By Mike Burrowes and Kymberly Martin
The NZD has remained extremely well supported overnight, despite the other major currencies weakening against the USD.
The NZD was relentlessly bid throughout Friday evening, surging to a fresh post-float high around 0.8385. In contrast, AUD/USD weakened throughout the night to a low around 1.0710, before recovering to around 1.0740 currently.
The NZD trade-weighted index has popped above 72.00, its highest level since March 2008. NZD/AUD flirted with the 0.7800 level on Friday evening, after starting the day around 0.7720. NZD/GBP made a fresh post-float high around 0.5225 early on Saturday morning. NZD/EUR rallied to 0.5870 from 0.5800.
Despite the NZD strength, our NZD/USD “fair value” model continues to suggest the currency is overvalued based on ‘fundamentals’.
However, for now momentum on NZD/USD remains very strong. Our NZD/USD “fair value” range is 0.7200 to 0.7400. The range is unchanged from last week as the move higher in the NZ-US 3-year interest rate differential has been offset by a fall in risk appetite.
The NZD/AUD “fair value” range has moved up ½ cent to 0.7400 to 0.7600 since last week. The move higher has been supported by a widening in the NZ-AU 3-year interest rate differential to -143bps, from -152bps. Over the next 3 months, we continue to caution about a pullback in the NZD as the recent move higher seem to be ahead of ‘fundamentals’.
Looking to the week ahead, the highlight will be the release of Q1 GDP. The sudden delay last week means the outcome could be a large surprise. Today we have the release of electronic card transactions and QV house prices.
Majors
The USD rallied against nearly all the major currencies on Friday night, following a dismal US employment number. The “safe haven” CHF and JPY also outperformed. For now, the outturn appears to have dashed hopes the recent US soft-patch will be quickly reversed.
US non-farm payrolls for June were much weaker-than-expected (18k vs 105k expected). The unemployment rate increased from 9.1% to 9.2%. The outturn saw risk assets get hit across the board. In equities, the S&P500 and Euro Stoxx 50 index ended the evening down 0.7% and 1.90% respectively. Industrial commodities suffered larger declines, with WTI oil plummeting 2.50% and copper falling 0.8%.
Currency markets found it harder to digest the weak US employment data. The “safe haven” CHF and JPY were immediately boosted after the data. The USD rallied against more risk sensitive currencies, while at the same time underperformed against the CHF and JPY.
Over Friday, CHF and JPY ended up 1.30% and 0.30% respectively against the USD.
EUR/USD suffered its losses prior to the release of the US employment data, falling from 1.4340 down to 1.4250. The move lower was again driven by concerns about the ‘peripheral’ European economies and a widening in their CDS spreads.
The data has lifted expectations the Fed will keep policy on-hold well into next year. In addition, the market remains concerned that there has been no resolution to the debt situation in the US. These factors make the outlook for the US economy uncertain and could continue to weigh on the USD in the near-term.
The US employment data overshadowed better-than-expected Canadian employment data for June (28.4k vs 15k expected). The Canadian data saw USD/CAD fall below 0.9600, but the gains were more than fully reversed after the release on the US employment. The rise in risk aversion caused the CAD to underperform.
Looking to the week ahead, the focus will remain on the US. We have the release of the FOMC minutes on Wednesday morning. Midweek, Fed Chairman Bernanke delivers his semi-annual testimony to the house. The Fed’s Fisher and Rosengren are also speaking around the same time. On Thursday and Friday we have US advance retails sales and University of Michigan consumer confidence respectively.
Fixed Interest Markets
NZ bonds and swaps inched higher on Friday, mostly following in the footsteps of their off-shore counterparts in the previous evening. On Friday night off-shore yields then fell sharply after a weak US payrolls number.
On Friday NZ swap yields opened higher, and held onto gains during the day. 2-year swap yields crept up to 3.4%, still within their recent trading range of the last few months. 10-year swap yields also held onto opening gains to be up 2bps on the day, closing at 5.25%.
Bond yields closed up around 1.5bps on the day, along the curve. 10-year bond yields closed at 5.14%, taking the swap-bond spread back over 10bps.
Overnight on Friday, US 10-year yields gapped lower after a disappointing US non-farm payroll report. Payrolls rose only 18K (105K expected), sending 10-year yields from above 3.17% to 3.02%. German 10-year Bunds followed a similar pattern plummeting from 2.93% to 2.83%.
Whilst receiving little attention on Friday, peripheral European bond yields made new highs. Greek 2-year yields traded up to above 30%. Portuguese and Irish 2-year yields made new highs of 17.5% and 16.4% respectively. Less dramatic, but still notable, Spanish and Italian yields also spiked up to recent highs above 3.5%. CDS spreads also continued their recent spike higher as investors attempt to price the possibility of default contagion in the region.
We expect NZ interest rate markets to open under downward pressure today, given the sharp plunge in yields seen off-shore on Friday night. In the week ahead, local highlights will come on Thursday with the NZ PMI, followed by the long-delayed 1Q GDP release.
Given recent delays, there is a bigger “fan chart” on the potential GDP outcome, so expect some volatility in the lead-up and after the release. Key off-shore developments will come mid-week, with Bernanke’s semi-annual monetary policy report to the house, and Eurozone CPI and industrial production data. Friday will bring US Empire manufacturing, industrial production and University of Michigan confidence surveys.
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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.
All its research is available here.
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