By Mike Jones and Kymberly Martin
The NZD was one of the strongest performing currencies in the past 24 hours after yesterday’s surprisingly strong NBNZ survey. Overnight the currency held onto most of its gains trading around 0.8240.
Following in the wake of Monday’s strong trade balance data, yesterday’s NBNZ Business Outlook survey continued the recent trend of positive surprises for local data. The business survey was extremely strong with business confidence surging to 38.3 in May from 14.2 in April extending the recovery post the Christchurch earthquake.
In addition, firms’ own activity expectations moved higher to 39.7 from an already healthy 29.5 in the previous month. In all there was more to the survey than just a ‘feel good’ factor. It indicates that more business activity, investment and hiring is ahead. The NZD/USD surged higher after the release from around 0.8200 to 0.8260, later dropping back a little to 0.8240.
The NZD/AUD crept a little higher overnight, extending strong gains yesterday as the cross was boosted by opposing data outcomes on either side of the Tasman. In contrast to the strong NBNZ survey data Australian export data extended recent Australian data disappointments. At -2.4% Q1 net exports make a meaningful detraction from Q1 growth and provide downside risk to today’s GDP release. NZ-AU interest rate differentials have become less negative on the back of the data and the NZD/AUD traded up to 0.7720, the highest level since early February.
Momentum continues to favour the NZD at present as it makes new post-float highs. We continue to expect any near-term pull-backs will be limited in the absence of deteriorating global risk appetite. Today’s Overseas Trade Index and ANZ Commodity Price data should reflect ongoing strength in NZ’s terms of trade, helping to underpin the NZD.
Majors
The USD index traded sideways overnight around 74.60 in the backdrop of further weak US data, confirming a lot of negativity is now priced in by USD weakness.
The US Chicago PMI came in well below expectation at 56.6 (62.0 expected), the lowest level since November last year. Consumer confidence also fell to 60.80 (66.6 expected). The data add further evidence of the recent drop-off in momentum in the US economy.
Over the past 24 hours the EUR/USD made some headway on reports the EU is drafting a second bail-out package for Greece and that Germany was pulling back from demands for debt ‘restructuring’. Overnight the EUR then traded sideways around 1.4400 to end the night around 1.4380.
Eurozone’s May CPI data came in slightly below expectation at 2.7%yoy (It was expected to hold at 2.8%). The rate remains well above the ECB’s 2% upper target limit but the dip down in May means the ECB can potentially afford to wait until July for their next rate hike.
The AUD continued to subside overnight after yesterday’s weak exports data. Net exports in Q1 were an astounding -2.4% points detraction from growth, well south of market expectations (-1.1%). The data provides some downside risk to today’s Q1 GDP outcome which is forecast by the market to be -1.1%q/q.
Tonight’s US ISM manufacturing survey will provide a useful cross-check of signs of stalling in US activity. We also receive the Eurozone Manufacturing PMI for a comparison of manufacturing activity in that region.
Fixed Interest Markets
In reaction to yesterday’s very positive NBNZ business survey short-end yields rose, while long end remained largely unchanged, resulting in further flattening of the curve.
The NBNZ survey, which compliments an array of recent data suggesting resilience in the NZ economy, prompted markets to revise up their OCR expectations. According to our OIS model the market now expects 55bps of rate hikes over the next year, almost 10bps more than just a week ago.
As a consequence yields on short-end bonds inched higher. Yields on 13s and 15s moved higher by 2-3bps to yield 3.24% and 4.1% respectively. The yield on 21s eased a fraction lower to around 5.08%, continuing to feel the drag from a falling US 10-year bond yield that has now slipped to 3.04%.
Similar dynamics played out in the swap market where short-end yields responded to the strong data by moving higher while the long end remained anchored. 2-year swaps moved up by as much as 7bp to 3.47%, moving toward our current “fair value” of 3.69%. (based on our OCR track which sees the cash rate peak at 5% in early 2013.)
With the contrasting fortunes represented by recent data released on either side of the Tasman, NZ-AU 2-year swap spreads have surged higher from -1.73% to -1.65% yesterday. That is their highest level since February this year and up from -1.96% just two weeks ago.
With further declines in US long yields overnight we expect the long end of the NZ curve will continue to be weighed down today. By contrast, positive terms of trade and ANZ commodity price data have the potential to exert more upward pressure on short-end yields.
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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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