Concerns about global growth dominate markets. NZ$ slips in response.

Concerns about global growth dominate markets. NZ$ slips in response.

By Mike Burrows and Kymberly Martin

The USD appreciated against nearly all the major currencies on Friday night as a bout of risk aversion pervaded markets. The NZD was not immune to this move. However the commodity sensitive currencies (AUD, CAD and NZD) remained better supported relative to the falls seen in the other major currencies.

Overall NZD/USD ended the evening down around 0.40% to be trading at 0.8220 currently. The NZD was better supported on the crosses with the trade-weighted index just below its recent highs. Despite the declines on Friday, the NZD was the best performing currency last week against the USD. Demand for the NZD has been bolstered by Thursday’s more upbeat RBNZ statement.  Last week the NZD/USD gained 0.80% and NZD/AUD surged 2.7%.

Q1 GDP indicators will dominate New Zealand’s economic data schedule this week. On Wednesday Q1 retail sales will be released. We think retail volumes posted some growth with the majority of the nominal gains we have seen in the electronic card transactions likely to have been driven by higher prices.

Thursday is a big data day. Starting in the small hours of the morning, we have the next Fonterra dairy auction. This would be positive even if it only holds previous gains. Next up is the PMI for May. Then it is back to the Q1 indicators in the form of manufacturing and wholesale trade. We are looking for the mix of sales and stocks to imply some growth in manufacturing GDP, but anticipate flatter implications from the wholesale trade survey. To round out an action packed Thursday, we get the latest pulse on consumer confidence in the early afternoon.

Looking to the day ahead, expect the NZD/USD to trade in a tight range. Initial support is seen at 0.8175, resistance is seen at 0.8245.


The USD ended the week stronger with the NZD the only major currency to outperform the USD last week. The USD seems to be benefiting from weakness in European currencies and from “safe haven” flows, given a fall in risk appetite.

Friday saw a return of risk aversion, with our risk appetite index (scale 0-100%) falling from 64% to 61%. European and US equity markets fell 1.4 -1.6% and commodities fell across the board. In particular WTI oil index fell -2.6%. Recent concerns regarding the robustness of the global economic recovery received an additional blow with the release of weaker-than-expected May Chinese trade balance data on Friday. The trade balance was $US13b vs. 19.3b expected. The pace of export growth declined to 19%y/y in May from 30%y/y in April.

In addition European sovereign debt issues continue to simmer with Greek bond yields making new highs. In this backdrop, the USD appears to have regained some of its “safe haven” status rising from 74.20 to 74.80 on Friday, having risen from 73.80 at the start of the week. JPY and CHF were also strong performers.

The commodity-linked currencies, NZD, AUD and CAD were pressured on Friday night by a combination of declining commodity prices and risk appetite. The AUD/USD fell from around 1.0620 to 1.0540, to end the week down 1.65%

European currencies however were the weakest performers on Friday. The EUR came under pressure as ECB president Trichet made comments opposing plans for Greek debt restructuring. This highlighted ongoing disagreement amongst European officials on tackling the issues in peripheral Europe. The EUR fell from 1.4500 to around 1.4350. The GBP also struggled as UK industrial production data for April showed a 1.7%m/m fall (0% expected). The GBP/USD declined from around 1.6380 on Friday afternoon to 1.6220 overnight.

In the week ahead, look out for Wednesday’s Eurozone and US Industrial production data along with the US Empire manufacturing data. Thursday’s Eurozone CPI will also be key as will the US Philadelphia Fed, ahead of Friday’s University of Michigan Confidence indicator.

Fixed Interest Markets

Last week NZ yield curves continued to flatten. Short-end yields were boosted by the RBNZ statement that was more hawkish than market expectations. Long-end yields continue to be weighed on by declining global long yields.

The DMO saw strong demand at its Friday bond auction. The combined bid-to-cover ratio was over 6x, with 1.95b bids for $300m on offer. The $100m of new 2023 bonds on offer attracted $942m of bids, with the weighted average successful bid at 5.26%.

At the end of last week, the yield on 21s had slipped as low as 5.06%, the lowest level since October last year. Long yields continue to feel the weight of declining US 10-year yields that bobbed around below 3% last week. They fell as low as 2.97% on Friday as the market continues to fret about the speed and durability of the global growth recovery.

NZ swap curves also continued to flatten meaningfully. Last week the 2s-10s spread narrowed from 180bps to around 172bps. On Friday flattening was particularly driven by the decline in 7 to 20-year yields. Over last week, 2-year yields rose around 5bp from 3.36% to 3.41% on the back of Thursday’s RBNZ comments. Conversely, 10-year swap yields declined from around 5.16% to 5.13%.

Greece remains in our peripheral vision. Last week the yield on 5-year Greek bonds traded up to a new high of 18.3%. Yields on Portuguese and Irish debt were dragged up to above 11% in sympathy. Trading levels in peripheral European debt have dropped to the lowest level on record. Uncertainty regarding the final resolution in European sovereign debt crisis remains high.

We believe NZ curve flattening pressures will remain this week. Thursday’s Business PMI and ANZ consumer confidence have the potential to further boost to short-end yields, if they provide additional confirmation of momentum in the NZ economic recovery.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrows and Kymberly Martin are part of the BNZ research team. 

All its research is available here.

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