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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media


The NZD/USD sits lower this morning, trading just above 0.8170 currently.

Along with most of its peers, the NZD suffered extreme volatility yesterday morning as the market digested the implications of the US FOMC finally announcing a start to its ‘tapering’ process (see Majors and Fixed Interest). Volatility was then compounded by the release of NZ Q3 GDP yesterday morning (1.4%q/q vs. 1.1% expected). While the headline was strong, equating to 3.5%y/y growth, it was flattered by post drought impacts and technicalities. It was a good reading, but not as strong as it initially appeared. Taking all of this in its stride the NZD/USD sits a little lower this morning at 0.8170, still within ranges of recent months.

Yesterday’s events confirmed two key messages. First, the process of US Fed ‘tapering’ is not necessarily the death knell for the NZD. Second, strong domestic data delivery is no longer sufficient to push the NZD to greater heights. This NZ story is now well known. The NZD/USD is unlikely to return to its peaks. That said, we see the NZD/USD fairly well supported in the near-term, and expect it to trade above 0.8000 for much of H1 2014. Near-term support is seen at 0.8140 while resistance is eyed at 0.8210.

The NZD was weaker on most crosses over the past 24-hours. Most notably, the NZD/AUD was on a fairly steady downward path, to sit around 0.9220 this morning. We continue to emphasise the cross has become a bit stretched relative to fundamentals which suggest a ‘fair value’ range of 0.8500-0.8700. The NZD/GBP is also attempting to once again break below the crucial 0.5000 level.

Today, domestic data is relatively low key (net migration and credit card billings). There are no scheduled data releases across the Tasman.


After significant post FOMC volatility yesterday morning, most currencies slipped into fairly steady trading patterns overnight. The USD index sits higher, at 80.60 currently.

Currencies were thrown into disarray yesterday morning as they struggled to absorb the implications of the US FOMC announcement (see Fixed Interest). Extreme volatility ensued as the market weighed up the implications of, immediate ‘tapering’ but a later start to ‘tightening’. It also factored in the reason these steps are being taken is because the US economy is on a firmer footing. Risk appetite bounced as a consequence. Our risk appetite index (scale 0-100%) sits at 67% from 60% pre-FOMC.

Currencies traded up to 1.5% ranges within minutes of the FOMC announcement. They then settled into more regular trading patterns overnight. The USD index pushed higher yesterday, once the dust had settled on the announcement, consolidating around 80.60 overnight.

As a consequence of USD strength, the EUR sits lower this morning, having consolidated just above 1.3660 overnight. Meanwhile the GBP/USD has been able to hold onto most of its previous day’s gains. While the heightened volatility yesterday morning saw the GBP/USD briefly spike to new highs it has settled into a comfortable range overnight, to trade at 1.6370 this morning. Key resistance for the currency remains at the 1.6460 level. Tonight, UK consumer confidence data will be released along with the UK current account and final reading of Q3 GDP.

The JPY weakened notably after the US FOMC announcement. From close to 103.00 the USD/JPY moved rapidly up to above 104.00, making new highs since late 2008. Today, the Bank of Japan will meet. In contrast to the US Fed, it is not expected to announce any changes to its target rate or asset purchases at this meeting. Further easing next year could hasten USD/JPY appreciation that we expect. We see the USD/JPY above 110.00 by the end of 2014.

The AUD/USD experienced some of the most severe volatility post the US FOMC meeting. It traded a 1.4% range within minutes of the announcement. Overnight it has consolidated at a slightly lower level, sitting at 0.8860 this morning. This is right at the lows it traded in early August.

After yesterday’s excitement it should be a quieter end to the week tonight. Only the latest reading of US Q3 GDP is scheduled along with Eurozone December consumer confidence.

Fixed Interest

Yesterday morning’s US FOMC created significant volatility offshore. NZ swaps pushed another 4-5bps higher. NZ bonds also closed up 3-5bps.

The US Fed finally delivered with $10b worth of tapering, beginning in January. Further tapering will be announced in "measured steps". However, the Fed also emphasised that rate hikes were still a long way off. In an amendment to previous statements it said it would keep the Fed funds rate low "well past" the point where the unemployment rate falls to 6.5%. US 10-year yields traded a 10bps range within minutes of the announcement as the market attempted to distil the consequences. Yields then settled around 2.88% until the early hours of this morning when yields pushed on up to 2.94%.

Domestically, NZ swaps pushed higher on the day, assisted by positioning and continued strong domestic data. Yesterday’s Q3 GDP came in above expectation at 1.4% (1.1% expected). NZ 2 and 5-year swap ended the day at 3.83% and 4.71% respectively. The 2-10s swap curve remains fairly stubbornly at 146bps. We anticipate a flattening to unfold next year as OCR hikes get underway.

Post the GDP release the market now prices almost a 50% chance of a 25bps rate hike in January. We believe this pricing is too stretched. In order to be consistent with previous communications, we believe the RBNZ will use the January meeting to set up the prospect of a first hike in March. The market now fully prices 125bps of hikes by the end of next year. This is our central view, although see the risks tilted toward more, rather than less, hikes.

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