The NZD was the strongest performing currency over the past 24-hours. This occurred in direct response to the stronger-than-expected release of NZ Q1GDP, even in a global backdrop of lack-lustre risk appetite. The NZD/USD touched a new post-float high above 0.8500 yesterday, immediately after the release, before sidling off to 0.8400 overnight.
The chunky 0.8% (0.3% expected) expansion in Q1 GDP did not mean February’s earthquake was not a significant blow for the economy. What the GDP results mean is that the broader economy is accelerating, rather rapidly and with Christchurch itself is doing very well to cope with its dreadful misfortune.
The Q1 increase in GDP was all the more notable given the added drag from NZ’s biggest trading partner, Australia, suffering a 1.2% drop in its GDP for the quarter. Japan, NZ’s fourth biggest trading market, also experienced a 0.9% fall in GDP, as both faced their own significant natural disaster.
We remain confident of the momentum in the NZ economy and maintain our forecast for Q2 GDP growth of 0.4%. We also maintain our forecast for the RBNZ to begin raising rates with a 25bps hike in December, which should provide interest rate support for the NZD.
The NZD spiked higher relative to the AUD, after the GDP release, from 0.7820 to 0.7880. The NZD/AUD then traded choppily yesterday afternoon, and overnight, to around 0.7860 this morning.
The NZD/EUR and NZD/GBP showed a similar spike higher to touch 0.5970 and 0.5260 respectively. They gave back some of their gains yesterday and overnight in choppy trading. The NZD/EUR traded to 0.5950 this morning and the NZD/GBP to 0.5210.
There are no NZ data releases today, so the focus for the currency today will return to off-shore developments that impact risk appetite.
Majors
Currency markets consolidated overnight as markets remained nervous about European sovereign debt developments and the outcome of the US debt ceiling standoff. The USD index crept up from 75.00 to 75.20.
The EUR eased a little lower from around 1.4220 to 1.4120. Eurozone CPI was in-line with expectation at 2.7%yoy, providing no great urgency for future ECB rate hikes. The GBP/USD bounced sideways overnight to around 1.6120 this morning, following the lack-lustre moves in the USD and EUR.
In comments to Congress, Fed chairman Bernanke dampened speculation regarding the potential for imminent QE3. He stated that “We’re not prepared at this point to take further action”. Growth sensitive assets generally came under pressure with the Euro Stoxx closing down 0.70% and the S&P500 currently down 0.6%. The CRB global commodity index declined 1.5%.
The AUD eased lower overnight, in the backdrop of commodity price weakness. It was the worst performer over the past 24-hours relative to the USD, losing 0.5%. It traded down to just below 1.0700 this morning.
The NZD bucked the trend of weakness in commodity-linked currencies, rising 0.3% relative to the USD in the past 24-hours. Demand for the NZD was buoyed by yesterday’s better-than-expected Q1 GDP release.
Tonight, US CPI and Empire Manufacturing and industrial production data should provide further colour on the growth-inflation dynamics in the US. The University of Michigan confidence survey will provide the latest view on US consumer sentiment.
Fixed Interest Markets
NZ swap and bond yields moved higher yesterday after the upside surprise on Q1 GDP. Curves flattened as short-end yields rose 5-6bps while the long-end yields closed only fractionally higher.
Immediately after the much-anticipated GDP release of 0.8%q/q (0.3% expected) bonds and swaps sold off. Yields rose by up to 8bps. However, long-end yields quickly fell back. 2-year swap yields rose as high as 3.43% intraday, before closing around 3.41%, still within their trading band of the past few months. With the 10-year swap yield at 5.15% on the close, the 2s-10s swap spread narrowed to 174bps.
Similar action was seen in the bond market. Yields on 13s rose 5bps to 3.19bps, and the yield on 21s closed almost unchanged at 4.98%. Demand for long relative to short-end bonds was also shown at the DMO auction. The auction saw strong demand for longer-dated bonds, but only a 1x bid-to-cover ratio for the 50m of 13s offered. As a consequence, the DMO accepted 150m of bids for 21s, 100m for 15s but no bids for 13s.
OIS markets have revised up expectations for RBNZ rate hikes over the coming 12 months by about 10bps. Markets now price over 60bps of hikes, while we still look for 125bps. On this basis, we continue to believe that 2-3-year swap yields trade significantly below “fair value”, though the precise catalyst for a repricing may not be imminent.
Overnight, a US Treasury auction attracted higher than average demand with a bid-to-cover ratio of 2.8x. This occurred despite Moody’s warning of a potential downgrade of the US sovereign rating. The market continues to expect an agreement regarding the US debt ceiling to be thrashed out at the last moment, once the political brinkmanship has been worked through. US 10-year yields rose marginally from 2.90% to 2.93% overnight.
In Europe, Irish government bond yields rose to new highs. 2-year bond yields soared as high as 21.3%, but other peripheral yields continued to consolidate at high levels. Italy successfully auctioned 15-year bonds with a 1.5x bid-to-cover ratio, although the yield paid, of 5.9%, was the highest on record.
There is no NZ data to finish the week. Tonight, US Empire Manufacturing, CPI, industrial production and University of Michigan consumer confidence data will likely impact the direction of US 10-year 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.
2 Comments
"...What the GDP results mean is that the broader economy is accelerating..."
Nonsense. This result is based on a few commodities, not on the "broader economy". The broader economy suffers from production erosion and debt constraints. The free trade agreements are killing the productive middle class. You can't live of milk and kiwifruit alone.
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