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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD trades a little lower around 0.8240 early this morning.

Overnight, all eyes were on Europe as the ECB and BoE announced rate targets. The result was a fair amount of volatility in European currencies (see Majors). However, the NZD/USD and AUD/USD managed to steer clear of most of the volatility, trading fairly steady sideways paths. The NZD/USD has dribbled a little lower this morning and currently sits very close to the 50-day moving average at 0.8243. Technically this level may be of interest to some traders. Otherwise the NZD/USD remains firmly within the broad 0.8120-0.8320 range it has traded over recent weeks. Yesterday morning’s release of US Fed Minutes (see Fixed Interest), nudged the NZD/USD a fraction lower, but provided nothing to threaten its broad range.

As might be expected, the NZD/EUR suffered some volatility at the hands of the ECB meeting overnight. From 0.6060 ahead of the meeting the cross spiked briefly toward 0.6100, before returning to trade just above the lower level this morning.

Meanwhile, the NZD/GBP drifted lower as the BoE left rates and asset purchases unchanged but gave little else away about its intentions. This cross now sits just above the 0.5000 level.

Domestically, NZ QV house prices are still expected to be released by week end. However, domestic factors will be very much in the back seat over the next 24-hours as the market awaits and dissects the December US payrolls report. Given the strength in Wednesday’s ADP report the market is likely now tilted toward expecting a strong number (consensus 200k). Therefore the greater knee-jerk market response (USD weakness) would likely result from a softer than expected outcome.

Majors

Despite a bit of volatility around last night’s European Central Bank meetings, most major currencies currently trade not far from where they were yesterday morning.

Yesterday morning’s December US Fed Minutes (see Fixed Interest) prompted only limited response from the market, with a knee-jerk tick higher in the USD. However, subsequent trading was fairly placid ahead of the ECB and BoE meetings last night. Then it was all eyes to Europe.

First up was the Bank of England, providing little surprise with its decision to leave rates at 0.5%, and asset purchase target unchanged. The GBP/USD very briefly spiked higher. But it proved short-lived and the market’s attention moved to the ECB’s announcement. The GBP/USD sits at 1.6460 this morning.

The ECB provided more for the market to chew on (see Fixed Interest). It provided enough hints for the market to speculate on the possibility of further stimulus measures, including QE. The EUR/USD responded with harsh volatility. On the initial ‘no change’ decision on rates the EUR/USD spiked above 1.3630. Later, as President Draghi was questioned the EUR/USD slipped back to 1.3550. It has settled around 1.3580 this morning.

In other markets, equities provided modest negative returns in Europe, and are currently fairly flat in the US. The broad CRB global commodity index declined a further 0.80% overnight to be close to its lows since mid-2012. There was also a notable further decline in the oil price. The WTI oil price now sits at $91.90, its lowest level since May last year. Supply issues appear to be contributing. A US government report showed crude production climbed to the highest level since 1988.

The AUD/USD sits a fraction lower this morning at 0.8890. We continue to watch key support for the AUD/USD at the 0.8820-0.8840 level that marked its lows in August and December. Today, AU HIA new home sales data will be released.

Tonight, UK industrial production data will be released. However, the main focus will be on US employment reports. Both payrolls data and the unemployment rate will be delivered. Official consensus is for a 200k payrolls release. However, after Wednesday’s strong ADP report expectations are likely tilted towards a higher number.

Fixed Interest

NZ swap yields closed up 1-2bps while bond yields closed up 4bps. Overnight, US 10-year yields bobbed sideways around 2.98%.

Yesterday morning’s US Federal Reserve Minutes did not elicit much market reaction. The overall impression was that the Fed will tread cautiously in ‘tapering’ its asset purchase but is increasingly aware of the ‘costs’ of additional purchase. But it was also concerned to make sure the market did not see a reduction in the pace of asset purchases as leading rapidly to tightening of policy. i.e. rate hikes. Furthermore the pace of asset purchases is not on a pre-set course and remains contingent on the outlook for the labour market and inflation.

NZ 2-year and 5-year swap ended the day at 3.82% and 4.68% respectively. We continue to see the 5-year point of the curve as ‘expensive’ for paying. However, with some current and expected Kauri issuance coming through it will provide receiving interest at the mid-curve. This should see the likes of 5-year swap decline relative to points at either end of the curve.

Overnight, the ECB and Bank of England left rates unchanged as expected. The BoE gave little away in its official accompanying statement as it left its cash rate at 0.5% and asset purchase target at £375b. The ECB was a little more vocal. It ratcheted up its ‘forward guidance’ with firmer words regarding its commitment to maintain a highly accommodative monetary stance. In questioning, President Draghi suggested the ECB would also be willing to use other methods to stimulate the economy. He would not be led on exactly what those might be but said the Bank will consider "all instruments that are allowed by treaty". It seems the ECB’s work is not yet done.

Overnight, US benchmark 10-year yields dabbled sideways around 2.98%, yesterday’s Fed Minutes being insufficient to prompt an assault on the crucial 3.0% level.

Tonight, all eyes will be on the release of the US payrolls report. It would likely take a significant upside surprise to convincingly breach the 3.0% level on US 10-year yields.

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