NZD has recovered, helped by a verbal intervention by the PBoC to help support the yuan; US equities and bond yields have moved lower; USD is broadly weaker across the board

By Jason Wong

The NZD has recovered, helped by a verbal intervention by the PBoC to help support the yuan, on a day where US equities and bond yields have moved lower.

After falling steadily over the past few weeks, the NZD has shown a rare increase, currently up 0.6% for the day to 0.6755, with all the gain coming after the local close.  The positive turnaround can be attributed to comments by PBoC Governor Yi Gang.  He said that China will keep the yuan exchange rate basically stable at a reasonable and balanced level. The comments came after USD/CNY breached 6.70, so there is speculation that this level might represent a line in the sand for the PBoC. CNY saw a swing of about 1% after the comments.  After trading as high as 6.72 earlier in the day, USD/CNY finished at 6.6425.  The Statement followed three weeks of unusually significant CNY weakness which the PBoC attributed to a stronger USD and external uncertainties. There were also reports from traders of state banks aggressively buying the Yuan. Another PBoC official stated that China won’t use the Yuan as a tool in trade conflicts.

The NZD essentially followed the path of CNY.  A fresh 2-year low of 0.6688 was set near the nadir in CNY weakness, with the quarterly survey of business opinion offering no support to the NZD.  The survey showed business confidence falling to a 7-year low, with the market putting more weight on the soft activity indicators than the survey’s evidence of rising inflationary pressure. We’ve seen a steady rise in the NZD since the PBoC comments, with the currency trading near its highs for the day despite a weak GDT dairy auction overnight.  The GDT price index fell by 5.0%, with whole milk powder down 7.3%, larger falls than expected.

Given the NZD’s strong link to CNY over the last week or two, some stability in CNY provides some hope that the relentless selling pressure in the NZD will now end and help the NZD enter a consolidation phase.

Earlier in the week we wrote about the extreme short positioning in the NZD from speculators and there was more evidence of that as the overnight cash rate implied in the NZD swaps market reached some 200bps over cash in a mad scramble to borrow NZD.  Other factors were also in play,  but the RBNZ stepped into the market to help bring the cash rate lower by injecting NZD in the swaps market and offering an unusually large $600m RB Bill tender to drain liquidity.

The USD is broadly weaker across the board, with the various USD indices down in the order of 0.3-0.5%.  The Swedish Krona is the best performing, up 1.4% after a more hawkish than expected policy statement by the Riksbank, with 2 out of the 6 voters calling for an earlier tightening.  GBP was supported after Saunders, a known hawk and one of the three that voted for a rate hike at the last BoE meeting, said that the central bank needed to raise rates faster than the market expects.  Also helping GBP was ITV’s Peston, a veteran British political reporter, who cited government insiders in saying that PM May’s Brexit plan is the “softest possible exit”.  He outlined some of May’s plans to support his case.

NZD/AUD is steady around 0.9150, after a temporary lurch down to as low as 0.9097 after the local close. The RBA’s statement came and went with little change to policy guidance and little market reaction.  The NZD is modestly higher on the other crosses.

The S&P500 closed early ahead of the Independence Day holiday.  While it spent most of the session in positive territory, it lurched down in the last hour of trading to be down 0.5% for the day.  A Chinese court temporarily banned chip sales of US tech company Micron Technology, ruling in favour of a Taiwanese competitor.  While the case was part of a broader dispute between the two companies, the announcement came soon after the US moved to block China Mobile from entering the US market on national security grounds, so these developments fuelled speculation that the decisions were part of the tit-for-tat trade war. China’s customs agency unexpectedly issued trade data that showed growth in exports to the US slowing.  This might be seen as signal China is trying to send to the US ahead of Trump’s final sign-off of tariffs at the end of the week.

The yield on US 10-year Treasuries slid 5bps from as high as 2.88% to 2.83%, with the move attributed to the turnaround in oil prices and the equity market.  WTI crude made a fresh multi-year high of $75.27 before plunging 3% on headlines that Saudi Arabia agreed to US demands to pump more oil and perhaps some closing of speculative long positions ahead of the US holiday. NZ rates faced downside pressure yesterday, with the 10-year swap rate closing below 3% for the first time since November 2016 at 2.9975%.

The US holiday tonight should make for relatively uneventful trading over the next 24 hours.

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