By Mike Burrrowes and Kymberly Martin
The NZD recovered against the USD on Friday night, helped by the modest improvement in risk sentiment. NZD/USD gained around ½ a cent over the evening to be trading at 0.8300 currently. The NZD trade-weighted index gained around 0.8% to 72.40.
Our NZD/USD 'fair value' model continues to suggest the currency is overvalued based on short-term fundamentals. Over the past week, the implied 'fair value' range has remained unchanged at 0.7350 to 0.7550 currently.
NZD/AUD made it to an overnight high of 0.8040, but has fallen back to 0.8000 currently. The current level is broadly consistent with the implied range from our NZD/AUD “fair value” model of 0.7730 to 0.7930.
While we have pushed out our call for the first RBNZ hike to March 2012, 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.
Looking to the week ahead, we have the Q2 GDP report due for release on Thursday. Following a run of disappointing partials, we now expect a modest 0.2% expansion (1.4% y/y). The market expectation is for 0.6%q/q. On Wednesday, we expect the bi-monthly Fonterra dairy auction to remain solid. Shortly after this, we anticipate the current account data to show a slight slimming in the annual deficit to 4% of GDP. Early Thursday morning, RBNZ Governor Bollard is due to speak at an Australasian Debt Market Forum in New York.
The USD gained against most of the major currencies on Friday night, although the moves were relatively small. The EUR lead the declines as investors continue to fret about a potential default by Greece. However, the risk sensitive AUD, CAD and NZD managed to eke out small gains.
Equity markets posted small gains, with the S&P500 and Euro Stoxx 50 index gaining 0.6% and 0.2% respectively. The VIX index (proxy for risk aversion) eased from 32 to 31. Despite the slightly better sentiment, the CRB index (broad index of global commodity prices) eased 0.9%.
The EUR/USD rally faded on Friday as traders become more nervous about the risk of an eventual default by the Greek government. Over the course of the evening, EUR/USD fell from above 1.3860 to below 1.3800 currently.
Investors were also disappointed no further policy actions were announced at the EU finance ministers meeting over the weekend. Although, guest speaker, US Treasury Secretary Geithner, urged the EU ministers to increase the size of the EFSF and act in a more coordinated manner. These comments were not well received by the EU finance ministers.
The GBP failed to hold onto its gains on Friday night as expectations of another round of QE from the Bank of England weighed on the currency. GBP/USD started the evening above 1.5800 and is currently trading at 1.5780. Adding to the QE expectations was comments from BoE Deputy Governor Bean. He noted the BoE will examine all the indicators and take a view on QE "ahead of our next meeting in October". In this regard, the market will scrutinise the minutes from this month's BoE policy meeting, due for release Wednesday evening.
Expect some shift in investors’ focus back to the US this week, with the Federal Reserve policy decision on Thursday morning NZT. Our NAB colleagues expect the Fed to use its balance sheet to flatten the US yield curve. This would involve selling their short-dated treasury bonds and buying long-dated treasury bonds. Any measures which expand the size of the Fed’s balance sheet would likely encourage risk appetite and pressure the USD lower.
Expect the focus for the week ahead to remain on the European debt crisis and US Fed policy statement. On Tuesday, we have the German ZEW survey and US housing starts. The highlight on Thursday will be the FOMC meeting at 6.15am NZT. Eurozone PMI manufacturing and services data for September are due for release Thursday evening. The week finishes with a speech from the Fed’s Dudley.
Fixed Interest Markets
NZ bond and swap yields rose on Friday, in sympathy with previous moves seen offshore.
NZ 2-year swap yields rose by 7bps to 3.29%, moving off the bottom of the range they have traded in since March. The market continues to price around 50bps of rate hikes form the RBNZ in the year ahead, expectations we believe will ultimately be revised higher. 10-year yields rose 9bps to 4.60%, with the 2s-10s spread bouncing off recent lows to 131bps.
At Friday’s DMO auction, demand was solid for 150m of 15s on offer. They were over 2x bid. 150m of 13s and 50m of 23s attracted more modest demand, but were still fully allocated. The average successful yield on 23s was 4.62%. On the day, the yield on 13s rose 7bps to 3.01% while the yield on 21s rose 10bps to 4.6%, almost completely reversing moves seen the previous day. In other NZ issues, ANZ bank sold 125m of 7-year bonds at an interest rate of 6.08%, or 180bps over swap. This shows there continues to be some demand for NZ banking sector credits, but demand has been negatively impacted by ructions in global credit markets.
Over the second half of last week, AU 10-year bond yields rose from 4.09% to 4.24%. This resulted in AU 10-year yields rebounding sharply relative to NZ equivalents, from -36bps to -19bps. This brings the relationship back in line with its average over the past 5 years.
On Friday night, the boost to US 10-year yields from the better-than-expected University of Michigan Confidence number of 57.8 (57.0 expected) proved short-lived. US 10-year yields traded above 2.11% before returning to trade at 2.05%.
Similarly, German 10-year yields traded as high as 1.95% before drifting off to 1.86%. Demand for “safe haven” bonds resurged late in the night. This occurred as the European finance ministers’ meeting failed to indicate further supportive measures, in addition to the USD swap lines previously announced.
Developments in Europe will continue to be a key driver of risk sentiment and NZ fixed interest markets this week. Thursday’s NZ Q2 GDP release will be important for local sentiment. Today’s, Westpac consumer confidence survey should confirm the solidity seen in Fridays ANZ survey. The August PSI should also reiterate the broad resilience seen in the PMI last week.
Mike Burowes and Kimberly Martin are part of the BNZ research team.