The NZD was the worst performer amongst the majors over the past 24-hours. However, as risk appetite has consolidated overnight, the NZD has pared some of its previous losses to trade up to 0.8200 this morning.
The ups and downs of global risk appetite have been the key driver of the NZD in the absence of local data releases. While markets remain skittish, and the NZD vulnerable at its current “overvalued” level, it has been supported overnight by a general stabilisation in risk sentiment. (see below)
The NZD traded sideways in a relatively tight band, overnight, relative to the EUR, finishing the night around 0.5870. Over the past 24- hours the NZD has fallen sharply from recent post-float highs relative to the GBP. NZD/GBP declined from yesterday’s highs around 0.5210, to stabilise in the early hours of this morning above 0.5140.
The NZD/AUD fell steadily from 0.7780 yesterday, before finding some support this morning above 0.7720. Interest rates on both sides of the Tasman have fallen sharply in recent days, though more so in Australia. The NZ-AU 3-year swap spread has moved higher from -1.43% to -1.30%. Markets now price more than a 25bps cut from the RBA in the next year. The interest rate differential should begin to provide some support to the NZD on the cross.
A consolidation in risk appetite could help to underpin the NZD today, ahead of Thursday’s GDP release. European debt headlines remain the wild card. The NZD/USD remains vulnerable, however, given it currently trades someway above what ‘fundamentals’ would dictate. In addition, sentiment toward the AUD, and by association the NZD, could be affected by today’s release of Chinese GDP, industrial production and fixed asset investment data.
Majors
Over the past 24-hours the “safe haven” JPY and CHF have continued to be the strongest performers. Risk sensitive currencies, AUD and NZD were the worst, although they have pared their losses overnight as risk sentiment has stabilised.
Overnight, a slightly less negative sentiment has prevailed with our risk appetite indicator (scale 0-100%) consolidating around 62%. Equity losses were more modest with European and US indices down around 0.5% and commodity prices showed modest gains.
Early this morning, sentiment improved somewhat, when an Italian auction of 12-month Treasury bills saw solid demand at 1.5x bid-to-cover ratio. There was also talk of the ECB buying Spanish and Italian bonds.
In addition, early this morning, the Fed minutes from June showed policy makers still have quite divergent views regarding whether additional monetary stimulus is needed. However, Bernanke did not rule out the option of purchasing more Treasuries if required.
The USD index eased lower slightly overnight from 76.60 to 75.80, seeing less support from “safe haven” flows. Conversely, the EUR pared some of its previous losses rising from 1.3850 to 1.4000 early this morning.
The GBP was also dragged higher on the EUR’s coat-tails. In addition, UK data showed like-for-like house sales declined less than expected in June (-0.6% vs. -1.4% expected). The UK inflation reading also showed a welcome drop in June from 4.5%y/y to 4.2%y/y, helping to ease BoE concerns. We still see it on hold until September next year. The GBP/USD moved up from 1.5800 to 1.5930.
The NZD and AUD both clawed back some of their earlier losses overnight, as risk appetite stabilised. The NZD/USD climbed back from 0.8100 to 0.8200. The AUD inched back from an overnight low around 1.0530, to 1.0610 this morning.
Today the consumer sentiment indicator will be released in Australia. Japanese and Eurozone industrial productions data will be released along with UK employment data. There will be a variety of ‘Fed speak’ that may create US headlines tonight.
Fixed Interest Markets
NZ swap and bond yields fell heavily yesterday, and curves flattened. Short-end yields declined 4ps while long end yields fell 9-10bps. Overnight, there was some consolidation in off-shore markets.
NZ swap markets had a volatile session yesterday. Yields were down on the open, following the lead of their off-shore counterparts and continued to fall during the day. The 2-year yield was once again supported around its closing level of 3.32%. However, 10-year yields fell 9bps to close at 5.10%, taking the 2s-10s spread to 179bps.
NZ bonds were also bid from the open. The yield on 13s fell 4ps to 3.13%, while the yield on 21s fell a full 10ps to 4.99%. This eliminated most of the late June rise. The yield on 21s was also dragged down by the precipitous fall in the yield on Australian 21s. It has fallen 29bps in 2 days and it now trades below its NZ peer, for the first time since early May. OIS markets are now pricing more than a 25bps cut from the RBA over the next 12 months. We believe these expectations will ultimately be reversed, but not until European issues have simmered down.
Yields on European peripheral debt and CDS spreads have pulled back from recent highs overnight, though remaining highly elevated. In fact, according to Moody’s, the current cost of insuring against Spanish and Italian default suggests their Aa2 investment grade ratings could be as much as nine steps lower, at Ba2.
Overnight, US 10-year yields tested new lows at 2.82% (below their June low of 2.86%) before rebounding to 2.92%. German 10-year yields showed a similar pattern but ended the night slightly higher at 2.10%.
Once again off-shore developments will be the key driver of NZ interest rate markets ahead of Thursday’s GDP long delayed release.
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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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