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USD has struggled and is the biggest loser; US equities are flat around record highs while UST yields are down slightly; NZD up to 0.6860 USD and has managed to hold its ground on all the key major crosses; NZ bond market continues to be well supported

Currencies
USD has struggled and is the biggest loser; US equities are flat around record highs while UST yields are down slightly; NZD up to 0.6860 USD and has managed to hold its ground on all the key major crosses; NZ bond market continues to be well supported

By Jason Wong

In light trading ahead of the US Thanksgiving holiday, the USD has struggled and is the biggest loser.  US equities are flat around record highs while UST yields are down slightly.

The USD has trended lower all through November and we saw another bout of weakness after some dovish comments by Yellen hit the screens yesterday afternoon. She noted that tightening too quickly risked stranding inflation below the Fed’s 2% target, and there has been “some hint” expectations for future price increases may be drifting down.  The USD indices are down around 0.5% for the day.

Yellen’s comments have had some impact on the yield curve, with slightly more downward pressure at the short-end of the curve than the long-end, a change from the recent trend.  A rate hike for December remains well priced at close to a 90% chance, albeit down slightly.  For the Treasury curve, the 2-year Treasury rate is down 3bps to 1.74% while the 10-year rate is down 2bps to 2.33%.  Durable goods orders were softer than expected but excluding the volatile transportation group were broadly in line.  The minutes of the FOMC’s November meeting are due at 8am but shouldn’t cause any more than a transitory impact on pricing.

The softer USD has helped lift the NZD up to 0.6860 and it has managed to hold its ground on all the key major crosses other than against the stronger JPY.  That’s a good result considering the fourth successive weak GDT dairy auction in the previous session – perhaps a sign that selling pressure in the NZD has largely been exhausted, with recent data showing speculative positioning now fairly stretched to the short-side.  BNZ’s expectation for retail sales data for Q3 later this morning is much weaker than the consensus estimate (-1.0% vs +0.1%), but driven more by technical factors than any nascent weakness in spending.  Nevertheless, there’s potential for some temporary “sticker shock” if the data underwhelms.

EUR met some resistance just under 1.18 but the general vibe is quite positive as pressure is mounting on Germany’s Social Democrats to join Merkel in a revived grand coalition and avoid another election.  This might be an attractive option for the SPD party as another election could see its support fall even further.  Since the local close yesterday, NZD/EUR has oscillated closely around 0.5815.

GBP/USD started to slip as Hammond delivered the UK Budget.  Economic growth forecasts were slashed alongside productivity growth estimates, seeing the UK economy grow in a 1-1½% range over the foreseeable future as Brexit risks cloud the future, a poor performance amidst the strongest global economic conditions since the GFC.   A weaker growth outlook provided little scope for any major policy initiatives.  The blip down in GBP proved temporary, with weaker USD forces taking over, seeing a push towards the 1.33 mark.  NZD/GBP is steady around 0.5160.

JPY has been the strongest major currency, for no fundamental reason, with flows and technical factors in the driving seat.  USD/JPY broke down through its 200-day moving average and currently sits at its lowest level in 2-months at 111.55.  NZD/JPY sits around 76.5.

NZD/AUD is slightly stronger overnight but continues to track in familiar territory and trades this morning close to 0.9040.

The NZ bond market continues to be well supported, with the 10-year rate down 3bps to 2.79% and the spread to US 10-year Treasuries back below 50bps, supported by narrowing spreads at the short end of the curve.  The DMO tenders $150m of 2033 bonds today and given the lack of recent issuance it should go well.

Once the FOMC minutes and NZ retail sales data are out of the way this morning then the rest of the week should be quiet with the US holiday.


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