By Mike Burrowes and Kymberly Martin
The NZD had the dubious honour of been the best performing currency against the USD over the past 24 hours. NZD/USD started the early evening around 0.8130 before surging to an overnight high above 0.8230.
NZD/USD was pushed higher by a combination of improving risk appetite and rising commodity prices. We have also noted strong demand for the NZD from a mix of short-term leveraged accounts.
The NZD trade-weighted index has jumped higher over the past 24 hours – up 1%. The strong risk-on theme has seen NZD/JPY rally from 65.90 to above 66.50 currently. NZD/GBP has made a new post-float high just below 0.5140.
While NZD/AUD and NZD/CAD have only edged higher overnight, we have seen strong demand from leveraged and hedge fund names. Demand for the NZD is been bolstered by interest rate differentials. Indeed, the OIS market is pricing more hikes from the RBNZ than nearly all the other major central banks over the next 12 months.
Looking to the day ahead, the focus locally will be on the NBNZ monthly survey due at 1pm. The stronger NZ dollar and global ructions might take a bit of gloss off the June NBNZ survey results. However, by and large, we expect the survey remained robust enough and fully consistent with the GDP acceleration we still foresee. We also have building approvals and credit aggregates update.
The favour shown for the NZD could translate into a further challenge of the 0.7800 level for NZD/AUD with technical analysts eyeing the 0.7845 region as a retracement target. For the NZD/USD, we eye the recent-post float high at 0.8300.
Majors
The USD has fallen against nearly all the major currencies overnight as the passing of the Greek austerity vote has buoyed investor sentiment. In this backdrop, the “safe haven” CHF and JPY have struggled, while commodity and risk-sensitive AUD, NZD and CAD have outperformed.
The bounce in risk appetite has been seen across most asset classes. In equities, the Euro Stoxx 50 index climbed 1.90% and the S&P500 is currently up 0.60%. Our risk appetite index (scaled from 0-100%) has jumped from 61.8% to 65.8%. Commodities have also surged higher, with the CRB index (broad index of global commodities) up 1.30%.
Risk sentiment was lifted early in the evening as the market anticipated the Greek austerity vote would pass. Further lifting sentiment was talk of progress between banks and Eurozone governments on a rollover of privately held Greek debt. The positive sentiment pushed EUR/USD to an overnight high around 1.4450.
The response in FX markets after the passing of the Greek austerity vote has been mixed. Initially EUR/USD shed ½ cent, but it has subsequently recovered these losses to be unchanged since the vote around 1.4420. The muted reaction in FX markets is not surprising, given the market had rallied in recent days in anticipation of the austerity vote passing. In addition there are still significant hurdles to pass before the European debt crisis is resolved.
USD/CAD dropped a cent to around 0.9690 after the release of higher-than-expected May CPI (0.7% vs -0.2% m/m expected). The CPI data has sparked debate about an interest rate hike by the end of the year. The OIS market is now pricing 55bps of hikes by the Bank of Canada over the next 12 months, up from 35bps.
Looking to the night ahead, the focus will be on another Greek vote detailing specific implementation measures for the austerity plan. Aside from this we have the release of the German unemployment rate, German retail sales and Eurozone CPI for June. In the US we have the Chicago Purchasing Managers Index and Fed members Bullard and Hoenig speaking.
Fixed Interest Markets
NZ interest rate markets sold-off yesterday following the lead of their off-shore counterparts. Curves steepened as the short-end remained relatively well anchored while long yields rose 5-6bps. Overnight off-shore yields continued to rise as risk appetite improved buoyed by the Greek parliament’s passing of austerity measures.
Swap yields moved up along the curve yesterday. There was a sharp leg higher on the open following moves seen off-shore. At the short-end, there was plenty of receiving interest after this spike higher, seeing yields end the day up only slightly. By contrast, long-end yields held onto most of their early rise. 10-year swap yields are now at 5.11% and the 2-year at 3.33% meaning the 2s-10s curve is now 178bps steep.
Long-end government bonds also nudged higher with the yield on 21s back at 5.00% and the yield on 23s at 5.15%.Overnight global long bonds continued to sell-off. US 10-year yields rose from 3.02% to 3.12% and German Bunds rose from 2.95% to 2.99%. An auction for US 7-year notes saw the weakest demand in 2-years with yields rising from 2.30% to 2.40%.
The Greek austerity plan was passed despite a backdrop of 48-hours of strikes and police clashes outside parliament. Bond yields and CDS spreads for Greece and its most vulnerable neighbours, Portugal and Ireland, have fallen from recent highs, although Greek 2-year bonds continue to trade at elevated levels around 25%.
Today we will see the DMO auction 300m 13s, 50m 15s and 50m 17s. We expect demand to be solid. Also look out for the NBNZ business confidence survey which should confirm the economy is on a solid footing. Yields should open higher this morning given the continued sell-off in interest rate markets overnight and rise in Australian swap yields. Australian 3-year swap yields rose from 5.19% to 5.28% yesterday.
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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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