By Mike Burrowes and Kymberly Martin
The NZD has treaded water over the past 24 hours, with NZD/USD trading in a tight range of 0.8260 to 0.8310.
The major focus yesterday was on the release of much weaker-than-expected Australian retail sales for May (-0.6% vs 0.3m/m expected) and building approvals for May (-7.9% vs -0.7%m/m expected). The market interpreted the data as supporting the case for the RBA to stay on-hold for some time yet.
In response to the data, AUD/USD plunged from 1.0775 down to a low around 1.0720. Overnight, AUD/USD has traded sideways and is currently around 1.0730.
NZD/AUD jumped back above 0.7720 following the Australian data and has managed to hold onto the gains overnight. Expect trading on the cross to be volatile today, with important data out on both sides of the Tasman.
NZD/EUR has popped above 0.5700 overnight as the EUR weakened following comments from ratings agency S&P (see below). Trading on the other crosses was very subdued.
It should be an action packed day ahead. We get some more timely updates on the state of the NZ economy, with the release of the Quarterly Survey of Business Opinion (QSBO) for Q2 at 10am. Across the Tasman, the highlight will be the RBA interest rate decision at 4.30pm. No change is expected, so the attention will be on the statement for any hints at if the RBA expects to resume raising rates. The AU trade balance is due for release at 1.30pm. Early tomorrow morning, we get the latest Fonterra dairy auction.
For the day ahead, initial resistance on NZD/USD is eyed at the post-float high. Support is seen at 0.8250.
Majors
FX markets paused for a breather overnight after recent weeks of volatile moves. The USD index has traded sideways and currently stands at 74.30. Trading volumes were light, with the US on holiday for Independence Day.
The risk-on theme of the past week was halted overnight by S&P, noting a debt rollover plan being considered for Greece may put the country into selective default. Although, for now, sentiment remains supported by hopes of a second Greek bailout package, expected in the coming weeks.
The S&P comments weighed on the EUR throughout the evening, with EUR/USD dropping to a low of 1.4490. EUR/USD has partially recovered these losses early this morning to be trading at 1.4530 currently. Peripheral European CDS have widened overnight, although still below their record levels.
Despite the lingering European debt concerns, the EUR is been supported by expectations the ECB will raise rates on Thursday morning. The OIS market has at least one further rate hike priced over the next 12 months.
The GBP benefited from weakness in the EUR overnight, helping EUR/GBP ease back from 15-month highs. However, the gains were tempered by a slightly weaker-than-expected UK Construction PMI for June (53.6 vs 53.8 expected). This adds to a string of recent weak data, confirming the UK economy has all but stalled in H1. Following the data, GBP/USD shed ¾ cents down to 1.6050. GBP/USD has recovered back to 1.6100 in the early hours of this morning.
Looking to the night ahead, the focus in the evening will be on the release of Eurozone retails sales after the shock fall in German retails sales last week. We also have the release of Eurozone and UK PMI services. In the US, factory orders are due to be released.
Fixed Interest Markets
It was a relatively quiet day in NZ interest rate markets, with more dramatic moves across the Tasman. The US market was closed and European markets absorbed negative comments from rating agency S&P.
Australian swap markets rallied after two very weak data outcomes. (see NZD section) The data serves to highlight household caution even as some sectors of the economy, such as resources, are booming.
The OIS market has revised down expectations for Australian rate hikes. Markets now expect the RBA policy rate to remain virtually unchanged over the next 12 months. We still expect the RBA to raise rates further ‘at some point’, although these data suggest no near-term urgency.
Australian swap yields fell sharply after the data releases. 3-year swaps fell from around 5.33% to 5.26%. 10-year swap yields fell from above 5.86% to as low as 5.79%, before climbing back to 5.82%.
As a consequence, the NZ-AU 3-year swap spread rebounded from -1.52% to -1.43%, as NZ swap markets remained relatively stable. NZ swap yields opened up 5-6bps yesterday, before giving back much of the gains over the day, to close up 2-3bps. Bond yields ended the day virtually unchanged.
In Europe, S&P announced that a French proposal for banks to roll over Greek government bonds would prompt the agency to place the sovereign’s rating in ‘selective default’. While this dampened risk appetite somewhat the reaction in interest rate markets was not severe. German bunds levelled off to yield around 3.02%. Greek, Irish and Portuguese bond yields were relatively stable although Greek CDS spreads ticked up a little.
Although the US market was closed, news filtered through that Republicans may tolerate a short-term settlement with the White House, regarding the debt ceiling, before the August 2 deadline. However, they would continue to push for a more stringent longer-term solution. Expectations of a solution, even if short-term, will help reduced Treasury volatility in the coming month.
Today, focus should return to local data with the NZIER quarterly survey of business opinion survey. We expect the QSBO will portray accelerating growth and rising inflation, a potential catalyst for upward pressure on 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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