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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD has traded approximately a 0.8260-0.8300 range over the past 24-hours, sitting just above 0.8280 at present.

There were no domestic data releases yesterday, although overnight the latest global dairy trade auction was held. Overall, average prices declined 0.8% from the previous event. This remains within expected ranges, with prices still highly elevated from year ago levels. We continue to see NZ commodity prices providing support for the NZD. The broad NZ commodity price index, at end 2013, remained almost 20% above year ago levels.

However, later this year, we expect some moderation in the NZ terms-of-trade, from 40-year highs, should contribute to some softening in the NZD. This is also assuming sustained momentum in US GDP growth, allowing it to narrow the differential with NZ. However, for now, the NZD/USD appears well supported within the broad 0.8100-0.8400 range it has traded since the beginning of November.

In addition, our fundamental ‘fair value’ model suggests the NZD/USD actually trades slightly below its short-term ‘fair value’ range. This currently sits at 0.8350-0.8900.

The NZD/AUD strengthened overnight. At 0.9280, it now has mid-December highs, just above 0.9300 in its sights. This was its highest trading level since October 2008.

Today, there are no domestic data releases scheduled although QV house prices are expected to be released by week end. Tonight, all eyes will be on the US where the ADP employment report and Fed December Minutes will be released (see Majors and Fixed Interest). A strong ADP report might boost the USD, but would also likely support risk appetite and hence the NZD.

Majors

Currencies traded relatively tight ranges overnight. The USD index is a little stronger while the CAD and AUD were key underperformers.

The USD index was fairly range-bound ahead of the release of US trade balance data early this morning. The data showed less of a trade deficit in November than expected (-$34.3b vs. -$40.0b). This is a four-year low. Following the release the USD gapped higher, but was unable to hold onto the gain, returning to trade around 80.75 this morning.

Overnight, Eurozone data came in close to expectation. CPI data confirmed core inflation (0.7%) remains well below the ECB’s target. Heading into the end of week meeting the pressure remains on the Bank to provide further stimulus to the economy, although a rate cut is not anticipated. Data also showed the German unemployment rate remained close to an historic low at 6.9%. By contrast, it is anticipated tonight’s data for Eurozone will show unemployment remains elevated at 12.1%. The EUR/USD sits around 1.3630 this morning.

The CAD was the weakest performing currency over the past 24-hours, declining 0.85% relative to the USD. Early this morning the Canadian trade deficit was shown to have swelled to $94b in November ($10b expected). Later this morning, data showed the CA Ivey PMI fall to 46.3 (a rise to 54.5 expected). Combined, the events took a toll on the currency. The USD/CAD rose from 1.0680 to 1.0760. This is its highest level since mid-2010.

The AUD was also a little softer over the past 24-hours. It fell yesterday afternoon following data showing the AU November trade balance at -AU$118m. The AUD/USD continued to drift lower overnight to trade just above 0.8920 this morning. Key support for the AUD/USD remains in the 0.8820-0.8840 window that marked the lows in August and December.

Tonight Eurozone retail sales and unemployment rate will be released. However, focus will likely fall across the Atlantic where the US ADP employment report will be released along with the Fed’s December Minutes. The ADP report is often seen by the market as a precursor to the end of week payrolls report. A strong result (200k expected) would likely support the USD. The Minutes will likely be scanned by the market to see whether there was a tight consensus behind the Fed’s decision to begin ‘tapering’ in December.

Fixed Interest

It was a fairly quiet day in the NZ market, with yields closing down around 2bps across swap and bond curves.

As NZ swaps declined for a second consecutive day, the end of year push higher in yield appears to be running out of steam. For the front-end of the curve, as we approach the end of month RBNZ meeting, the market is likely questioning whether the Bank will actually pull the trigger and raise rates. Around a 50% chance of a hike at this meeting is still priced. We continue to believe that this would be inconsistent with RBNZ previous communications. Rather, we believe the Bank will use the meeting to set itself up for a first hike in March.

Meanwhile NZ 10-year bonds ended the day at 4.71%. Yields have traded in less than a 20bps range over the past two months. We foresee a 4.50% to 5.10% range in the year ahead. Overall we expect positive returns as "carry" offsets any drift higher in yield. We believe NZGB supply constraint will limit the sell-off in longer-dated NZGBs despite a rising OCR in the year ahead. We continue to see the OCR being 125bps higher (at 3.75%) at year-end.

Overnight, in the backdrop of relatively light data-flow but positive equity markets, US benchmark 10-year yields traded a tight range between 2.94-2.96%. They sit at the bottom of this range at present.

It is once again quiet on the domestic data front, although QV house prices are scheduled for release by week end. A strong result (200k expected) in tonight’s US ADP employment report could see US 10-year yields re-testing their 3.0% peak. The Fed’s December Minutes will also be released. If a tight consensus behind the Fed’s decision to begin ‘tapering’ in December is shown, this would suggest a steady progression of tapering at coming meetings is more likely.

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