NZ$/A$ a tad higher as RBA minutes give no significant clues

By Mike Burrowes and Kymberly Martin

NZD

The NZD inched higher relative to the USD in relatively quiet currency markets. The NZD/USD trades around 0.8360 this morning.

With no NZ data releases yesterday, the NZD bobbed around during the day. It moved higher in the early hours of this morning as global equity markets experienced a reversal from intra-night lows. Early this morning, the Fonterra auction also showed milk prices held up relatively well. Average milk prices declined 0.9% from the previous event. Prices have moved gradually lower in recent months, but are still up 19% on a year ago.

The NZD has traded higher relative to the AUD. Yesterday’s RBA minutes (see below) failed to force the market to significantly change its expectations for RBA cuts in the coming year. NZ-AU 3-year swap spreads sit around -70bps. Overnight, the NZD/AUD inched up from 0.7950 to 0.7990.

The NZD also gained on the EUR. The EUR subsided after the meeting between European leaders Sarkozy and Merkel promoted further economic integration, but did not support issuing Euro bonds. They also stated no plans to extend the EFSF facility. The NZD/EUR moved up from 0.5770 to 0.5810.

The NZD/GBP showed choppy trading over the past 24-hours. The GBP was underpinned by a high-side UK CPI reading last night. The NZD/GBP trades at similar level to yesterday morning at around 0.5080.

Today, NZ producer price and capital goods price data will be released along with the NBNZ regional trends survey. The NZD/USD should, however, continue to take its cue from developments in global risk appetite.

Further stabilisation should allow the NZD/USD to creep higher, in the near term.

Majors
Moves in currency markets have been relatively muted. With the exception of the CHF, compared to 24 hours ago all majors are within 0.5% of the USD. The strongest performers have been the GBP and NZD.

Our risk appetite index (scale 0-100%) continued to trade at a subdued 33% yesterday. European equities were relatively flat and the S&P500 is down -1.0% currently. Commodity prices were also relatively flat as markets appear to be catching their breath after the significant gyrations of the past couple of weeks.

The USD index traded in a relatively tight band overnight, creeping up from 73.90 to 74.00. USD data releases were mixed, with building permits disappointing at -3.2%m/m (-1.9% expected), but July industrial production solid at 0.9%m/m (0.5% expected).

The EUR/USD ended the night close to where it had started around 1.4400. Intra-night however, it spiked as high as 1.4470 on optimism that the scheduled meeting between the German and French leaders would produce positive results. The EUR/USD then returned to earth as the outcome was less than ground-breaking (see below). Data releases also showed that Eurozone GDP for Q2 was slightly below expectation at 0.2%q/q (0.3% expected).

The GBP/USD crept higher overnight, to be the strongest performer over the past 24-hours. July data showed that UK inflation remains stubbornly high at 4.4%y/y (4.3% expected). While weak growth will keep the Bank of England on the sidelines for some time, the data is a reminder that the Bank can not remain on hold indefinitely. The GBP/USD rose from 1.6340 to 1.6460 overnight.

Over the past 24 hours, the CHF has declined 1.20% relative to the USD. The market has become more wary of the “safe haven” CHF after recent Swiss National Bank measures to weaken the currency. The USD/CHF was trading at 0.7940 this morning, some 12% off the lows reached last week.

Trading in the AUD was somewhat choppy yesterday. The RBA minutes discussed both domestic inflation risk and global uncertainties. The members considered “further tightening” but decided not to “at this meeting” given acute uncertainty in global financial markets. Despite no mention of rate cuts the market continues to price 130bps of cuts in the coming year. By contrast, we do not expect any rate cuts. The AUD/USD traded as low as 1.4010 overnight, before returning to trade around 1.0480 this morning.

Today, we get the Australian leading index and wage cost index. Tonight, the Bank of England minutes will be released along with the UK unemployment rate. Eurozone CPI and US PPI data will also be released, as indicators of how inflationary dynamics are developing on either side of the Atlantic.

Fixed Interest Markets
NZ yields ground higher along the curve yesterday. Overnight, US yields moved a little lower.

NZ swap yields moved higher by 3 to 6bps along the curve. There was a slight flattening bias as the 2-year yield rose to 3.41% and the 10-year to 4.93%, taking the 2s-10s curve to 152bps. 2-year yields have now retraced about half of the plunge that occurred at the start of August, as global risk sentiment initially plummeted. Bond yields were 4bps higher along the curve, taking the yield on 21s to 4.52%.

Overnight, risk appetite remained muted pressuring US 10-year yields from 2.31% to 2.20%. They are heading back toward their 2.03% low as markets continue to discount a modest medium term US growth outlook.

Italian and Spanish 10-year bond yields appear to be finding a comfortable level around 4.99%. They have meaningfully narrowed their spread to German “safe haven” bonds in recent days, since the ECB began purchases. The ECB confirmed it purchased €22bn of bonds for the week through Aug 12, greater than widely estimated.

However, market sentiment was dampened somewhat when French and German leaders failed to respond to calls for the issuance of Eurobonds. The leaders also rejected Euro fiscal union, but proposed greater economic integration with tougher deficit rules. The market was under-whelmed by the announcement.

There are no NZ tier-one data releases today. In the absence of negative dramas off-shore NZ yields should continue to inch higher today, with curve flattening pressure remaining.

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

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

All its research is available here.