By Mike Burrowes and Kymberly Martin
The NZD has been hit by a bout of risk aversion but has largely recovered the losses this morning. The NZD/USD is currently trading around 0.8120. However the NZD has posted gains against most of the other major currencies.
The rally against the other major currencies has meant the NZD trade-weighted index is currently marginally higher at 70.60. NZD/GBP made a new post-float high yesterday afternoon just below 0.5100 and is currently trading around 0.5080. The hefty fall in the EUR overnight has seen NZD/EUR rally from 0.5680 to 0.5710 currently.
NZD/AUD has continued to march higher over the past 24 hours. The cross reached a high around 0.7750 overnight and is currently trading at 0.7730. We have noted increase demand from offshore names to buy NZD/AUD.
The NZD was given a boost yesterday afternoon after the Government announced a package for homeowners in the areas worst-hit by the Christchurch earthquake. The package was seen as positive for the NZD as it brings forward the timing of part of the fiscal stimulus and rebuilding process related to the earthquake.
Interest rate differential are also helping to support the NZD. The OIS market is currently pricing over two hikes from the RBNZ over the next 12 months. This contrasts to a scaling back of interest rate hikes for the majority of other central banks.
There is no data out locally today, so expect the NZD to take its cues from offshore. In Australia RBA’s Lowe is speaking around 3pm. For the day ahead, support is initially seen around 0.8080 and resistance at 0.8180.
Majors
The USD has bounced aggressively over the past 24 hours as a bout of risk aversion has entered markets. The “safe-haven” CHF and JPY have also performed strongly against the other major currencies. The USD gains have been partially pared back this morning after an announcement from the IMF and EU.
The rally in the USD was driven by risk aversion flows rather than positive US economic news. In equities, the Euro Stoxx 50 plunged 2.30% and the S&P500 is currently down 0.50%. There has also been a rout in commodities, with the CRB index (a broad index of global commodities) falling 2%. Most notably oil prices collapsed 4% after the International Energy Agency said it would release 60 million barrels of oil to help support the global economic recovery. Our risk appetite index has dropped from 62.1% to 57.5%.
The spike in risk aversion has been driven by concerns over Greece and signs of a slowdown down global growth. The growth concerns were triggered by weaker-than-expected purchasing managers’ indexes (PMIs) for China and Europe. The Eurozone's private sector grew only modestly in June, while China's factory sector barely expanded. US weekly jobless claims were also worse-than-expected.
Fuelling the risk-off mood, the Greek government may face further hurdles in passing austerity measures next week. Overnight Greek opposition leader Samaras noted the only way for Greece to repay its debt was for the government to change its current fiscal policies. This suggests the vote on the austerity package next week will not be plain sailing.
The focus back on Europe has seen the EUR/USD drop from 1.4350 to a low around 1.4130. However the EUR/USD has recovered some of these losses to be currently trading around 1.4240. The EUR/USD bounced late this morning after the EU and IMF announced they had reached an agreement with Greece on their 5-year plan. This has helped risk sentiment more generally.
The GBP/USD has traded to a 3 month low below 1.5950. The risk-off mood combined with Wednesday’s dovish BoE minutes has seen the GBP fall around 1.50% over the past two days.
Looking to the night ahead, the BoE governor King is holding a Financial Policy Committee Press Conference. In Germany we have the IFO due for release. While in the US we have Durable Goods and another take on Q1 GDP.
Fixed Interest Markets
NZ swap and bond markets diverged yesterday with swap yields moving higher as bond yields crept a little lower. As a result, the spread between 10-year swaps and bonds has moved further into positive territory at around 10bp, the highest level since last June.
This week’s DMO auction saw solid demand with bid-to-cover ratios of 2 to 3x. However the office chose to accept only $60m bids for $100m of 21s on offer, in favour of accepting $140m bids for $100m 23s offered. The average successful bid for the relatively new 23s was 5.13%. Bond yields declined 1-2bps at the longer end of the curve yesterday, as demand remains solid given global uncertainty.
By contrast, swaps sold off with yields rising by 4-5bps along the curve, accompanied by a slight steepening, as the market absorbed the government’s announcement on Christchurch properties. The government’s offer to buy homes in the most earthquake devastated regions was deemed a positive move in removing some of the uncertainty weighing on the Christchurch region. 2-year swaps traded as high as 3.37%, but are still some way below our own “fair-value” which sits in a 3.55-3.60% range.
US 10-year yields fell sharply overnight from 2.97% to 2.90%, the lowest level since December last year. This occurred after an unexpected tick up in US initial jobless claims. The market continues to fret about a slowdown in US growth, especially after this week’s FOMC statement acknowledged the recent economic recover had been slower-than-expected.
Given the fall in US bond yields overnight, further downward pressure will likely be felt on NZ bond yields today. There are no NZ data releases in the day ahead.
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See our interactive swap rates charts here and bond rate charts here.
Mike Burrowes and Kymberly Martin are part of the BNZ research team.
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