The double act of a stronger USD and sliding global commodity prices conspired to knock the NZD/USD lower overnight. The NZD/USD shed around ¾ of a cent to trade around 0.7880 currently.
Yesterday’s lambasting of the high NZD by RBNZ Governor Bollard had only a fleeting effect on the currency. The brief dip towards 0.7940 was quickly reversed, perhaps assisted by yesterday’s robust set of REINZ housing figures. Sales and prices rose, and houses appear to be selling faster.
Fear and volatility returned to markets overnight as a sea of red in commodities markets triggered a bout of risk aversion. Oil prices began to lose ground yesterday following a weaker than expected April read on Chinese industrial production (13.4%y/y vs. 14.6% expected).
Overnight the sell-off continued, amid a surprise rise in gasoline inventories and easing fears about production. Oil and gas prices skidded 5-7% lower, dragging prices down across the commodities complex. Not only did this sap demand for “commodity-linked” currencies like the NZD, but rising “safe-haven” demand saw the likes of the JPY and USD outperform. From above 64.50, NZD/JPY slipped below 63.80 and the NZD/USD fell from 0.7960 to around 0.7880.
For today keep an eye out for this morning’s local food price and PMI data, although neither are likely to have big implications for the NZD. Prime Minister Key is also speaking this morning at the Hotel Industry Conference. The most watched event of the day is likely to be Australian jobs data, to be released at 1:30pm (NZT). Another fall in the unemployment rate would all but clinch the case for a June 7 RBA rate hike which would serve to underpin the AUD and NZD.
Near-term NZD/USD support is eyed towards 0.7830, with initial resistance at 0.7920.
Majors
The USD and the JPY strengthened against all of the major currencies overnight as a spike in risk aversion encouraged demand for “safe-haven” assets.
A rout in global commodities prices was the most eye-catching development of the night. The CRB index (a broad index of commodity prices) has tumbled just over 3%.
A slide in oil and gasoline prices appears to have triggered the broader commodities move. Oil prices plunged nearly 6%, with gasoline prices down around 6.8% as concerns about the impact of flooding along the Mississippi River on gasoline production eased. News from the EIA of an unexpected build up in gasoline inventories (the first rise in 12 weeks) added to the selling pressure.
The commodities wash out saw risk aversion climb. US stocks slipped 0.9 to 1.1%, led by falls in energy stocks and the VIX index (a proxy for risk aversion) rose from 16% to above 17%.
Faltering risk appetite and heightened nervousness spurred demand for “safe-haven” currencies like the USD and JPY. In addition traders were forced to unwind short USD positions expressed through long positions in the commodities complex, further underpinning the USD.
Against the broadly stronger USD the AUD/USD gave up 1 ½ cents and the EUR/USD skidded from 1.4400 to 1.4200, not helped by reports of protests in Greece against ongoing austerity measures.
The GBP struggled against the stronger USD but leapt to a 6-week high against the EUR following a more hawkish than expected inflation report from the Bank of England. The BoE revised up its medium term inflation forecasts and Governor King said “the Bank rate will need to rise at some point”, calling into question the market’s view the BOE will keep rates on hold until December.
Fixed Interest Markets
Interest rate markets were relatively subdued yesterday. Yields on swaps and bonds crept a little higher. US 10 year bond yields fell as risk appetite faded once again.
NZ bond yields appear to be consolidating after recent sharp falls. The market showed little reaction to yesterday’s RBNZ financial stability report that contained few surprises.
US 10 year yields declined after solid demand at the auction of $24b government notes, as the sell-off in commodity and equity markets increased demand for short-covering. The auction was around 3x bid. The yields on 10 year bond yields declined from around 3.21% to 3.16%.
As a result of respective moves in NZ and US long rates, the NZ/US 10 year bond spread has rebounded quite strongly from around 201bp to close to 211bp.
Demand relative to supply at DMO tenders will continue to be a driver of NZ interest rate markets at the long end. Short end rates appear relatively well anchored at present, with little in the immediate term to move the market closer to our view of a RBNZ rate hike by year end.
Today, we get the Business PMI and April’s food price index which should help to fine-tune our 1.0% (5.4%y/y) pick for Q2 CPI. Rising inflationary pressures are a key component of our view that the RBNZ will remove its ’emergency’ rate cut, sooner rather than later.
No chart with that title exists.
See our interactive swap rates charts here and bond rate charts here.
Mike Jones and Kymberly Martin are part of the BNZ research team.
2 Comments
Well first off Ostrich he'll have to go clear that opinion with vested interests.....
Further this from the above should give you a hint of what you would get........
"Yesterday’s lambasting of the high NZD by RBNZ Governor Bollard had only a fleeting effect on the currency. The brief dip towards 0.7940 was quickly reversed, perhaps assisted by yesterday’s robust set of REINZ housing figures. Sales and prices rose, and houses appear to be selling faster."
Yep just keep on talking it up banky boy........it will be a lot harder to sustain now Bolly's not on the team plan.
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