USD has shown broadly based gains, seeing it make a fresh high for the year, while the NZD makes a low; that’s against a backdrop of stronger equity markets; meanwhile in bond markets, European rates are higher, while US Treasury rates are slightly lower

There has been little newsflow, and it is one of those weird days where nothing much makes sense.  The USD has shown broadly based gains, seeing it make a fresh high for the year, while the NZD makes a low.  That’s against a backdrop of stronger equity markets.  Meanwhile in bond markets, European rates are higher, while US Treasury rates are slightly lower.

Global equity markets are stronger, with the S&P500 currently up 0.9%, on track for a record close, albeit still a few points shy of the intra-day high in September. The earnings season is supporting a more upbeat tone.  According to FactSet, with more than 100 S&P 500 companies having reported results, nearly 79% have beaten analysts’ profit estimates, outpacing the 69% of companies that did so in the previous quarter.  Healthcare stocks are leading today’s charge, a sector that has underperformed this year, while the economically-sensitive consumer discretionary and IT sectors are the next best sectors today.  Yesterday, the NZX50 Index blasted through the 10,000 mark, with the current bull market stoked by lower interest rates and expectations of more – great for those of us with big stakes in the market, but poor policy from a social equality point of view.

There has been little overnight data to drive markets.  US new home sales was surprisingly strong, rising to a 16-month high.  The data follows a trio of “misses” on housing starts, permits and existing home sales and wasn’t a market-mover.  The US 10-year rate has traded a tight 2.56-2.59% range, and is currently at the lower end of the range and down 2bps for the day.  This goes against the trend of higher European rates, with German and UK rates up in the order of 2-3%.

Despite higher risk appetite and lower US-European rates, the USD shows broadly-based gains, with the widely followed DXY index making a fresh high for the year of 97.777, up 0.4% for the day, and our preferred USD TWI majors index doing the same. The NZD made a fresh low for the year of 0.6629 (excluding the 3 January flash-crash), and has recovered a little to about 0.6650.  The gap between the spot rate and our short-term fair value estimate is the greatest it has been this year, nearly 4% “cheap”, in an environment where risk appetite and NZ commodity prices have been tracking higher.  This valuation gap isn’t statistically significant at this stage, but is indicative of the NZD trading on the cheap side of fundamental fair-value, with recent weakness influenced by speculators taking short positions after the RBNZ’s dovish pivot in late-March.  The recent fall in the NZD puts it at the lower end of its trading range seen since November and is no cause for panic.  Indeed, our projection for the end of June has sat unchanged at 0.67 since our last forecast revision back in December.

The stronger USD backdrop sees AUD slip back below the 0.71 mark, while NZD/AUD has pushed up a touch to 0.9370, with some nerves ahead of Australian CPI data today.  The consensus sees a soft outcome, and that would help reduce a hurdle for potential RBA rate cuts this year, although the Bank seems more attune to labour market developments and last week’s decent employment report won’t rush the RBA into cutting rates ahead of the May Federal election.

Oil prices have pushed on up further, following the near-3% gain yesterday on the Iran sanction waiver news.  But this move hasn’t help CAD, with the USD on a roll.  Focus turns to the Bank of Canada’s announcement (early ANZAC Day morning), where policy should remain unchanged, but the case for a prolonged pause has been gaining traction, with a slower domestic economy evident.  Still, Governor Poloz might be unwilling to remove the modest tightening bias from the policy outlook.  NZD/CAD dipped below 0.89 for the first time this year, but has since recovered to 0.8930.

EUR and GBP are about 0.3-0.4% lower against the USD.  In the UK, the government seems focused on getting the Withdrawal Agreement Bill passed by Parliament in what would be a fourth attempt.  But the FT reports that there is little confidence in Downing Street that the negotiations between the Conservatives and Labour will yield a breakthrough, given the disinclination of Corbyn to help PM May out of her Brexit trap. Some of Mrs May’s aides believe the talks could collapse this week.

JPY is the second best performer after the USD, with USD/JPY barely lower at 111.85 and NZD/JPY down 0.6% to 74.3.  The BoJ meets on ANZAC Day and is expected to keep policy unchanged, even as core inflation remains low and unlikely to meet the target in the foreseeable future.  BoJ officials have talked about the possibility of further easing, but policy options are limited by practical considerations.

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