst the crosses on Friday, falling from 0.7730 down to 0.7680. For now we expect dips in the cross to be shallow. The NZD was slightly lower against the GBP and EUR at 0.5150 and 0.5700 respectively.
Our NZD/USD “fair value” model suggests the recent appreciation of the currency is ahead of ‘fundamentals’. The current “fair value” range is 0.7200 to 0.7400. Over the week, the range was driven 1 cent higher by improving risk appetite, but partially offset by a narrowing in the 3-year NZ-US interest rate differentials from 2.81% to 2.64%. Given NZD/USD is well above “fair-value” we continue to caution against a pull back over the next 1-3 months. Our NZD/AUD “fair value” range is currently 0.7350 to 0.7550.
Looking to the week ahead, the focus will be on the release of Q1 GDP on Thursday. We and the market expect 0.4% for the quarter. We get some more timely updates on the state of the economy with the release of the Quarterly Survey of Business Opinion (QSBO) for Q2 on Tuesday. Commodity updates come in the form of today’s ANZ export prices and Fonterra’s latest auction early Wednesday morning (NZT). The Crown Accounts, for the year-to-May 2001, are due mid morning Wednesday. Across the Tasman, the highlight will be the RBA interest rate decision on Tuesday.
Majors
It was a game of two halves for the USD index on Friday, rising during the evening before giving up the gains in the early hours of the morning. Over the weekend the EU and IMF have confirmed Greece will receive the July aid payment.
Risk aversion increased during Friday evening after the release of weaker-than-expected Spanish, Switzerland, UK and Eurozone PMIs. In addition, ratings agency Moodys put German Landesbanks on review for possible downgrade. Over the course of the evening, EUR/USD slipped from 1.4510 to below 1.4440.
Risk sentiment snapped back early in the morning after the release of much better-than-expected ISM manufacturing for June (55.3 vs 52.0 expected). This saw equities surge higher, with the S&P500 rallying 1.40% and the Euro Stoxx 50 index rising 1%.
The US data lead to selling of the USD as risk appetite flows dominated the narrowing in US interest rate differentials. After an extremely poor run of US data recently, over the past week there have been some tentative signs the data is stabilising.
The improvement in risk appetite catapulted EUR/USD back above 1.4520 by the close of markets. Over the week, EUR/USD has surged 2.40% higher as concerns around the Greek debt crisis have eased. Expect ongoing headlines from EU political leaders as the second bailout for Greece is negotiated.
The weaker-than-expected UK PMI for June (51.3 vs 52.3 expected) saw GBP/USD plummet from 1.6080 down to 1.6000. The GBP weakness pushed EUR/GBP above 0.9080, its highest level in 15 months.
For the week ahead, the focus in the US will be on Friday’s non-farm payrolls. Expectations will be refined over the week, with ISM nonmanufacturing out on Wednesday and ADP employment released Thursday. The focus in Europe will be on Thursday’s ECB policy meeting. The market is fully priced for a 25bps rate hike. The BoE interest rate decision should pass with little fanfare.
Fixed Interest Markets
NZ interest rate markets continued to sell-off on Friday. There was ongoing pressure at the long-end due to the rise in off-shore yields, and general improvement in global risk sentiment. Our risk appetite index (scale 0-100%) rose from 53-71% last week. NZ curves steepened sharply.
On Friday, 10-year swap yields rose by 7bps to 5.22% while 2-year yields were relatively well anchored rising 2bps to 3.38%. Over last week, the 2s-10s swap curve steepened 11bps to 185bps, as NZ long yields followed their US counterparts in returning to early May levels.
US 10-year government yields continued to rise on Friday night from 3.15% to 3.18%. This occurred after the US ISM came in above expectation at 55.3 (52.0 expected), providing some hope that US manufacturing activity may have bottomed. The message from other regional PMI was less convincing, although all (China, UK and Eurozone) held above the 50 ‘expansion’ level.
NZ bond yields also rose steeply at the long-end of the curve. The yield on 21s rose 8bps to 5.15%, while the yield on 13s remained almost unchanged at 3.21%. Over the week the yield on 21s rose by 17bps relative to the yield on 13s. This short-term steepening reflects relief from the weight on global long yields, as the situation in Greece has stepped back from the precipice and US data has shown some rare positive surprises. In the very near-term steepening pressures will remain. However, the medium-term trend is toward a much flatter curve as the market begins to anticipate RBNZ rate hikes with higher short-end rates.
Greek bonds were amongst the best performers last week as risk appetite improved, with the parliament’s passing of the 2nd austerity vote. Greek 10-year yields declined to 16.33% last week from close to 18% a fortnight ago, and CDS spreads declined.
Upward pressure on NZ long-end yields is likely to remain as markets open today, following the rises off-shore on Friday. However, in the week ahead, focus should return to local data with Tuesday’s NZIER quarterly survey of business opinion survey and Thursday’s Q1 GDP release. We expect the QSBO will portray accelerating growth and rising inflation, a potential catalyst for rises in short-end yields.
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See our interactive swap rates charts here and bond rate charts here.
Mike Burrowes and Kymberly Martin are part of the BNZ research team.
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