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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD has been amongst the weakest performing currencies over the past 24-hours, sitting at 0.8560 this morning.

The NZD was on the back foot from early yesterday morning, after the further decline in diary prices shown at the latest Global Dairy Trade auction. During the day, data was released to show very strong NZ net migration (4,080, s.a.). Indeed, aside from a spike in February 2003, the data showed the strongest net inflows of migrants in the history of the series (from 1982). The RBNZ is watching these data closely. They suggest greater demand and inflationary pressure, in the first instance.

The NZD/USD briefly rebounded last evening, to above 0.8590, but was unable to hold onto the gain. It sits around 0.8560 this morning. Key support remains just above 0.8500 which has market the lows on the kiwi since mid-March.

The most notable move on the crosses overnight was on the NZD/GBP. The GBP strengthened overnight, as the Bank of England’s minutes showed rates hikes are very gradually coming onto the horizon (see Majors). The NZD/GBP slipped from 0.5130 last evening to sit around 0.5070 currently. This is at the crucial support level that held in late April. A break below this level would open the way for a return to the magnetic 0.5000 level.

Today, the ANZ consumer confidence survey, and the RBNZ’s survey of inflation expectations will be released. More broadly, the tone of markets may be set by the release of the HSBC China PMI (1.45pm NZT). A disappointing result would take a toll on the NZD along with the AUD.

Majors

Over the past 24-hours the GBP has been the strongest performer while the USD index has also strengthened.

Market sentiment was fairly solid overnight as equities provided positive returns on either side of the Atlantic. While commodity prices were generally fairly flat there was a notable further rise in the WTI oil prices. It now sits at 104.50, equal to the highs it reached in mid-April.

Amongst currencies the GBP/USD showed some of the most notable moves. Last evening the Bank of England’s minutes showed the Bank is slowly creeping toward its first rate increase since 2007. Some committee members saw the arguments for a first rate increase as now becoming "more balanced". But all agreed they first wanted to see "more evidence of slack reducing". The GBP/USD was catapulted to intra-night highs around 1.6920, before returning to trade at 1.6900 this morning.

The US Fed minutes passed without too much drama early this morning. The April minutes showed the committee did not see increasing inflation pressures as an impediment to maintaining stimulus, aimed at the labour market. The USD index, which had been on an uptrend most of the evening declined a little after the release, to sit at 80.10 this morning.

Meanwhile, the JPY stepped higher last evening after the Bank of Japan refrained from announcing any further stimulus measures. The Japanese economy shows signs of weathering the early April tax increase. But the USD/JPY failed to break below 100.80, returning to trade at 101.40 this morning.

Today, the May HSBC China Manufacturing PMI will be released. Consensus expects this to remain in contraction, at 48.3. The outcome will likely impact on broad sentiment, and more specifically the AUD. The AUD/USD trades at 0.9240 this morning.

Tonight, all eyes will once again be on the UK as it releases its preliminary Q1 GDP reading. Consensus expects a solid 0.8% reading (3.1%y/y). Markit will also release PMI readings for the Eurozone and the US.

Fixed Interest

NZ swaps closed down 1-2bps yesterday. Overnight, US 10-year yields pushed up from 2.50% to 2.54%.

We believe the market is once again becoming complacent on the NZ OCR outlook. Only 54bps of further hikes are priced by year-end despite there being five more RBNZ meetings in that time. Further out, the market is only pricing a cumulative 125bps of hikes over the next two years. i.e. that the OCR would only be back at ‘neutral’ (circa 4.25%), 27 months into a tightening cycle, when the economy is expanding well above trend. We believe these expectations will be overshot on the high-side and therefore current swap rates offer good hedging ‘value’.

Yesterday’s data, in the form of very strong migration data also suggest a more hawkish tilt for the RBNZ, all else equal. Higher migration will add both to demand and inflation pressures. Meanwhile, the fact the NZ TWI is now1.6% below its early May highs will provide the RBNZ with some comfort, even as it remains 1.8% above the Bank’s forecast Q2 average.

Last night, US Treasuries had begun their sell-off ahead of the release of Fed minutes, and did not rally subsequently. US 10-year yields sit at 2.54% this morning.

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