Europeans leave their rates on hold; weak support for NZ govt bond tender

Europeans leave their rates on hold; weak support for NZ govt bond tender

By Mike Burrrowes


The NZD was the best performing currency against the USD over the past 24 hours, despite being up only 0.1%. NZD/USD rallied from around 0.8330 to a high of 0.8380 early this morning. These gains have been fully reversed over the past several hours of trading with NZD/USD trading at 0.8320 currently.

Yesterday’s weaker-than-expected Australian employment data (-9.7k vs. 10k expected) saw AUD/USD shed around ¾ cent to 1.0570. AUD/USD recovered back above 1.0650 during the evening, but has fallen to 1.0570 early this morning as the USD recovered against all the major currencies. The OIS market is now pricing almost 130bps of cuts from the RBA over the next 12 months, from around 120bps yesterday.

The weak AU data has seen NZD/AUD partially reverse the declines suffered earlier in the week. The cross is currently trading at 0.7860, from 0.7820 prior to the AU data. The move higher was supported by the NZ-AU 3-year interest rate differential becoming less negative, moving from -95bps to -80bps currently. We continue to favour a gradual move higher in the cross over the next 12 months.

The NZD surged higher against a sharply weaker EUR overnight, rallying from 0.5910 to just below 0.6000 currently. NZD/GBP traded to a high of 0.5240 overnight, but has settled back around the 0.5200.

Locally, the only data due for release is credit card spending at 10.45am. On the day, initial support for NZD/USD is seen around 0.8250 and resistance at 0.8350. 


The USD has rallied against nearly all the major currencies over the past 24 hours. The EUR lead the declines in FX markets as the ECB delivered a more dovish statement. The USD index has gained 1.1% to 76.20.

Measures of risk appetite across other markets were more mixed. The S&P500 index declined 0.7%, lead by a 2.3% decline in financial sector stocks. In contrast, the Euro Stoxx 50 index gained 0.5%. The CRB index (broad index of global commodities) remained broadly flat.

The ECB left rates on-hold at 1.5%, as expected. However, in the accompanying press conference President Trichet was dovish, noting the risks to growth are skewed to the downside. EUR/USD nose-dived from 1.4050 to below 1.3950 following the comments. The OIS market is now pricing 31bps of cuts over the next 12 months from the ECB, from 26bps yesterday.

EUR/USD continued to decline after the Greek Economic Minister stated the budget deficit will be larger than agreed due to the deep recession. This has reignited talk that Greece may leave the Eurozone. Indeed, overnight German Finance Minister Schaeuble noted it was “up to Greece as to whether it can fulfil the conditions that are necessary for membership in the common currency”. Subsequently, EUR/USD declined to around 1.3900, its lowest level since mid-July.

Sentiment towards to the USD was bolstered by better-than-expected US trade data for July (-44.8bn vs. -51.0bn expected). US initial jobless claims for the week ended September 3 were slightly weaker-than-expected at 414k (vs. 405k expected). In the early hours of this morning the USD index has surged from 75.6 to 75.20.

Comments from Fed Chairman Bernanke offered little in the way of surprises. Bernanke noted the Fed is ready to employ tools as appropriate to boost economic recovery, but stopped short as providing details on what measures could be implemented.

The Bank of England left rates and its asset purchase programme unchanged overnight. GBP/USD staged a small rally following the release, as there was some expectation the BoE would announce further asset purchases. GBP/USD rallied to an overnight high of 1.6080, but has fallen back to 1.5960 in the early hours of this morning.

Looking to the day ahead, the focus will initially be on a speech from US President Obama at 11am NZT. Obama is expected to announce a USD300bn job creation package. Shortly after this we have the release Chinese CPI, industrial production and retail sales for August. In the US tonight we have wholesale inventories.

Fixed Interest Markets

by Kimberly Martin

NZ bond yields rose after weak demand at the DMO bond auction. NZ swaps yields were more contained, resulting in a narrowing of swap-bond spreads.

The DMO government bond tender attracted relatively weak demand, with 50m of 15s only 1.1x bid. 100m of 23s were under-bid and under-accepted at an average successful yield of 4.59%. Only 50m of 13s received a decent bid-to-cover ratio of 3x, with 75m bids being accepted, at an average yield of 3.01%. After the tender bond markets sold off. The yield on 23s rose 11bps on the day to close at 4.65%, and the yield on 21s rose 7bps to close at 4.50%. The curve steepened as the short-end remained relatively well anchored.

Australian 10-year yields declined on the back of their weak employment data to 4.25%. This resulted in AU-NZ 10-year bond spreads becoming sharply more negative at -23bps, it lowest level since April. Australian swap yields also declined on the back of the labour market report. 3-year swap yields gapped from 4.48% to 4.35%.
NZ swap yields ticked a little lower at the short-end with 2-year yields declining 3bps to 3.28%. 10-year yields rose 3bps to 4.68%, taking the 2s-10s spread back to 140bps. With bond yields rising more sharply than swap yields, swap bond spreads (EFP) have narrowed. The 10-year EFP now sits at 18bps, down from a recent peak above 50bps in early August.

Overnight, US 10-year yields crept down again to 1.98%. German yields traded as low as 1.82% before moving back to 1.87%. Italian and Spanish 10-year yields have declined in recent days to trade at 5.3% and 5.0% respectively.

In the absence of any teir 1 NZ data releases today we expect some consolidation in fixed interest markets, ahead of next Thursday’s RBNZ meeting. We expect at this meeting the RBNZ will remain on hold, but to restate the case for removal of their 50bps ‘insurance’ cut, as soon as global ructions show some stabilisation.

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

Mike Burowes and Kimberly Martin are part of the BNZ research team. 

All its research is available here.

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