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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD continued to strengthen overnight, to sit around 0.7960 this morning.

The NZD has recovered from its Fonterra-induced losses. After stable trading around 0.7900 yesterday, the currency gained upward momentum overnight, before finding resistance at 0.8000. It has returned to trade around 0.7960 currently.

The NZD/AUD also continued a steady upward path to sit around 0.8860 this morning. The cross will now be eying its early month highs around 0.8930. However, the outcome of the cross today will likely be very much determined by the release of the AU employment report in the absence of any NZ data releases (see Majors). Post this week’s RBA rate cut the market still looks for a further 30bps of RBA cuts, partly predicated on a deteriorating employment outlook. We reiterate that although the NZD/AUD has currently run someway ahead of fundamental ‘fair value’ we do not expect any sort of meaningful ‘correction’.

The NZD showed volatility against its European peers overnight. The NZD/GBP was tossed around by the market’s response to the BoE’s quarterly inflation report (see Majors). Trading between 0.5100 and 0.5190 it now sits around 0.5140.

Today, there is not too much on the data front to impact on the NZD, either domestically or globally. For now, resistance remains at 0.8000 and support is seen approaching 0.7900.

Majors

The USD was broadly weaker over the past 24-hours. The JPY and GBP were the key outperformers.

Generally, overnight, markets continued to show slightly directionless summer trading. This was aided by a lack of US data releases. Our risk appetite index (scale 0-100%) remains at a solid 70%, a level it has traded around since mid-July.

Once again the decline in the USD was more a reflection of surprises elsewhere rather than a fundamental shift in sentiment against the USD. First up last evening the Bank of England released its quarterly inflation report. As anticipated, the BoE followed the example of the US Fed by providing ‘forward guidance’. It stated it does not intend to raise rates until unemployment dips below 7.0%. The BoE’s forecasts show this would not be achieved until late 2016. Despite this apparent dovishness, after an initial dip lower, the GBP/USD climbed sharply.

The market appears to be looking at the potential impact of such a rate commitment on the UK economy, which is already starting to look a lot better. The BoE also raised its 2014 GDP forecast quite dramatically to 2.7% from 1.9%. The GBP/USD rose from post-report lows around 1.5200 to sit around 1.5500 this morning. This is its highest level since late June.

The EUR got its own boost from data showing German industrial production grew 2.4%m/m in June (0.3% expected). The data point to a healthy GDP rise in Q2, to be released next Wednesday. The EUR/USD moved off overnight lows below 1.3270 to sit at 1.3330 currently.

Meanwhile, the JPY continues to strengthen heading into today’s Bank of Japan meeting. The USD/JPY has moved down from 97.80 to sit around 96.40 this morning.

The AUD/USD found support overnight at 0.8920, moving up to 0.9000 this morning. The key for the AUD today will be the AU employment report. Our NAB colleagues expect the report to show the unemployment rate steady at 5.7%. But in coming months the weakness in domestic demand will see the unemployment rate continue to trend higher toward 6% by year-end.

Tonight, it is a fairly quiet data agenda with only the German trade balance and US weekly jobless claims to note.

Fixed Interest

It was a quiet day across the board in NZ rates markets yesterday. Yields closed up 2bps across the swap and bond curves. Swaps remain close to the top of recent ranges with 2-year and 5-year at 3.37% and 4.17% respectively. The 2-10s swap curve remains at 131bps.

The market showed very little response to yesterday’s labour market data. While the unemployment rate ticked up to 6.4% from 6.2% previously, the underlying details were broadly robust. We continue to see a broadly improving trend.

Overnight, US 10-year yields drifted lower from 2.64% to 2.59%.There was no great insights from Fed speaker Pianalto, who reiterated she would support QE ‘tapering’ as long as the labour market continues to recover. With the US unemployment rate at 7.4% and inflation at 1.3%y/y "we still have a way to go".

After the Bank of England’s release of it inflation report UK 10-year bond yields initially rose more than 10bps to 2.54%, before settling around 2.48%. The response may reflect the markets expectation that very loose policy will stimulate the nascent UK recover more than previously expected. It may also reflect market scepticism that inflation outcomes will allow the BoE to maintain its target rate at 0.50% for such an extended period.

Domestically, it will likely be another quiet day of consolidation. Across the Tasman the AU employment report will be crucial in stream-lining market expectations for RBA activity. After this week’s 25bps cut the market now prices a further 30bps of cuts in the year ahead. This is consistent with our own view. Today, the Bank of Japan will also announce its target rate.

Event Calendar: 8 August: AU employment; CH trade balance; JN BoJ decision; US jobless claims; 9 August: NZ ECT data; AU RBA SoMP; CH CPI, PPI, retail sales, and industrial production.

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