The positive sentiment of the past few trading sessions, on hopes of an extension to the US-China trade war ceasefire and an agreement to fund the US government, continues to linger. Global equity markets have moved higher again, although US indices are now only slightly up on the day. The NZD is the top performing currency over the past 24 hours, after the RBNZ MPS was seen as less dovish than expected, although it has eased back overnight from the highs reached yesterday. NZ rates were higher across the curve yesterday as the market pared back OCR rate cut expectations.
Heading into the MPS yesterday, there had been building expectations that the RBNZ might adopt an explicit easing bias, following on from the recent dovish shifts by the Fed and the RBA. Prior to the MPS, the market was nearly 40% priced for a May rate cut, which could only be sustained, in our view, if the RBNZ explicitly pointed towards the risk of near-term cut.
As it happened, the RBNZ retained a decidedly neutral stance at the MPS. The RBNZ said it expected to keep the OCR on hold through until mid-2021 (6 months longer than previously expected) and noted the next move “could be up or down”. Governor Orr added in the press conference that the chance of a rate cut had not increased since the last MPS.
In response, the NZD increased sharply from 0.6730 to 0.6850 while swap rates moved 8 to 10bps higher across the curve as positions were unwound. The market reaction saw both the NZD and NZ swap rates retrace most of their moves last week after the dovish speech from RBA Governor Lowe and the softer than expected NZ labour market report. Overnight, the NZD has eased back from the highs reached late afternoon yesterday amidst a strengthening in the USD, and it current sits around 0.6815, still over 1% higher than this time yesterday. The NZD/AUD, which rose from 0.95 to almost 0.9620 in the aftermath of the RBNZ has drifted lower to around 0.9590.
The market has pared back its OCR rate cut expectations, with around a 50% chance of a cut now seen by year-end compared to almost 100% prior to the Statement. The message from the MPS appears to be that the hurdle for a change in the OCR this year is very high. We don’t expect the market to completely price out the risk of rate cuts any time soon however, given the downside risks to the global economy. Accordingly, we expect short-end NZ swap rates to be tightly range-bound for some time.
Broader markets are still trading with a risk-on tone due to growing expectations that the US and China will extend the trade war ceasefire beyond March 1st. US Trade Representative Lighthizer and US Treasury Secretary Mnuchin are in China this week for trade talks, with President Xi reportedly planning to make an appearance later this week as a gesture of goodwill. On the border wall, Trump appears to be coming around to the view that he can sign the bipartisan border security deal, which allocates only $1.4b to “the wall”, and appropriate funds from other areas to ‘top up’ funding for the wall. If the President signs off the deal by Friday, it will avert another government shutdown. Chinese equities increased another 2% yesterday amidst rising optimism on US-China trade talks, leaving the CSI 300 index almost 13% higher this year. The S&P500 moved around 0.6% higher, to its highest level since early December, although it has since pared around half that move.
The USD is around 0.3% higher on the day, and close to its highest levels of the year. Economic data continues to portray a US economy that is slowing less than other countries. Overnight, US headline and core CPI slightly exceeded expectations, although this was mainly due to rounding (headline 1.551% vs. 1.5% expected and core 2.154% vs. 2.1% expected). US core inflation has been close to the Fed’s target for the past year. The US 10y Treasury yield is 1bp higher to 2.70%.
In contrast to the US, European industrial production fell in December, disappointing expectations. The European economic surprise index is towards the lowest levels it has reached since the GFC. The EUR currently trades at 1.1280, near its lowest level since mid-2017. In the UK, headline CPI missed expectations slightly, although the core measure was on consensus. UK data remains a sideshow, with the market much more focused on whether a no-deal Brexit scenario can be averted.
In the day ahead, RBNZ Governor Orr will testify at the Finance and Expenditure select committee at 8am, although we don’t expect much deviation from yesterday’s message. More importantly, the new RBNZ remit will be announced this morning at 10:30am, with Governor Orr and Finance Minister Robertson holding a joint press conference shortly afterwards. The new remit will replace the current Policy Targets Agreement, and will define the operational objectives for the soon-to-be-formed Monetary Policy Committee. The Bank will also publish a Charter, which will define the decision making procedure for the MPC, which will make its first decision on the OCR at the May MPS. We expect the new remit will likely be similar to the current arrangements, although we will be closely watching for any variations. Offshore, US retail sales is released as well as European and German Q4 GDP.
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