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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

Showing some volatility on Friday evening, the NZD/USD ended the week at 0.8260.

Friday’s RM-ANZ consumer confidence index showed NZ consumers are confident heading into Christmas. The index, at 129.4 in December, is at its highest level in four years. This is despite LVR restrictions and the talk of interest rates soon heading 200bps higher. Meanwhile the NZD/USD was tossed around a bit on Friday. It touched below 0.8210 early on Saturday morning, before grappling its way back to end the week at 0.8260.

The NZD strengthened against a weak GBP on Friday (see Majors). From around 0.5030 early in the evening, the NZD/GBP pushed up to end the week at 0.5070. Once again, a base appears to be forming at the psychologically significant 0.5000 level. This has marked the bottom in the NZD/GBP on several occasions over the past 18 months.

NZD/AUD consolidated in a tight 0.9200-0.9220 range on Friday. We continue to see positive momentum in the cross but equally recognise that it is looking stretched relative to fundamental valuations. Our short-term model suggests a ‘fair value’ range of 0.8500-0.8700. There are no AU data releases of note today. However, the RBA minutes and Government’s Mid-Year Economic and Fiscal Outlook will be released tomorrow.

The NZD/USD remains well within its recent trading ranges. There will be plenty on both the domestic and offshore agenda to impact on the currency this week. Wednesday’s US FOMC meeting will be the centre-piece of the week. Domestic highlights will be Thursday’s Q3 GDP (we expect 1.0%q/q, 3.2%y/y), Tuesday’s Half Year Economic and Fiscal Update and Wednesday’s ANZ business survey. For today, the BNZ PSI release for November is unlikely to be a major market mover (recall the previous month sat at a lofty 58.2). Key support for the NZD/USD remains just below 0.8200. Resistance is eyed around 0.8310.

Majors

Currencies traded fairly tight ranges on Friday. The GBP was the weakest performer while the CAD outperformed.

It was a fairly subdued end to the week, as markets appear to be slipping gradually into holiday mode. As our risk appetite index (scale 0-100%) remained fairly steady, just above 61%, equities provided flattish returns.

The USD index traded between 80.20 and 80.40. US November retail sales (0.7%m/m) came in slightly above expectation (0.6%). More broadly, as we head into the end of the year, the US Citigroup surprise index shows a positive trend in US data delivery relative to expectation.

Meanwhile, in the UK, positive surprises in economic data peaked in Q3, and have faded in recent months. The Citigroup surprise index shows UK data delivery is now fairly neutral on aggregate relative to expectation. Positive data surprise helped drive the GBP/USD off its lows in early July, to above 1.6450 last week. However, it has been unable to maintain the momentum, slipping to end the week at 1.6300.

The AUD/USD had a fairly uneventful end to the week. It traded a tight path to close just above 0.8950 on Friday night. Friday’s IMM data showed the market remains fairly short the AUD. AUD shorts were extended slightly, to 45.9k from 44.3k but would still need to double to be at multi-year extremes. Local highlights for the AUD this week will be the release of RBA minutes tomorrow and Governor Steven’s testimony to Parliament on Wednesday. Crucial support for the AUD/USD remains at the August lows of 0.8850.

Elsewhere, the focus for currencies this week will be the US FOMC meeting on Wednesday. Heading into the meeting the WSJ’s latest poll on Fed expectations, published on Friday, shows 50% of firms looking for an initial Fed taper in either December or January.

For today, the December China HSBC flash PMI will be released. The market will be looking for the index to remain in expansion (consensus 50.9). Tonight, Eurozone PMI data will be released for December and the ECB’s President Draghi is scheduled to speak at the European Parliament in Brussels. The US Empire Manufacturing index will be released along with US industrial production data.

Fixed Interest

NZ swap yields closed up 2bps on Friday while bond yields closed up 4-6bps. US benchmark 10-year yields traded sideways to end the week at 2.86%.

NZ 2 and 5-year swap closed the week at 3.77% and 4.63% respectively, at, or close to their highs since mid-2011. The 2-10s swap curve sits at 146bps, still well within in the 140-160bps range it has traded for the past four months. We see this curve flattening to 80bps next year as OCR hikes get underway.

Last week the RBNZ confirmed to us, that it will begin its rate hiking cycle early next year, although not in January. March appears likely. It also confirmed that the risks around our forecast 4.50% peak (in late 2015) for the OCR are to the upside.

Friday’s DMO auction of $200m of NZGB2020 bonds showed only tepid demand. The bid to cover ratio was a relatively modest 2.4x. The bonds went at a yield of 4.60-4.65%, a little above where they were marked at the time of the tender. The sell-off in NZGBs saw swap spreads narrow somewhat and spreads to AU bonds widen dramatically.

This week’s HYEFU (17 Dec) will likely confirm a more constrained NZGB issuance program in 2H of the fiscal year. This should help support NZ bonds, as should the fact there is likely now to be a notable summer break in the issuance program.

It is a huge final week to the working year, domestically. The highlights will be Thursday’s Q3 GDP (we expect 1.0%q/q, 3.2%y/y), Tuesday’s HYEFU and Wednesday’s ANZ business survey. All are likely to send fairly positive signals about the state of the economy. But much of this good news is now priced by NZ fixed interest markets and their expectations for almost 125bps of OCR hikes next year. This is consistent with our own forecasts.

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