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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

After marching higher yesterday, the NZD/USD has failed to retain its foot hold above 0.7900. It currently trades around 0.7890.

The surprising thing is that the NZD is not even weaker. Not only did the kiwi have to absorb some significant selling from macro and Asian real money accounts overnight, but the USD is once again in the ascendancy.

Last night’s US data further reinforced the case for the Fed to begin tapering QE in September, and US bond yields have leapt to fresh highs as a result. Against this backdrop, NZ-US interest rate differentials have fallen to the lowest level in 1½ months. At 280bps, NZ-US 3-year swap differentials are around 25bps below their mid-August highs.

Sharp gains in the NZD/EUR look to have helped prop up the kiwi. Last night’s combination of a stronger USD and a dovish sounding ECB (see Majors) amounted to a perfect storm for the EUR. With the EUR/USD probing two month lows around 1.3100, NZD/EUR was propelled ½ cent higher to around 0.6020. We think there is a good chance the NZD/EUR bounce could extend, but expectations of ongoing European economic repair should limit gains to around 0.6200.

For today, there are a few pieces of second (or third?) tier local data to watch for. We’re expecting a 0.7% real increase in NZ Q2 wholesale trade, while Australia has updates on construction and RBA foreign reserves.

However, these will be of only passing interest for a market which remains completely obsessed with tonight’s US payrolls employment figures. The risks around the payrolls number look evenly balanced so NZD/USD will simply (inversely) react to any misses. In the absence of a really awful number, it’s hard to see the data throwing the NZD/USD out of its 0.7700-0.8100 range.

Majors

The USD is once again stronger overnight, as upbeat US economic data continue to swing in favour of a September Fed taper. 10-year US bond yields made a fresh cycle high of 2.99%, helping USD/JPY back above 100 for the first time since July.

Last night’s jump in the August ISM non-manufacturing index to a 7-year high of 58.6, from 56.0 in July (55.0 expected) suggests the US recovery is shifting into a higher gear. July factory orders fell by less than expected (-2.4%m/m vs. -3.4% expected), and the 176k gain in ADP employment (184k expected) should be enough to keep expectations of a circa 180k increase in tonight’s non-farm payrolls intact.

The steepening in the US yield curve helped embolden the USD overnight, but it also means a September Fed taper is increasingly in the price.

Across the Atlantic, the overnight news wasn’t quite so positive. President Draghi did his best to sound optimistic at the ECB’s Press Conference (whilst leaving the refi and deposit rate unchanged at 0.5% and 0% respectively), but his good work was undone by admitting a rate cut was discussed at the meeting.

The EUR was belted. EUR/USD fell from 1.3220 to around 1.3120. The decisive break below the 1.3147 200-day moving average, coupled with the fact EU-US interest rate differentials are becoming more of a drag, means further declines look likely. We wouldn’t be surprised to see a correction back towards the bottom of the 1.2800-1.3400 range, as long as payrolls don’t disappoint.

Tonight’s non-farm payrolls data for August is the only data point standing in the way of the Fed tapering QE at the 19 September meeting. While any downside miss would cast doubt on a September taper, we’d look to fade any knee-jerk USD selling. Broader labour market indicators (like jobless claims, which recorded another fall overnight) suggest a "substantial" labour market improvement is occurring. And with US inflation set to rise, it looks very likely the Fed will taper QE at some point this year.

Other news: -Bank of England leaves interest rates and its asset purchase target unchanged at 0.5% and £375b respectively, as expected.

Data calendar 6 Sep: EU German IP; US Fed’s Evans speaks; US non-farm payrolls; US unemployment rate; US Fed’s George speaks.

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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