By Mike Burrrowes and Kymberly Martin
The NZD was once again the weakest performer over the past 24-hours, falling over 5% against the USD. The drivers this time were both local and global. The NZD fell after the weaker-than-expected Q2 GDP release yesterday. Falls were exaggerated later, as global risk appetite plummeted and the USD broadly gained from “safe haven” flows. The NZD currently trades around 0.7800.
Yesterday’s NZ Q2 GDP (0.1%q/q) disappointed consensus expectations (0.5%q/q). However, it was not far from our own expectations for 0.2%q/q.The release does nothing to undermine our view that GDP growth momentum will build into 2H. We continue to focus on the strength of the NZ primary sector which is helping to support the NZ economy relative to downshifts in growth elsewhere.
However the markets responded to the release, as was expected, selling the NZD and revising down expectations for RBNZ rate hikes. The market now expects little more than one 25bps hike in the coming year. The NZD broke below the 0.7970 level it bounced off during the spike in risk aversion in early August.
Overnight, sentiment toward the NZD was further undermined as risk appetite globally plummeted. Our risk appetite index (scale 0-100%) fell to 26%, its lowest level since early 2009. The NZD/USD currently trades around 0.7800, its lowest level since May this year.
The NZD also traded lower relative to both the EUR and GBP. It currently trades at 0.5800 relative to the EUR and 0.5080 relative to the GBP.
The NZD and AUD are battling out for the worst performing currencies over the past 24-hours. They have both been battered by risk aversion and global growth concerns. The NZD/AUD gapped lower yesterday after the release of NZ GDP, but has been creeping higher since, to trade around 0.8000 currently.
In the day ahead, negative sentiment is likely to continue to pervade markets, although US equities are currently rallying into their close. Negative global risk sentiment will continue to put downward pressure on the NZD, although fundamental players may be drawn in, to pick up NZD at its lowest level in 4-months.
Once again the USD was broadly stronger over the past 24-hours as risk aversion spiked higher and markets discounted global growth fears. The JPY held up against the USD while all other currencies fell heavily. The NZD and AUD were the worst performers down over 5% relative to the USD.
“Safe haven” demand for the USD surged after the market absorbed several negatives. The Fed’s comments yesterday that it saw “significant downside risks” to the economy. China’s manufacturing PMI that remained in contraction territory for the third consecutive month at 49.4. The Eurozone composite PMI that was also weaker-than-expected at 49.1 (49.8 expected) with both the manufacturing and services components slipping into contraction territory. In this backdrop the USD index traded up from 77.80 to 78.50, its highest level since February.
Equity markets also fell sharply. The Euro Stoxx 50 closed down 4.9%, and the S&P500 is down 3%. It was led lower by sectors that are leverage to the economic cycle, in particular commodity and energy sectors. The CRB global commodities index fell over 4% and the WTI oil price is down over 6%.
Relative to the broadly stronger USD the EUR/USD eased lower from 1.3550 to 1.3450. However, it held up relatively well compared to its more “growth sensitive” peers, the CAD, AUD and NZD.
The AUD came under consistently heavy selling pressure over the past 24-hours, since the FOMC announcement. It was also undermined by the release of the Chinese manufacturing PMI data. This has raised concerns about the resilience of China to the slowdowns occurring in the US and Europe, raising worries regarding its ongoing demand for commodities. The AUD/US broke below parity to trade at 0.9720 currently, close to its March low.
There are no key international data releases today.
Fixed Interest Markets
NZ yields fell heavily yesterday across the curve. Swap yields closed down 10-12bps. Bond yields fell 10-14bps. Overnight, 10-year yields fell sharply off-shore.
NZ swap yields fell sharply after the weaker-than-expected Q2 GDP release. The data was enough to take yields 9bps lower at the short end, with the 2-year finding its first point of liquidity at 3.12%. Later, yields edged even lower as risk sentiment abroad continued to deteriorate. 2-year yields closed at 3.10%, the level they bounced off during the spike in risk aversion in early August. This was also the low in early 2009, at the depth of the GFC. 10-year swap yields closed at 4.39%.
The DMO bond auction attracted slightly better demand than of late. 75m of 17s were 3.4x bid, and 200m of 15s were 2.5x bid. The long end of the curve saw the weakest demand. 50m of 23s were 2.2x bid, at an average successful yield of 4.53%, compared to a pre-tender yield of 4.51%. By the end of day, 23s were trading at 4.47%, 21s at 4.32% and 13s at 2.85%.NZ 10-year yields are now trading at their lowest level since early 2009.
Overnight, risk aversion surged higher. US 10-year yields fell to new 60-year lows, close to 1.70%. The moves were also assisted by yesterday’s Fed announcement that it would increases purchases at the long-end of the Treasury curve. US 2-year yields currently trade around 20bps, a little below the 22bps they spiked toward yesterday, after the Fed announcement they would sell short-dated bonds. German 10-year bond yields have also traded down to news lows at 1.67%.
It is difficult to see any relief from the downward pressure on NZ yields today, given the plunges in equity markets and off-shore yields overnight. However, short-end yields have little further to fall unless the market begins to price rate cuts from the RBNZ. The market has already revised down rate hike expectations for the RBNZ to little more than one 25bps move over the coming 12 months.
Mike Burowes and Kimberly Martin are part of the BNZ research team.