NZ$/US$ weaker as risk aversion kicks in

NZD

The NZD fell overnight as a bout of risk aversion entered markets. The risk aversion move was driven by worries around global growth and ‘peripheral’ European economies. Overnight, NZD/USD fell from 88.20 to 87.60 currently.

The EUR weakness overnight saw NZD/EUR rise from 0.6120 to a high of 0.6170. The cross is currently trading at 0.6140. NZD/GBP is marginally higher at 0.5370 over the past 24 hours.

NZD/AUD spent the evening treading water as the market eagerly awaits the RBA decision today. The RBA is widely expected to leave rates unchanged, but we suspect it will deliver a more upbeat statement. This could be the catalyst for interest rate market to reverse expectations of rate cuts from the RBA over the next 12 months. Should this eventuate, expect some downside pressure on NZD/AUD.

While not gaining much attention, yesterday’s ANZ commodity price index for July was better than we feared. The index was unchanged in USD terms, but the surging currency saw the NZD index fall 3.7%. Despite recent declines in global commodity prices, NZD prices are still about 5% higher than a year ago.

Looking to the day ahead, we have the QES wage report for Q2. In the earlier hours of tomorrow morning, we have the Fonterra milk auction. Any further decline in prices would start to generate a bit of discomfort, given the NZD is moving in the opposite direction. Expect NZD/USD to trade in a tight range until the RBA at 4.30pm today. Initial support on NZD/USD is seen at 0.8730 and resistance at 0.8790.  

Majors

The USD posted decent gains overnight against nearly all the major currencies, driven higher by a decent bout of risk aversion. With the US debt ceiling deal announced yesterday, overnight the USD has regained its “safe haven” appeal.

The global jitters overnight were sparked by weaker-than-expected US ISM manufacturing data for July (50.9 vs 54.5 expected). The data saw equity market get hit, with the S&P500 and Euro Stoxx 50 index down 0.6% and 2.9% respectively. The VIX index (proxy for risk aversion) remains elevated at 23.0, its highest level since March 2011. The USD acted in its role as a “safe haven”, spurring the USD index from 73.80 to 74.30 currently.

The EUR suffered heavy losses in the early hours of the morning. In addition to the worries around global growth, speculation mounted that the ECB will soften its hawkish tone at Thursday’s policy meeting. Renewed concerns around the ‘peripheral’ European economies saw CDS spreads widen. These developments saw EUR/USD plummet from 1.4400 to a low around 1.4200, currently trading at 1.4250. EUR/CHF hit a fresh record low around 1.1030.

The concerns around global growth have trumped any optimism about the US debt ceiling being raised. Political leaders in Washington are due to vote on the bill this morning or tomorrow, but indications are that it has sufficient support from Republicans and Democrats to pass. The bill reduces the near-term risk of a technical default, but it is still unclear whether the ratings agencies will downgrade the US’s triple-A credit rating.

The JPY underperformed relative to its “safe haven” friends, as the market is nervous about intervention. The intervention concerns surfaced after news agency Nikkei reported coordinated intervention may follow Thursday’s Bank of Japan policy meeting. For now, we do not think the Japanese have a strong enough case to persuade the other G7 leaders to undertake coordinated intervention. USD/JPY has risen from 76.50 to above 77.00 early this morning.  

The GBP slipped against the USD during the early evening, after UK PMI manufacturing data for July was weaker-than-expected (49.1 vs 51.0 expected). The ongoing weakness in UK growth will no doubt see the Bank of England kept rates on hold at their meeting on Thursday. The OIS market does not expect the BoE to raise rates until the end of 2012.

Looking to the night ahead, we have UK PMI construction, Eurozone PPI and US personal spending.

Fixed Interest Markets

It was a quiet day of consolidation in NZ interest rate markets. Overnight, the rise in US bond yields that had followed the announcement of a deal in the debt ceiling debate, was cut short by weak US ISM data.

After opening lower yesterday, NZ bond and swap markets closed largely unchanged. 2-month bank bills rose 7bps to 2.80% further factoring in imminent RBNZ rate hikes. We continue to expect the RBNZ to raise rates by 50bps in September. Anecdotal evidence suggests there are some moves underway to fixing mortgage rates. We expect this continued pay-side interest should keep short-end swap rates inching higher.

Across the Tasman, we expect the RBA to leave rates on hold at 4.75% but to issue a more hawkish statement. This should serve to force the market to reverse its expectations for rate cuts over the coming 12 months. This will likely result in NZ-AU swap spreads becoming more negative in the near term. NZ-AU 3-year swap spreads currently sit around -90bps.

Off-shore, after yesterday morning’s announcement of a deal on the US debt ceiling, US and German10-year yields initially crept higher. However, early this morning, after the release of a disappointing ISM manufacturing number (50.9 vs. 54.5 expected) yields declined. US 10-year yields subsided from 2.80% to 2.74% and German 10-year yields from 2.54% to 2.45%.

For the moment, in Europe, attention appears to be focused on Italy. Italian 10-year yields moved up to new highs at 6.00%. Italian spreads to German bunds have widened to Euro era highs of around 350bps. Italian CDS spreads, representing the risk of sovereign default, have also spiked higher.

Today’s NZ Q2 labour data will probably show salary and wage inflation continuing to edge up. Given developments off-shore overnight NZ long-end rates will likely feel further downward pressure today, continuing the curve flattening bias.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes and Kymberly Martin are part of the BNZ research team. 

All its research is available here.