By Kymberly Martin and Mike Burrowes
The NZD is slightly higher than 24-hours ago but has experienced extreme volatility in the intervening period, whipped around by gyrations in global risk appetite.
The NZD/USD hit an intraday low below 0.7970 early yesterday afternoon, before later testing 0.8250 several times. The US Federal Reserves announcement, (see Fixed Interest Section below) early this morning appeared to initially disappoint market expectations. The NZD/USD briefly came under renewed downward pressure. As market sentiment has subsequently improved, with a strong rally in US equity markets, the NZD/USD has broken higher to around 0.8360.
Given current global market turbulence we believe that the RBNZ’s stated premise for the removal of the 50bp “insurance cut’” in September (i.e that the “current global financial risks recede…”) is clearly not being met. We now expect the RBNZ to wait longer to see how global events develop and have pushed back our expectation for the first RBNZ hike to December. Notwithstanding global developments, we believe domestic fundamentals remain on a solid footing and continue to expect the RBNZ to gradually remove monetary stimulus next year.
The NZD/AUD has also been highly volatile, trading in a wide band between 0.8010 and 0.8090, pulled around by fluctuations in risk sentiment.
Relative to the EUR the NZD is trading at similar levels to 24 hours ago. However, once again the end point disguises meaningful volatility. The NZD/EUR touched an intraday low below 0.5630, before rebounding to trade above 0.5800 this morning.
The NZD/GBP broke below 0.5000 yesterday afternoon for the first time since mid-June. It has subsequently rallied in the wake of the US FOMC statement to above 0.5100.
With no NZ data releases today, the NZD will continue to respond to shifts in global risk appetite. Expect volatility to remain high.
The “safe haven” CHF was the best performing currency over the past 24 hours as the market remains nervous about a further slowdown in global growth. In this backdrop, the risk sensitive NZD and AUD lagged against the USD but rebounded this morning after the FOMC announcement.
Panic selling of risky assets started yesterday afternoon as markets responded to the 6.7% decline in the S&P500 index. The moves in FX markets were exacerbated by stop-loss selling of risk sensitive positions. Indeed, NZD/USD and AUD/USD briefly fell through 0.8000 and 1.0000, but have since recovered.
The focus overnight was on the FOMC statement. While the Fed acknowledged lower growth and inflation, it stopped short of providing a firm hint at QE3 (see below). Trading in FX markets following the statement was very volatile, but overall the USD index has fallen from 74.60 to 74.20 currently.
After the Fed statement equity markets mustered a rally. The S&P500 is currently up almost 5.0%, following a 0.3% return from the Euro Stoxxx 50. However, since late July the S&P500 index is down over 13%, as concerns about global growth have surfaced. The VIX index has eased overnight, but still remains very elevated at around 36.
Despite improving sentiment in equity markets the “safe haven” CHF and JPY have continued to benefit from repatriation flows, as investors look to reduce their risk exposures. USD/CHF collapsed to record low at 0.7080, after starting yesterday around 0.7550.
Similarly, EUR/CHF plunged from 1.0680 yesterday, to a low of 1.0085 overnight. The Swiss National Bank will be very concerned about the impact of the strengthening CHF on the economy. However, for now, their policy options to stem the rise in the currency seem limited.
Prior to the FOMC statement, EUR/USD edged down to 1.4200. However, subsequently EUR/USD has rallied from 1.4220 to 1.4330 currently. GBP/USD lagged the moves during the evening after weaker-than-expected UK manufacturing production for June (-0.4% vs 0.2% expected). GBP/USD fell to a low around 1.6180, but since the FOMC statement it has recovered to 1.6300.
Looking to the night ahead, expect trading to remain volatile as the market continues to fret about a global slowdown. Data wise, we have German CPI, French industrial and manufacturing and the Bank of England inflation report.
Fixed Interest Markets
NZ interest yields declined further yesterday as global risk aversion remained elevated. Overnight US yields fell further.
NZ swap yields declined a further 6bps yesterday to 3.18%, taking them perilously close to their March 2009 lows of 3.16%. The long-end of the curve remained around 4.90% taking the 2s-10s spread back to 172bps. This is a marked steepening in the curve from a low of 143bps just over a week ago, prior to the sharp decline in short-end yields.
OIS markets now price less than 40bps of rate hikes from the RBNZ in the coming year. We no longer expect the RBNZ to raise rates in September, as it waits for global uncertainties to subside. However, we believe the fundamentals remain in place for the RBNZ to raise rates by year end, and move gradually higher there after.
Bond yields also declined, with the yield on 13s falling to 2.85% and that on 21s declining to 4.45%. NZ 10-year bond yields are now nearing their March 2009 low of 4.28%.
As Australian swap yields have declined further to 4.21%, the NZ-AU 3-year swap spread has moved higher to -70bps. OIS markets are now pricing 140bps of rate cuts from the RBA, expectations that we continue to believe are inconsistence with the RBA’s stated tightening bias.
In the early hours of this morning the US Federal Reserve made its rate decision. It stated that economic growth this year was considerably slower than it had expected. It took the unprecedented step of outlining a specific time frame for its current monetary stance, saying it saw an “exceptionally low levels for the Fed funds rate at least through mid 2013”.
It will continue reinvesting principal payments from their securities holdings. However, it did not announce any new measures, instead noting it was ready to use “a range of tools” if necessary.
US 10-year yields fell sharply on the announcement, to 2.05%, the low they reached in December 2008. US 2-year yields are now trading at 0.18%, an all time low.
In Europe, yields on Italian and Spanish 10-year yields have declined to 5.2% and 5.1%, from 6.2% and 6.3% respectively last week, after the ECB’s action to buy their sovereign bonds. Their CDS spreads have also declined.
In the day ahead there are no NZ data releases. Expect NZ long–end yields to open under downward pressure given the heavy falls off-shore yields following the Federal Reserve announcement.
Kymberly Martin is part of the BNZ research team.