By Mike Burrowes and Kymberly Martin
It was a rollercoaster ride for the NZD on Friday night. Risk-on sentiment early in the evening saw NZD/USD surge to around 0.8170 but it has fallen back to 0.8100 currently as risk sentiment was hit by further concerns about the European debt saga.
Despite the declines, the NZD has held up better against the “safe-havens” (CHF, JPY and USD) than all the other major currencies. NZD/EUR started the evening around 0.5710 and is currently trading at 0.5720. NZD/AUD remained well supported above 0.7700 and is currently trading around 0.7740. NZD/GBP is trading near post-float highs around 0.5070.
The resilience of the NZD has been a consistent theme over the past week. We suspect the recent increase in NZ interest rate differentials is playing a key part in this. Indeed, the NZ-US 3-year interest rate differential has widened from 2.71% to 2.83% currently. And the NZ-AU 3-year interest rate differential has moved from -1.47% to -1.34% currently.
The move in interest rate differentials has seen our short-term “fair-value” estimates increase by a cent over the past week. The “fair-value” range on NZD/USD is now at 0.7100 to 0.7300. However, given NZD/USD is well above “fair-value” we continue to caution against a pull-back, especially if risk appetite deteriorates further. The “fair-value” range for NZD/AUD has moved up to 0.7450 to 0.7650, inline with the move in spot.
Locally, we start with this morning’s May merchandise trade figures, which are expected to be further boosted by commodity export receipts. The key local focus this week will be Thursday’s NBNZ business survey. The stronger NZD and global ructions might take a bit of gloss off the June results. However, by and large, we expect the survey remained robust enough and fully consistent with the GDP acceleration we still foresee. Also watch the survey’s inflation indicators, given they spiked in May’s report.
Majors
Risk aversion flows have seen the “safe-haven” CHF, JPY and USD outperform the other major currencies. It was again concerns about the European debt crisis that sparked the rise in risk aversion.
Trading in FX markets over the past week has been volatile, although the levels remain broadly unchanged. Indeed, the USD index ended the week unchanged at 75.60. The VIX index (a proxy for risk aversion) also ended the week unchanged at 21%.
Early on Friday evening, the EUR was supported by a better-than-expected German IFO outturn for June (114.5 vs 113.5 expected). Further supporting sentiment, was comments from a Chinese official in the FT that inflation is under control. This saw EUR/USD pop briefly above 1.4300.
However, risk sentiment was hit after ratings agency Moody’s put 16 Italian banks on negative outlook. This sparked fears of further contagion within the peripheral European economies. Further fuelling the negative sentiments was comments from the deputy of Greece's ruling party, Robopoulos, saying he will vote against the proposed austerity plan. The vote is scheduled for June 29 and 30.
Over the course of the evening EUR/USD slumped from 1.4250 down to a low around 1.4150. The EUR weakness is most obvious against the CHF, trading to a record low around 1.1850 on Friday evening. Despite the debt concerns, the OIS market is still pricing just under two interest rate hikes from the ECB over the next 12 months.
Looking to the week ahead, the focus will be on the Greek austerity vote. Aside from this, there are several ECB and Fed members speaking over the course of the week. The focus data wise will be on the monthly update of manufacturing PMI’s for China, Europe, US and the UK. Investors will be looking for further signs global growth has slowed.
Fixed Interest Markets
It was a relatively quiet day in NZ interest rate markets on Friday. This finished a week that saw swap yields higher across the curve. Bond yields were also higher at the short end, with 10-year bond yields holding relatively steady. By contrast, off-shore yields continued to fall heavily on Friday night, as ongoing European debt concerns saw risk aversion increase.
NZ swap yields rose 6-8bps along the curve last week retracing some of the losses in the previous week triggered by further Christchurch aftershocks. The tone of domestic data last week was generally supportive even as global data continues to disappoint. With 2-year swap yields ending the week at 3.37% and 10-year at 5.11% curve steepness remained around 174bps.
Notably, the NZ-AU 3-year swap spread became sharply less negative last week. Australian swap yields fell following the RBA’s minutes that suggested no urgency for further rate hikes in the near future. NZ-AU 3-year swap spreads therefore moved from -1.48% to -1.35%.
NZ short-end bond yields also moved higher, mirroring moves in swaps markets. However, the yield on 21s continued to languish below 5% weighed on by continued falls in global long yields.
On Friday night both US and German 10-year yields fell to new lows for the year at 2.86% and 2.83% respectively. US 2-year yields fell to 0.329% heading toward the all time lows of 0.312% seen in November last year. Reflecting the market’s expectations that the US Fed will leave interest rates untouched for the foreseeable future, 2-year yields have now fallen for 11 consecutive weeks.
US bond markets appeared to be reacting to the latest developments in Europe, on Friday, as opposed to their own durable and capital goods data that were actually relatively positive. Risk appetite took a hit as Moody’s placed 16 Italian banks on review for downgrade.
In the panic that ensued shares of several Italian banks were temporarily suspended. The issue highlights the market’s ongoing concern that debt issues will not be contained to Greece but potentially snowball across Europe.
European sovereign debt developments will continue to be a key focus for interest rate markets this week. The tug of war will continue as domestic data such as Thursdays NBNZ business confidence is likely to confirm resilience in the NZ economy suggesting higher yields are warranted. By contrast, off-shore risk aversion is likely to continue to exert downward pressure on 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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