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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD modestly underperformed on Friday night, to end the week at 0.8630.

There was little on the domestic agenda to drive the currency on Friday. The NZD/USD drifted slightly lower in the early evening before gluing itself to the 0.8630 level for the night. It ended the week just below this level.

On the crosses the NZD was slightly softer relative to both the GBP and the AUD. The NZD/GBP has dipped back to 0.5130, with near-term support now seen at the 0.5100 level. Meanwhile the NZD/AUD declined from above 0.9240 to end the week below 0.9220. A very solid band of support for the NZD/AUD sits between 0.9150 and 0.9160. This has marked the low on the cross’s trading range since December last year.

It should be a fairly quiet start to the week for the NZD, although look out for the market’s response to Chinese property data released at the weekend (see Majors). On the domestic front there is an array of 2nd tier data delivered today. The Performance of Services Index, PPI, and Capital Goods prices are all released this morning. But none are likely to be major market movers.

This week’s domestic highlights for the currency will arguably be Wednesday’s global dairy auction (early a.m. NZT) and NZ migration figures (10.45 a.m. NZT). The RBNZ has recently elaborated on both, with respect to its future OCR path.

Near-term, NZD/USD support is seen just below 0.8600, while resistance is eyed at 0.8690.

Majors

Currencies traded tight ranges on Friday. The GBP, CAD and NOK were slight outperformers.

On Friday night, equity markets eked out modest positive returns as our global risk appetite index (scale 0-100%) managed to cling on at 72%.

The main weekend news was the release of Chinese property price data. The official April data shows further evidence of a deflating bubble, with the number of cities reporting rising prices having declined to 44/70 from 56/70 in March. 8 of 70 cities reported price falls, double the March rate. This Chinese news might weigh slightly on the AUD this morning. So too might the weekend news that iron ore prices have dropped to a new post-2012 lows. The AUD/USD ended last week at 0.9360.

On Friday night, US data releases were mixed. While April US housing starts were notably stronger than expectations (13.2%m/m vs. 3.6% expected), the University of Michigan Confidences survey disappointed (81.8 vs. 84.5 expected). The USD index, experienced some intra-night volatility, but closed the night fractionally higher, just above 80.00.

The GBP was one of the strongest performing majors on Friday night relative to the USD. It briefly pushed above 1.6840 before returning to end the week at 1.6810.

Today should provide a relatively quiet start to the week. Japanese Machine Orders are the only offshore data release of note today. Tonight, is also fairly data-light with only UK house prices scheduled. UK data releases, the Bank of Japan’s meeting (Wednesday) and US Fed Speakers will be highlights this week in what otherwise is a relatively data-light week. The Fed’s latest Minutes are also scheduled for release early Thursday morning.

Fixed Interest

NZ swaps closed down 3-6bps on Friday. US 10-year yields crept up from 2.49% to 2.52%.

There was a sharp further flattening of the NZ swap curve on Friday. Longer-dated swaps followed the offshore decline in yields. The short-end held up comparatively well, supported by payside flow emanating from mortgage books. 5 and 10-year swap closed at 4.39% and 4.74% respectively. We expect to see corporate paying enticed back at these levels. 10-year swap is now at its lowest level since mid-August last year and some 60bps below its December highs.

We do expect further curve flattening, (2-10s) to a trough of 50bps in the year ahead (currently 78bps). But we anticipate this will occur by short-end yields rising faster than long-end yields as the OCR hiking cycle progresses.

Meanwhile NZ bond yields closed flat to up 1bps on Friday. Friday’s DMO tender of $200m of NZGB2020s was solid rather than stellar. The relative moves saw swap-bond spreads narrow 4-5bps on the day.

On Friday night, US Treasury yields pushed off their lows in the backdrop of modestly positive equities and mixed US data. Overall, US 10-year yields crept up from 2.49% to 2.52%.

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