By Mike Jones and Kymberly Martin
The NZD was the strongest performing currency relative to major peers over the past 24 hours as risk appetite and commodity prices rebounded.
As we suspected, yesterday’s Q1 producer prices were more inflationary than the market anticipated. Output prices jumped 1.7% (4.2% y/y) with input prices up 2.2% (5.3% y/y). They provided further hints of inflationary pressure in the economy that are broader than the consumer price index (CPI) captures.
The NZD was boosted yesterday after the release of the ANZ-RM consumer confidence index. It showed an increase to 103.3 in May from the 101.4 level it had settled at in March/April post the Christchurch earthquake. As such, it lags the stronger rebound we’ve seen in business confidence but is a move in the right direction. Overnight the NZD held onto gains, sidling sideways around 0.7880.
The NZD/AUD flat-lined around 0.7420 overnight while the NZD also traded sideways relative to the EUR. However the NZD made gains versus a weak GBP that fell after BoE minutes showed no indication of UK rate hikes any time soon. The NZD/GBP moved up from 0.4850 to 0.4880.
Risk appetite will continue to be the key global driver of the NZD in the near-term. Resurgence in risk appetite will help to support the NZD/USD that remains trading above our model derived ‘fair-value’. The ‘fair-value’ on this basis sits in the 0.7300-0.7500 range. Locally, today’s Budget will be the market’s focus.
Majors
The USD rose overnight in a backdrop of slightly better risk appetite. “Safe haven” currencies JPY and CHF were amongst the worst performers in the past 24 hours along with the GBP.
Fed minutes released overnight showed officials agreed that the ‘first step toward normalisation’ should be to stop reinvestment of principal payments on mortgage debt owned by the Fed. A majority favoured selling the Fed’s securities once rate hikes got underway. The talks of the ‘exit’ strategy however did not indicate it would necessarily begin soon. The USD index made some gains after the release, moving from 75.30 to finish the night around 75.50.
Broadly there was some improvement in risk appetite overnight with our indicator (scale 0-100%) ticking up further from 66% to 68%. Equities rebounded by 0.6% on the Euro Stoxx50 and by around 0.8% on the S&P500, led by commodity sectors. Underlying commodity prices also rose with the WTI oil price up almost 3% and the CRB global index up around 2%. As risk appetite has improved the ‘safe haven’ JPY underperformed with the USD/JPY moving up from around 81.00 to close to 81.70.
The GBP was the weakest performing currency over the past 24 hours. Labour market data was mixed with a tick down in the March unemployment rate from 7.8% to 7.7% but a tick up in the claimant count for April from 4.5% to 4.6%. The market appeared to take its cue from the release of MPC minutes showing the vote remained at 6-3 to keep rates at 0.5% with little urgency for raising rates any time soon. The GBP/USD fell from around 1.6250 to 1.6150.
The AUD shuffled sideways overnight around 1.0620 after a muted reaction to yesterday’s data releases. Yesterday the Westpac-Melbourne Institute measure of consumer sentiment fell 1.3% in May. It shows consumers are still on the defensive, though sentiment remains somewhat above its long-term average. The Australian wage index grew below expectation at 0.8% in Q1 (1.1% expected). The combination of these two data points have made June a less likely candidate for a RBA rate hike although July is still a ‘live’ possibility in our view.
Look out today for UK retail sales data. The US releases home sales data, along with the Philadelphia Fed and leading indicators. A number of Fed officials speak tonight at various locations. ECB’s Trichet also speaks in Frankfurt.
Fixed Interest Markets
It was another subdued day in NZ interest rate markets as they remain in ‘wait and see’ mode ahead of today’s Budget and indications of bond issuance for coming years.
Bond yields inched another couple of bps lower as did swap rates. The 10-year swap rate declined around 3bp taking it to 5.21%, just a smidge above 10-year bond yields. The yield on 21s is around 5.17%, keeping EFP marginally in positive territory.
US 10-year yields have bounced off recent lows in a backdrop of improving risk appetite, rising from 3.12% to 3.16%.
Across the Tasman, with consumer sentiment and the wage index coming in below expectation, markets have notched down further their expectations for rate hikes. Just over 25bp of hikes are now priced for the next 12 months. Australian swap yields have nudged down. However with the recent decline in NZ swap rates the NZ/AU 3-year swap differential remains around -1.55%.
Moody’s also announced a cut to the ratings of the four largest Australian banks by one notch to Aa2. The move was as the market expected with little change in the cost of protecting Australian bank bonds from default.
See our interactive swap rates charts here and bond rate charts here.
Mike Jones and Kymberly Martin are part of the BNZ research team.
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