Market remains in an anxious state about the global economic outlook, which sees downward pressure on equity markets and global rates; NZD 1.6% lower; GBP is bid; AUD is under pressure

By Jason Wong

There has been minimal news overnight, but the market remains in an anxious state about the global economic outlook, which sees downward pressure on equity markets and global rates.  The NZD has held its ground around 0.68 overnight after yesterday’s 1.6% drop after the shocking RBNZ OCR Review.  GBP is bid ahead of a series of indicative votes on Brexit this morning by the UK Parliament, while the AUD is under pressure on the back of weaker risk appetite.

Yesterday’s OCR review from the RBNZ was widely anticipated to pass with little fanfare with an unchanged policy outlook, but the Bank shocked the market by explicitly introducing a bias to ease policy, commenting “given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down”.

This was a seemingly deliberate attempt to drive interest rates and the NZD lower and the shock announcement delivered that reaction.  The 2-year swap rate plunged by 16bps to 1.64%, the 5-year rate by 13bps to 1.72%, and the 10-year rate by 8bps to 2.10%.  Falls of this magnitude are not unprecedented but are rare outside a time of crisis.  At the close, the market had priced in a full 25bps rate cut by August and a better-than-even chance of a second rate cut by next February.  The intent behind the surprise announcement suggests that a rate cut as soon as the next meeting in May is not out of the question, with the market pricing in a 42% chance of a 25bps cut.

The NZD fell by over a cent to just under 0.68, taking it from near the top of its trading range since early November to around the mid-point.  In overnight trading, it seems that selling pressure has been exhausted, with the currency trading in a tight band around 0.6800, even with weaker risk appetite. We remind readers that the RBNZ also surprised the market at its August (to the dovish side) and February (to the hawkish side) Monetary Policy Statements.  In both cases there was an additional ½ cent follow-through in the following days, before the market reaction was reversed by subsequent factors.  If the same pattern follows, then the NZD might well be supported around 0.6750 before global trends take over. This afternoon ANZ’s business outlook survey takes on increasing importance, in light of the RBNZ’s fresh policy bias, with a weak result fuelling rate cut expectations and only a strong rebound likely to have any opposing market impact.

In overnight news, ECB President Draghi suggested he could consider further delaying plans to raise interest rates. He also seems to have woken up to the fact that negative interest rates might be having adverse effects on the banking sector and therefore the economy, saying that the ECB would, if necessary, look for ways to maintain the positive impact of negative rates for the economy “while mitigating the side effects, if any” and would continue to monitor how banks can “maintain healthy earning conditions while net interest margins are compressed.” One obvious move would be to adopt a “tier system” like NZ does, where the interest charged to banks on overnight deposits varies with the volume of funds provided.  Draghi’s comments had little impact on the euro, which has tracked sideways, but supported the banking sector on a flat day for the Euro Stoxx 600 index.

From 8am this morning the UK Parliament will vote on eight Brexit options, the results of which are non-binding, but Parliament could push through the preferred option in a subsequent move.  The eight options are no-deal, Norway Plus, Norway, Customs Union, no-deal emergency brake, second referendum, and Malthouse Plan B which is like a managed no-deal Brexit.  PM May hopes to have a third vote on her plan at the end of the week, but there still remains an element of doubt whether the speaker will allow it.   PM May told her party this morning that she will stand down once she has ratified a deal and Britain has left the EU, which might help trigger more support for her deal, although crucial support from coalition partner DUP remains in doubt.  GBP has been well supported overnight and is at 1.3220.  The weaker NZD sees NZD/GBP trade at the bottom of its range for this year around 0.5140.

As the NZD plunged yesterday, there was some immediate negative spillover for the AUD as traders consider whether the RBA will follow the RBNZ’s easing bias next week.  The AUD has slipped further overnight against a backdrop of weaker risk sentiment, trading at 0.7080.  NZD/AUD was just under 0.97 before the RBNZ OCR review, before plunging to a low of 0.9567 ahead of the NZ close.  Since then it has been climbing up steadily and trades this morning near 0.9600.  The yen is well supported in the lower global rate environment, with USD/JPY down below 110.50 and NZD/JPY down 1.7% for the day to 75.1.

On a day with little newsflow, the S&P500 is currently down 0.4%, with sentiment driving the market.  In economic news, the US trade deficit for January came in much lower than expected which will help support Q1 GDP through net exports.  Global rates maintained a downward bias with fresh lows seen.  Germany’s 10-year rate fell by 6.5bps to minus 0.08%, while the US 10-year rate is down 4bps to 2.38% after earlier touching 2.35%, the lowest level in 15 months.

Fed speakers have been out in force this week, but Vice-Chair Clarida’s speech tonight will carry more weight.  In the euro area, we’ll be watching the confidence indicators of the EC’s business and consumer surveys and Germany CPI data.

Get our daily currency email by signing up here:

BNZ Markets research is available here.