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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD was the strongest performer amongst its key peers over the past 24-hours, sitting at 0.7850 currently.

The NZD showed limited response to NZ trade balance data yesterday morning. July’s merchandise trade deficit ($774m vs. $16m expected by market) was mainly owing to a lump of aircraft imports and higher than usual oil arrival in the month. That aside, there remained a solid tone running through core imports, especially around investment goods. This is encouraging, and may be further evidence of the construction upswing that’s underway.

The NZD/USD showed a quiet ascent ahead of the key data release last night, US durable goods. A disappointing result (see Majors), saw the NZD benefit from knee-jerk USD selling. The NZD/USD was boosted to 0.7870, holding onto much of the gain to sit around 0.7850 this morning.

The NZD was also stronger on the crosses, extending its bounce relative to its key European peers. The NZD/GBP sits around 0.5040 this morning having found crucial support at 0.4980 on Friday evening. Around the psychologically important 0.5000 level has marked the lows on this cross since June last year.

It was all uphill for the NZD/AUD over the past 24-hours. From around 0.8630, the cross has climbed steadily to sit just below 0.8700. A band of support for the cross appears to be forming above the 0.8600 level. There is little on the local calendar to drive the cross today. Over the medium-term we continue to see relative domestic developments (growth, interest rates, commodity prices) supporting the NZD. We see the NZD/AUD moving above 0.8900 by year-end.

Majors

Currencies traded relatively tight ranges, aside from some USD-inspired volatility early this morning.

It was a relatively sluggish start to the week, aided by a Bank holiday in the UK. Aside from a 2.0% fall in the Italian MIB index, equity market performances were clustered around flat. Commodity prices made further gains led by agricultural commodities. The CRB global index is up a further 0.90%. The WTI oil price continues to hover above $105/barrel, underpinned by ongoing Middle-East tensions.

The USD index traded virtually without a heart-beat for most of the evening, before rising to 81.50 ahead of the release of US July durable goods orders early this morning. The data (-7.3%m/m vs. -4.0% expected) represented genuine softness and dampens hopes for a pick-up in business investment in Q3. The USD index then skidded to below 81.30 before clawing its say back to 81.45 this morning. The response to the data (not normally a significant market mover) shows the market’s heightened sensitivity to individual data points in the lead-up to the September 18 US FOMC meeting.

The EUR/USD responded in mirror image, popping from 1.3360 to above 1.3390 on the data delivery, before drifting back down to below 1.3370 this morning. The pattern was also mimicked by the GBP that currently trades at 1.5570.

The AUD/USD, which had been drifting lower over the course of the evening, shot from 0.9010 to 0.9070 on the back of the knee-jerk move in the USD. However, the move was not sustained. The AUD/USD sits around 0.9020 currently, still dabbling at the lower-end of its range of the past couple of months. There are no AU data releases today, though it may be worth keeping an eye on Chinese industrial profits released this afternoon. A negative outcome has potential to dampen sentiment toward the AUD.

Elsewhere, tonight, all eyes will be on the German IFO survey of business. Consensus expects improvement in current conditions and expectations in August, over the previous month. US consumer confidence, house price data and Richmond the Fed manufacturing index are delivered tonight. Given current market sensitivity, any of these data has the potential to elicit a USD response, especially if feeding nascent concerns about the economy’s resilience to higher yields.

Fixed Interest

It was a fairly quiet start to the week in NZ rates markets. Overnight, US 10-year yields slipped after soft US durable goods orders.

NZ swaps closed down 1-2bps across the curve. 2-year swaps closed at 3.44%, and the spread to the AU equivalents narrowed a fraction to 67bps. There appears to still be steady paying coming through from the mortgage sector of the economy. Given recent rises in fixed mortgage rates we would expect this to diminish, though it appears for now there is still an overhang to be cleared.

NZ bond yields closed down 4bps across the curve, following Friday night’s offshore moves. NZ 10-year bond yields sit at 4.63%, with spreads to US and AU equivalents at 184bps and 63bps respectively. We would not be surprised to see some demand for NZ bonds returning at these levels, though the market may retain some reticence in the uncertain run-up to the September US FOMC meeting.

Overnight, the market demonstrated its recent heightened sensitivity to individual data points. Early this morning US July durable goods orders disappointed expectations. Benchmark bond yields dropped in response. German 10-year yields fell from above 1.92% to 1.89%, while US equivalents fell from 2.83% to below 2.79%, before inching back up to 2.80%.

Meanwhile, in Europe, peripheral European spreads to German bonds have widened, as Italy prepares to auction bonds for the first time since July. Tensions also surround the political future of former Italian P.M Berlusconi. Italian-German 10-year spreads, at 249bps, are now 18bps above their lows of just over a week ago.

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