NZ$ bounces back post aftershock and on back of good Chinese and US data.

By Mike Burrowes and Kymberly Martin

The NZD has regained much of the losses induced by Monday’s Christchurch aftershocks. Little additional negative news materialised in the aftermath of the shocks. The NZD was buoyed by a general improvement in risk appetite globally, bounding from around 0.8120 to trade around 0.8190 this morning.

Risk appetite improved globally as Chinese and US data was stronger-than-expected (see below). The broad improvement in risk sentiment underpinned demand for “risky” and “commodity-linked” assets, including the NZD and AUD.

The NZD/AUD drifted lower over night. The AUD benefited on a relative basis from expectations for solid commodity demand, implied by the strong Chinese data. In addition, the fall in NZ swap yields that occurred after Monday’s aftershocks has resulted in the NZ-AU swap spreads becoming more negative. The NZ-AU 3-year swap spread has declined to -1.41% from -1.29% at the end of last week. The NZD/AUD declined from around 0.7700 to 0.7660.

Relative to the European currencies, the NZD was somewhat volatile overnight. The NZD/EUR bounced around to finish the night back around 0.5660. After being whipped around by gyrations in the GBP, the NZD/GBP ended the night slightly higher at close to 0.5000.

Global risk appetite will continue to be a key driver of the NZD today. A follow-through on improved global sentiment in Asian equity markets would indicate further near-tem upside for the NZD. NZ Q1 retail sales is the only local data release today, where we expect a rebound to see a solid rebound from the -0.4% recorded in Q4. Tonight we will also get the results from the latest Fonterra auction.

Majors

The USD has fallen against nearly all the majors over the past 24 hours, as an improvement in global risk appetite has seen investors chase higher yielding currencies. In this backdrop, the “safe haven” JPY and CHF have underperformed the USD.

The improvement in risk appetite was initially spurred by Chinese data out in the Asian session. In particular, markets focused on better-than-expected May Industrial Production (13.3% vs 13.1% expected). The data helped to ease recent concerns about a slowdown in global growth.

Further supporting risk sentiment was stronger-than expected May US PPI (0.2% vs 0.1% m/m expected) and advanced retail sales (-0.2% vs -0.5% m/m expected). Comments from Fed Chairman Bernanke expressing concern around the US’s long-term fiscal situation have had limited impact in FX markets.

The improvement in risk appetite has been broad-based. In equity markets, the Euro Stoxx is up 1.70% and the S&P 500 is up 1.50%. Commodities have also performed well, with the CRB (a broad index of global commodities) up 0.7% for the evening. Our own risk appetite index (scale of 0-100%) has risen from 58.8% to 63.2% overnight.

AUD/USD was the best performing currency over the past 24hrs, up around 0.9%. Sentiment towards the AUD was buoyed by the Chinese data and an ongoing improvement in risk appetite overnight. The more risk sensitive NZD and CAD have also performed strongly overnight, up 0.40% and 0.75% respectively.  

However, AUD/USD fell briefly around 25pts after the PBOC announced an increase of 50bps to the Reserve Requirement Ratio. The muted reaction highlights markets are now more confident Chinese growth is on a firmer footing.

The EUR/USD has posted more modest gains overnight, along with the GBP. GBP/USD is only marginally higher overnight, as UK inflation rose 4.5%y/y in May, inline with expectations. Markets expect the BoE to keep rates on hold while other major central banks begin increasing interest rates and exiting QE. The OIS market is currently pricing 30bps of BoE hikes over the next 12 months.

Looking to the night ahead, markets will be focusing on US and Eurozone Industrial Production for any signs of further weakness in global growth. US CPI will also be released.

Fixed Interest Markets

NZ interest rate markets were relatively quiet yesterday. The market consolidated after Monday’s aftershock driven rally. Global long yields rose.

NZ swap yields were fairly stable yesterday, with yields rising less than 1bps along the curve. Bond yields slipped slightly across the curve taking the yield on 21s to new lows at 5.02%.

US 10-year yields surged overnight in the backdrop of better-than-expected US retail sales numbers for May (-0.2%m/m vs. -0.5%m/m expected). General risk sentiment also improved with benign Chinese data releases. With equity market and commodities rising, demand for “safe haven” US Treasuries declined. US 10-year yields rose from 2.98% to 3.08%.

German 10-year bund yields also rebounded off recent lows from 2.98% to 3.02%. The spread between Greek bonds and German bunds has risen to record highs, as Greek 10-year bond yields have risen to 17.4%. Portuguese and Irish bond yields also remain elevated.

The rise in off-shore long yields should reduce weight on NZ long yields, allowing them to potentially drift higher today. Today’s Q1 retail sales data, being somewhat backward looking, is unlikely to be a key driver of short-end rates. However, tomorrow’s more timely NZ PMI and ANZ consumer confidence should be more critical in illustrating the current pulse of the economy.

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

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

All its research is available here.