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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media


The NZD sits a little lower, around 0.7880 this morning.

The NZD showed little response to yesterday’s tier 2 domestic data releases, migration and credit card spending. Rather, it drifted gently lower in anticipation of the release of US FOMC minutes early this morning (see Majors). Overall the minutes confirm the US Federal Reserve is likely on track to begin ‘tapering’ its asset purchases next month. As the USD initially strengthened on the release and US bond yields surged the NZD fell as low as 0.7850. However, it soon found its feet and has subsequently rebounded to sit just below 0.7900.

For now, in the absence of further domestic data releases this week, sentiment toward the USD will likely remain a key driver of the NZD/USD. However, the release of the Chinese HSBC PMI today will be important in influencing sentiment towards the AUD, and by implication the NZD. Key near-term support for the NZD/USD is seen at 0.7820.

Overnight, the NZD extended recent losses relative to its key European peers. The NZD/EUR sits around 0.5890 this morning. It is approaching the critical band of support between 0.5800 and 0.5860 that marked its lows mid this year. Similarly, the NZD has extended its recent sharp fall against an independently strong GBP (see Majors). At 0.5020 this morning the NZD/GBP is approaching the psychologically critical 0.5000 level. This marked the lows in this cross in June this year, and in September last year. A convincing breach of this level would open the way for a deeper pull-back.

The NZD/AUD was also weaker overnight, sitting around 0.8740 currently, close to the bottom of its range of the past month. The fate of the cross today will likely be influenced by the Chinese HSBC PMI release. A strong reading would likely boost the AUD relative to the NZD. Over the medium-term however, we continue to see further NZD/AUD upside, with an end of year target above 0.9000.


USD strength was the key theme ahead of the release of US FOMC minutes this morning. The GBP outperformed.

Overnight, equity markets were slightly softer, as our risk appetite index (scale 0-100%) slipped from 63% to 61%.The broad CRB global commodity index also slipped a further 0.60%. The WTI oil price also slipped back toward $104/barrel from last week’s highs above $107.

Early this morning the July FOMC minutes were released. They showed officials at the US Federal Reserve were "broadly comfortable" with the plan to reduce bond purchases later this year. Members discussed the risk that easing monetary policy was encouraging excessive risk taking. However, they also expressed concern that the recent run higher in long-term interest rates could be "holding back spending and economic growth". Overall the minutes confirmed that September will be the likely starting point for the Fed’s ‘tapering’ of bond purchases.

The minutes elicited a knee-jerk surge in US bond yields (see Fixed Interest). The USD was also further boosted on the upward path it had maintained overnight. From around 80.90 last evening the USD index now sits around 81.30.

The GBP proved fairly resilient to USD strength. UK data continued its recent trend of surprising positively. This time it came in the form of August CBI total industrial orders, which were at their highest level in two years (0 vs. -8 expected). The continued sign of momentum in the UK economy has seen the GBP/USD nudge up to 1.5680. However, key resistance remains at the mid-June highs of 1.5750.

The JPY which had been gradually weakening overnight fell further after the release of the FOMC minutes. The US Fed’s commitment to push forward with reducing monetary easing contrasts with the Bank of Japan’s plans to maintain monetary accommodation. From 97.20 last evening, the USD/JPY now sits around 97.90.

The EUR/USD has been slipping lower overnight to sit around 1.3370 currently. Firm resistance at the mid-June highs, just above 1.3400, appears intact for now.

The AUD was also a casualty of the general stronger USD overnight. The AUD/USD drifted lower, briefly breaking below 0.9000 on the release of the US FOMC minutes. However, the break has not been sustained and the AUD/USD now sits around 0.9020. Key for sentiment toward the AUD today will be the release of the Chinese HSBC manufacturing PMI. Consensus expects a rise from 47.7 to 48.2, though this would represent a sector still in contraction. However, it would take a significant surprise on the data for the AUD/USD to test the limits of its current range, which are at 0.8850 and 0.9220.

Tonight, US initial jobless claims and house prices are released, while the Jackson Hole economic summit kicks off. This is expected to be a lower key event this year, with Bernanke not in attendance.

Fixed Interest

After the previous day’s large moves, the NZ market was fairly subdued yesterday. Swap yields closed little changed, although there is still a decent amount of paying coming through.

However, we suspect with domestic banks raising their fixed mortgage rates, the demand to pay, from this sector, may subside. NZ 2-year swap sits at 3.44% with 5-year at 4.37%. The 2-10s curve remains at its steepest level since March last year, at 153bps.

We believe we may be starting to see the start of some buying interest in NZ government bonds given the levels of outright yields, spreads to offshore counterparts, and spreads to swap. The yield on 10-year bonds now sits at 4.61% or 36bps below swap.

Overnight, ahead of the release of the US FOMC minutes, US 10-year yields traded quietly around 2.82%, briefly moving as high as 2.86% on the release of strong July existing home sales data (6.5%m/m vs. 1.4% expected). On the release of the FOMC minutes US 10-year yields initially spiked from 2.81% to 2.88% but are in the process of now consolidating (currently 2.86%).

Today, there is no data scheduled on the domestic agenda. The HSBC Chinese flash PMI will be the focus for local markets today.

Event Calendar: 22 August: CH HSBC Flash PMI; EU Flash PMIs; US jobless claims; US house prices; US Jackson Hole Summit; 23 August: EU German GDP; UK GDP; US new home sales.

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