Dovish RBA comments and weak US dollar help lift NZ dollar ahead of RBNZ meeting

The NZD has been the strongest performing currency over the past 24 hours.  The twin tailwinds of a broadly weaker USD and heavy NZD/AUD demand propelled the NZD/USD from 0.8140 to above 0.8220 overnight.

 

The RBA kept is policy rate steady at 4.75% yesterday, as widely expected. But the accompanying statement was noticeably less hawkish than expected. There certainly wasn’t a smoking gun signaling the likelihood of a near-term rate hike.

 

In the wake of the statement, the implied odds of a 25bps RBA rate hike over the next 12 months were scaled back to around 80% (from 100%), taking a small toll on the AUD. Meantime, NZ-AU 3-year swap spreads ticked up from -156bps to -149bps, underpinning a jump in the NZD/AUD from 0.7600 to almost 0.7680 yesterday.

 

Having spent most of yesterday on the front foot, the NZD/USD received an additional shot in the arm overnight from a generalised bout of USD weakness. Worries about a sharp slowdown in US economic growth have taken a toll on the USD over the past few sessions. Compounding these woes overnight were warnings from a Chinese official about the risks of holding “excessive” USD assets . The ensuing USD selling saw EUR/USD climb ½ cent to 1.4680, helping drag the NZD/USD up from 0.8180 to above 0.8220.

 

Tomorrow’s RBNZ Monetary Policy Statement will provide key local direction for the NZD. On balance, we think the Bank will signal a late-2011 start to its tightening cycle, similar to that inferred from the March MPS. Any hint from the RBNZ that the tightening cycle could begin earlier than the early 2012 start markets expect would provide more legs for the NZD/USD.

 

Ahead of the RBNZ meeting, keep an eye out for today’s building work put in place data, due at 10:45am (NZT). In the short-term, NZD/USD headwinds are expected on bounces towards last week’s 0.8265 high. Initial support is eyed around 0.8140.

 

Majors

By Mike Burrows

 

The USD has weakened against nearly all of the major currencies overnight.

The USD weakness started in the London session after a Chinese official warned about investing too heavily in dollar-denominated assets. The official speculated "the United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home".  

 

Generalised USD weakness has seen most of the major currencies rally 0.7% to 1% since yesterday morning.

Leading the gains amongst the majors, the EUR/USD climbed from around 1.4580 yesterday morning to just below 1.4700. Further underpinning sentiment towards the EUR was better-than-expected

 

German factory orders (2.8%m/m vs. 2% expected) and Eurozone retail sales data (0.9%m/m vs. 0.3% expected). The EUR/USD is now trading at its highest level in over a month. Sovereign names have been noted buyers of the EUR throughout the evening.   

 

Modest gains in global equity markets indicated some improvement in risk appetite overnight, supporting sentiment in FX markets. The German DAX finished up 0.25% and the S&P500 is currently up around 0.20%.

 

With currency markets firmly in risk-seeking mode overnight, the traditional “safe haven” CHF and JPY have underperformed against the USD.

While not gaining much attention overnight, the IMF warned that Europe must make some tough decisions before they will release the next block of aid to Greece. In this regard, the European summit in June is shaping up to be crucial meeting.   

 

Looking ahead, the markets’ focus will now turn to the ECB and Bank of England interest rate decisions tonight. In particular, investors will be looking for signals from ECB head Trichet about the possibility of a July rate hike. The market has nothing priced in for this meeting, but around 80 bps of hikes are priced in over the next 12 months.

 

Fixed Interest Markets

By Kymberly Martin

It was a relatively subdued day in NZ interest rate markets, as the market awaits Thursday’s RBNZ OCR announcement. Swap yields were 1-2bps higher along the curve, while bond yields moved lower by a similar amount.

The inching of the curves in opposite directions has moved 10-year swap spreads to around +8bps, their highest level since last June. NZ long bond yields have continued to feel the pressure of lower US 10-year yields which broke below 3% last week. US 10-year yields did however attempt to rise yesterday, moving up from 3.0% to 3.05% before settling back around 3.02%. US yields appear to have moved off their lows in the backdrop of improved news flow surrounding the debt situation in Greece. This has helped to quell demand for “safe haven” assets such as US Treasuries.

 

Locally, the DMO announced yesterday that at its Friday tender it will introduce a 15 April 2023 government bond, with a coupon of 5.5%. It is expected that over time the bond will become the next NZ 10-year benchmark bond. It is also expected to help in pricing of the new September 2025 inflation-indexed bond.

The key off-shore driver this evening will be the US Fed’s Beige Book economic survey, which has the potential to impact US 10-year yields. Locally the market will be looking to tomorrow’s RBNZ announcement.

We expect rates to remain at the historically low 2.5%. However, a firmer statement than the market anticipates could boost short-end yields.