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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD had the dubious honour of being the biggest ‘winner’ from Friday’s disappointing US employment report (see Majors). The ½ cent bounce back to 0.8000 brought last week’s gains in the NZD/USD to 3.5%. NZD/JPY, meanwhile, surged almost 4.5% through last week and, following Tokyo’s successful Olympics bid, has opened another ¾ figure higher around 80.00 this morning.

Last week’s NZD/USD gains have largely eliminated the "cheap" valuation status previously assigned to the currency by our short-term valuation model. The model currently estimates a short-term NZD/USD ‘fair-value’ range of 0.8000-0.8600. This suggests fundamentals will provide no impediment to further NZD/USD appreciation in the event USD selling continues this week.

This week’s Chinese data may end up being NZD supportive too, if further signs of a stabilisation and/or recovery shine through. August inflation figures today (2.6%y/y expected), will be followed by industrial production (9.9%) and retail sales (13.3%) numbers tomorrow.

In contrast to the above, upcoming local events may weigh on the NZD. Last week’s partial indicators have left us even more wary of a weak or even negative Q2 GDP print (data due 19 Sep). We’ve shaved our point forecast down to 0.2%q/q, with downside risk.

Key for this Thursday’s RBNZ Monetary Policy Statement is the extent to which the Bank rails against market pricing. The June MPS, recall, signalled no OCR hikes until Q3 of next year. The market now has almost 100bps priced by then, with the first hike fully priced for March. Yes, there are plenty of positives for the RBNZ to acknowledge (dairy cash, buoyant confidence, a currency 3% below previous Bank forecasts), but we wouldn’t be surprised if Governor Wheeler attempt to roll out his own brand of ‘forward guidance’. This could weigh on the NZD through a lower NZ-US interest rate differential.

The net of all this leaves us fairly comfortable with the idea the 0.7700-0.8100 range will continue to contain the NZD/USD in the near-term. We doubt a break of 0.8100 would extend beyond 0.8300. For today, as well as the Chinese numbers, keep an eye out for local manufacturing data (due 10:45am) and Japanese BoP and GDP figures (due 11:50 NZT, 1.0%q/q expected for GDP).

Majors

US bond yields and the USD were belted on Friday, after August’s US employment report cast fresh doubt on whether Fed tapering will commence following the September 17-18 FOMC meeting. With no top-tier economic data due for release between now and then, we put the odds of a taper being announced later this month at no higher than 60%.

The 169k rise in payrolls in August was only 11k below the consensus, but negative revisions means that the Q3 average payroll gain is running at 136.5k, down from 182k in Q2 and 207k in Q1. If that average is maintained through September, it would be the weakest quarterly payroll gain since Q2 2012. August’s drop in the unemployment rate (to 7.3% from 7.4%), meanwhile, was thanks to a 0.2% decline in the participation rate.

So will the Fed go in September? Noted WSJ Fed-watcher Jon Hilsenrath on Friday outlined one option that we’ve been warming to lately. "Reduce monthly bond purchases by a small amount, say by $10 billion…and signal as loudly as possible the next step will depend on more evidence the job market is continuing to improve and inflation is moving back towards 2%." In this way, the Fed can shore up its credibility while still ensuring US bond yields do not get away on them.

The market reaction was fairly violent, with positioning no doubt a factor. Indeed, going into payrolls, US 10-year Treasury yields were at their 3% highs and speculative USD longs were close to "extreme", according to IMM data. The USD lost ground to all the major currencies, with the NZD (+1.44%) and JPY (+1.0%) the biggest gainers on the day. Gains for the NZD, CAD and AUD also need to be seen in the context of a sharp rally across the emerging market currencies on reduced Fed tapering fears (MXN +2.2% and ZAR +1.7%). 10-year Treasury yields recouped much of their knee-jerk losses to finish the night 7bps down around 2.93%. US stocks were more or less flat.

Saturday’s Australian election delivered a landslide victory for Tony Abbot and the Liberal-led Coalition. According to our NAB colleagues, the broad thrust of fiscal policy will be little different under the Coalition’s declared plans. For markets and monetary policy, the bigger issue then is whether we see a sustained improvement in business and consumer confidence with election uncertainty behind us.

US political debate over whether to enter Syria looks set to dominate what will be a relatively quiet week data wise. The Senate is expected to vote on a proposal this week. Oil prices popped almost 2% higher on Friday and investors will do doubt continue to monitor price action in oil as the go-to fear gauge of Middle East military tensions.

China data will be the other key driver of currency market sentiment this week. We look for further evidence of recovery from today’s inflation data and tomorrow’s August activity data.

Other news: -The weekend’s Chinese trade balance provides more evidence growth is stabilising (US$28.5 vs. US$20b expected, thanks to a 7.2%y/y surge in exports and weaker-than-expected imports - 7%y/y vs. 11.3% expected). -Tokyo secures 2020 Olympic Games, watch for a boost for the Nikkei today.

Fixed Interest

Ahead of Friday night’s US payrolls data, NZ swaps closed up across the curve, as US 10-year yields had been reaching toward the 3.0% level.

On the week, NZ 2-year swaps were 10bps higher at 3.51%, but still a little below their mid-August highs. However, 10-year swaps closed up 19bps on the week, at 5.12%, to be close to their highs since August 2011. The 2-10s curve, at 161bps, is also at its steepest level since late 2011.

NZ bonds were also weak. The yield on NZ 10-year bonds rose 17bps on the week to close at 4.72%, also its highest levels since August 2011. There remains a lack of buyers of NZ bonds.

However, following the weaker-than-expected US payrolls data (early Saturday morning NZT), US 10-year yields (that had touched 3.0% earlier in the evening) gapped from 2.96% to 2.86% before finding some composure. They ended the week at 2.94%. This may exert some downward pressure on NZ yields at the start of the week. However, with the US ‘tapering’ debate still alive and well, it is unlikely a severe pull-back in yields will ensue.

Rather, this week, attention will return to the domestic economy with the RBNZ’s Thursday meeting the highlight of the local calendar. As at the end of last week the market was pricing a first 25bps OCR hike in March next year with almost 100bps of hikes by this time next year. This is fairly consistent with our own view, but well ahead of the RBNZ whose last published forecasts had a first hike implied for Q3 next year. We suspect these forecasts will be amended in this week’s MPS.

For today, the market will take its cue from Friday’s offshore moves. Today’s 2Q NZ manufacturing data and QV house prices are unlikely to be major market moves

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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