By Mike Burrowes and Kymberly Martin
The NZD fell sharply after yesterday’s news of further severe aftershocks (largest of magnitude 6.0) in Christchurch. The NZD clawed back a little of the losses relative to a weak USD overnight to trade around 0.8160 this morning.
In an otherwise relatively quiet day, aftershocks again hit Christchurch early yesterday afternoon, causing the NZD to fall from around 0.8220 to a low of 0.8120. Overnight the NZD/USD traded in a tight range before getting a small boost from USD weakness in the early hours of this morning.
On the crosses, the NZD showed similar falls yesterday afternoon and was unable to make any significant come-back overnight. The NZD/EUR fell from around 0.5730 to 0.5660, a level it traded around for most of the night. Similarly, the NZD/GBP slipped from 0.5060 to 0.5000 immediately post the shocks, before drifting off to 0.4980 overnight.
NZD/AUD trading showed a similar pattern. The NZD/AUD is now at around 0.7680. Today’s NAB business confidence indicators will be important in indicating whether recent data weakness in Australia has filtered through to May confidence. In addition the cross may be impacted by China data releases today. In particular markets will look to industrial production data for any signs of reduced demand for Australian commodities.
News detailing the extent of damage in Christchurch is likely to keep the NZD volatile today. Given that recent rises have taken the currency some way above “fair-value”, it does remain vulnerable to short-term pull-backs, if positive sentiment toward the NZD is rattled. The longer-term issue is how the additional disruption to Christchurch reconstruction will affect RBNZ thinking. Until more details come to hand, we would caution against making knee-jerk predictions. As we have emphasised from the outset, as devastating as these events are, they are but one part of the RBNZ’s considerations.
Majors
The USD has fallen across the board over the past 24-hours, led lower by renewed concerns about growth in the US and signs Chinese growth is beginning to slow.
The bulk of the fall in the USD occurred during the late NY session at the same time as US equity markets recovered their earlier losses. The move appears to have been driven by a short positioning squeeze.
The EUR managed to post modest gains against the USD, despite a downgrade of Greece. Overnight rating agency S&P downgrade Greece three notches to triple C. This is only two notches above default. This ratings news has seen 5-year CDS spreads for Greece rise around 50bps to a record high of 1,610bps. CDS spreads for Ireland and Portugal has also risen to record highs of 740 and 765bps respectively. In response to the downgrade, EUR/USD fell from around 1.4400 down to 1.4350, but is now trading back up at 1.4410.
The GBP also benefited from USD weakness and concerns about the debt situation in Europe. The GBP has rallied around 0.9% against the USD and 0.45% against the EUR overnight. Further supporting the GBP was comments from Bank of England’s Weale, noting interest rates must rise to counter the persistent inflation pressures. In this regard markets are eagerly awaiting the release of UK CPI tonight.
Helping to spur the initial risk-off sentiment in FX markets was the release of Chinese date. The annual growth of broad M2 money supply in China dropped to a multi-year low of 15.1 percent in May. This suggest the official monetary tightening policy in place since last October has help to slow the rapid pace of growth. We will get more information tonight on the state of the Chinese economy with the release of May CPI, Retail Sales, Industrial Production and Fixed Asset Investment.
Fixed Interest Markets
NZ yield curves moved lower after yesterday’s severe aftershocks in Christchurch. Bond and swap yields both lost 4-8bps across the curve. The S&P further downgraded Greece’s sovereign rating.
Yesterday afternoon, NZ markets were thrown into disarray after the news of very significant further aftershocks in Christchurch. Bond and swap yields fell sharply with the market seeing short covering in the futures.
Swap yields declined 4-8bps along the curve. 2-year yields ended down around 7bps at 3.34% while 10-year dropped around 5bps to 5.08%. Similarly, immediately after news of the aftershocks struck, bond yields fell sharply with the yield on 13s down around 6bps to 3.17% and 21s down 4bps to 5.02%. NZ 10-year bond yields are now at close to their lows of last October. A break below this level would breach a key support level around 5.00%.
US 10-year yields also continue to provide little support. While showing some volatility over night, spiking as high as 3.01%, they ended the evening around 2.98%.
The key development globally was S&P’s downgrading of Greece’s sovereign debt rating by 3 notches from B to CCC. Greece now has the lowest credit rating in the world, and remains on outlook ‘negative’. The S&P undertook the downgrade given “Our view that there is a significantly higher likelihood of one or more defaults”.
The yield on Greek 5-year bonds has spiked to 17.7%. CDS spreads have also soared and Portuguese and Irish bond yields have also risen to, or close to, new highs as investors express contagion fears.
Coverage of the extent of new damage from the Christchurch aftershocks will dominate NZ markets today. Yields could well squeeze a little lower today, especially as Australia returns from Queen’s birthday holiday today.
No chart with that title exists.
See our interactive swap rates charts here and bond rate charts here.
Mike Burrowes and Kymberly Martin are part of the BNZ research team.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.