By Mike Jones and Kymberly Martin
The NZD/USD fell further overnight from around 0.7950 to around 0.7900 as risk tolerance has waned and commodity prices continue to fall.
Yesterday the NZD, AUD and CAD all suffered downward pressure as commodity prices subsided overnight. The CRB global commodity index has fallen further to around 358, having peaked last week around 371. Along with concerns about global growth recovery and with some weakness in US data, the market appears concerned about slowing in China demand. Officials from the People’s Bank of China were reported as saying they would continue to tighten monetary policy to tackle inflation.
With the AUD also under pressure overnight, the NZD/AUD managed to make some ground in the early hours of this morning. It traded up from around 0.7300 to around 0.7360.
Local data yesterday showed March building consents were weak, as expected. However, we believe they may be close to bottoming. Several factors, including earthquake rebuilding and the leaky-home resolution pact, are likely to contribute to a strong rebound over the next 18mths.
In the near-term the NZD is looking vulnerable to any further down-shift in global risk appetite and commodity prices, given recent currency strength has run ahead of domestic ‘fundamentals’. Our NZD/USD ‘fair value’ remains in the 0.7400-0.7600 range.
The USD index had another choppy night but ended at similar levels just above 73.00, as risk aversion has ticked up from previously complacent levels.
Commodity linked’ currencies CAD, AUD and NZD were the weakest performers. JPY benefited from some relative ‘safe haven’ demandand and was the strongest performer over the past 24 hours with the USD/JPY declining to around 80.60. This level is not a million miles away from where the G7 coordinated intervention in the JPY to prevent further appreciation at the height of the Japanese nuclear crisis in March.
The VIX index (a proxy for risk aversion) remains around 17. It is certainly not at alarming levels, but suggests sentiment has shifted from the complacency seen when the VIX traded close to 14 last week.
Equities had a difficult night with the Euro Stoxx down around 1.6% and the S&P500 currently down around 0.6%. It was once again dragged down by oil, gas and materials sectors that fell in line with the falls seen in underlying commodity prices. The oil price fell another 2% with WTI breaking below US$110 while silver once again stood out amongst metals, falling a further 5%.
US data was also weak taking some of the froth off expectations for the global recovery. The ISM non-manufacturing index came in well below expectation at 52.8 (57.5 expected), giving up all the gain it has seen since August last year. The ADP employment change number also disappointed at 179k (198k expected).
The EUR/USD took its cue from the USD, trading in mirror image. It traded as high as 1.4940 after the weak ISM US data but then gave up the gains as the USD rebounded. It currently trades around 1.4840. The Eurozone had its own data disappointments with March retails sales -1.0%m/m (-0.1% expected), however its PMI was bang in line with expectation at 57.8. It held at last months level.
The GBP faced more disappointing data overnight with UK Nationwide house prices falling 1.3%y/y in April (-0.7% expected). The construction PMI also disappointed at 53.3 (55.9 expected). The GBP/USD showed a bit of volatility intra-night closing at familiar levels around 1.6510.
Today the focus will be on Europe where both the ECB and BoE are meeting. Both are widely expected to remain on hold this meeting. However the market still sees the ECB as on a normalisation path with close to 100bp of rate hikes expected over the next 12mths. Less than 40bp are expected from the BoE, once they eventually get underway.
In the US, look out for ULC and productivity numbers and Fed chairman Bernanke speaking in Chicago.
Fixed Interest Markets
The DMO announced 300m of 19s and 100m of 17s would be available at this week’s auction. Bond and swap yields declined a little further.
NZ bonds continued to rally. 21s yield dropped another few basis points to around 5.41% with 13s yield dropping to around 3.29%.10 year swap yields inched lower also, from around 5.34% to around 5.30%, with 2 year swaps steadier around 3.7%.
Two factors seem to be driving yields lower. First, it appears demand for bonds remains strong, with DMO supply maybe not sufficient to satisfy demand. Second, NZ interest rates are also rallying in sympathy with their global counterparts, as risk appetite has waned.
US 10 year bond (the benchmark “safe haven” bond) yields continued their recent descent, amid a backdrop of reduced risk appetite. They fell from 3.26% to around 3.21%, now not far off their mid-March lows of 3.17%.
All remains relatively quiet on the European sovereign debt front, with no new developments overnight although the issues are far from resolved. Yields for Greek, Irish and Portuguese bonds remain some way above 10%.
Mike Jones and Kymberly Martin are part of the BNZ research team.