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US$ weaker across the board responding to US growth concerns

Currencies
US$ weaker across the board responding to US growth concerns

By Mike Burrowes and Kymberly Martin

NZD

The NZD crept up relative to a broadly weaker USD over the past 24-hours. It was however weaker relative to its European peers and the AUD.

There was a state of relative calm overnight, with equity markets relatively flat. Sentiment toward the USD remained lacklustre as the market continues to discount a muted US growth outlook. The NZD/USD moved gradually higher touching 0.8420, before returning to trade around 0.8380 this morning.

Relative to a stronger GBP, (see below) the NZD declined in the early hours of this morning. The NZD/GBP fell from above 0.5090 to just over 0.5060. NZD trading relative to the EUR was choppier. It traded in a range from 0.5790 to 0.5820 overnight, before returning to trade around 0.5800 currently.

The NZD/AUD bumped lower overnight, in the face of a strong AUD. From around 0.7970 last evening the NZD/AUD traded to around 0.7940 this morning. Both currencies were underpinned by the return of demand from real money and macro accounts.

It is another quiet day on the NZ data front. In the absence of off-shore events to reignite heightened risk aversion, expect the NZD to trade with an upward bias.

Majors

Over the past 24-hours, all major currencies strengthened against a broadly weaker USD. The USD index traded from a high of 74.20 last evening, to touch 73.50 early this morning, before recovering to 73.70.

It was a further day of consolidation in markets. Our risk appetite index (scale 0-100%) hovered around 32%. The Euro Stoxx 50 posted a tentative 0.30% gain, though driven by defensive as opposed to cyclical sectors. The S&P500 is currently flat. The WTI oil price rose 1.0% with similar moves seen in the CRB global commodities index.

The USD was broadly weaker in this backdrop, as the market continued to digest the prospect of a lower US growth environment. US 10-year bond yields slipped another 8bps lower to 2.16%, back toward recent lows. US PPI data was slightly higher than expected at 2.5%y/y ex-food and energy (2.3% expected). This raises the spectre of a lower growth, higher inflation outlook. In this regard, tonight’s US CPI data will be closely monitored.

The CHF was one of the strongest performers in the past 24-hours. The SNB intensified measures to weaken the “massively overvalued” CHF by increasing banks’ reserve deposits from CHF 130bn to CHF 200bn. In effect this increases the supply of liquidity, helping to pressure yields ever lower. However, the move did not go as far as market expectations for a peg or floor for the exchange rate. The USD/CHF gapped lower on the announcement from 0.8000 to 0.7850, before crawling up to trade around 0.7900.

The GBP/USD moved higher overnight after the release of Bank of England minutes showed a unanimous vote to maintain rates at the historically low 0.50%. This was in contrast to previous votes where 2 to 3 members had voted for rate increases. The currency moved higher despite disappointing unemployment data (7.9% vs. 7.7% expected). The currency appeared to take comfort from the fact that the BoE stands ready to maintain stimulus to the economy, despite current inflation running well above its target band. The GBP/USD rebounded from a low of 1.6350 to trade above 1.6550 this morning.

The EUR/USD rose in the backdrop of broad USD weakness. Eurozone headline CPI was in line with expectation at 2.5%y/y, although core CPI for July was lower than expected at 1.2% (1.6% expected). The EUR/USD moved up from 1.4400 to trade around 1.4450 this morning.

The Australian wage price index for June rose 0.9%m/m, in line with expectation. In our view, the data was a continuation of the evidence that there is no case for a change in monetary policy in either direction, at present.

The AUD/USD moved up from around 1.0450, touching 1.0600 early this morning, trading around 1.0570 currently.

Key data releases this evening will be US CPI, Philadelphia Fed and Existing Home Sales. UK Retail Sales data will also be released.

Fixed Interest Markets

NZ swap and bond yields closed down 3-4 bps yesterday. Markets opened with lower yields, following off-shore moves, and then moved sideways in very quiet trading.

NZ bond markets were very quiet yesterday, with the yields on 13s closing down 4bps at 2.97%. Similar moves were seen in 21s that closed at 4.48%. The DMO announced a small NZ$50m auction of 23s for today, likely responding to limited demand for short-end bonds at last week’s auction.

Swap yields followed similar dynamics to bonds. 2-year yields closed down 3bps at 3.38%. 5-year yields declined 4bps to 4.19%. Although 5-year yields have bounced off their recent lows of 4.01%, they still trade around the same level as their mid-March lows. 10-year swap yields closed at 4.89%, taking the 2s-10s spread to 151bps.

Overnight, US 10-year yields declined from 2.24% to 2.16%, as global uncertainty continued to underpin “safe haven” demand for US Treasuries. Similarly, German 10-year bund yields declined from 2.28% to 2.20%. An eerie calm has descended on European rates markets. Spanish and Italian 10-year yields have eased further to 4.90%, with speculation that the ECB continues to buy their bonds.

The release of Bank of England minutes showed the committee voted unanimously to keep rates on hold at 0.5%. We maintain our call that the Bank remains on hold until September 2012.

There are no NZ data releases today. Look to the DMO auction for indications of bond demand given current relatively low yields.

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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.

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