Positive US data helps NZ$ higher. NZ$/GBP reaches new post-float high

By Mike Burrowes and Kymberly Martin

The NZD rallied overnight, supported by improving risk appetite and stronger US data. NZD/USD spent most of the evening treading water, before surging from 0.8280 to 0.8320 in the early hours of this morning.

The major focus yesterday was on the release of better-than-expected Australian employment for June (23.4k vs 15k expected). The data suggest the labour market remains tight, despite recent signs of a slowing in the domestic economy. The data gave AUD/USD an immediate boost from 1.0700 to 1.0740. Overnight AUD/USD has continued march higher, currently trading at 1.0770.

The Australian data helped check the advance of the NZD/AUD. Although the cross spent some time below 0.7700, overnight it has recovered back to 0.7720. It’s interesting to note there has been minimal change in RBA rate expectations, with the OIS market still pricing a small chance of a rate cut over the next 12 months.

The ongoing weakness in the GBP has seen NZD/GBP surge to a fresh post-float high around 0.5210, after starting the evening at 0.5170. In the near-term we expect NZD/GBP to remain elevated as NZ-UK interest rate differentials continue to widen. NZD/EUR has rallied form 0.5770 to around 0.5800 currently.

Looking to the day ahead, with no data from either side of the Tasman expect the NZD to take its cues from offshore. In this regard, we have the RBA’s Debelle speaking “in defence of current account deficits”.

On the day, initial support on NZD/USD seen at 0.8290 and resistance at the post-float high of 0.8330.

Majors

The USD is slightly weaker as risk appetite recovered in currency markets overnight. The “safe haven” CHF and JPY have underperformed.

Positive US data and a tempering in worries about the European debt crisis spurred a broad based recovery across most asset classes. In equities, the S&P 500 has surged 1.20% and the Euro Stoxx 50 index closed up 0.40%. The VIX index (a proxy for risk aversion) has fallen from 16.3 to 15.9.

The ECB lifted rates by 25bps to 1.50% overnight. In the accompanying press conference, ECB president Trichet said the central bank would relax its rules and keep providing liquidity to Portugal, despite its ‘junk’ credit rating. This helped temper worries about Europe's debt crisis. On the inflation front, Trichet noted the ECB will "monitor very closely". This indicates further tightening is possible in the months ahead. For now, the ECB is trying to balance the need to normalise interest rates, while at the same time providing sufficient liquidity to the ‘peripheral’ European economies.

The comments at the press conference provided support to EUR/USD, surging from below 1.4230 to around 1.4340 currently. Earlier in the evening, EUR/USD had plummeted from 1.4320 to 1.4230.

While gaining less attention overnight, the BoE left rates unchanged at 0.50% and held its asset purchase programme steady at £200bn. Earlier in the evening, UK industrial and manufacturing data was mixed, but overall the data suggests the UK economy is struggling. GBP/USD has weakened overnight despite the moves higher in most of the other major currencies, currently at 1.6090.

The USD pared early gains this morning after the release of better-than-expected US ADP employment data for June (157k vs 70k expected). The data buoyed investor risk appetite, leading to selling of the USD. For now, expect risk appetite flows to drive the USD while US short-end rates remain anchored.  While the US economy slowed in H1, more recent data outturns are showing tentative signs of stabilising.

Looking to the night ahead, the focus will be on the release of US non-farm payrolls, with the market looking for it to validate the strong ADP employment number. Given the ECB decision overnight, markets will scrutinize a  speech from ECB member Smaghi for any hints of when the ECB will raise rates again.  

Fixed Interest Markets

NZ swaps and bond yields had a quiet day. Australian yields rose strongly after the release of their employment report. US and German bond yields also rose overnight.

The DMO auction saw solid demand at an average 3x bid to cover ratio. On the day, however, bond yields were virtually unchanged, as were swap yields. The yield on 2-year and 10-year swaps ended the day at 3.38% and 5.22% respectively. There was no meaningful impact from the rise in swap yields across the Tasman.

Australian swap yields rose after their employment report was taken by the market to be positive. In the detail, the June bounce in employment looked to be payback from the weaker-than-expected May outcome, with the trend in employment growth continuing to slow.  The better-than-expected outturn, however, saw Australian 3-year swaps rise from around 5.16% to 5.26% over the past 24-hours. As a result NZ-AU 3-year swap spreads have become more negative moving from -1.38% to -1.46%.However, the market still prices a small chance of a rate cut from the RBA over the next 12-months.

The US ADP employment report showed payrolls increased by 157k (70k expected). Treasury yields rose, as the market moved to protect itself against the possibility of a high-side surprise on tonight’s all important US non-farm payrolls report. Bond yields were also buoyed by comments from president Trichet signalling the ECB will continue to accept Portuguese bonds as collateral despite their ‘junk’ bond status. US 10-year yields rose from 3.11% to 3.16% and German 10-year yields rose from 2.93% to 2.97%.

Portuguese and Irish bond yields and CDS spreads continued to rise, with 2-year bond yields for each market rising to 17.5% and 15.6% respectively.

NZ yields are likely to feel upward pressure today, given they were relatively stable yesterday in the face of Australian developments, and off-shore yields have risen overnight.

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.