By Mike Burrowes and Kymberly Martin
NZD
The NZD showed some choppy trading in the past 24-hours but returned to trade at a similar level around 0.8320 this morning.
A general stabilisation in risk appetite was the key driver of currencies overnight, causing “safe haven” currencies, JPY and CHF to underperform. Our risk appetite index (scale 0-100%) inched up from 30 to 32%, as equities rallied.
Yesterday’s NZ Performance Sector Index was without surprise, coming in at 54.4 (54.7 previously). While the PSI jobs indicator stalled, its activity component was a firm 56.3. New orders strengthened even further to 58.6. This builds on the reasonably good PMI reading of 53.2 we saw last week. That also had a sturdy ‘forward looking’ new orders component.
However, the data had little direct effect on the NZD that is taking its cue more from global developments. The NZD traded to above 0.8380 overnight before returning to trade around 0.8320 this morning.
The NZD lost ground against a broadly stronger EUR and GBP. The NZD/EUR traded down from 0.5860 to 0.5760. The NZD/GBP eased from around 0.5150 to 0.5080 this morning.
The NZD/AUD came under pressure overnight. Some stabilisation in global markets saw markets revisit and reduce expectations for rate cuts from the RBA. This helped boost Australian 3-year swap rates, resulting in the NZ-AU 3-year swap spread moving to -0.82% from -0.73% at the end of last week. The NZD/AUD fell from 0.8040 to 0.7920 overnight. Strong AUD/USD flows exacerbated the move.
We believe there is ample room for further upward revisions to RBA rate expectations with today’s RBA board minutes for August a potential catalyst. Further reversal of rate expectations could see the cross move toward 0.7850 in the near term.
There are no NZ data releases today so expect the NZD to continue to take its cues from offshore. The Fonterra auction in the early hours of tomorrow morning should be closely watched, to see if the recent pullback in global milk prices is building to anything more serious. Over the week, initial support on NZD/USD is seen around 0.8050 and resistance around 0.8550.
Majors
It was a day of relative calm in currency markets. As risk appetite improved somewhat, the USD underperformed along with the “safe haven” JPY and CHF. The EUR and AUD were amongst the strongest performers over the past 24 hours.
Risk sentiment stabilised to an extent overnight, as there was an absence of further negative sovereign news from either the US or Europe. In addition, there was some positive corporate news of M&A deals to take advantage of “cheap” equity values.
The VIX index (a proxy for risk aversion) declined from 36 to 32, the Euro Stoxx 50 rose 0.70% and the S&P500 is currently up 2.00%. The CRB global commodity index staged a 1.2% rally. In this backdrop, as demand for “safe haven” currencies weakened, the JPY underperformed.
The CHF was the weakest performer in the past 24-hours, declining 0.80% relative to a broadly declining USD. The CHF was also pressured by press reports that the SNB is in negotiations to impose a EUR/CHF peg. The USD/CHF trades around 0.7840 this morning.
The USD was broadly weaker as risk appetite stabilised. Sentiment toward the USD was also not helped by a disappointing Empire Manufacturing release that came in at -7.72 (flat expected). This shows US manufacturing activity continues to languish. The USD index traded from around 74.50 to 73.80 this morning.
The EUR was a key beneficiary of USD weakness in the absence of any EUR data releases or negative sovereign headlines. A nervous sense of calm appears to have settled on the European “periphery”. Italian and Spanish 10-year bonds are now trading at below 5.0%, well down from their peaks above 6.0% before ECB intervention. The EUR/USD traded up from 1.4300 to 1.4450.
The AUD has been a beneficiary of the greater sense of calm in markets. Markets have revised up expectations for RBA rate cuts in the coming 12 months, to less than 130bps from more than 140bps previously. In contrast, we continue to expect the RBA to remain on hold with a tightening bias.
Australian 3-year swap rates have moved up from 4.32% to 4.49% since the start of the week, helping to underpin the AUD. The AUD/USD traded up from 1.0400 last night to 1.0510 this morning.
Today’s RBA minutes will be important, potentially prompting further market upward revisions to rate expectations. This evening we get Eurozone GDP for Q2 and US industrial production data.
Fixed Interest Markets
It was a quiet day in NZ interest rate markets after all the recent drama. Overnight, off-shore long yields consolidated at low levels.
NZ swap yields opened yesterday down 1-2bps but soon rose to close up 1-2bps along the curve. With the 2-year yield at 3.35% and the 10-year at 4.90% the 2s-10s spread remains at 155bps.
Bond markets similarly opened with yields down slightly. They then crept higher over the day to close up 3bps along the curve. The yield on 21s trades around 4.48%, still not far off recent lows of 4.38%. Low US yields continue to weigh on the long end of the NZ curve.
Bank bill market yields rose 5 to 7bps. The 3 month bill now yields 3.01%, well off the low of 2.68% reached just a week ago, as the market starts to revisit its RBNZ rate expectations. As global markets consolidate, RBNZ rate expectations are starting to creep up again, with over 50bps of hikes now priced for the coming 12 months.
Overnight, US 10-year yields traded with a fair amount of volatility but moved up from 2.25% to 2.28%. German 10-year bunds continued to trade around 2.33%.
There are no NZ data releases today. If off-shore issues begin to show further stabilisation, attention will return to the solid basis of the NZ economy. We continue to believe that market expectations for RBNZ rate hikes in the coming year are too low and will see upward revision, putting upward pressure on yields.
No chart with that title exists.
See our interactive swap rates charts here and bond rate charts here.
Kymberly Martin and Mike Burrowes are part of the BNZ research team.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.