By Mike Burrowes and Kymberly Martin
NZD
The NZD struggled on Friday night as risk aversion rose sharply. NZD/USD started the evening around 0.8500, but tumbled to a low of 0.8430. NZD/USD is currently trading at 0.8440.
Despite weakening against the USD, the NZD was better supported on the crosses. The NZD trade-weighted index ended marginally higher at 73.10. NZD/EUR spent the evening hovering around the 0.5970 level.
NZD/GBP fell from 0.5260 to 0.5220 after weak US employment data (see below). We expect both currencies pairs to range trade around current levels over the next few months.
NZD/AUD tried to break above the 0.8000 cent level on Friday but failed, ending slightly higher at 0.7970. There is no shortage of event risk for the cross this week.
On Tuesday we have the RBA interest rate decision. The market is pricing around a 25% chance of a 25bp cut. Given we expect no change from the RBA, we caution about the potential for a pull back in the cross towards 0.7900. Following this, we have a speech from RBA Governor Stevens on Wednesday and AU employment data on Thursday. Overall, we would expect any dips in NZD/AUD below 0.7850 to be short-lived.
The local data starts early Wednesday morning with Fonterra’s most recent online auction. Questions on Q2 might be answered in some part this week. We have wholesale trade, manufacturing and construction reports for the June quarter. We expect all of these to imply moderate gains in growth when released on Wednesday and Thursday respectively.
Majors
The “safe haven” CHF, JPY and USD were among the best performing currencies on Friday, as the US employment data disappointed. The USD responded in its “safe haven” capacity as opposed to falling on concerns around the US economy. In this backdrop, the risk sensitive NZD and AUD fell 0.3% and 0.7% respectively.
The poor US jobs data saw risk assets suffer across the board. The S&P500 index and Euro Stoxx 50 index plunged 2.5% and 3.7% respectively. The VIX index (a proxy for risk aversion) surged from 31.8 to 33.8.
Highlighting the uncertainty around the USD, gold prices surged 3.2% to USD1885 per ounce. Other commodity prices struggled, with WTI oil falling 2.5%.
The major focus on Friday was the weaker-than-expected US non-farm payrolls data for August (flat vs. 68k expected). Adding to the weakness, the jobs number for July was revised lower (85k from 117k). Overall, the USD index strengthened in response to the data, as rising risk aversion saw USD buying. The USD index rallied from 74.40 to around 74.70.
However, should US data outturns continue to disappoint we would expect speculation for further monetary easing from the Fed to mount. This would likely lead to the resumption of USD weakness.
The EUR struggled against a strengthening USD on Friday evening. EUR/USD shed over ½ cent after the US employment number, to close just above 1.4200. EUR/USD was briefly supported by comments from Chinese Premier Wen Jiabao, noting China has “confidence in the European economy and the EUR and will continue to make Europe one of its major investment markets”.
Rising risk aversion lead to “safe haven” buying of the CHF and JPY on Friday night. USD/CHF plunged from 0.7960 to an intra-day low of 0.7710. USD/CHF recovered back to around 0.7880 after the Swiss government noted they supported the efforts by the Swiss National Bank to stem the rise in the currency. The comments were seen as giving the SNB further authority to intervene if the strength in the CHF persists. USD/JPY fell sharply from 76.80 to below 0.7650 after the US employment number.
The latest IMM data showed USD speculative short positions were trimmed in the week ending 30 August. The value of the USD net short position fell to $14.6bn from $16.3bn a week earlier. Long positions in the AUD increased to 6.06bn from 5.09bn. Long positions in the NZD remained broadly unchanged at around 1.8bn.
It is a busy week for central banks. The week starts with the RBA on Tuesday where the market is pricing around a 25% chance of a 25bp cut. We see a rate cut as very unlikely. On Wednesday, the Bank of Canada is expected to leave rates on hold.
On Thursday night, we have the ECB and Bank of England interest rate decisions. Expect the focus to be on ECB President Trichet’s press conference afterwards. We also have RBA Governor Stevens speaking on Wednesday and Fed Chairman Bernanke speaking on Thursday. Both will be closely watched. The week rounds out with the monthly update of Chinese activity data on Friday.
Fixed Interest Markets
NZ swap and bond yields inched lower on Friday. After the NZ close, US and German 10-year yields gapped lower, after disappointing US payrolls data.
NZ swap yields closed a little lower on Friday. 2-year traded from 3.40% to 3.37%, relatively unchanged over the week. 10-year yields traded from 4.83% to 4.81% on Friday, slightly lower on the week. This saw the 2s-10s curve flatten slightly to 144bps.
Over the course of last week, Australian swap yields slipped lower. 3-year yields fell more sharply than their NZ counterparts from 4.59% to 4.39%, taking the NZ-AU 3-year spread to -0.76%. Markets continue to price more than 110bps of rate cuts from the RBA and around 50bps of rate hikes from the RBNZ in the coming year. We believe both will ultimately see upward revision.
NZ 10-year bond yields inched lower on Friday from around 4.56% to 4.54%. 10-year yields appear to be forming a bottom, above their August lows of 4.38%. Last week’s DMO auction saw only limited demand for long bonds at current yields. 100m of 23s solicited only 50m of bids.100m of 17s and 19s however, saw modest demand, with bid-to-cover ratios of 1.3x and 1.8x respectively.
On Friday night, US payroll data disappointed, with no additions (68k expected).The US 10-year yield gapped from 2.14% to 2.04% on the release. It later traded down to a new low of 1.98%. German 10-year yields showed similar moves, falling from 2.08% to below 2.01%.
Meanwhile, Italian 10-year yields have been creeping up again. They moved up from 5.09% to 5.28% last week. Italian 5-year CDS spreads spiked to new highs of 397bps, as the market prices greater risk of government default. The market began to speculate whether the ECB will continue to buy Italian bonds. This came after comments from ECB President Trichet, asking for Italian action, over the perceived haphazard implementation of recently agreed austerity measures. Over the weekend, the Italian Economy Minister Tremonti stated balanced budget plans for 2013, would be met.
Given moves seen off-shore on Friday night, expect NZ yields to open under downward pressure. In the week ahead, there are no NZ data releases until Wednesday’s trade and house price figures. Tomorrow’s RBA announcement will be important. We expect the RBA to remain on hold and show little inclination for cutting rates.
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See our interactive swap rates charts here and bond rate charts here.
Mike Burrowes and Kymberly Martin are part of the BNZ research team.
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