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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media


The NZD has spent most of the offshore session licking its wounds following the beating it took at the hands of the RBNZ yesterday. After sliding ½ cent following the Governor’s speech, the NZD/USD consolidated in a 0.7950-0.8000 range overnight.

It wasn’t so much the formal introduction of the RBNZ’s LVR limits yesterday (which wasn’t a surprise), but the language accompanying their introduction, that did the damage to local swap yields and the NZD.

In particular, Governor Wheeler’s comments that LVR limits will be used in place of OCR hikes, and as a means of preventing currency strength, caught investors off guard. OIS-implied RBNZ tightening expectations were pushed back accordingly, delivering a 5-10bps decline in swap yields, and a ½ cent sell-off in the NZD/USD and NZD/AUD.

The imposition of the LVR limits has done nothing to change our NZD view. Fundamentals are still positive. Local interest rate markets had got a little ahead of themselves in pricing a chance of a December/January RBNZ rate hike. And with the LVR tools now in place, we suspect pricing will gravitate back towards our March view of the first OCR hike. The associated pullback in NZ-US interest rate differentials will strengthen NZD/USD resistance at 0.8130, further entrenching the currency inside the now familiar 0.7820-0.8130 trading range.

A positive dairy price auction overnight failed to resuscitate the kiwi. Prices rose 2.3% from the last auction, to be up 63%y/y. It’s another sign there’s been no lasting fallout for NZ dairy from the recent botulism scare.

We doubt today’s snippets of local economic data (credit card spending and migration) will hold any relevance for the NZD. More important will be whether the rout in emerging markets currencies (THB, INR, IDR etc.) and Asian equity markets continues. Further signs of weakness here would keep the NZD/USD heavy, with a test of 0.7950 likely on the day. Caution ahead of tomorrow morning’s (6am NZT) FOMC minutes may prevent bigger moves on the day.


Currency moves have been something of a mish-mash overnight. Thin liquidity remains a feature, along with general caution ahead of tomorrow morning’s FOMC minutes.

A downbeat tone pervaded the Asian and European trading sessions, as the rout in emerging market assets kept risk appetite under pressure. Sharp losses in Asian equities fed into declines of 0.8-1.8% across European bourses.

But the mood improved somewhat through New York trade. US stocks have eked out gains of 0.3-0.8%. A mild pullback in 10-year bond yields (the run higher of which seems to have been the catalyst for the EM rout) seemed to help sentiment, as did some positive earnings reports from Best Buy and Home Depot. Commodity prices are mixed-to-down, with the CRB index off around 1%.

In currency markets, EUR strength is the stand out feature. From around 1.3340, EUR/USD soared through resistance at 1.3400. Stronger German PPIs data and soothing words from German Chancellor Merkel may have helped bouy the EUR. But thin liquidity and positioning ahead of tomorrow’s FOMC minutes look to have been just as important.

Elsewhere, ‘safe-haven’ buying of the JPY and CHF has eased back somewhat in line with the less downbeat sentiment. But further gains in these currencies can be expected today should EM assets remain under pressure.

The risks around tomorrow’s FOMC minutes look evenly balanced. On the one hand, the likely reaffirmation of the Fed’s intention to taper this year could rejuvenate the USD. On the other, the minutes would be seen as dovish if members discussed a change to its unemployment threshold, as some are speculating. Technically speaking, the USD looks set to remain soft in the short-term, ahead of support layered around 80.50 on the DXY index.

Other news: -Chicago Fed index -0.15 vs. -0.10 expected. -German PPIs print stronger-than-expected (0.2%m/m vs. -0.1% expected) - Germany’s Merkel says "the world has understood that Europe stands firmly by the euro and that we work for its survival." -RBA minutes suggest the RBA has moved to a neutral bias, and additional rate cuts remain data dependent..

Event Calendar: 21 August: NZ migration; NZ credit card spending; UK public sector borrowing; US home sales; 22 August: CH HSBC Flash PMI; EU Flash PMIs; US jobless claims; US house prices; US FOMC minutes; US Jackson Hole Summit; 23 August: EU German GDP; UK GDP; US new home sales.

Fixed Interest

Following the RBNZ’s speech yesterday NZ swaps closed down 3-9bps. Overnight, US yields continued the theme, with 10-year yields declining 6bps to 2.82%.

Yesterday’s speech introduced the long-awaited LVR restrictions for banks. The restrictions were tighter than anticipated by the market with no more than 10% of new loans to have a LVR of over 80%. The Governor also made specific references to monetary policy describing current inflation as low, and reiterating the mantra that raising the OCR ahead of other major economies could lead to a surge in the NZD. The rates market responded by reining in near-term rate hike expectations. 2-year swap closed down 9bps at 3.43%. The 2s-10s curve steepened to 153bps.

NZ bond yields also declined, though less dramatically than swap as there appears to still be sellers of NZGBs around. Yields closed down 3-6bps, with the yield on NZ 10-year bonds at 4.62%. The relative moves in swaps and bonds in recent days has seen swap-bond spreads moved down toward the bottom of ranges. We see a 25-60bps range for 10-year swap spreads over the medium-term. 10-year spreads closed at 34bps.

Overnight, in the absence of key data releases European equity markets delivered negative returns as German "safe haven" bonds extended their rally of the past couple of days. German 10-year bonds yields closed down 6bps at 1.84%. US equivalents also closed down 6bps at 2.82%.

Today’s domestic data releases will likely only be of passing interest to markets. Tonight, all eyes will be on the release of the July US FOMC minutes. The market will be looking for confirmation, or otherwise, that QE ‘tapering’ will start in September. Any signs of reluctance within the committee could see some further pull-back in US yields. Signs from the Fed they are fairly united and committed to pushing forward with QE tapering could see US yields push higher. We continue to forecast US 10-year yields at 3.00% at year-end.

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to

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