Generally subdued trading conditions prevailed across markets overnight with little new news. Lower European equities gave a hint of risk off tone, with the Eurostoxx50 closing down 0.5%. Major US equity indices opened lower, but have recovered to currently be up smalls. A tweet from President Trump saying ‘we’re getting close’ on tax reform seemed to support sentiment. Commodity currencies are generally lower.
But it is the GBP that sits at the bottom of the currency leaderboard. After starting the week just under 1.3200, GBP came under pressure from around mid-day yesterday. A seemingly delayed reaction to recent unfavourable Brexit news and fledging confidence in Teresa May as the UK’s PM among her Conservative MPs. GBP/USD extended losses overnight, falling toward 1.3060 before finding some support. The next two weeks could be critical for GBP with the EU Commission upping the ante on transition talks and the potential for a UK cross-party deal on the Withdrawal Bill. The latter could bring a significant bounce in GBP, but no deal could see the opposite. Brexit negotiations were never going to be easy. GBP/USD is down around 0.6%, opening this morning around 1.3110. NZD/GBP is marginally higher, currently at 0.5260.
Elsewhere, the US dollar is slightly higher amid the mild risk off atmosphere. The DXY is up around 0.1%. USD/JPY is little changed around 113.60.
The VIX fear index pushed up through 12 during the night, before easing back toward 11. This is still up from the sub 10 levels prevailing through much of last week. The decline in risk appetite has seen commodity currencies under some downward pressure overnight with AUD, NOK, CAD, and NZD down between 0.3% and 0.5% against the USD from where we left them at the local close yesterday.
Our risk appetite index sits at a 2-month low of 76%, down from as high as 85% just a few weeks ago. A reduction in risk appetite back to a more normal level represents a key downside risk factor for the NZD. A reduction in risk appetite and lower NZ commodity prices has seen our short-term fair value estimate fall to USD 0.7150. Against a backdrop of weaker risk appetite it’ll be hard for the NZD to make any further recovery over the short term. NZD/USD opens this morning around 0.6900. Technically, strong support sits around the 0.6820-0.6840 area. To the topside, resistance comes in around 0.7050.
AUD/USD continues to probe lower, currently testing 0.7620, its lowest level since mid-July. NZD/AUD traded a tight range overnight and opens this morning around 0.9050.
Looking ahead, there is a fair amount on the calendar with potential to drive market movement. First up is AU business confidence and Chinese activity data today. Then overnight there will be focus on the ECB Panel discussion feature central bank heavy-hitters Yellen, Draghi, Kuroda, and Carney. US PPI data will be a precursor to the more important CPI data due the following night.
The mild risk off tone saw global yields test lower. But it was all rather half-hearted. US 10-year Treasury yields dipped to around 2.37% before lifting back to around 2.40% following Trump’s tweet, close to where they currently sit. It all looks like range trading ahead of Yellen tonight and the US CPI data the following night.
Locally, yields tried to push higher yesterday reflecting movements in the previous offshore session, but generally could not hold gains. NZ 2-year swap closed little changed on the day at just over 2.20%, as it remains anchored by an on-hold RBNZ. NZ 5-year swap close up 0.5bp at 2.71% while NZ 10-swap added nearly 2bps to 3.225%.
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