By Mike Burrrowes and Kymberly Martin
NZD/USD bolted higher overnight after the major central banks announced they would reinstate their USD swap lines. This action is designed to temper the recent increase in USD funding pressures for European banks. NZD/USD gained 2 cents from the lows reached early in the evening to be around 0.8230 currently.
The local highlight yesterday was the RBNZ Monetary Policy Statement. Governor Bollard was always going to come back from Jackson Hole feeling less than optimistic about life and reflect this in the MPS. Accordingly, it came as no surprise that the RBNZ decided to leave its cash rate on hold, following the old adage that if you don’t know what’s happening, do nothing. But not only did the RBNZ stay on hold it produced a more downbeat statement about the state of the world and benign view of inflationary pressures. More dovish it may be, but it’s hard to fault in these uncertain times. In short, our revised OCR cash rate track has the first 25bp hike in March 2012, followed by a series of 25bp moves thereafter until such time that the cash rate peaks at around 4.75%.
Unsurprisingly, following the RBNZ statement NZD/USD fell from 0.8220 to around 0.8180. The currency continued to fall throughout the day to 0.8120, but this was driven by a deterioration in global risk sentiment.
NZD/AUD spent the evening flirting with the 0.8000 level, currently 0.7970. While we have pushed out our call for the first RBNZ hike, we still have a total of 125bps of hikes pencilled-in over the next 12-months. This contrasts to our NAB colleagues who are calling for one rate hike from the RBA over the same period. As such, we still maintain our call for NZD/AUD to gradually appreciate to 0.8500 by September 2012.
The local data calendar is light today, with only the ANZ Roy-Morgan consumer confidence survey due for release. Therefore, expect NZD/USD to consolidate after the hefty gains overnight. We see initial support on NZD/USD at 0.8200 and resistance at 0.8270 for the day ahead.
Investor risk appetite was buoyed overnight after the major central banks took collective action to ease USD funding pressures for European banks. In FX markets, this saw the “safe haven” CHF, JPY and USD weaken against nearly all the other major currencies. The USD index has fallen from 76.80 to 76.30.
The central bank action to ease funding pressure has helped risk assets in general. In equities, the S&P500 index and Euro Stoxx 50 index added 1.6% and 3.5% respectively. Our risk appetite index (scale 0 – 100%) rose from 30.3% to 31.3%, although the index still remains well below its long-run average of 50%. Despite the better risk sentiment, the CRB index (broad index of global commodity prices) fell 0.4% overnight.
Investor sentiment was bolstered overnight after the US Federal Reserve, the Bank of England, Bank of Japan and Swiss National Bank announced they would lend Eurozone banks USDs in three separate 3-month loans to ensure they have funding until the end of the year. The announcement has seen the spread between 3-month EURIBOR-OIS (a measure of bank funding pressure) narrow from around 80bps to 77bps. This spread is still at its highest level since the Global Financial Crisis. While the actions overnight provided some relief, it will not be the panacea for struggling European banks.
In response to the announcement early this morning, EUR/USD surged from around 1.3780, to an overnight high of 1.3940. EUR/USD is currently trading just below 1.3890.
GBP/USD recovered sharply early in the evening, as risk sentiment improved and UK retails sales were marginally better-than-expected for August (-0.2% vs.-0.3 percent expected). This saw GBP/USD gain almost ½ a cent to 1.5800. However, dovish comments from BoE member Weale limited further gains in the GBP. Weale noted the risks of a double-dip recession had risen and that he would consider more quantitative easing if inflation looked set to undershoot the central bank's target.
US data outturns were mixed overnight. The Empire manufacturing data for September (-8.82 vs. -4 expected) and Philadelphia Federal business survey (-17.5 vs. -15 expected) were weaker-than-expected. However, industrial production for August was better-than-expected at 0.2% (zero expected). The data outturns were overshadowed by the collective central bank action announced around the same time.
The Swiss National Bank left its policy rate unchanged at zero overnight. However, the SNB slashed its growth and inflation forecasts due to the soaring CHF. The SNB noted it would defend the EUR/CHF 1.2000 floor with the “utmost determination”. Following the SNB decision, EUR/CHF weakened from 1.2050 to 1.2090.
Expect the focus to remain on the European debt crisis for the night ahead. The only data releases are Eurozone current account, US net TIC flows and US University of Michigan consumer confidence.
Fixed Interest Markets
Markets response to the RBNZ meeting was relatively modest. Swap and bond yields declined 3 to 7bps along the curve. Overnight off-shore long yields have risen.
After yesterday’s RBNZ statement, expectations for rate hikes in the coming year nudged down by just 4bps, to 44bps. There was therefore little affect on the short-end of the swap curve. 2-year yields dropped by only 3bps, to 3.22%.
There was greater receiving interest further out the curve, with 5-year yields declining 8bps and 10-year yields by 6bps. 10-year swap yields now trade at 4.51%, not far above the January 2009 lows of 4.33%. At points on the curve below 7-year, swap yields are now trading at, or below, their lowest points seen during the GFC.
The swap curve has flattened further. 2s-10s have broken down to 129bps, with support not seen until 120bps.
Bond yields also slipped lower along the curve. The DMO auction for today was announced, with 150m of 13s, 150m of 15s and 50m 23s. It will be interesting to see how much demand there is at current low yields, particularly on a day when global sentiment has improved with a strong rally in equity markets overnight.
The ECB announced it would coordinate with the US Fed, BoE, BoJ and SNB to lend USD to eurozone financials (see Majors section). The actions also helped to soothe the market’s frayed nerves, resulting in less demand for “safe haven” government bonds. US 10-year yields rose overnight from 1.98% to 2.08%. German 10-year yields climbed from 1.88% to 2.00% before drifting off to 1.93%.
The long-end of the NZ curve will likely feel some relief today, given rises in off-shore yields overnight.
Mike Burowes and Kimberly Martin are part of the BNZ research team.