By Mike Jones and Kymberly Martin
The NZD has been the strongest performing currency over the past 24 hours. Overnight the NZD/USD hit the highest level since March 2008.
A report by Interest.co.nz that China’s sovereign wealth fund, the CIC, may have earmarked 1.5% of its foreign currency reserves (roughly NZ$6b) to invest in NZ assets lit a rocket under the NZD yesterday. While this report was unconfirmed, they are certainly consistent with the exceptional demand recorded at recent DMO government bond tenders.
From below 0.8000, the NZD/USD soared to almost 0.8110 before a bout of profit-taking saw the uptrend stall. Admittedly yesterday’s move higher in the NZD/USD was helped along by an improvement in offshore risk appetite.
The FT reported Asian investors are keen to buy Portuguese bail out bonds, helping allay European sovereign solvency concerns to some extent. Our risk appetite index (scale of 0-100%) rose from 66.5% to 69%. Steady NZD/AUD buying from a mix of custodial and Asian real money accounts also underpinned the NZD overnight. The NZD/AUD climbed from 0.7580 to 3-month highs above 0.7640.
It’s worth noting a modest increase in NZ-AU interest rate differentials has accompanied the recent rise in the NZD/AUD. Over the week NZ-AU 3-year swap spreads have risen from -168bps to -156bps. Still, we suspect we’ll have to see a further improvement in NZD/AUD fundamentals for the currency to sustain its recent gains. Our short-term NZD/AUD valuation model currently suggests a “fair-value” range of 0.7300-0.7500.
Looking ahead, watch out for a NZD/USD daily close above 0.8120. This would be consistent with a test of the post float high of 0.8214. Solid support is eyed towards 0.7990.
Majors
A broad-based weakening in the USD was the main theme pervading currency markets overnight. However it wasn’t without volatility, with the worsening Greek debt crisis spurring periodic bouts of EUR/USD selling. Investors’ risk appetite and the EUR received a boost yesterday from an FT report suggesting Asian investors (including China) would represent a “strong proportion” of the buyers of Portugal’s bailout bonds.
Indicative of improving risk appetite, Asian stocks mostly lifted and the EUR/USD bounced from 1.4080 to almost 1.4170 yesterday. With most of the major currencies happy to piggy-back off the EUR gains, the USD began to weaken broadly.
Another batch of soft-looking US economic data certainly did the USD no favours. Jobless claims confounded expectations for a small fall (to 404k), rising from 409k to 424k. Meanwhile the second estimate of US Q1 GDP was left at 1.8%q/q (annualised), in stark contrast to analysts’ expectation for an upward revision to 2.2%.
Mounting worries the US economy is entering another soft patch saw US bond yields slip 5-9bps. As a result US-Japan 2-year bond differentials fell from 36bps to 31bps, dragging USD/JPY from above 81.80 to around 81.20.
Later in the night, the USD found some fleeting support from a bout of heavy EUR/USD selling. Jean-Claude Juncker, head of the EU group of finance ministers, warned the IMF may not deliver the next batch of bailout funding to Greece if austerity conditions are not met. The German finance minister also said he opposes a reprofiling or rescheduling of Greek sovereign debt.
In response, the EUR/USD surrendered most of its early gains, sliding back below 1.4100. However the effect on general sentiment elsewhere was muted. US stocks shrugged off a weak lead from Europe, rising 0.3-0.9%, and the VIX index (a proxy for risk aversion) fell from 17.5 to 16.0.
Looking ahead, should tonight’s US data (home sales, consumer confidence, personal spending) underscore fears of stalling economic momentum we wouldn’t be surprised to see the USD continue to suffer. Near-term support on the USD index is eyed towards 74.75.
Fixed Interest Markets
Global events continue to be a key driver of NZ rates, while locally the DMO auction saw solid demand tilted toward the long-end.
Yesterday’s DMO auction saw $860m bids in total for $300m on offer, in aggregate a respectable 2.9x bid-to-cover ratio. However demand was heavily weighted to longer-dated bonds. The DMO therefore elected to accept just $45m bids for its $100m 13s offered, and $130m bids for $100m of 17s offered, and $125m bids for $100m of 19s offered.
Later in the day we saw news that China’s sovereign wealth fund, had plans to invest NZ$6bn of its foreign reserves in NZ assets, including Government bonds. The market responded with bidding at the long end of the bond curve, with 21s yield trading around 5.15%. However swap yields inched higher along the curve with 2-year yields now trading around 3.39% and 5-year yields at 4.44%.
US bond yields continued to decline as concerns around the Greek debt situation remain forefront and two US Government bond auctions this week saw very strong demand. The yield on 10-year Treasuries has broken its critical support level trading down to 3.06%.
Similarly, in Europe, German 10-year bund yields fell below 3% for the first time in 4 months as “safe haven” demand rose following the IMF’s announcement that it may not release its portion of aid to Greece next month. Developments in peripheral Europe will continue to impact global and NZ interest rate markets.
The break lower in US 10-year yields certainly allows for further downside to NZ long rates in the near-term, in the absence of local data releases today.
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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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