The NZD moved higher against the backdrop of broad USD weakness over the past 24 hours. The NZD/USD made a new post-float high of 0.8740 overnight before trading to 0.8720 this morning.
Yesterday's June merchandise trade balance ($230m) was slightly under market expectation, but in line with our own. It was good enough to be consistent with our expectation for Q2 GDP growth of 0.4%. The data did nothing to dampen the market view that the NZ economy is now on a fairly steady footing and something of an oasis in an uncertain global backdrop, a view that is helping to underpin current NZD strength.
Overnight the NZD/EUR rose as high as 0.6030 before drifting back to 0.6000 this morning. The NZD gapped lower relative to the GBP last evening, after supportive UK data. (see below). The NZD/GBP then eased lower overnight to trade around 0.5310 this morning.
NZD/AUD trading has been choppy over the past 24 hours, responding to the NZ trade data and comments by RBA Governor Stevens across the Tasman. In aggregate, Steven’s comments did nothing to further expectations for rate cuts from the RBA over the coming 12 months.
Today’s Australian CPI data will also be critical in this regard. A high-side reading (0.7% q/q expected) could cause the market to sharply reassess its expectations of rate cut from the RBA. We do not expect rate cuts. In the near-term this could result in a pull-back in the NZD/AUD, even though in the medium-term we continue to expect NZD/AUD appreciation.
The NZD/AUD currently trades around 0.7950, not far above the fundamental “fair value” range of 0.7680 to 0.7880.
It is likely to be a volatile day on the cross, with the NBNZ business confidence survey also due for release at 1pm today. Then all eyes will be on tomorrow’s RBNZ meeting as the key driver of the NZD this week.
Majors
All major currencies gained against a weak USD over the past 24 hours. The NZD was around middle of the pack and “safe haven” JPY and CHF were near the bottom, though risk appetite was fairly steady. Equities were relatively flat overnight, commodities made modest gains and our risk appetite index slipped fractionally from 63% to 62%.
The USD has fallen steadily over the past 24 hours, as a stalemate in the US ‘debt ceiling’ debate continues to weigh on the currency. In the early hours of this morning, further disappointing US data only added to the downward momentum.
The Richmond Fed manufacturing index came in at -1 (5 expected), dampening optimism of a rebound in US manufacturing activity. New home sales also disappointed in June (-1.0%m/m vs. 0.3% expected). These overshadowed a better-than-expected US consumer confidence number (59.5 vs. 56.0 expected). The USD index traded around 73.50 this morning, revisiting early June lows.
By contrast, the EUR/USD made steady gains yesterday, continuing to move higher overnight despite a weaker than expected German consumer confidence number (5.4 vs. 5.6 expected). The EUR/USD crept up from 1.4470 to 1.4520 overnight.
The GBP gapped higher yesterday evening after data releases failed to disappoint. Q2 GDP came in at 0.2%q/q as expected. In addition, the May index of services was ahead of expectation at 1.6%m/m (0.8% expected). The GBP/USD moved up from1.6340 last evening to trade around 1.6420 this morning.
The AUD was spurred higher yesterday. Comments from Governor Stevens acknowledged some caution on the consumer outlook. However he did not sound overly concerned about the global backdrop. With implications for Australian resources, he mentioned that “the Chinese slowdown we have all been anticipating seems to be relatively mild so far”. In all, there was nothing in the comments that suggested rate cuts were being contemplated.
The market has revised down expectations for rate cuts, a fraction to under 40bps for the coming year. The AUD/USD rose almost a cent from 1.0850 yesterday, to 1.0950 this morning. A high-side reading on today’s Australian CPI (0.7%q/q expected) could see the AUD/USD retest its early May high at 1.1000.
Fixed Interest Markets
NZ yields declined across the curve yesterday, with some flattening in the swap curve. Overnight US and German 10-year yields declined.
After the very rapid run up in NZ yields of the past couple of weeks, the market appears to be consolidating ahead of Thursday’s RBNZ meeting. OIS markets are now pricing over 90bps of hikes from the RBNZ in the coming 12 months, with a 50% chance of a first hike in September.
We expect a first rate hike in September and 150bps of hikes is the coming year. On this basis we see “fair value” on 2 and 3-year swaps at 4.20% and 4.50% respectively. 2-year swaps closed yesterday at 3.64% and 3-year at 3.99%. Any further pullback in yields will only increase the attractiveness of fixing some interest rate protection for the next few years.
Bond yields declined around 2bps along the curve yesterday, a little less than the 3-5bps seen in the swap curve. As a consequence swap bond spreads narrowed slightly, with 10-year EFP now at 20bps.
Overnight US 10-year yields declined from 3.04% to 2.94%. This followed disappointing US data releases. US Treasuries continue to act in their traditional “safe haven” capacity. The market has not moved to applying any meaningful risk premium to US Treasury yields, despite the current stalemate in Washington. Republicans and Democrats are still at loggerheads over the US ‘debt ceiling’ with one week until the August 2 deadline.
Italy cancelled an auction of medium-term bonds scheduled for mid-August stating a surplus of cash and limited need for further borrowing. This helped Italian and Spanish 10-year yields to tick down to 5.63% and 5.96% respectively.
Given the fall in off-shore yields overnight, NZ yields could see some downward pressure on the open. Attention will then turn to today’s NBNZ business confidence survey and tomorrow’s RBNZ meeting.
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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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