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NZ$ buffeted by views on commodity price direction. Weak US data undermines its "safe haven" role

NZ$ buffeted by views on commodity price direction. Weak US data undermines its "safe haven" role

By Mike Jones and Kymberly Martin

The NZD/USD experienced a rocky night in the backdrop of declining global commodity prices and a tick up in global risk aversion.

The NZD was under pressure overnight along with its “commodity-linked” peer the CAD. In addition to global factors, the NZD gapped lower early in the evening as the NZD/USD broke below technical support levels and was also buffeted by rumours relating to the upcoming Budget. The NZD/USD later clawed back some of its losses ending the night at around 0.7820.

Overnight the AUD held up somewhat better despite the weak commodities backdrop with the NZD/AUD declining from around 0.7430 to 0.7380. The NZD/EUR also drifted lower in the backdrop of a strong EUR supported by an upside surprise on Eurozone’s April CPI. This keeps the ECB clearly on a path of removing monetary stimulus.  The NZD/EUR declined from 0.5560 to around 0.5520.

Yesterday’s local data provided little direction for the NZD. The Performance of Services Index rose to 52.6 from 51.1 in March. The composite services-manufacturing PMI shows a creditable run over recent months through the recent turbulence (note that Canterbury membership is surveyed in the post-quakes PSI and PMI). New orders are leading and there is an encouraging recovery in the employment indices.

Tomorrow morning’s Fonterra milk price auction has the potential to influence the NZD, particularly in the context of recent turbulence in global commodity markets. Global risk appetite will also continue to be a key driver of the NZD.

We continue to highlight the fact recent NZD/USD gains have run ahead of “fair-value”. The NZD/USD “fair-value” according to our short-term valuation model sits in the 0.7300-0.7500 range.

Majors

The USD declined overnight as US data releases disappointed. A waning in risk appetite and pull-back in commodity prices saw strong performance from the CHF with the CAD and NZD the weakest performers over the past 24 hours.

The VIX index (a proxy for risk aversion) ticked up further to 17.6 and equities failed to hold onto early gains. The Euro Stoxx50 closed down 0.5% and the S&P500 is down 0.3%. Commodity prices were under pressure with the oil price off around 2.5% and the broad CRB index drifting lower, now 9% below the late April peak.

The USD failed to benefit from its “safe haven” status as US data releases disappointed. The Empire Manufacturing index came in below expectation at 11.9 (19.5 expected) as surging materials costs negatively impacted manufacturing confidence. The NAHB housing market index also disappointed at 16 relative to an expectation for 17. The USD index declined from 75.800 to around 75.400.

The EUR was supported by USD weakness but also by the Eurozone CPI data release. CPI for April was 1.6%y/y (1.5% expected), a move up from just 1.0% in February. The data, along with last week’s solid GDP numbers, suggest further ECB tightening is still clearly in the picture. The EUR moved higher from around 1.4100 to 1.4200.

Of the “commodity-linked” currencies, the AUD held up better than the CAD and NZD. Whilst experiencing a bit of turbulence the AUD ended the night higher around 1.0600.

Today the RBA publishes their board minutes for May that may help to influence the market’s view on future RBA hikes. The market currently prices another 30bp of hikes over the next 12 months whilst we think more hikes are likely. Tonight the German ZEW survey will be released along with US housing and industrial production data.

Fixed Interest Markets

NZ swap and bond yields inched lower and US 10-year yields failed to move higher.

Bond markets rallied a little further yesterday with 13 to 21’s yields down 5-6bp. The yield on 21s now sits around 5.18%, levels last seen at the end of October last year. Swap yields also inched lower by 3-4bp along the curve with 2-year swap rates now at 3.3% and 10-year rates at around 5.24%. 10-year EFP (spread between swap and bond) remains marginally in positive territory.

US 10-year yields attempted to rise early in the night, touching close to 3.2% before being knocked back by the disappointment from the Empire Manufacturing survey and NAHB housing confidence index. The 10-year yield has returned to familiar levels around 3.15%.

In the latest European sovereign debt development Eurozone finance ministers approved a three-year emergency loan programme for Portugal of €78b.Portugal is also required to undertake an ambitious privatisation programme. In addition, a voluntary request has been made to private investors not to sell down bond holdings. The yield on Portuguese 5-year bonds declined slightly to below 11% having peaked at almost 12% at the end of April. Similarly 5-year CDS spreads have ticked down to 593bp after peaking at around 680.

There are no NZ data releases today until the Fonterra auction in the early hours of tomorrow morning. Interest rate markets will continue to look to Thursday’s Budget for indications of ongoing bond issuance.

See our interactive swap rates charts here and bond rate charts here.

Mike Jones and Kymberly Martin are part of the BNZ research team. 

All its research is available here.

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