NZD hit a fresh multi-year low of 0.6425; AUD found support after reaching a fresh low just above 0.7040 and sits this morning at 0.7070; Italy remains a worry for markets; Treasury futures show the implied 10-year rate down a few basis points

By Jason Wong

The new week has begun as last week ended, with risk sentiment souring, albeit with holidays across the US, Canada and Japan helping contain market volatility.  Under the circumstances the NZD and AUD have held up well, but this follows the significant falls for both currencies last week. 

As the new week began all eyes turned to China, following its “Golden Week” holiday and the weekend move to cut the reserve requirement ratio for banks by 100bps, a further easing in monetary policy as growth headwinds develop in the face of escalating tensions with the US.  In the event China’s CSI 300, a composite of the Shanghai and Shenzhen exchanges, fell by a chunky 4.3%, some of this reflecting the catch-up to weaker global equities last week.

The PBoC weakened the yuan’s daily reference rate by less than expected, but the market has continued to put more downward pressure on the currency since the local close.  Bloomberg reported that a senior Treasury official said that the Trump administration is concerned about the Chinese Yuan’s depreciation.   Treasury Secretary Mnuchin is facing pressure from the White House to name China as a currency manipulator in the semi-annual report on America's trading partners' currencies due later this month.  This would be ironic as the US policies including trade tariffs have been the key source of downward pressure on CNY this year.  USD/CNH and USD/CNY have both blasted up through the 6.93 mark, up 0.6% and 0.9% respectively for the day.

Pressure on CNY would normally be a source of downward pressure for the NZD and AUD but as we noted yesterday, the more than 2½% falls in these currencies last week pre-empted the weaker CNY move.  The NZD hit a fresh multi-year low of 0.6425 reflecting market nerves just ahead of the CNY fix, but it recovered thereafter and in a low volatility session has generally hovered around the 0.6440 mark, close to where it began the week.  The AUD found support after reaching a fresh low just above 0.7040 and sits this morning at 0.7070, with NZD/AUD fairly steady at 0.9120.

The NZD and AUD have held up well considering much of the other news to report is negative.  While the US bond market is closed for the holiday, the US equity market is open, with the S&P500 currently down 0.7% and the Nasdaq is down 1.3%, on track for its third consecutive daily fall of more than 1%. The VIX index shot up to 18.4 but is now below 18. The Euro Stoxx 600 fell by 1.1%, with Italy’s key benchmark index down 2.4% to an 18-month low.

Italy remains a worry for markets.  Tensions flared up after the populist government leaders responded defiantly to a letter from EU officials to finance minister Tria, warning that the budget is a "source of serious concern".  A showdown is looming between Italy and the EU as they prepare for the next battle over the 2019 budget, with the plan for a 2.4% of GDP deficit in breach of the EU rules.  Italy 10-year yields rose up through the 3.5% mark for the first time since 2014, up 14bps for the day to 3.56%.  The tipping point before Italy heads into an unsustainable debt spiral is probably close to the 4% mark.  Against this backdrop, EUR is down 0.4% to 1.1480 after finding some support at 1.1460. NZD/EUR is up 0.5% to 0.5615.

GBP has followed a similar path and is down 0.3% to 1.3075 and NZD/GBP is up to 0.4930.  Negotiations over Brexit are at a critical juncture ahead of the October EU summit mid next week.

JPY is the strongest of the majors, reflecting the risk-off tone.  USD/JPY is down 0.7% to 112.90 while NZD/JPY is threatening the August and September support level of 72.3, as it has blasted down through the 73 mark this morning.

While the US bond market is closed, Treasury futures are trading and show the implied 10-year rate down a few basis points.  The local curve bear steepened yesterday as it reflected the move in Treasuries post Friday’s payrolls report.  The 2-year swap rate rose by 1bp to 2.03% while the 10-year rate rose by 4bps to 2.94%.  The pressure will be on some unwinding of this move when trading opens today.  The data calendar remains light for the next 24 hours.

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