By Mike Burrows and Kymberly Martin
The NZD has been the best performing currency over the past 24 hours. The buoyant investor sentiment towards the NZD has seen NZD/USD surge to a new post-float high around 0.8300. On a trade-weighted basis the NZD is back to the highs seen at the beginning of the month. These are the highest levels seen on the trade-weighted index since March 2008.
Sentiment towards the NZD has been buoyed by yesterday’s RBNZ Monetary Policy Statement that was more hawkish than the market expected. The RBNZ acknowledged that the New Zealand economy is on a relatively firm footing. This is despite the Christchurch earthquake. And with that firm footing comes heightened inflation risk.
Accordingly, while maintaining the cash rate at 2.5%, the RBNZ issued a clear warning that the first hike in interest rates is not only getting closer but that when that hiking process starts it will be more aggressive than previously expected.
The NZD got an immediate shot in the arm with the NZD/USD surging from around 0.8150 up to around 0.8240. The NZD/USD has continued to surge ahead during the overnight session with decent demand from a range of short-term leveraged accounts.
The combination of a more upbeat RBNZ and weaker-than-expected Australian employment data has seen the NZD/AUD jump to its highest levels since the beginning of the year. The cross is currently trading around 0.7770 from around 0.7670 yesterday morning. There has been very strong buying demand noted from short-term leveraged and proprietary accounts.
Yesterday afternoon the May Australian employment data come out weaker-than-market expectations (+7.8k vs 25k expected). The AUD/USD dived 1% in the aftermath but these losses have almost been fully reversed in overnight trading.
Shortly after the Australian data markets were caught off guard by comments from RBNZ Governor Bollard to the Finance and Expenditure Committee. Bollard noted the market had overreacted to the RBNZ statement. The NZD however shook off these comments, rising further overnight to trade around 0.8270 this morning.
The US dollar index also gained on stronger than expected trade surplus data overnight rising from around 73.800 to 74.200. The “commodity currencies” NZD, CAD and AUD were the however the best performers over the past 24hrs bolstered by a rebound in commodity and equity prices and improved risk appetite. “Safe haven” CHF and JPY were amongst the worst.
The US trade balance surprised positively at -$43.7b in April (-$48.8b expected), with the detail revealing exports had growth at their fastest pace on record.
This provided a small off-set to recent disappointing US data. The VIX index (a proxy for risk aversion) declined from 18.20 to 17.30 and equity markets in Europe and the US rebounded 1%. The best performing equity sectors were materials and oil and gas, themselves underpinned by a rise in global commodity prices, with the WTI oil price up 1%.
The ECB left rates at 1.25% as expected. President Trichet signalled the next hike will be in July, through the use of code words “strong vigilance” to describe their stance on inflation. Initially the EUR/USD gapped higher. Soon after, it fell quite heavily from around 1.4620 to settle at 1.4500 in acknowledgement that the market had already priced in a July hike. If anything, the market has now revised down expectations of rate hikes for the next 12months. Eurozone sovereign debt issues could also now return to focus, as a driver of the EUR.
The BoE also left rates on hold as expected, with little initial response by the market. However, later, after the ECB announcement the GBP was dragged lower by the falling EUR. The GBP/USD fell from around 1.6440 to just above 1.6370 this morning.
This evening, European data will show German CPI and UK industrial production, while Trichet will speak again, in Frankfurt. The US will release its monthly Budget Statement tonight.
Fixed Interest Markets
It was a day of high drama in NZ interest rate markets following the RBNZ’s statement that was more hawkish than the market expected. US 10-year yields also staged a comeback breaking above 3.0%, after better-than-expected trade balance and inventories data.
Yesterday’s RBNZ announcement saw the OCR held at 2.5%, but a rate hike by year-end was suggested. In addition the RBNZ’s new 90-day bank bill trajectory implies an eventual OCR peak of 4.75% in 2013.
The bond market initially sold-off across the curve with 21s yield briefly touching 5.15%, while 13s rose as high as 3.32%. Over the course of the day however, the market took on board RBNZ’s governor Bollards later comments that the market had ‘over-reacted’ to its statement. (A comment largely directed at the surging NZD market). The yield on 21s then slipped back to 5.09%, to be slightly down on the day. 13s yield slipped back to 3.25%, still up around 5bps on the day. By the end of day therefore the curve had flattened.
In swap markets a similar dynamic played out. Immediately following the RBNZ statement, 2-year swap yields spiked as high as 3.50% and 10-year as high as 5.25%. As the day progressed 2-year yields settled back to around 3.43% and 10-year to 5.18%, a marked flattening of the 2s-10s curve to 175bps. Despite the moves in short-end swaps, our own forecast OCR track suggest a current 2-year “fair-value” around 3.55%. As a result we continue to see some upside risk to short-end yields. Near-term consolidation may occur however after yesterday’s sharp moves.
Off-shore, rumblings around Greek sovereign debt issues continue, with the yield on 5-year Greek government bonds spiking towards previous highs at 17%.
Today’s NZ DMO bond tender will see 100m 13s, 100m 15s and 100m of the new 2023 bond on offer.
Mike Burrows and Kymberly Martin are part of the BNZ research team.