US equities are flat to lower and US Treasury rates have steadied after the significant sell-off yesterday. NZD, AUD and CAD are all weaker, facing their own issues.
Only second-tier economic data were released overnight, with US durable goods orders confirming a soft US investment backdrop. US equities began the session on the backfoot after an earnings warning from retailer Walgreens and the S&P500 remains in negative territory, albeit not by much. US Treasuries have consolidated after the 10bps sell-off in the previous session. After almost reaching as high as 2.51% yesterday morning, since the NZ close the 10-year Treasury rate has traded tightly between 2.47-2.49%.
The NZD and AUD have been the two weakest major currencies over the past 24 hours, down about 1% and 0.7% respectively, with further slippage overnight following weakness during local trading hours. NZ’s quarterly survey of business opinion showed weaker confidence and activity indicators, as forewarned by other business surveys, but the market took rates and the NZD lower anyway, looking for anything that helps support the view of near-term RBNZ rate cuts. Market pricing for a 25bps rate cut at next month’s MPS is now just under 50% with a nearly 50% chance of two cuts by August priced in. The yield curve continued to steepen, with 2-year swap down 3bps to 1.62% and 10-year swap flat at 2.19%. The 10-year government rate rose by just 2bps, an outperformance against the chunky sell-off of Treasuries in the prior overnight session.
The NZD fell after the QSBO and has continued to drift lower, and now finding some support around 0.6740. The GDT dairy auction showed a smaller gain in prices (+0.8%) than expected, but the price index continues to trend higher. Whole milk powder prices fell by 1.3%.
The AUD fell after the RBA’s policy announcement, with some reading between the lines that the Bank might be open to cutting rates. Two key changes made to the Statement, were some acknowledgment, for the first time, that the housing downturn was weighing on consumption, and a re-write of the final paragraph for the first time in ages. The RBA deleted language about holding the stance of monetary policy. In its place, the bank “will continue to monitor developments and set monetary policy to support sustainable growth”, which the market has interpreted as a nod to being open about considering future rate cuts. A full 25bps cut is priced by August.
Earlier, Australian building approvals soared in the month, but this was entirely driven by apartment approvals which we do not think will be sustained given the weak momentum in the housing market. Last night, the Australian Budget came and went with little surprise or market reaction – the government needs to be re-elected next month, so the Budget was more like a pre-election advertisement. The AUD trades this morning at 0.7065, with NZD/AUD around 0.9550.
Rounding off a bad day for commodity currencies, CAD weakened after a report that home sales in the metro Vancouver region fell to the lowest March levels in over three decades – some 46% below the 10-year March sales average and with prices down 7.7% yoy. Domestic concerns are weighing on the currency even with oil prices continuing to trend higher, reaching a four-month high, supported by declines in OPEC production and Venezuela output falling. The threat of additional US sanctions is hanging over Iranian supply – the White House is expected to decide early May whether to extend waivers allowing some countries to keep buying oil from the rogue nation.
GBP fell yesterday morning after parliament voted down all measures designed to break the Brexit impasse. After some stabilisation, GBP is stronger again after PM May has come up with a plan – work with the Labour party and look for a “single, unified approach” to Brexit and accept that the government will abide by parliament’s decision. This might raise hope for the “customs union” solution, a softer Brexit than May’s plan, which the Labour party supports and which only lost by 3 votes yesterday. As we go to press, all eyes are on Labour’s response.
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