NZD at the bottom of the leaderboard as traders expect dovish tone from RBNZ; NZ rates were lower and the long end rates outperformed global peers; USD and UST yields were higher

By Jason Wong

It was another typical sleepy northern hemisphere summer trading session overnight, but we did see a little price action after a strong US labour market report, while the NZD and NZ rates faced downward pressure ahead of Thursday’s MPS.

The NZD is again at the bottom of the leaderboard as traders anticipate a more dovish tone from the RBNZ later in the week.  AUD/NZD buying has seen the cross drive up to 1.08, pulling NZD/AUD down to 0.9260, taking the cumulative fall to 1% over the past two sessions, and dragging NZD/USD down to 0.7330 in the process.

We don’t see the RBNZ upping the rhetoric on the NZD.  At the June OCR Review, when the NZ TWI was trading slightly above its current level, the Bank stuck to the facts, noting the prior increase in the TWI, partly explained by higher export prices.  The Bank merely suggested that “a lower NZD would help rebalance the growth outlook towards the tradeables sector”.  We expect similar language.  The TWI is more than 2½% below the peak at the end of July.

NZ short rates have also faced downward pressure ahead of the Statement, with the 2-year swap rate down 1.5bps to 2.165%, its lowest close for the year.  Paying interest has evaporated and the market has become a bit one-sided.  The long end of the curve outperformed global peers, with the 10-year swap rate down 4bps to 3.17% and 10-year government stock down 6bps to 2.85%.

We are effectively seeing a reversal of what we saw in the lead-up to the May MPS.  Back then, the market was convinced that the Bank would adopt a more hawkish tone and yet it didn’t.  The Bank held the line and maintained a neutral stance.  Now the market is convinced that the Bank will adopt a more dovish tone and pricing has moved such that there now might be room for some disappointment on that score.  So now, even a more dovish tone runs the risk of leading to some profit-taking on the day, seeing a modest reversal of recent trends in the NZD and rates, while the Bank holding its ground would see an even larger reaction.

On the global scene there isn’t much to report other than another strong US labour market report.  Job openings surged to a record 6.2 million in June and showed fewer people quitting their jobs. There are 1.1 unemployed job seekers for each available job, which is the lowest ratio since 2001. Unfilled jobs are 28% higher than the previous peak in 2007.  At this point the only missing variable is stronger wages, but as the labour market continues to tighten, upward pressure should ultimately prevail.  This keeps alive the prospect of further Fed tightening, although the market remains fairly sceptical of that.  The data followed a report on unexpected strength in small business optimism by the NFIB.

So the USD and UST yields are higher, although a lot of the currency reaction post the labour market report has reversed.   EUR and GBP have worn the brunt, falling 0.3-0-4% to 1.1760 and 1.2980 respectively, after recovering somewhat.  The higher yield environment has supported the yen, seeing USD/JPY down 0.3% to 110.40 and, alongside a weak NZD, sees NZD/JPY sub-81.  The USD strength sees it further away from the danger of breaking key technical support levels.  The widely followed DXY is up 0.2% for the day and up around 1% from levels prevailing before last week’s non-farm payrolls report.

UST yields are higher across the curve, with the 10-year rate up 2bps to 2.28%, with much of the gain coming after the JOLTs labour market report.  There’s not a lot on the calendar to excite the market over the next 24 hours, ahead of key US CPI data at the end of the week.

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