By Mike Burrowes and Kymberly Martin
The NZD has surged higher against the USD overnight as there was a broad based recovery in risk appetite. NZD/USD spent most of the evening oscillating around 0.8040, before surging higher in the early hours of this morning to be currently trading around 0.8110.
Highlighting the risk-on theme, the AUD was the best performing currency over the past 24 hours. The AUD/USD started the evening around 1.0450 and is now trading around 1.0530. The strong performance in commodity markets supporting the move in AUD and NZD.
The NZD has outperformed on the crosses over the past 24 hours. NZD/GBP has rallied from 0.5040 to around 0.5070, spurred higher by further signs the UK economy has slowed (see below). Given the risk-on mood, NZD/JPY has rallied almost 1% to 65.80 currently.
NZD/AUD has fallen ¼ cent to 0.7700, but continues to be well supported by the divergence in RBNZ and RBA policy expectations. Over the next 12 months, the OIS market has over two rate hikes from the RBNZ, but a small chance of a rate cut from the RBA.
There are no local data releases today, so expect the NZD to takes its cues from offshore. For the day, initial support is eyed around 0.8070 and resistance at 0.8130.
Majors
The USD has edged lower against most of the major currencies. Again, market sentiment was buoyed by hopes the Greek austerity measures would pass, thus paving the way for the EU and IMF to make the scheduled aid payment.
The positive sentiment relating to the Europe debt crisis rubbed-off on other markets. In equites, the Euro Stoxx 50 index rose 1% and the S&P500 is currently up 1.20%. The VIX index (a proxy for risk aversion) has fallen from 20.50 to 19.50. In commodities, the CRB index (broad index of global commodities) has charged 1.70% higher.
The EUR was given further support after comments from ECB President Trichet that policymakers were in strong vigilance mode on inflation. The phrase “strong vigilance” usually signals a rate hike at the next meeting. Indeed, for the next ECB policy meeting the OIS market is fully pricing a 25bp hike. The OIS market has an additional 25bp hike priced in over the next 12 months.
It was another volatile 24 hours for EUR/USD, weakening to around 1.4240 late evening before ripping higher this morning to just below 1.4400. We suspect the moves higher over the past two days is more a reflection of market participants reducing short positions, rather than believing the Greek austerity measure with be the panacea to their debt problems.
Despite the risk-on theme overnight, markets still remain uncertain about the longer-term ramifications of the European debt crisis. This uncertainty is highlighted by the ongoing strength in the CHF. Indeed, USD/CHF fell to a record low overnight of just above 0.8300. EUR/CHF remains near record lows as well.
The GBP underperformed against nearly all the major currencies overnight after the release of a weaker-than-expected Q1 current account (-9.4bn vs -4.7bn expected) and Q1 GDP (1.6% vs 1.8% y/y expected). The data saw GBP/USD nose-dive from 1.5980 down to a low around 1.5910, a 5-month low. However, a weakening USD throughout the rest of the evening has seen the losses pared back, with GBP/USD currently trading around 1.6000.
Looking to the night ahead, the focus will be on the Greek austerity vote due at 11pm tonight. Aside from this, we have ECB member Draghi and Weidman speaking. On the data front, the focus will be on US pending home sales and MBA mortgage applications.
Fixed Interest Markets
Bond yields rose yesterday in sympathy with moves seen globally, as risk appetite improved. Swap yields however failed to hold onto gains, closing at similar levels to the previous close. Overnight global bond yields surged higher.
NZ bond yields rose 2-3bps along the curve yesterday, taking the yield on 21s back to 4.95%. However, with the strong sell-off in US 10-year bonds overnight to yield 3.04%, the NZ-US 10-year bond spread has fallen sharply back to 1.9%, the lowest level since February. This should exert some upward pressure on NZ bond yields today.
Despite a weaker-than-expected US consumer confidence number, markets globally continue to take their cue from developments in Greece. Given market optimism on the impending Greek government austerity vote, equities and commodities rose, as did US bond yields along the curve. German 10-year yields also moved up from 2.89% to 2.93%.
NZ swap yields made little headway yesterday with 2-year yields at 3.31% and 3-year yields at 3.70%. By contrast, Australian swap yields, buoyed by improved global risk appetite, rose along the curve. 3-year swap yields rose from 5.13% to 5.20%. This resulted in the NZ-AU 3-year swap spread moving sharply lower from -1.40% to -1.49%.
Given the strong rise in off-shore yields overnight we believe local yields will face upside pressure today.
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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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