By Mike Jones and Kymberly Martin
The NZD/USD has spent the past 24 hours trading choppily inside a 0.8110-0.8180 range, torn between offsetting global influences overnight.
On the one hand a broad-based weakening in the USD provided a boost to the NZD. Last night’s US data continued its recent lacklustre tone, casting doubts on the strength of the US recovery. Yesterday the 10-year US government bond yield fell below 3% for the first time since December, causing NZ-US interest rate differentials to widen. From around 250bps at the start of last week, NZ-US 3-year swap spreads climbed to 280bps, bolstering yield demand for the NZD/USD. Providing additional headwinds for the USD overnight, ratings agency Moody’s said the US could suffer a ratings downgrade if ructions over the US legal debt limit are not sorted out.
On the other hand investors’ subdued appetite for risk weighed on the NZD. Worries about a global economic slowdown have knocked back risk appetite this week and this theme continued overnight. European equities slumped 1.4-2.0% and the VIX index (a proxy for risk aversion) held up around 18% (having started the week closer to 15.5%). As a result the NZD/USD couldn’t break back above 0.8180 overnight.
As for today we’d be surprised to see any marked further fall in residential consents when the April numbers are released today at 10:45am. The next big move is up. We’re just not sure on the timing.
In the absence of a wild consents number focus for the NZD should remain offshore. The twists and turns of the Greek sovereign debt crisis and the associated gyrations in risk appetite and the EUR will continue to provide near-term direction for the NZD/USD. In the short-term support is eyed on dips towards 0.8100. Resistance will be found towards the week’s high of around 0.8260.
Major
“Safe-haven” currencies underperformed overnight. The USD weakened against all of the major currencies with the exception of the CHF.
Early in the night a spurt higher in the EUR set the scene for a weaker USD. Not only did a successful Spanish bond auction help soothe Greek contagion worries but wire reports suggested EU/IMF officials had agreed in principle on a 3-year “adjustment” plan for Greece. Chatter from ECB President Trichet about the potential introduction of a Eurozone finance ministry also underpinned the EUR. From below 1.4350 the EUR/USD climbed to almost 1.4450, before easing off its highs.
The GBP initially suffered from dovish Bank of England rhetoric. BoE official Fisher said he would consider voting for another round of quantitative easing if the UK economy weakened further. However a solid read on the UK construction PMI (54.0 vs. 53.5 expected) later saw the GBP/USD leap nearly a cent to 1.6420.
Late in the night, independent USD weakness provided a boost to all of the major currencies. US data was, once again, less than impressive reinforcing worries the US recovery is losing steam. Jobless claims held up at 422k (417k expected) and April factory orders fell by more than expected (-1.2%m/m vs. -1.0% expected). Providing more headaches for the USD, ratings agency Moody’s said “the heightened polarization over the debt limit has increased the odds of a short-lived (US) default”.
Against the broadly weaker USD the EUR/USD rose to nearly 1.4500, USD/JPY slipped from above 81.30 to nearly 80.60 and the AUD/USD ground up to around 1.0680.
Looking ahead, tonight’s non-farm payrolls report for May is the next test of whether a sharp US slowdown is likely. A noticeably weaker-than-expected outturn would bolster claims the US is entering a prolonged slowdown, dragging the USD lower. Near-term support on the USD index is eyed towards 74.10.
Fixed Interest Markets
As we earlier flagged, local swap yields fell yesterday as the sizeable rally in offshore markets took a toll. The 2-year swap yield slipped around 6bps, amid reasonably heavy trading. In contrast, 10-year swap yields barely budged at around 5.15%. The resulting modest steepening in the curve provided some contrast to the recent flattening bias.
Overnight US bond markets sold off aggressively. The 10-year US Treasury yield has soared back above 3%, after touching a 6-month low of 2.94% yesterday.
Contributing to the move, ratings agency Moody’s warned about a possible US sovereign downgrade. 5-year US CDS spreads rose from 46bps to 51bps, implying a marginally higher US government default risk. However the sell-off likely more reflected profit-taking ahead of tonight’s all important US non-farm payrolls report.
With moves in offshore yields still providing most of the direction for local rates, expect local swap yields to open into payside pressure this morning.
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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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