By Mike Jones and Kymberly Martin
The NZD/USD fell overnight from around 0.8060 to 0.7980 in the backdrop of a rise in risk aversion, weak commodity prices, and a range-bound USD.
The widespread fall in commodity prices overnight took some of the froth off recent gains with the “commodity-linked” currencies, NZD, AUD and CAD all suffering downward pressure. Our risk appetite index (scale 0-100%) has also fallen back to 68% from its recent high of 75%, late last week. Although the AUD itself was under pressure the NZD/AUD fell from above 0.7380 to around 0.7360, extending its recent falls but still some way off early March lows of around 0.7280.
In the backdrop of a weak GBP, given a disappointing UK PMI release, the NZD/GBP initially traded up from around 0.4840 to above 0.4870, giving up all of this gain in the early hours of this morning. Relative to the EUR the NZD drifted lower from 0.5430 to 0.5380.
Locally, yesterday’s private sector LCI rose 0.4%, lifting the annual pace to 2.0% from 1.9% in Q4 last year. It was below the market expectation of 0.5% and was certain nothing to set alarm bells ringing. However, with unit labour costs around the mid-point of the RBNZ’s inflation target band at this stage of the cycle it is enough to prevent complacency. The Fonterra auction overnight provided no drama with the average price down -0.1% since the previous event, but shows prices remain stable at elevated levels.
While the dip in the NZD/USD may prove short-lived and there is still a chance the NZD/USD resurges to test the March 2008 post-float high of 0.8213, the NZD is looking vulnerable to any further down-shift in risk appetite in the near-term. We continue to emphasis the NZD/USD looks overstretched, and recent currency strength has run ahead of domestic ‘fundamentals’.
The USD index had a choppy night but ended largely where it started around 73.10 with the backdrop of diminished global risk appetite.
The VIX index (a proxy for risk aversion) moved from around 16 to above 17, someway off the low of 14.6 reached last week. Equity markets also fell with the Euro Stoxx50 off around 0.3% and S&P500 down 0.6%, dragged down by heavy falls (2-3%) from materials and oil and gas sectors. These falls represented the decline in underlying commodity prices with the WTI oil price down around 2.5%, silver down over 6% and the CRB commodity index falling from around 367.5 to around 364.5.
The EUR also had a choppy night in mirror image to the USD, trading between 1.4760 and 1.4880 and currently around 1.4830. Eurozone data provided little direction for the EUR with the Eurozone PPI coming in line with expectation at 0.7%m/m.
The RBA kept rates at 4.75%, as expected. In our view the RBA statement was a little more hawkish than April’s, preparing the ground to hike in the months ahead if they wish. We believe an August hike is likely although it could be earlier. The market did not appear to respond to the hawkish tone with the AUD drifted down from around 1.0920 after the announcement, retesting this level in the early hours of this morning before falling to 1.0860. It was also weighed on by adverse commodity price movements.
The GBP had a difficult night, falling precipitously after the April manufacturing PMI (54.6) came in well below expectation (57.0), taking the PMI to the lowest level in 7 months. The CBI sales data showed a rise in the balance to +21 from +15 in March, but sales for this time of the year remain very weak. This only compounds the UK’s woes following on BoE governor King’s comments earlier this week that high debt levels pose a “massive” economic challenge. Further he said, “The economic consequence of high-level indebtedness now would become more severe if rates were to rise”. The market has revised down expectations for BoE hikes with only around 36bp of hikes now expected by this time next year, with the first 25bp hike not fully priced until January next year. The GBP/USD fell from around 1.6650 to end the night around 1.6470.
Today, UK house prices and mortgage approvals will provide more detail on the moribund housing market. The Eurozone PMI and retail sales data will also be released this evening, along with US mortgage applications and the ISM non-manufacturing survey.
Fixed Interest Markets
It was a relatively quiet day in NZ markets with little movement in swaps and bonds, with the biggest news being the DMO announcement of an increased issuance programme.
The DMO increased its domestic bond program for the year to June 30 by NZ$3.5b, to a maximum of $20b. Responding to strong demand at recent tenders, the DMO has ensured an average issuance of $400m a week for the next two months. However they state that ‘…the rapid pace of bond issuance has built up our cash holding to record levels. Consequently, it is most unlikely that there will be any further increase to this year’s programme. We expect that demand should continue to be relatively solid.
2 year swaps are trading around 3.39% and 10 year around 5.34%, not much changed over the past 24hours. NZGS 21s are trading around 5.44% with the spread between government bonds and swaps becoming marginally more negative at around -10bp.
US 10 year yields declined noticeably overnight from around 3.28% to below 3.25%, taking them back toward their mid March low of 3.17% as risk appetite has waned. The market continues to look for around 25bp of hikes from the Fed by this time next year.
Mike Jones and Kymberly Martin are part of the BNZ research team.