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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD was the strongest performing major currency overnight, gaining 0.4% against the USD to 0.8670.

In a night where bond markets seemed to express a view that US, EZ, and UK bond yields would remain low for longer, we find it unsurprising that the NZD outperformed. The combination of subdued US bond yields and ultra-low currency volatility has kept the NZD lofty (as well as the AUD and a swathe of emerging market currencies). Until those factors change, it is difficult for the NZD to maintain a downward track, as fundamentals suggest it should.

Yesterday’s local releases had little bearing on the currency. The retail sales report for Q1 2014 registered a solid 0.7% m/m gain, with upward revisions to the previous quarter. While this disappointed the market in a headline sense, the small sell-off was quickly reversed.

The themes covered in the RBNZ’s Financial Stability Report came as no surprise to the market, And despite an unusually long press conference, the Bank’s leadership were careful not to make waves on the monetary policy front. The comment that the Bank was looking at exchange rate implications for the interest rate track are no different to the message espoused at the April OCR Review, not to mention last week’s speech.

The BNZ-BusinessNZ PMI is the local data release today, and is unlikely to attract more than a passing interest. With the thrust of the NZ Government Budget already well known, it is unlikely the official release will see any substantial reaction. The session should be fairly subdued as markets hunker down for Fed Chair Yellen’s speech tonight.

Majors

The USD had a mixed performance against the majors overnight, in a session which focussed more on bond markets than on currencies (see Fixed Interest).

The GBP was the weakest performing major currency, despite continued improvement in UK labour market metrics. The unemployment rate slid in line with expectations from 6.9% to 6.8% in March. In amongst the detail, employment growth remained impressive but wage growth continues to be subdued.

The Bank of England’s quarterly Inflation Report had more bearing on the currency, with Governor Carney giving little indication that UK rates would rise earlier or further than previously signalled. In the context of breathless reports in the UK newspapers that the Bank would signal a greater readiness to tighten policy, the even tone clearly disappointed the market. Implied rates in futures markets fell by 10bps, and the GBP/USD dropped 0.3% to 1.6770.

The JPY outperformed against the USD overnight, gaining 0.4% to 101.80. The Bank of Japan and the Abe administration will certainly be watching this drift towards 100 with consternation. Diminishing expectations that the Bank of Japan will imminently introduce a new round of monetary stimulus has seen the JPY strengthen from above 104 in early April.

The RUB gained for a third day, as markets continue to expect that the war of words between Russia and the West (with regard to the Ukraine) will not escalate considerably. Earlier this week, the European Union unveiled a further round of sanctions that will not faze Russia from an economic standpoint. With the Europeans clearly reluctant to take a stronger stance, the RUB has risen 2.0% against the USD over the past three days.

Tonight, markets will largely ignore the swathe of incoming data in favour of watching Fed Chair Yellen address the US Chamber of Commerce, as part of National Small Business Week. Comments on the economy will be unavoidable, though Dr Yellen has recently discovered a Greenspan-like ability for obfuscation. Nevertheless, every word will be scrutinised.

Of the data that are due, the final reading for Euro-zone inflation for April, and the (only) reading for US inflation for the same month will likely be highlights. US industrial production, the Philly Fed Index, and the NAHB housing market index may also attract attention.

Fixed Interest

NZ swap yields fell by 2bps across the curve yesterday. The rally was more reflective of that seen in US government bonds the night before, rather than a rather solid NZ retail sales report (see NZD). The 2-year swap yield closed 2bps lower at 3.99%.

Overnight, government bond yields fell sharply, led by a 10bp fall in the UK 10-year to 2.58%. The US 10-year benchmark dropped by 7bps to 2.54%, a new 2014 low and the lowest since October last year. Mounting expectations of a fresh round of ECB easing in June, along with unwillingness from both the US Fed and Bank of England to signal rate hikes, appears to be the primary driver of this squeeze lower in year.

The fall in US bond yields came despite a punchy inflation report released overnight. US producer prices jumped from 1.4% y/y to 2.1% in April, the fastest pace in two years. Some analysts expect this will drive core consumer inflation above 2.0% in short order. That will certainly get the Fed’s attention. Mounting inflationary pressure will force it reassess its outlook for low rates, and may prompt the market to price in a higher chance of rate hikes by the middle of 2015.

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to www.research.bnz.co.nz.

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