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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media


The NZD/USD was the strongest performing major currency on Friday, which is a bizarre result after a strong US jobs report.

To be fair, the NZD was on the rise leading into US non-farm payrolls, out of step with other major currencies which were almost uniformly staid. The kiwi simply continued to grind higher following the volatility seen after the data release (see Majors). As a result, the NZD/USD closed 0.3% higher at 0.8660.

The NZD gained against all the crosses, including the JPY despite the deteriorating situation in Ukraine (see Majors). Consequently, the NZ TWI has built on last week’s gains to open at 80.60 this morning, back within territory that will raise angst about whether the RBNZ might pause its hiking cycle in June or July.

Friday’s release of the ANZ Commodity Price Index did little to shift the NZD, despite registering a 4% m/m fall in world prices for NZ’s primary export products over April. This follows March’s 0.1% decline from the all-time high. Last month’s drop was led by dairy prices (-9.2%), which should come as no surprise to those following Fonterra’s fortnightly auctions. We think prices will continue to trend lower, eroding support for the NZD.

This week, the highlight for the NZ market will be Wednesday’s employment report for Q1 2014, where we are looking for the unemployment rate to edge lower to 5.9%, despite rising participation. The dairy auction earlier that morning will also garner attention, though another drop after six consecutive declines might be too much to ask for.


On a point-to-point basis, major currencies closed the week little changed from where they were 24 hours previously. But that belies the volatility that followed the US employment report.

Leading up to that marquee event, currency markets were understandably subdued. The AUD/USD spent the entirety of the local trading session in a tight 20-point range between 0.9260 and 0.9280. Other major currencies fared little better as far as volatility was concerned.

The much-anticipated US non-farm payrolls result certainly did not disappoint. The headline number for April printed at 288k (against 218k expected), and upward revisions to February and March contributed a further 36k to the cause. The unemployment rate dropped to 6.3% from 6.7%, when a much milder fall to 6.6% was expected.

The initial reaction was rightfully and unequivocally USD positive. Major peers fell quickly, with the US Dollar Index gaining 0.4% to 79.80 immediately on the release. But that soon began to turn as commentators narrowed in on signs of weakness within the report, such as the sharp drop in labour force participation (from 63.2% to 62.8%) and a slump in average hourly earnings growth (from 2.1% y/y to 1.9% y/y). The upshot appeared to be a labour market reading somewhat softer that the headlines suggested.

The USD reversal was accelerated by unfolding news from the Ukraine, including reports of helicopters being shot down, and government officials declaring that the country’s east had descended into war. More than 40 people were killed over the weekend, in the worst violence since the initial overthrow of government in Kiev.

At the close, the overall stance of markets was one of mild risk aversion. The JPY and the CHF were among the better performing currencies, US and European equities dipped, and gold was stronger. The hesitancy to hold onto risk may have been compounded by the fact that the UK was heading into a long weekend.

The data calendar for the week ahead is much lighter in terms of importance, especially for the Northern Hemisphere. The highlight will be the ECB policy meeting on Thursday night, with pressure still on the ECB council to ease monetary policy further. Closer to home, Australia’s employment report (due Thursday) should build upon the improvement in recent months.

Other news: -US factory orders +1.1% m/m vs +1.5% expected.

Fixed Interest

NZ swaps closed up 2-3bps on Friday. Despite strong US payrolls data, US 10-year yields closed down at 2.58%.

There was slightly better paying interest at the short-end of the NZ curve on Friday, with 2-year swap closing up 3bps, at 4.01%. The 2-10s curve flattened a little further to 91bps. We continue to see good value in hedging interest rate risk at the short-end of the swap curve. This is based on our view the OCR will be at 5.00% by the end of 2015. i.e. a further 200bps of hikes. The market prices only 130bps of OCR hikes by this time.

But the biggest news on Friday night was the much anticipated US labour market data. Payrolls came in at 288k (218k expected) and the US unemployment rate fell to 6.3% (although partly due to a lower participation rate). The initial response in US Treasuries was to be expected. 2-year yields gapped from 0.41% to 0.47% and 10-year from 2.62% toward 2.70%. However, this proved short-lived. News of the deteriorating situation in the Ukraine soon saw the bid-tone return to ‘safe haven’ US Treasuries. US 10-year yields ended the week at 2.58%, the lows of their range, last seen in early February.

This suggests NZ longer yields may open down at the start of the week, mimicking moves in Aussie bond futures on Friday night.

Domestically, there is little on the data front at the start of the week. This week’s local highlights for fixed interest markets will be Wednesday’s NZ labour market reports, Thursday’s AU equivalent and tomorrow’s RBA meeting. On Wednesday, we anticipate a solid Q1 NZ employment gain that would be just sufficient for the unemployment rate to decline to 5.9% (from 6.0%).

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to

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