NZD holds it ground while Aussie slips. Upward pressure on short end of NZ interest rate curce 2yr swap rate rises to a fresh high of 2.5%

By Jason Wong

There was plenty of US data to digest last night but the result was little change in market pricing in thin market conditions. US and European equities are down slightly, US Treasury yields are little changed, and currency movements against the USD are all within +/-0.5%, with the USD major currency TWI itself flat for the day.

On the positive side, the third estimate of US Q3 GDP data confirmed that the economy was on a more solid footing and while durable goods orders fell, it followed a spike up the previous month and core orders were solid.

On the negative side, US personal income and spending data were softer than expected, as were the PCE deflators, with the core estimate flat for the month and the y/y change slipping to 1.6%. On a normal day, this might have seen the USD retreat and US Treasuries rally, as it questions the extent of Fed tightening required next year, but in pre-Christmas trading conditions the US yield curve has bare budged. The 2-year Treasury yield is up 1bp at 1.19% and the 10-year rate is up 2bps to 2.56%.

For the second day running the Swedish Krona heads the currency leaderboard, with further gains – a modest 0.4% – following the Riksbank's policy decision, which showed a divided board on further quantitative monetary easing. The EUR has found good support around the 1.04 mark this week and currently sits around 1.045.

The NZD is finding good support around the 0.69 mark and is within a few pips of where it sat this time yesterday morning. GDP data confirmed that growth was running ahead of trend. However, the positive 1.1% q/q result was tainted by downward revisions to previous quarters. It was strong enough to keep the market keen to price in further monetary policy tightening in late 2017 and through 2018.

Bank bill futures were 4 bps higher in yield across those dates and the 2-year swap rate rose 4.5 bps to a fresh high of 2.5%. The nearly 50 bps gap between 2-year swap and 90 day bank bills would normally be tempting for outright 2-year receiving positions to be put on, but ahead of the holiday period traders weren't willing to run with that trade – perhaps one to put on in the first week of the New Year. The upward pressure at the short end of the curve resulted in the curve flattening, with the 10-year rate unchanged at 3.59%.

While the NZD has held its ground against the USD, the AUD is softer, breaking down through 0.72 just after midnight, although it has since recovered a little. Thus, NZD/AUD is back up probing resistance towards the 0.96 mark and currently sits at 0.9575.

USD/JPY is flat at 117.60, while GBP is the worst of the majors, falling 0.5% to sub 1.23, which sees NZD/GBP back up through 0.56.

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