In a direct reversal of the previous day, the NZD has been the strongest performing currency over the past 24-hours, up almost 2.2% relative to the USD. The NZD trades at 0.8360 this morning.
Risk sentiment was boosted by solid Chinese data yesterday afternoon and by relatively dovish comments from Fed chairman Bernanke in the early hours of this morning. Equity markets rebounded by 0.8% in Europe and 0.4% in the US, led by commodity-related sectors. The CRB global commodity index rose 1%, and our risk appetite indicator (scale 0-100%) consolidated at 61%.
In this backdrop, the NZD traded up from 0.8260 to 0.8360 this morning, bouncing off last week’s post-float high of 0.8386. The move higher has been exacerbated by flows from short-term accounts covering short positions.
The NZD made solid gains relative to the AUD overnight, trading up from 0.7740 to 0.7770 this morning. The move higher was helped by the interest rate differential that continued to move in the NZD’s favour yesterday. The NZ-AU 3-year swap spread has inched up to -1.28%.
The NZD also made solid gains versus the EUR and GBP, despite the European currencies making gains on the USD, as risk appetite improved. The NZD/EUR moved up from 0.5870 to 0.5910 this morning. The NZD/GBP crept up from 0.5160 to 0.5180.
After a prolonged period of focusing on off-shore developments, the focus for the NZD today should be on the long-delayed NZ Q1 GDP release. Whilst being ‘old history’ now, its significance is heightened by the uncertainty of the impact of February’s ChCh earthquake on the numbers. We remain with a 0.4%q/q pick for the quarter, though we acknowledge the potential for a significantly different outcome is much higher than usual.
Expect the NZD to show a knee-jerk spike, to a new post-float high, if the number beats consensus expectations (0.3%).
Majors
All major currencies have rallied versus the USD over the past 24-hours as risk sentiment has stabilised. The NZD and AUD have been the strongest performers, while the JPY the weakest.
Risk appetite was underpinned by Bernanke’s comments, a lack of new ‘bad news’ out of Europe and by Chinese data that allied fears of a hard-landing in the world’s second largest economy. Chinese GDP grew 9.6%y/y in Q2, and industrial production rebounded to 15.1%y/y (13.1% expected).
The Chinese data and general improvement in risk appetite helped underpin demand for the AUD. This occurred even as the Australian consumer confidence indicator fell 8.3% in July, emphasising the ‘two-speed’ nature of the economy. The AUD moved higher overnight from below 1.0650 to 1.0750.
In Bernanke’s semi-annual testimony to the house he reiterated the Fed stood ready to provide “additional policy support” if needed. However Bernanke attributed recent weak jobs growth numbers to temporary shocks and still expected economic expansion of 3% in H2. The USD eased lower after the comments, given better risk appetite. It declined from 76.00 to around 75.20 this morning.
The EUR was a beneficiary of USD weakness making steady gains overnight to trade around 1.4150 this morning. The EUR made gains despite industrial production data for the Eurozone coming in weaker-than-expected at 4.0% in May (4.8% expected).
The GBP surged higher after Bernanke’s comments. The GBP was also underpinned by UK data that failed to provide any nasty surprises. Employment data was close to expectation with the unemployment rate stable at 7.7%. GBP/USD moved up from 1.5950 to 1.6100 currently.
This evening, Eurozone CPI data and US retail sales data will be released. Elsewhere, European debt developments will remain the key driver of market sentiment. Bernanke will also be making comments again tonight.
Fixed Interest Markets
NZ swap and bond yields moved in opposite directions yesterday, resulting in a widening of bond-swap spreads (EFP).
Yesterday, NZ bond markets continued to rally taking the yield on 21s 3bps lower to 4.97%. This takes their yield back close to late June lows around 4.94%. The yield on 13s remains well anchored at 3.14% ahead of today’s GDP release.
By contrast swap yields rebounded from their recent fall, taking 10-year yields 3ps higher to 5.14%, and 2-year yields 2bps higher to 3.34%.The divergent move in swaps and bond yields saw bond-swap spreads widen. For example 10-year EFP is now above 16bps, its highest level since June last year.
Two further European sovereign downgrades yesterday. First, Moody’s cut Ireland’s sovereign rating by one notch to Ba1 from Baa3, maintaining a negative watch. Second, Fitch downgraded Greece from B+ to CCC and removed its negative watch, although this simply aligns its rating with S&P’s rating for Greece. The market response was contained to Irish bond yields, with all tenors spiking higher. 2-year and 10-year bond yields traded up to 20% and 14% respectively. Other peripheral yields and CDS spreads consolidated at high levels yesterday.
Overnight, US 10-year yields again attempted to rise touching 2.95% before returning to trade below 2.9%. No resolution is yet in sight for the US debt ceiling debate, although some compromise will most likely be cobbled together ahead of the August 2nd deadline.
The DMO has announced a NZ$250m tender for today. This consists of 50m 13s, 100m 15s and 100m 21s. However, the key focus for today will be the much delayed release of Q1 GDP. The unusual circumstances of its delay means the fan-chart around its result is wider than normal. Expect possible volatility in interest rate markets today. In addition, today’s NZ PMI release for June will provide a more timely sign of how the NZ economy is tracking.
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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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