NZD
Continued global risk aversion saw the NZD decline 1.0% relative to the USD over the past 24-hours, to trade around 0.8700 this morning.
Yesterday’s NZ Labour Cost Index and Quarterly Employment Survey were fundamentally robust. They pointed to not only firming wage inflation in the June quarter, but improving labour market activity as well. However, with all eyes on off-shore developments the data had little affect on the NZD. Yesterday the NZD traded in a relatively tight range until the RBA announcement. At this point, the NZD/USD was boosted higher to 0.8780, before drifting off below 0.8700 this morning, as global markets remained risk averse (see below).
The NZD/AUD gapped higher yesterday afternoon following the RBA meeting. The RBA left rates at 4.75%, as expected, and while raising the prospect of further rate hikes, highlighted the significant uncertainties in the global backdrop. The statement saw the market actually increase pricing for RBA cuts to 40bps in the coming year. The Australian interest rate differential deteriorated relative to NZ. The NZD/AUD spiked from 0.7970 to 0.8030, a level it has traded around until this morning.
The NZD/EUR tracked lower overnight from around 0.6160 to 0.6110 given the “risk-off” sentiment in markets. Similarly, the NZD/GBP subsided from 0.5380 to almost 0.5320, as the GBP held up relatively well following a solid UK construction PMI data release.
In the early hours of this morning, the Fonterra milk auction showed average prices declined 1.3% from the previous event. This continues the softening seen in recent months, taking the top off recent elevated prices, but is far from alarming. Expect NZD trading to be driven by global risk appetite today. Trading is likely to be choppy with a downward bias.
Majors
It was another day of clear risk aversion in currency markets. The “safe haven” CHF and JPY were amongst the strongest performers while the USD index also rose.
Markets took little solace from the passing and signing into law of the increase to the US debt ceiling and spending cuts. The market appears focused on recent weakness in global growth data, along with the risks that reduced US government spending may hinder the US’s nascent recovery. In addition, US personal spending for June declined 0.2% m/m (0.1% expected). The USD however, acted in its “safe haven” capacity creeping up from 74.30 to 74.50 overnight.
Our risk appetite index (scale 0-100%) remained around 51% overnight. Equities fell again, with the Euro Stoxx 50 down 1.90% and the S&P500 down 1.50%, dragged down by cyclical sectors and financials. Commodity prices held up relatively well, and the gold price made new all-time highs.
Against this backdrop, the CHF has risen a further 2.0% relative to the USD over the past 24 hours. The JPY treaded water relative to the USD, with the USD/JPY trading around 77.20 this morning. This is well below the 78.90 level that the USD/JPY bottomed at in March, following coordinated G7 intervention in the wake of the Japanese earthquake. This time around, given widespread woes in other regions, it is unlikely any sort of coordination will occur.
The EUR traded choppily overnight relative to the USD, as the USD initially responded negatively to the release of US personal spending data. Having started the evening around 1.4260 the EUR/USD traded to around 1.4200 this morning. The GBP held its own relative to USD overnight, as the UK Construction PMI failed to disappoint, coming in at 53.5 (53.1 expected). The GBP/USD started the evening around 1.6300, the level it is trading at this morning.
The NZD and AUD both lost ground relative to the USD overnight in the backdrop of weak risk appetite. In addition, the market took the RBA’s statement to be relatively dovish (see below) increasing expectations for rate cuts in the coming year. The AUD/USD subsided from 1.100 to 1.0800 this morning.
In the day ahead, we receive an array of non-manufacturing PMI from China, Eurozone, UK and the US, along with the US ADP employment report and US factory orders.
Fixed Interest Markets
NZ interest rate markets rallied on the back of off-shore risk aversion. Yields declined 4-5bps across the board.
The decline in swap yields saw 2-year yields close at 3.67% and 10-year yields at 5.10%, with the 2-10s spread at 143bps. Similar moves were seen in bond markets with the yield on 21s closing at 4.90%, the lowest level since March 2009. It is still someway above the Jan 2009 low of 4.22%. The yield on Australian 21s, at 4.73%, has fallen below NZ’s, suggesting there may be some further downward pressure on NZ long yields.
Yesterday the RBA kept rates on hold as expected. It stated that it “considered whether the recent information warranted further policy tightening”, likely a reference to the recent CPI data. However it concluded that “the acute sense of uncertainty in global financial markets over recent weeks” convinced it to remain on hold. We continue to see the risk of rate hikes rather then cuts in the coming year. However, the market took the statement to be relatively dovish with Australian swap yields declining. NZ-AU 3-year swap rates have moved to -75bps.
For now, default in the US appears to have been diverted with the House of Representative voting by a large margin to increase the US debt ceiling. It was later signed into law by President Obama. However, the removal of this uncertainty has done little to improve market sentiment that is now focused on concerns regarding global growth. In addition, the possibility of a rating agency downgrade of the US still hangs in the balance. US 10-year yields continue to plumb new depths, falling overnight from 2.74% to 2.62%.
In Europe, Spanish and Italian 10-year yields moved higher to 6.28% and 6.13% respectively and CDS spreads spiked higher. Spreads to bunds also reached new Euro-era highs as demand for “safe haven” German bunds saw 10-year yields decline to 2.42%.
In the day ahead, in the absence of NZ data releases, direction in NZ interest rate markets will be dictated by global risk appetite. Expect yields to open lower given developments overnight.
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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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