By Mike Burrowes and Kymberly Martin
The NZD has been the worst performing currency against the USD over the past 24 hours. The losses were suffered during our day as risk aversion dominated FX trading. During the overnight session, a weaker USD has helped the NZD partially recovered these losses to be trading around 0.8050 currently.
NZD/USD shed over ½ a cent after the release of a weaker-than-expected trade balance for May ($605m vs $1000m expected). The weaker outturn was mainly because of higher than expected imports. Overall, it showed chipper signs regarding business investment and industrial activity. While imports of consumer goods were lagging, they were still growing on an annual basis.
NZD/USD shed a further ½ cent later on, as a bout of risk aversion entered markets. Similar moves were seen across most of the other major currencies against the USD. Risk sentiment has improved overnight and this has helped the NZD partially pare back these losses.
The NZD has struggled on the crosses over the past 24 hours. NZD/EUR has fallen from 0.5720 to around 0.5640 currently. NZD/GBP has fallen from 0.5080 to 0.5040 currently. NZD/AUD dropped below 0.7670 yesterday, but has recovered these losses overnight to be trading around 0.7720 currently.
There are no local data releases today, so expect the NZD to takes its cues from offshore. In this regard, we have RBA’s Debelle speaking today at 1pm. For the day, we expect support around 0.8000 and resistance at 0.8090.
Majors
The USD is slightly weaker over the past 24 hours, largely driven by a strengthening EUR. Sentiment towards the EUR was buoyed by hopes the Greek austerity package will pass this week, paving the way for the EU and IMF to make the scheduled aid payment.
EUR/USD trading has been very volatile, plummeting around 1 cent yesterday before surging higher overnight. Over the past 24 hours, the EUR/USD is up around 0.60%. Sentiment towards the EUR was bolstered by hopes Greece's parliament will approve an austerity package this week and the country will avoid a sovereign debt default. An initial vote on the austerity package is due on Wednesday. Lawmakers then vote on Thursday on a separate bill containing specific steps to implement it.
Providing further support to the EUR, French President Sarkozy said French banks have agreed in principle to roll over 70% of their holdings of Greek debt for 30 years. EUR/USD has surged higher overnight, fully reversing the losses suffered yesterday. EUR/USD started the evening around 1.4130 and rallied all the way to around 1.4290 early this morning.
It has been a more mixed performance across the other major currencies. The “safe haven” CHF and JPY have underperformed against the USD over the past 24 hours. While at the same time, risk-sensitive NZD and AUD have also underperformed against the USD (see above). Expect FX markets to remain volatile while the focus is solely on the European debt crisis.
Looking to the night ahead, we have speeches by ECB President Trichet, ECB member Wellink and Fed Member Fisher. Data wise in Europe, we have the UK current account for Q1 and German CPI. In the US, the focus will be on consumer confidence and the Richmond Fed Manufacturing index. On then political front, Chinese Premier Wen Jiabao is meeting with German Chancellor Merkel over the next two days to discuss the Euro and reforming the global currency system – so we may get headlines from this.
Fixed Interest Markets
NZ swaps and bond markets had a meaningful rally yesterday, following on from that seen off-shore on Friday night. Swap yields declined 6bps along the curve and bond yields fell 3-6bps.
Yields on 2-year swaps fell to 3.31% and 10-year yields dipped back down toward 5.00% as global influences dominated yesterday. Indeed, NZ’s trade surplus data that was a little shy of expectation failed to impact the market. Bond yields also fell with some flattening in the curve as the yield on 23s dipped to 5.07% while the yield on 13s was better anchored, slipping to 3.16%.
With Australian swaps stabilising somewhat, the NZ-AU 3-year swap spread fell back further into negative territory from -1.34% to -1.44%.
Overnight global risk appetite improved on word that a proposal was progressing for creditors to roll-over 70% of their maturing Greek debt, receiving 30-year Greek bonds. Worryingly however, while Greek bond yields appear to be stabilising at very elevated level, Portuguese and Irish bonds and CDS spreads continue to make new highs.
US 10-year yields recovered a little, rising from 2.84% to 2.92%, while German 10-year yields also rose from 2.83% to 2.89%.An auction for US 2-year bonds saw only modest demand with yields rebounding sharply from 0.33% to 0.39%.
With no NZ data releases today, markets will once again be driven by off-shore developments. Given the better risk appetite overnight we expect that local yields will open up higher, particularly at the long-end of the curve.
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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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