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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD sits at a similar level as yesterday morning, at 0.8250, having traded above 0.8280 overnight.

Yesterday’s Half Year Economic and Fiscal Update confirmed the NZ fiscal accounts are on a solid footing. As economic momentum is picking up, stronger revenues will help contribute to the Government reaching surplus in the year to June 2015. Government bond issuance programmes have also been reduced (see Fixed Interest).

Overnight, in the latest global dairy auction, average prices were up 0.2% from the previous event, to be 51% higher than a year ago. Prices remain very strong, and the forward price curve is still generally upward sloping. This continues the recent theme that dairy will provide a very large income boost to NZ over the coming year while supporting improvement in the external accounts.

The NZD took all the positive domestic news in its stride over the past 24-hours without demonstrating too much excitement; a lot of the NZ ‘good news’ story is now well known. In addition, heading into tonight’s US FOMC meeting (see Majors) the market is likely reticent to take on addition ‘risk’. The NZD continues to be seen as a ‘risk sensitive’ currency. Our global risk appetite index (scale 0-100%) remains at a contained 60%.

The NZD was fairly range-bound relative to its key European peers overnight. However, it continued its ascent relative to the AUD. Contrasting Trans-Tasman fiscal trends were highlighted yesterday as the AU Mid-Year Budget update was tabled alongside the NZ HYEFU (see Majors). The NZD/AUD pushed up to 0.9290, a new cyclical high.

Today, the NZ current account balance will be released along with the ANZ business confidence survey and the RBNZ’s weekly mortgage approvals data. More broadly, the market will have its eyes firmly fixed on the US FOMC meeting in the early hours of tomorrow morning (NZT).

Majors

Heading into tonight’s crucial US FOMC meeting, the USD index remains around 80.10. The AUD and GBP have underperformed over the past 24-hours while the JPY outperformed.

Equities were softer again overnight, as our risk appetite (scale 0-100%) has slipped a little further to 60%. The market appears reticent to take on any aggressive positions ahead of tonight’s highly anticipated FOMC meeting. It is a ‘live’ meeting in terms of its potential to announce the start of the Fed’s ‘tapering’ process. The USD appears to remain ambivalent about that prospect. The USD index traded up toward 80.30 overnight before returning to sit at 80.10 this morning.

Overnight, the December German ZEW survey suggested financial market participants have ended the year with a fairly optimistic outlook for the region. The economic sentiment index (62.0 vs. 55 expected) was the highest reading since April 2006. Actual conditions were more pedestrian at 32.4. However, the overall message seems to be that solid German growth is helping Eurozone as a whole to expand. Meanwhile the EUR/USD traded between 1.3730 and 1.3780 overnight, returning to sit around 1.3760 this morning.

The GBP was a notable underperformer overnight, extending its pullback from early December highs. Data overnight showed UK core CPI at 1.8%y/y, providing some comfort to the BoE as it maintains highly accommodative monetary policy. The GBP/USD has declined from above 1.6320 last evening to trade close to 1.6260 currently.

However, the dubious honour of key underperformer was held by the AUD over the past 24-hours. Several factors likely contributed. First, the RBA’s minutes yesterday repeated the AUD remains "uncomfortably high and a lower level would likely be need to achieve balanced growth". Second, yesterday’s Mid-Year Budget showed the deficit for 2013/2014 to have blown out to AU$47b from the Treasury’s last estimate in August of AU$30.1b. GDP forecasts were also revised down. Finally, as the market approaches tonight’s US FOMC meeting it is reticent to take on additional ‘risk’. The AUD/USD sits around 0.8900 this morning, while crucial support remains at the August lows of 0.8850.

Tonight, all eyes will be on the US FOMC meeting. In addition, the German IFO business survey will be released along with a slew of UK data including its employment report and the Bank of England minutes.

Fixed Interest

The big move yesterday came in NZ bond yields that closed down 8-10bps. Swaps closed up 2-3bps. Overnight, US 10-year yields traded between 2.85% and 2.88%.

Yesterday’s HYEFU highlighted the relatively positive state of the NZ fiscal accounts. The DMO announced it has reduced its 2013/2014 bond issuance program from $10b to $8b, and 2014/2015 issuance from $8b to $7b. It also announced its specific issuance schedule for Q1 2014 (calendar year). A mere $400m of nominal NZGBs are scheduled to be issued in the quarter, along with $400m of inflation-indexed bonds.

The market now faces an outlook where there will be no new issuance of nominal bonds for ten weeks. This will also coincide with the potential for new year allocation into NZGBs by global fixed income mandates. We see a potentially very tight supply-demand equation in the near-term. Already swap spreads have widened significantly. 10-year that has hugged the 30bps level since mid-September, now sits at 45bps. We have long argued we see wider swap spreads as we head into 2014, assisted by relative NZGB supply constraint.

NZ-AU 10-year bond spreads narrowed yesterday (from 71bps to 61bps) as the AU MYEFO stood in stark contrast to NZ’s HYEFU.

NZ swaps closed up a further 2-3bps yesterday. 2-year remains close to its highs since February 2011, at 3.78%. This is close to ‘fair’ relative to our expectation for the OCR to begin to rise in March next year and to be 200bps higher in two years’ time.

Overnight, in the backdrop of soft equity markets, US benchmark 10-year yields continued their sideways shuffle between 2.85% and 2.88%. They sit toward the lower end of this band at present.

Today, RBA Governor Stevens will give testimony in Parliament. Domestically, ANZ business confidence and weekly mortgage approvals will be released. Tonight, it will be all about the US FOMC rate decision. However, we do not believe any tapering announcement would likely be sufficient for US 10-year yields to breach their 3.0% highs reached in early September.

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