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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

Over the past 24-hours the NZD/USD has traded between 0.8000 and 0.8050, sitting at the lower-end of this range at present.

There was little on the domestic front to drive the NZD yesterday. Equally, overnight markets were fairly lacklustre in the midst of the Northern hemisphere summer lull. The NZD sits little changed on most key crosses.

The NZD/AUD reached toward 0.8770 overnight, before dropping back to sit around 0.8750 this morning. We see further appreciation over the medium-term but continue to note that for now the NZD/AUD sits a little above its fundamental ‘fair-value’. We see the NZD/AUD above 0.9000 by year-end, as relative growth, commodity price and interest rate trajectories favour the NZD.

Our year-end target for the NZD/USD remains at 0.7800, although we reiterate upsides risks to this forecast. Indicative of such, our model-derived NZD/USD ‘fair value’ currently sits at 0.8100-0.8500. From a practical perspective, we think the NZD/USD will spend most of the rest of the year in a broadly sideways 0.7700-0.8300 range.

For today, there are no domestic data to look out for. Tonight, broader risk sentiment may be impacted by the release of the German ZEW economic survey and US retail sales data. For now, we see NZD/USD resistance approaching 0.8060. Support is eyed at 0.7950.

Majors

In thin summer markets the USD is a little stronger overnight. The AUD has underperformed over the past 24-hours.

Markets have started the week with a whimper rather than a roar. Our risk appetite index (scale 0-100%) remains at a solid 69%. However equity markets are fairly flat on both sides of the Atlantic. Proxies for credit spreads are also little changed. The WTI oil price continues to hover just below $106/barrel. Within other commodity markets there was a little more action. Pockets of strength were seen with the broad CRB global commodity index up 0.90% from the end of last week. In the big picture however, the CRB commodity index still appears to be on a down-trend from its mid-2011 highs.

The USD is a little stronger sitting just above 81.30 this morning. The bounce in the USD in the past couple of days does not appear to be the result of strong market conviction. Rather, markets remain becalmed in the summer doldrums.

The JPY weakened slightly after a softer-than-expected Japan Q2 GDP release (2.6%y/y vs. 3.6% expected). Growth was led by consumption, but private capex looked to account for much of the disappointment. The result will feed into increased uncertainty as to whether the rise in the Japanese consumption tax, from 5% to 8% next April, will go ahead. Further growth disappointment will ultimately likely bring a step up in the pace of quantitative easing, implying further yen weakness. But that is a story for further down the track. For now, the JPY has weakened only slightly. The USD/JPY sits at 96.60 this morning.

The EUR and GBP are both a little weaker this morning relative to the USD. However, the most notable under-performer was the AUD. Despite the fairly solid night for global commodities, the AUD was unable to maintain its surge higher of recent days. It drifted off to sit around 0.9150 this morning.

This week, we have downgraded our end-year forecasts for the AUD/USD to 0.86 from 0.88 previously. Similarly we have ratcheted down end-2014 forecasts to 0.80 from 0.83 previously. In the near-term however, the risk of a AUD bounce remains. This is not least because short AUD positions amongst the speculative trading community are now at severely extended levels.

Today will bring the NAB business survey which will help refine the market’s RBA rate expectations. Currently the market looks for a further 25bps cut in the year ahead. The German ZEW economic survey and US retail sales will also be released tonight as two of the more important global data points this week.

Fixed Interest

It has been very quiet across domestic and global rates markets over the past 24-hours.

Yesterday, NZ bond markets closed virtually unchanged. Swap yields closed down 3-4bps across the curve, pulling back from year-to-date highs.

Once again today there is little on the domestic front to impact on market pricing. However, across the Tasman there will be two notable events for interest rate markets. First the NAB business confidence survey will be released. This may help inform market expectations for future RBA activity. The market currently prices a further 25bps cut from the RBA in the year ahead. This is consistent with our own view, and would take the RBA’s cash rate below the RBNZ’s. Historically, this situation is the ‘norm’ rather than the exception.

The AU pre-election economic and fiscal outlook will also be released. This may have implications for the supply of AU government bonds. Irrespective of supply issues we see AU bonds outperforming NZ equivalents in the year ahead. We see NZ bond yields driven higher on a relative basis by the more aggressive cash rate outlook on this side of the Tasman. We see NZ-AU 10-year bond spreads peaking above 80bps next year (currently 64bps).

Markets were very sleepy overnight. US 10-year yields traded a 2.55% to 2.59% range, currently sitting at the top of this range.

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