NZD/USD spent the evening flirting with the post-float high at 0.8570 but remains unchanged overnight. This is despite the USD weakening against all other major currencies.
The NZD’s underperformance overnight saw it consolidate recent gains on the crosses. NZD/AUD was very uneventful, hovering around the 0.7970 level for the evening. Some brief weakness in the GBP catapulted NZD/GBP to a fresh post-float high around 0.5325 but the cross has settled back below 0.5300 for now. NZD/EUR shed ½ a cent to be trading around 0.6020 currently.
The key events locally for the NZD will come next week. The highlight will be the RBNZ interest rate decision on Thursday. No change is expected but the market is ramping up the chance of a rate hike in September and is fully priced for a 25bp hike from the RBNZ at the October meeting. On Wednesday we also have the important NBNZ business survey.
Today, we have the release of net migration and credit card spending. Across the Tasman, we have NAB Business Confidence and the RBA transaction report. We expect initial support on NZD/USD at 0.8530 and resistance around 0.8600.
Majors
The USD has weakened against all the major currencies over the past 24 hours. There was no clear risk-on or risk-off theme prevailing in FX markets overnight. Indeed, the “safe haven” CHF and JPY performed strongly, while NZD and AUD slid sideways. For now, FX markets are in a holding pattern as we await key news from the US debt ceiling debate and Greek bailout package.
Sentiment towards the EUR was buoyed by hopes that EU leaders would announce the details of the second bailout package for Greece tonight. The hopes were spurred by comments from French finance minister Baroin, noting that European leaders were less divided than the media was suggesting and could reach an agreement to alleviate Greece's debt woes. EUR/USD started the evening around 1.4160 and is now trading at 1.4230.
Across the channel, the Bank of England minutes were less dovish than expected. The vote was again split 7-2 to kept rates at 0.5%, with 2 members voting for a rate increase. Only MPC member Posen discussed the need for further asset purchases, in contrast to the previous set of minutes where the discussion around further asset purchases was more intense among members. The minutes gave the beleaguered GBP a boost, with GBP/USD up around ½ a cent to 1.6160 overnight.
The USD/JPY has continued to fall overnight and is now approaching its four-month low at 0.7845. The ongoing JPY strength spurred the Bank of Japan to step-up its rhetoric on the currency yesterday, noting it will act ‘decisively’ should the JPY continue to appreciate. For now, we see the chance of intervention in the currency as slim and certainly don’t expect a repeat of the coordinated G7 invention we saw after the Japanese earthquake earlier this year.
Looking to the night ahead, expect the European debt crisis and US debt ceiling debate to be the dominate driver of currency direction. Data-wise, we have Eurozone PMI updates, UK retail sales and US Philadelphia Fed index.
Fixed Interest Markets
NZ yields moved higher across the curve yesterday, with strong rises at the short end. Overnight, US and German 10-year yields crept higher as risk sentiment improved.
Upward pressure on NZ yields continues as the market reassesses its OCR outlook, after the high-side surprises on both GDP and inflation data. OIS markets are now pricing 90bps of rate hikes in the coming 12 months and 25bps of hikes by the October meeting. We continue to expect 125bps of hikes in the coming year.
NZ 2-year swap rates spiked as high as 3.62% early yesterday morning. Pay-side interest driving yields to these levels may have been stop-loss-related. Yields came back a little later in the day but still ended up 7bps at 3.58%. 2-year yields have now moved 26bps in the past week, although we still believe they are some way below current “fair value” we see around 3.95%. 10-year swap yields rose 5ps to close at 5.22%, and the 2s-10s curve flattened a further 2bps to 164bps.
Bond markets showed slightly more modest moves. The yields on 13s rose 5bps to 3.40% and the yields on 21s rose 3bps to 5.05%. The DMO announced a small auction of $100m 15s, $50m 19s and $50m 21s for today.
Overnight, there was renewed optimism that Washington could reach a deal on raising its debt ceiling, and reduce the nation’s deficit by $3,700b over the coming 10 years. US 10-year yields inched higher from 2.89% to 2.93%. German 10-year yields rose from 2.68% to 2.76% narrowing the spread with peripheral yields that have fallen from recent highs.
News from the US corporate sector continues to be relatively positive in the Q2 S&P500 reporting season. 61 of 500 companies have now reported with 54 surprising positively and earnings growth standing at 27%y/y.
In the day ahead, NZ credit card spending data will likely provide further evidence of solidness in the NZ economy. Expect upward pressure on NZ short-end yields to continue.
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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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