NZD remains steady at around 0.6875 USD after rising to 0.6920 last evening on the back of USD weakness; UST 10yr yields fell to 2.32% before CPI data helped it get back to 2.34%; lower global rates placed downward pressure on the local swap curve

By Jason Wong

A risk-off tone remains evident which sees lower equity markets and bond rates but the NZD has remained steady overnight, after a round-trip in the USD. 

Our risk appetite index has slipped to 72% to a three-month low, after being as high as 83% at the beginning of the month.  The MSCI world index is on track to post its fifth daily decline in a row and the same can be said for Bloomberg’s commodity price index.  Triggers for the move include a sense that equity markets have been well overdue for a correction after their strong run and China’s focus on quality rather than quantity of growth that might see reduced demand for commodities.  Oil prices have fallen over the past few days, after the strong run-up before and after the increased political risk in Saudi Arabia, with higher inventory levels supporting a reversal of trend.

Despite the risk-off tone, the NZD has managed to steady itself and sits this morning around 0.6875, flat compared to the level this time yesterday and the 5pm local close. The flat point to point reading hides the round-trip we saw in the USD.  The USD saw some broadly based downward pressure last evening which saw the NZD climb towards the 0.6920 mark, until some positive US data saw a reversal of that price action.  

The much anticipated US core CPI was marginally ahead of expectations, with the 0.2% m/m gain in line but the annual increase of 1.8% slightly ahead.  It was a welcome relief after the CPI has tended to come in below expectations over the last six months or so. The data came alongside slightly better retail sales data for October (including upward revisions). The data all but sealed the likelihood of a December rate hike from the Fed. 

The risk-off tone saw the US 10-year rate fall a few basis points to a low of 2.32%, before the CPI and retail sales data helped see rates back up to 2.34%.  There has been a further flattening of the yield curve, with the 2s10s spread down to a fresh low of 65bps as the 2-year rate has remained flat at 1.69%.

The round-trip in the USD saw EUR/USD rise from 1.1790 up to 1.1860 before reversing back down to a sub 1.18 level.  NZD/EUR has spent much of the past 24 hours hovering around the 0.5825 mark.

The AUD collapsed from 0.7630 to 0.7580 after softer than expected wage data, with the rise in the minimum wage seemingly washed out by generally soft wage inflation.  The data supports the RBA’s stance of keeping rates steady and adds to the move over the past month of the market pricing out the chance of the RBA tightening policy any time soon.  After a brief recovery induced by the (temporary) USD selloff, the currency is back down to that level, making it the worst performing of the key majors we follow.  NZD/AUD clawed back the losses seen over the previous day and after peaking at 0.9100 overnight it currently sits at 0.9070.

There’s not much to say on the other crosses, with current levels not far from the 5pm close.  GBP fell after employment data came in weaker than expected, but wages and the unemployment rate were in line and the price action soon reversed.  NZD/GBP is down slightly at 0.5220.

Lower US and Australian rates put downward pressure on NZ’s yield curve yesterday, seeing the 2-year swap rate down 2bps to 2.17% and the 10-year rate down 4bps to 3.18%.  The 90-day bank bill rate fell to 1.91%, a fresh low for the cycle as banks are flush with cash at the moment, being well ahead of funding targets against a backdrop of soft-ish credit demand.  These conditions are likely to persist over the short term and will likely keep the short end of the yield curve underpinned.

In the day ahead we get the first clean reading of NZ consumer confidence since the new government was formed and we’d expect the data to show a fall.  Australian employment data always provide the opportunity for some AUD volatility, while tonight sees some second-tier US data, which shouldn’t provoke much market reaction.

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