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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD sits at a similar level this morning, around 0.8560.

The NZD/AUD came under initial heavy selling pressure after the release of a stronger than expected HSBC China PMI yesterday afternoon (see Majors). Despite this, the NZD/USD managed to pop higher on the release. It reached toward 0.8590 last evening before succumbing to broader USD strength this morning. It now sits at 0.8560, with key support still seen just above the 0.8500 level.

Meanwhile, the NZD/AUD slipped toward 0.9250 early last evening, before re-establishing its composure. It then climbed steadily overnight to sit just below 0.9290 this morning.

The NZD was bolstered on most other crosses after the China data release. But it failed to really extend those gains overnight. The NZD/GBP still hovers above 0.5070, after last night’s UK data releases failed to inspire any further rally in the GBP (see Majors).

Today, data is thin on the ground locally. There will not be too much data-wise to provide currencies will direction until German and US data releases tonight. The low volatility NZD trading environment will likely continue into week end. The NZD/USD appears comfortably sandwiched between 0.8510 and 0.8610.

Majors

USD strength has been the key theme overnight. The JPY has been the weakest performer over the past 24-hours.

Market sentiment remained fairly steady overnight as equities eked out further modest returns. Our global risk appetite index (scale 0-100%) continues to hold up at a healthy 78%. Meanwhile the USD index was on a steady uptrend from late last evening. The move seemed unrelated to mixed US data releases early this morning. While the Markit US manufacturing PMI beat expectations (56.2 vs. 55.5), existing home sales data was disappointing. Nevertheless, the USD has appreciated against most of its peers over the past 24-hours. The USD index sits above 80.25 this morning.

Early yesterday afternoon, the HSBC China PMI reading for May surprised to the upside (49.7 vs. 48.3 expected). It showed manufacturing activity still marginally in contraction, but signaled downward pressure on the sector had eased markedly. The most notably initial response was seen in the AUD. The AUD/USD gapped form 0.9220 to 0.9260 on the result. It later pushed above 0.9270 but was unable to hold onto the gain overnight, returning to sit below 0.9220 this morning.

The general improvement in sentiment following the China data release undermined the ‘safe haven’ appeal of the JPY. The downtrend in the JPY then continued overnight. From 101.50 the USD/JPY now trades at 101.80.

There was a plethora of UK data releases overnight, which created some volatility for the GBP. The GBP/USD had crept higher earlier in the evening, to 1.6910, in anticipation of the data. However, the data failed to exceed expectations. Q1 GDP came in line with expectation at 0.8%, although consumption was slightly higher than expectations, while investment was below. The GBP/USD then fell back to earth, to trade at 16860 this morning.

The EUR/USD also suffered some volatility around the components releases of its Markit PMI data. Overall the region’s May composite PMI came in line with expectation at 53.9. However, the EUR/USD slipped in the early hours of this morning against the stronger USD, to trade at 1.3650 currently.

It promises to be a relatively quiet end to the week for currencies. However, this evening the German IFO business survey will be released along with the final reading of Q1 GDP. US new homes sales data are also due.

Fixed Interest

Yields pushed higher across NZ curves yesterday. Overnight, US 10-year yields traded between 2.53% and 2.56%.

Following the release of the HSBC China PMI yesterday, AU yields pushed abruptly higher. The yield on AU 10-year bonds rose from 3.66% to 3.75%. Equally, the likes of AU 10-year swaps pushed up from 4.04% to 4.12%. This move then set the tone for the NZ market. NZ swaps closed up 3-6bps with a steepening of the curve. While 2-yer swap now sits at 3.98%, the 2-10s curve sits at 81bps. The NZ bond curve also steepened. The yield on NZGB23s rose 6bps to 4.31%. We reiterate that we suggest shortening NZGB duration as the yield on NZGB23s has dipped below 4.30%.

Overnight, as equities provided further modest returns, US Treasuries traded fairly tight ranges. The yield on 10-year has traded between 2.53% and 2.56%. While it is difficult to see the immediate catalyst for a sell-off in Treasuries, there is definite reluctance for yields to break below the bottom of 11-month ranges, at 2.47%.

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