USD is stronger across the board which sees the NZD down to its lowest level this week around 0.6620; US 10-year rates are steady at 3.05%; German CPI figures that were much higher than expected

By Jason Wong

The USD is stronger across the board which sees the NZD down to its lowest level this week around 0.6620, but steady on most of the crosses.  US 10-year rates are steady at 3.05%.

The USD is strong, with the various dollar indices we track up 0.5-0.75% for the day.  It is not entirely obvious why the USD is so well bid but a number of factors could be in play – the afterglow of the FOMC statement yesterday morning where it maintained a clear bias to continue hiking rates through 2019 and into 2020, pressure on EUR as Italy’s budget debate comes into focus, end-of-quarter rebalancing, and spike up in year-end dollar funding that has seen a collapse in the EUR/USD cross currency basis.

The 3-month EUR/USD cross currency basis swap plunged from -16bps to -41bps, with the 3-month tenor now covering the remainder of 2018, a sign that investors are getting in early to cover year-end dollar funding demand. The daily fall was the largest since the depths of the GFC in 2009. It means that European buyers of US Treasuries face a higher cost to cover their foreign exchange risk, reducing the appeal of US Treasuries versus, say , German bunds.  Demand for dollar hedging can also put upward pressure on the USD.

A last minute dispute between Italy’s two deputy PMs and the Finance Minister over a demand for extra spending and thus the size of the fiscal deficit, got the market’s attention and saw a weaker Euro and higher Italian bond yields.  At the time of writing the Italian Cabinet were meeting to discuss targets and an agreement had still not been reached, but some headlines suggest that the deficit target would come in wider than the market was hoping for.  EUR is down 0.7% to 1.1660. 

The focus on Italy took the gloss off German CPI figures that were much higher than expected (by 0.3 percentage points), suggesting that euro-area CPI figures due tonight will also be higher than the consensus estimate surveyed earlier in the week.  Recall earlier in the week, ECB President Draghi noted the “vigorous” pick-up in core inflation. Higher inflation data would eventually support EUR, but today wasn’t the day.   A possible offsetting factor was that Euro-area economic confidence – a mix of business and consumer confidence – fell for the ninth consecutive month.

US data released weren’t exactly flash and they resulted in a number of economists trimming their Q3 growth estimates down to around 3%. The US goods trade deficit was much greater than expected, against President Trump’s ambitions to cut the deficit (of course, his own policies go a long way in explaining the wider deficit).  Durable goods orders were boosted by aircraft and defence spending, with core orders coming in softer than expected.  Pending home sales data suggest the housing market is continuing to cool, against a backdrop of the highest (30year) mortgage rates in seven years.

Against a backdrop of a strong USD, the NZD is down to around 0.6620.  Yesterday there was little market reaction to the RBNZ’s OCR Review, which came as no surprise.  The statement showed little change in guidance about the policy outlook.  Recent data have not swayed the Bank from its August projections.  The Bank kept its policy options open, reiterating that the direction of the next OCR move could be up or down and that it expected to keep the OCR unchanged through 2019 and 2020. There was little reaction in the rates market, with the modest fall in rates across the swap and bond curves a reflection of global forces, following the nudge down in rates after the FOMC statement.  The market still seems happy to price in a chance of easier monetary policy over the year ahead, with a close to 30% chance of a 25bps cut priced in by August 2019.

The NZD is flat on the major crosses – versus AUD, EUR, GBP and JPY.  The only notable change is a weaker NZD/CAD, down 0.6% to 0.8625, with CAD matching USD strength for the day.  CAD was hit in the previous session when reports came through that it was unlikely to be part of a trade deal when text on a US-Mexico is released by the end of this week.  The option will be left open to include Canada in a later deal.

The calendar for the day ahead is heavy.  The ANZ NZ consumer confidence index is more likely than not to show some further slippage while dwelling consents should rebound after a couple of chunky monthly falls.  Globally, the key releases are euro-area CPI, now expected to be stronger than the consensus, and the US core PCE deflator, expected to remain steady on target at 2.0% y/y.


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