By Mike Jones
There were no surprises in the RBNZ’s October OCR review yesterday. The OCR was held at 3.00%, as expected by all and sundry, and the RBNZ maintained its tightening bias. There was certainly nothing to change anyone’s views, including our own.
We remain of the view that the next hike will come in March next year and the OCR will push on to around 5% by early 2012. We suggested yesterday that it would take a real bolt from the blue from the RBNZ to change the fact USD sentiment remains the key driver of the NZD/USD at present.
We didn’t get it. And so with USD sentiment again hitting the skids overnight, the NZD/USD was dragged back up to the top end of its recent 0.7400-0.7550 range.
Revelations the New York Fed has been surveying US primary dealers on their expectations of additional Fed easing essentially confirmed to the market some form of quantitative easing is likely to be announced from the Fed next week. The associated slide in US bond yields saw the USD take another pounding, providing a default boost to most of the major currencies.
It’s worth noting, a widening in NZ interest rate differentials has helped underpin recent gains in NZD/USD and NZD/AUD.
And with yesterday’s RBNZ statement reinforcing the RBNZ’s tightening bias, we wouldn’t be surprised to see this trend continue. NZ-US 3-year swap spreads rose to 330bps yesterday, the highest since July, while NZ-AU spreads have increased around 15bps this week following Wednesday’s benign Australian CPI. Looking ahead, there is potential for increased volatility in the NZD and currencies generally over the next 24 hours given a weighty data schedule.
Local building consents and merchandise trade figures for September seem unlikely to shift NZD sentiment much. But offshore investors will be closely watching tonight’s Eurozone CPI, US consumer confidence and, in particular, Q3 US GDP figures for clues on USD sentiment. Initial resistance on NZD/USD is eyed towards 0.7560, with near-term support around 0.7450.
The USD weakened sharply overnight, propelling most of the major currencies back towards the top end of their recent ranges. The USD index slipped around 1%, unwinding all of the previous two day’s gains. Uncertainty about the size and timing of possible quantitative easing (QE) to be announced by the Fed next week continues to be the dominant theme influencing currency markets.
Early in the week, suggestions the second round of Fed easing might not be as aggressive as some are expecting provided some respite for the USD. However, USD selling returned with a vengeance overnight on news the New York Fed was surveying US primary dealers on their expectations of the size and impact of further QE. It was essentially confirmation, if any more was needed, that QE in some form is more likely than not next week.
US government bond yields reversed most of the previous day’s gains, flipping from a USD support to a clear drag. 10-year Treasury yields dived 7bps to 2.65% and 2-year yields dipped around 5bps to 0.37%. This was despite US jobless claims dropping to three-month low of 434,000 (450,000 expected) in the week to October 23. Against the broadly weaker USD, the JPY, GBP, AUD and CHF all posted gains of 0.5%-1.0%.
Still, the EUR was the night’s strongest performer amid more chatter of central bank reserves diversification into EUR. From below 1.3800, EUR/USD eventually settled around the 1.3900 mark. Fresh signs of encouraging European economic performance added to the positive EUR sentiment. Indeed, October Eurozone economic confidence rose from 103.2 to 104.1 (103.5 expected) and German unemployment dropped to a 28-year low of 7.5% in October.
Yesterday’s Bank of Japan policy announcement contained few surprises for markets. The BoJ kept interest rates at zero, but said it will bring forward its next meeting to November 5 in order to speed up the launch of its ¥5t asset purchase programme. Global equity markets were mixed overnight.
While talk of additional monetary stimulus and better-than-expected earnings results out of Europe and the US buoyed sentiment, investors were reluctant to take on more risk ahead of next week’s event risk (FOMC meeting, US mid-term elections and US non-farm payrolls). European equity indices ticked up 0.4-0.6%, while the S&P500 and Dow Jones indices ended the night broadly unchanged.
* Mike Jones is part of the BNZ research team.