NZD is hovering around 0.7060 USD after meeting some resistance near 0.7090 last night; local rates market saw modest upward pressure, reversing some of Friday’s move

By Jason Wong

With the US, UK and China on holiday, market trading is thin and there has been little change in pricing.

With no data to speak of, focus turned to central bank speakers.  In a speech in Asia yesterday, the Fed’s Williams reaffirmed his view that a total of three interest-rate increases makes sense this year (including March’s rate hike).  While a non-voter, he is often seen to be aligned with Fed Chair Yellen, whose view in response to the recent run of softer US data remains unknown.

ECB President Draghi spoke to the European Parliament and he described the euro area’s economic upswing as “increasingly solid” and broadening, and contrasted that with some caution about the global environment, particularly the threat of US protectionism.   On monetary policy his viewed remained unchanged.  ”Overall, we remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary” if inflation is to rise in a sustainable way, he said, adding that “It’s still very, very early to make us think we are going to change the monetary policy stance”.

These comments come ahead of next week’s ECB meeting, where it is widely expected that the current forward guidance that indicates rates could still fall further will be dropped.  There was little market reaction to Draghi’s comments either because of the holiday trading conditions, the market believes Draghi is bluffing, or that the market believes Draghi will change his mind next week after seeing the new set of inflation forecasts. 

EUR is lower but only slightly, by around 0.1% to 1.1170.  In other European news Italy’s main parties are reported to be close to an agreement on a new voting law and former Prime Minister Matteo Renzi said he favours an election in autumn (Northern Hemisphere).  Italy’s 10-year government bond yield rose by 9bps to 2.17% going against grain of a 3bps drop in the German bunds.

We mention this European news as our call on a stronger EUR is based on the ECB gradually changing its language towards a less accommodative tone this year and that Italian elections are not held until about March next year.  At face value, neither of those views was supported last night!  We’ll see.

There is little else to report.  The NZD is hovering around 0.7060 after meeting some resistance near 0.7090 last night.  The NZD is little changed on all the crosses except for a 0.4% fall in NZD/GBP to just below 0.55.  GBP recovered some of Friday’s losses that had been induced by polls showing a narrowing gap between the Conservatives and Labour Party, ahead of next week’s UK election.

In data ahead, the key releases to focus on are US personal spending and the core PCE deflator.  Spending is expected to rebound in April and if it doesn’t then the risk of a June rate hike diminishes, sending the USD and rates lower.  The core PCE deflator is expected to show annual inflation dropping to 1.5% yoy, moving further away from the US’s 2% target, as indicated by previously released CPI data.  An even bigger drop would give fuel to the doves on the FOMC committee to suggest holding back on a June rate increase.

The local rates market saw modest upward pressure on rates, reversing some of Friday’s move.  The 2-year swap rate closed up 2bps to 2.24%.  This rate has traded in a very tight range around 2.20-2.25% since the RBNZ’s MPS, and we expect that to continue over coming months.  The 5-year swap rate rose by 2bps to 2.75% while the 10-year rate rose by 3bps to 3.23%.  These rates lifted off their fresh lows for the year reached at the end of last week and we see the bias as more to the upside than downside over coming months.   This assumes the Fed does in fact get another rate hike underway next month and the recent soft patch in US data proves to be temporary.

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