By Mike Burrowes and Kymberly Martin
NZD
NZD/USD was the best performing currency over the past 24 hours, supported by a broad based recovery in risk appetite. Overnight, NZD/USD marched higher from 0.8260 to 0.8350 currently.
Yesterday’s RBNZ inflation expectations survey for Q3 remained stubbornly high, despite being taken in the heat of the global markets turmoil. The key 2-year ahead annual CPI view was 2.86%, up from 3.00% in the last survey. Overall, we believe the RBNZ will be annoyed by these latest inflation expectations results. We think high inflation and an improving growth outlook will eventually force the RBNZ to raise rates more aggressively than currently expected by the market.
The inflation expectations data, combined with a stronger-than-expected Chinese HSBC PMI manufacturing data for August (49.8 vs 49.3 for July), was enough to push NZD/USD from 0.8210 to just shy of 0.8300 before the European data (see below).
The NZD/ AUD cross has continued to recover, rallying from around 0.7900 to 0.7940 currently. The divergence between the currency and interest rate differentials has closed sharply in the past 24 hours. The NZ-AU 3-year interest rate differential moved back in favour of the AUD, currently -85bps from -76bps yesterday.
The NZD posted steady gains against the EUR and GBP overnight. NZD/EUR is currently around 0.5790, from 0.5750 at the start of the evening. NZD/GBP surged from around 0.5010 to 0.5060 currently. Should global risk sentiment continue to stabilise, we see potential for a move back towards the highs seen at the beginning of the month.
Looking to the day ahead, keep an eye out for comments from NZ Finance Minister English around 9am. English is speaking to the Hong Kong NZ business council. Following this, we have the release of NZ trade balance. We anticipate ongoing reasonable growth in exports and imports, y/y, with a seasonally-impacted deficit of $236m for the month of July.
Majors
The USD is weaker across the board over the past 24 hours as risk sentiment has continued to recover. Sentiment was buoyed by data out of China and Europe, helping to quell concerns of an imminent global recession. The USD index fell from 74.10 to a low around 73.60, but has recovered back to 73.90 in the early hours of this morning.
The recovery in risk appetite was broad based. The S&P500 surged 3.4% higher and the Euro Stoxx 50 index gained 0.7%. The VIX index (proxy for risk aversion) plunged from 42.0 to 36.2. The recovery in risk appetite saw “safe haven” demand for gold wane, falling from above USD1900 to USD1828 an ounce.
EUR/USD gained over ¾ cents to 1.4480 after the release of better-than-expected German PMI manufacturing data for August (52.0 vs 50.6). However, the gains in EUR/USD were halted shortly after by weaker-than-expected Eurozone ZEW survey for August (current 53.5 vs 85.0 expected). The data suggests the Eurozone debt crisis is having some impact on business confidence. EUR/USD is currently trading at 1.4440.
The broad based USD weakness continued during the early evening after comments from an advisor to the People’s Bank of China, Xia Bin, hit the news wires. The advisor noted China should diversify its huge foreign exchange reserves to hedge against risks from a long-term decline in the USD. It is estimated around 70% of China’s USD3.2 trillion in reserves are invested in USD.
Weaker-than-expected US data tempered risk appetite and supported the USD early this morning. New home sales for July were 298k (310k expected) and the Richmond Federal manufacturing index for August was a disappointing -10 (-5 expected).
GBP/USD was dragged higher by the EUR, reaching an overnight high of 1.6570. The GBP has fallen back to 1.6500 currently as the USD has partially pared back its losses in the early hours of this morning.
The commodity sensitive NZD and AUD have remained better supported throughout the evening. AUD/USD is currently trading at 1.0530, from 1.0450 at the beginning of the evening.
Looking to the night ahead, expect the focus to remain on what policy options US Federal Reserve Chairman Bernanke will discuss in his Jackson Hole speech on Friday evening. Data wise, we have the German IFO, Eurozone industrial new orders, US durable goods orders and US house prices.
Fixed Interest Markets
NZ yields bounced off recent lows yesterday. As risk aversion eased overnight, US and German 10-year yields crept higher.
Yesterday the RBNZ’s Q3 2-year-ahead inflation expectations data stayed high at 2.9%. This was just a tick below the previous reading of a 20 year high of 3.0%. This was despite the survey being undertaken during the depths of the recent market turmoil. The data will be enough to keep the RBNZ on its toes, despite the uncertain global backdrop. NZ swap yields moved higher along the curve by around 4bps after the data. 2-year yields closed around 3.31% and 10-year yields at 4.83%.
Bond yields closed 7bps higher across the curve. The yield on 21s bounced off recent lows to 4.48%. Across the Tasman, Australian 10-year yields have risen from their low of 4.23% at the end of last week, to trade at 4.39% currently. This saw the AU-NZ 10-year yield differential narrow from -20bps to -8bps.
Overnight, US and German 10-year yields rose on the back of slightly better risk sentiment, both trading from around 2.10% to 2.13%. An auction of US 2-year notes yielded a record low 22bps, as markets continue to factor that the Federal Reserve will keep rates on hold, until at least mid 2013.
An uneasy calm has descended over European debt markets, where yields of peripheral sovereigns are largely consolidating below peak levels. It is worth noting however, that in the past few days, yields on Greek bonds and CDS spreads have surged higher. They have moved back toward previous peaks, indicating the market is pricing a greater risk of default.
Upward pressure on NZ yields is likely today given some easing in global risk aversion and the US equity rally overnight. Today’s trade balance should highlight the continued solidity of the NZ economy.
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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.
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