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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD traded a relatively tight range over the past 24-hours, to sit at 0.8640 this morning.

After the previous days’ sharp falls the NZD/USD eased into a steady range of trading yesterday. There was little on the domestic data agenda. Even heavy selling of the NZD/AUD, following the strong AU employment report, (see Majors) was unable to throw the NZD/USD off course. Finding its composure around the 0.8640 level yesterday morning it has dabbled around this level since. The RBNZ will likely be disappointed the resilient NZD did not extend losses that ensued post the mention of ‘intervention’.

The NZD/AUD that was knocked lower after the AU employment report, then continued to drift lower overnight. It sits at 0.9220 this morning. Crucial support is now eyed around 0.9160, which has marked the lows for the cross since the start of the year.

There was significant volatility in the NZD/EUR overnight. This occurred around the ECB’s policy announcement and subsequent press conference (see Majors). From intra-night lows around 0.6180 the NZD/EUR now sits at 0.6240.

Today NZ crown financial statements and electronic card transactions will be released, although neither is likely to be a key influence on the NZD. For now, NZD/USD support is seen approaching the 0.8600 level.

Majors

The AUD was amongst the strongest performers and the EUR the weakest, over the past 24-hours.

Equity markets eked out further positive returns overnight, as our global risk appetite index (scale 0-100%) inched up to 72%. This was despite separatists in the Ukraine’s Donetsk region stating they would proceed with a referendum.

Meanwhile on the Central Bank front, ECB President Draghi managed to steal the limelight from Fed Chair Yellen. Testifying to the Senate, Yellen largely reiterated her previous day’s messages. However, with reference to US Treasury yields she did specifically say; "Interest rates are unlikely to begin rising until we are in a strong economic recovery".

But it was ECB President Draghi’s comments that inspired the greatest currency response. Initially, as the ECB left rates unchanged the EUR surged higher, reaching toward 1.4000. However, it fell sharply soon after, as Draghi said the exchange rate was a "serious concern", and the Bank stands ready to act "next time" (see Fixed Interest). The EUR/USD now sits at 1.3860.

The result was that the USD index was catapulted from intra-night lows close to 78.90 to its current levels above 79.30.

The best performing currencies however were the CAD and the AUD. The AUD was launched higher yesterday afternoon after a stronger than expected AU employment report. While the participation rate remained steady, 14.2k jobs were added (8.8k expected) and the unemployment rate fell from 5.9% to 5.8%. The AUD/USD popped from 0.9320 to sit at 0.9370 this morning. Today the RBA will release its statement on monetary policy.

The UK will be in the spotlight tonight with the release of the UK trade balance, industrial production and the NIESR GDP estimate for April. Still, with the GBP/USD close to five year highs, at 1.6940, data will not easily inspire further gains.

Fixed Interest

NZ swaps and bonds pushed another 3-4bps lower yesterday. Overnight, US 10-year yields traded between 2.58% and 2.63%.

Continuing in the sentiment inspired by RBNZ Governor Wheeler the previous day, NZ swaps pushed lower. NZ 2 and 5-year swap now sit at 3.94% and 4.41% respectively. There is steady rather than strong paying demand from the SME sector and mortgage book. Meanwhile, offshore investors appear happy to receive NZ rates on the expectation the RBNZ will not deliver, even much-reduced OCR hike expectations. At current levels, even accounting for the risk of a pause soon in the OCR hiking cycle, we see value in hedging over a 2-4-year timeframe.

Meanwhile, the yield on NZGB23s has dipped even lower to 4.28%. Limited supply is a key issue assisting the rally, in addition to the rally in bonds offshore. In this regard, next Friday’s DMO auction of $200m of nominal bonds will be of interest. Also the DMO’s funding announcement in conjunction with next Thursday’s Budget will also be closely watched.

The upside surprise in yesterday’s AU employment report saw AU yields nudge higher. This resulted in NZ-AU 2-year swap spreads dipping toward the bottom of recent ranges, currently at 109bps.

Overnight, both the Bank of England and ECB announced interest rates. The BoE left rates unchanged without any surprise. While the ECB also left rates unchanged it managed to garner significant market response from its commentary. The ECB stated that despite its inaction this time, the governing council is comfortable with acting "next time". First it wants to see staff projections that will come out in early June. German 10-year yields fell from 1.48% to 1.45% on the comments. The likes of Italian 10-year bond yields dipped almost 10bps, to new lows around 2.92%.

Meanwhile, across the Atlantic, an auction of long-dated US Treasury bonds attracted lackluster demand, given their strong recent rally. The yield on US 10-year yields traded between 2.58% and 2.63%, sitting around 2.60% currently.

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