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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD was dragged lower by the AUD yesterday, but stabilised overnight to sit around 0.8180 currently.

There were limited domestic data releases yesterday. Weekly mortgage approvals data for the week to 29 November rose 2% from the previous week but were down 16% on a year earlier. It seems that recently implemented LVR restrictions are having an impact but are not out of line with the RBNZ’s central assumptions.

However the NZD/USD suffered by association as the AUD/USD was knocked lower after a disappointing AU Q3 GDP release (see Majors). It fell sharply from 0.8240 to around 0.8200 but found its feet overnight to trade around 0.8180 this morning.

A toll was also taken on the NZD relative to its key European peers. The NZD/GBP fell before flirting with the crucial 0.5000 level for most of the night, sitting around 0.4990 this morning.

The NZD/AUD however benefitted from AUD selling. The NZD/AUD gapped higher after the GDP release and then built on its gains overnight. The NZD/AUD now sits at 0.9080. The NZD/AUD was last at this level when it briefly spiked toward 0.9400 in October 2008.

There is no domestic data scheduled today. More broadly, market sentiment will remain in limbo ahead of tomorrow night’s US payroll data. Near-term support for the NZD/USD is eyed at 0.8150. Resistance should be encountered approaching 0.8220, ahead of 0.8260.

Majors

There has been a fair amount of volatility in currency markets over the past 24-hours. The AUD has been the weakest performer, while the JPY the strongest.

Overnight, equities continued to slip as risk appetite waned a further. Our risk appetite index (scale 0-100%) has slipped to 61.6%, from 71% a fortnight ago. Equity markets appear to have returned to the mode where ‘good news’ is ‘bad’ in that it represents a more imminent start to the Fed’s ‘tapering’ process. Overnight, the ADP employment report surprised to the upside (215k vs. 170k expected). The relationship between this data and the US payrolls report is not always tight. However, the market appears to be extrapolating the report to a strong outcome for Friday’s US payrolls.

The USD initially pushed higher on the data delivery, as US 10-year yields gapped higher. However, the USD was unable to hold onto the gains after a softer-than-expected ISM non-manufacturing report (53.9 vs. 55.0 expected). The USD index sits at 80.60 this morning, a similar level to yesterday morning.

The EUR/USD traded in mirror-image to the USD index, in the absence of Eurozone data surprises. Both the Eurozone Services PMI (51.7) and preliminary reading of Q3 GDP (0.1%q/q) came in close to expectation. However, at the whim of the USD, the EUR/USD dipped to 1.3530 early this morning, before returning to trade at 1.3600.

The JPY has strengthened a little further against the USD. Having been unable to break through the crucial resistance level at 103.70, the USD/JPY now sits at 102.10. It may take further announcements of easing from the Bank of Japan to inspire the next up-leg in the USD/JPY. Ultimately we see the USD/JPY heading toward 110.00 in 2014.

Yesterday the AUD/USD gapped lower after the release of AU Q3 GDP (0.6%q/q vs. 0.7% expected, 2.3%y/y vs. 2.6%). There were signs of soft domestic demand, as net exports contributed much of the growth for the quarter. The AUD/USD gapped from 0.9140 to 0.9060 on the release, subsiding further overnight to sit at 0.9020 this morning. Today, AU trade balance data will be released.

Tonight, it will be all eyes on Central Banks. The Bank of England and ECB will both announce rates. Both are expected to remain on hold. Greater attention will be focused on comments from ECB’s Draghi at the associated press conference. Tonight, the US also publishes Q3 GDP and factory orders for October. However, the market will likely look through this, to tomorrow night’s US payrolls release.

Fixed Interest

NZ swaps closed up 1-3bps yesterday while bonds closed down 1-2bps, resulting in wider swap spreads. Overnight, US 10-year yields gapped higher to 2.84%.

NZ 2-year swap closed at its highest level since August 2011 at 3.73%. The 2-10s swap curve steepened to 143bps. The 140-160bps range appears intact for now, though we see a flattening to 70bps next year. 2-year swap is now above ‘fair value’, which we see at 3.70% based on our expectation of 125bps of OCR hikes by the end of 2014, and 200bps by the end of 2015.

By contrast, NZ bonds were in favour yesterday. As a result NZ 10-year swap-bond spreads widened to 34bps. We expect spreads to continue to widen within a 25-55bps range in the year ahead. Constrained NZGB supply should assist outperformance of bonds relative to swap.

For today, we have the DMO tender of $200m of 2025 inflation-indexed bonds. This will be closely watched after weakness in demand seen at the last tender.

Overnight, US benchmark 10-year yields gapped higher after a stronger-than-expected ADP employment report (215k vs.170k expected). US 10-year yields sit at 2.84% this morning from 2.78% last evening.

There are no domestic data releases today. Expect yields to open down given the moves offshore overnight, mimicked by AU bond futures. Tonight, the Bank of England and ECB both announce interest rates.

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