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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD bounced off intra-night lows on Friday night to end the week at 0.7800.

After relatively quiet trading on Friday, the NZD/USD drifted lower on Friday night. However, disappointing US home sales data (see Majors), arrested the NZD’s fall. The NZD/USD then rebounded from lows around 0.7760 to close the week around 0.7800.

Having started last week testing the upper-end of its recent trading range, the currency is now close to the lower-end of this range. The bottom end of the range is marked by lows in June, July and early-August around 0.7690.

The NZD also declined relative to the AUD on Friday, with the cross ending the week around 0.8650. This week looks to be relatively low-key on the local data front. Highlights will be Thursday’s ANZ NZ business survey. We expect this to tell a similar story to last month i.e. of buoyant confidence signalling above-trend growth ahead. Across the Tasman, this week’s highlights will be Thursday’s capex data and Friday’s credit growth data, both of which will be closely watched by the RBA.

Near-term, with momentum neutral and short covering buoying the AUD, we could see the cross spend some time in a lower 0.8600-0.8800 range. Fundamental ‘fair-value’, according to our short-term valuation model, is 0.8400-0.8600. However, we continue to see domestic developments supporting the NZD over the medium-term. We see the NZD/AUD moving above 0.8900 by year-end.

Today, NZ trade balance data will be released but is unlikely to have a significant impact on the currency. Of interest later in the week will be Thursday’s publication of currency flows by the RBNZ.

Majors

The USD underperformed on Friday night after the release of weaker-than-expected US home sales data.

Despite the data miss (or perhaps because of it, and the potential implications for Fed policy), the general tone in markets on Friday night was relatively buoyant. Equity markets rose across the board, including a decent bounce from emerging markets. Our risk appetite index (scale 0-100%) moved up from 63% to 65%. The CRB global commodity index also rose 0.85%.

During the evening most currencies were trading sideways in fairly tight ranges. However, early on Saturday morning, data showed US July new home sales falling by 13.4%, to their lowest level since October 2012. In addition, there were downward revisions to the previous three months of data. The data asks some serious questions about the veracity of the US housing market recovery. A spokesman for housing agency Fannie Mae described the data as reflecting a ‘rates hit’ (i.e. from the rise of more than 1% in 30-year mortgage rates since April).

In response, the USD index plummeted from above 81.60 to almost 81.20 before finding its feet, to close the week just below 81.40.

Earlier, in the evening the GBP was boosted by the release of UK data. UK 2Q GDP was shown rising 1.5%y/y (1.4% expected). The Q2 trade balance and fixed investment was stronger than anticipated. The GBP/USD bounced from 1.5580 to almost 1.5640, but later gave up the gains to end the week around 1.5570.

The EUR was a key beneficiary of the decline in the USD. The EUR/USD popped from around 1.3350 to touch 1.3410. However, the gain was not sustained and the EUR drifted lower to finish the week at 1.3380. Key resistance for the EUR/USD remains in the 1.3410 to 1.3450 window that has marked the highs earlier this month and in June this year.

The AUD also benefitted from the weaker USD, rising from intra-night lows around 0.8980 to end the week at 0.9030. However, it remains in the bottom sector of the range it has established over the past couple of months. The most recent IMM data shows speculative AUD short positions virtually unchanged at a hefty -62.3k contracts. This week, components of AUQ2 GDP will be released (construction, capex), ahead of the overall release on 4 September. Our NAB colleagues expect Thursday’s release of Q2 capex to show a fall of 2.25%, which could present some challenge for the AUD.

Elsewhere, it should be a gradual easing into the week, with the UK closed for the August Bank holiday today, and only limited European data releases scheduled. The US delivers durable goods orders tonight.

Fixed Interest

In fairly quiet trading, NZ swaps and bonds closed down 3bps across the curve on Friday. 2-year swap, at 3.45%, sits around 10bps below its mid-month highs. The 2-10s curve remains close to two year highs at 159bps.

On Friday night ‘benchmark’ bond yields were paddling sideways ahead of the release of US new home sales data. Following the data US 10-year yields slumped from above 2.90% to sit around 2.82%. 30-year yields fell by a similar magnitude to 3.80%.

There are now just four weeks until the Sep 18 FOMC meeting when the US Fed is widely expected to begin to ‘taper’ its asset purchases. In the lead up to the meeting housing data should now gain as much, if not more scrutiny, as labour market and inflation read-outs.

This week, Wednesday will bring US pending home sales and MBA mortgage applications. The Fed’s Bullard is also scheduled to speak twice at the end of week. For tonight, the US will deliver durable goods orders.

Today NZ will release its July trade balance. In a relatively quiet week for domestic data, Thursday’s ANZ business survey will be the highlight.

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