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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

Reversing the previous day’s dynamics, the NZD and AUD have been key underperformers over the past 24-hours. The NZD/USD sits at 0.8230 this morning.

The NZD started on the back-foot yesterday morning after Fonterra made its payout announcement. Confounding expectations (including our own) for an increase, Fonterra held the 2013/2014 milk price at $8.30/kgMS and cut its dividend to 10c from 32c. Overall income from the season will still be up by about $5b, including an 8-9% increase in production, so a big boost to the economy. But expectations for even more were likely disappointed yesterday.

Overnight, the NZD/USD continued to slip as general risk appetite eased a little further (see Majors). The NZD/USD sits at 0.8230 this morning. Key for the currency today will be this morning’s RBNZ meeting. Any attempts by the RBNZ to push back on partial pricing for a rate hike as early as January (see Fixed Interest), could see further NZD softness.

It was also mostly one way traffic on most of the NZD crosses overnight. The NZD sits lower relative to the EUR, GBP and JPY this morning. The NZD/AUD traded a more interesting pattern overnight, sinking to almost 0.9050 before clawing its way back above 0.9080 this morning. It will be an important day for the cross today with this morning’s RBNZ meeting followed by the AU employment report this afternoon (1.30pm NZT). We continue to emphasise that the NZD/AUD looks quite stretched based on fundamentals, though our momentum model continues to favour the cross.

Majors

The USD has declined relative to the EUR and JPY over the past 24-hours though the major under-performers were the AUD and NZD.

US lawmakers finally announced a budget deal, which will see a reduction to its budget deficit by US$20b, to $23b. However, some of the previous automatic spending cuts that were in place under ‘sequestration’ have been eased. Overall, however, the market appeared fairly disinterested, as much had likely been anticipated. The deal (if passed) does remove budget uncertainty as one hurdle to the Fed announcing an imminent start to its ‘tapering’ process.

Meanwhile our risk appetite index (scale 0-100%) has subsided a little further to sit at 62% this morning. Equities have eased a little further, as the prospect of imminent ‘tapering’ reduces appetite for equity risk. The USD however, has continued to slip lower overnight, to trade around 79.80 this morning. It certainly begs the question whether ‘tapering’ will catalyse USD strength as had previously been a popular assertion.

The key outperformers overnight were the JPY and EUR. The USD/JPY has subsided to 102.30, unable to push through its May highs, for now. Ultimately, we see a higher USD/JPY next year, likely with the assistance of further announcements of easing from the Bank of Japan.

The EUR/USD pushed up to 1.3800 overnight. Resistance is now eyed at the late October highs of 1.3830. Tonight the ECB publishes its monthly report while Eurozone industrial production for October will be released.

The AUD/USD has been on a descending path over the past 24-hours. Yesterday, data showed AU consumer confidence declined 4.8% in December. The AUD/USD slipped as low as 0.9050 early this morning before returning to trade at 0.9060 currently. Today, the most important AU data of the week will be delivered in the form of the AU employment report. We, along with consensus expect a tick up in the unemployment rate to 5.8%. Our expectation of further deterioration in the labour market is a key reason we still see potential for further RBA rate cut(s) next year.

Tonight, US retail sales data will be delivered along with weekly jobless claims data.

Fixed Interest

The market was relatively quiet heading into today’s RBNZ meeting. NZ swap and bond closed virtually unchanged.

Heading into today’s meeting (9.00am NZT), the market continues to prices more than a 30% chance of a hike in January; fully prices a first hike by March; and prices around 115bps of hikes by the end of next year. We believe the latter is justified but the market overestimates the chance of a January hike. The Bank may push back on this today by reconfirming in its 90-day bank bill track that it expects to hike later in H1.

Yesterday’s LGFA tender attracted solid bidding, but with a relatively wide range of bids and ‘tails’ in successful bids. The average bid-to-cover ratio was around 3x. The $105m of LGFA 2021 bonds went at an average yield of 5.50%, a little above where they were marked prior to the tender.

Overnight, as the sogginess in equity markets continued, US benchmark 10-year yields dabbled around between 2.80% and 2.83%.

Aside from the RBNZ meeting, there will also be much focus across the Tasman today as the AU employment report is released. The unemployment rate is seen ticking up from 5.7% to 5.8% as part of a broader deteriorating trend in the labour market.

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