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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

‘Back from the brink’ has been the story of the NZD over the past 24 hours. Support levels were tested, and held.

The escalation of Syrian tensions and further pressure on emerging market currencies kept the NZD on the back foot for most of the past 24 hours. The NZD/USD slipped from 0.7800 to almost 0.7745 and NZD/JPY, NZD/CHF, NZD/EUR, and NZD/GBP were all jammed below important support levels.

But just as technical traders became convinced the NZD crosses had all broken lower, the gloom lifted and the kiwi bounced. In fact, the NZD finished the night as the strongest (or least weakest) performing G10 currency. A positive night in US equity markets seems to have been the catalyst, as fears over an imminent Syrian military strike appeared to recede. Our risk appetite index (scale 0-100%) crept up to 58%, from 56% the night before.

Syria and the emerging markets will remain the key focus for the NZD today. Further signs of EM stress and/or inflammatory Syrian headlines would reintroduce downward pressure on the kiwi. NZD/USD bounces toward 0.7850 area will continue to attract sellers, with support expected in the 0.7720/50 window.

There’s also some local focus for the currency today. The ANZ business confidence survey will be released at 1pm. We expect the confidence and own-activity indices to remain consistent with above trend growth. Across the Tasman, private capex numbers (1:30pm NZT) will be important for RBA watchers and Q2 GDP forecasts. Our NAB colleagues expect a 2.3% quarterly decline (market consensus flat).

Lastly, the RBNZ’s latest balance sheet and currency flow statistics will be released at 3pm today (referencing July). Recall, the last two months of flows data revealed the RBNZ as a net buyer of the NZD, confusing its "NZD is overvalued" message. There will be some interest in whether this continued in July.

Majors

The USD has gained ground against all of the major currencies over the past 24 hours.

While most commentators are attributing this to ‘safe-haven’ buying, we note that US Treasury yields have actually risen not fallen overnight, suggesting the greenback’s gains were more driven by ‘fundamentals’. This is confirmed by the punchy gains in USD/JPY. US 10-year yields are 8bps higher around 2.78%.

Whatever the case, risk aversion and safe-haven demand have tended to ease in New York trading hours, having earlier been in the ascendency. US stocks shook off stiff losses in Asian and European equities, rallying 0.4-0.5%. Oil and gold prices have eased off their recent highs (to US$110/barrel and US$1420/ounce respectively) and the VIX index (a proxy for risk aversion) slipped from above 17% to closer to 16.2%.

This all comes as investors take heart from apparent delays in the timing of likely Western military strikes against Syria. Reports suggest that the US is still crafting its response, while the UN continues to dither.

In currency markets, the partial recovery in risk appetite has allowed some pause in the EUR, GBP, AUD, and NZD selling that has so far dominated the week. The GBP has led the bounce, helped by BoE Governor Carney’s first speech. Carney’s attempt to talk Gilt yields and the GBP lower failed again. The GBP/USD surged from 1.5460 to 1.5540 in the wake of the speech, with some attributing this to Carney’s relaxation of capital restrictions on UK banks.

Looking ahead, thin liquidity and whippy price action looks set to continue as investors keep a nervous eye on Syria and emerging markets. The USD should remain in favour against this backdrop. Dips in the USD index are expected to be limited to 81.10 in the short-term. Tonight’s jobless claims figures are expected to be encouraging, further bolstering the USD. The Fed’s Bullard and Lacker are also scheduled to speak.

Other news: -UK CBI (retail) sales index +27 vs. +20 expected - the highest since November 2012. -US pending home sales record a surprise fall in July (-1.3%m/m vs. flat expected). Positive revisions may have helped limit the fallout from the data (8.6%y/y vs. 7.9% expected).

Fixed Interest

A similar theme continued yesterday, with NZ yields following their offshore counterparts lower.

NZ swaps closed down a further 2-6bps while the curve flattened. At 3.39%, 2-year swap is now 15bps below its mid-August peak. 5-year swap, at 4.33%, sits around 13bps below its recent peak.

In recent weeks as the market has inched down its expectations for RBNZ rate hikes, across the Tasman the market has reduced expectations for further RBA rate cuts. This has seen the NZ-AU 2-year swap spread pull back from around 83bps to sit at 62bps currently. However, our central view has not changed. We expect a first RBNZ hike in March next year with a steady rise in the OCR thereafter. We see a further RBA cut later this/early next year. On this basis, ultimately later this year we see spreads beginning to widen again, taking the NZ-AU 2-year spread to a peak around 120bps next year.

We are starting to see tentative buying interest in NZGBs, though this is certainly not yet widespread. We prefer to buy NZGB23s relative to US counterparts, as this week we reached top of ranges close to 200bps. We look for spreads to narrow toward 170bps.

Overnight, a sense of calm prevailed in markets, despite the prospect of military strikes on Syria. US 10-year yields rose from 2.70%, ignoring mixed US housing data, to sit at 2.78% this morning.

Overnight, Mark Carney made his first scheduled speech as BoE Governor. He indicated that he would be willing to follow the increasingly popular route of using ‘new tools’ other than the cash target rate. His comments echoed the RBNZ’s. He sees risks of an inflated housing market, but does not want to raise interest rates for fear of stifling growth elsewhere in the economy.

Today, attention should return to the domestic economy with the release of the ANZ business survey. We expect, this combined with offshore moves overnight, will see NZ yields bounce from their recent pull-back.

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to www.research.bnz.co.nz.

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