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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media


The NZD/USD is just 10 points away from its opening level yesterday morning, effectively unchanged at 0.8550. Price action against the crosses was similarly lacklustre. The US and the UK were on holiday, and markets simply took it easy. The NZD was no exception.

Don’t expect too much over today, either. There are no data due in our time-zone, so we expect markets to be fairly quiet ahead of US releases tonight.

One thing to watch out for is Fonterra’s payout forecast for the 2014/15 season, which we’re expecting sometime this week. This will likely see a first estimate in the range of $6.50 to $7.50 per kg of milk solids, well below the current season’s payout of $8.65. While onshore investors are like well aware of the dynamics dictating a payout in the region of $7 (falling milk prices, elevated NZD), we doubt many offshore investors are as prepared. We would not be surprised if the sticker shock is enough cause for the NZD/USD to test support at 0.8500.

Today we see support in the 0.8500-0.8520 region, and resistance at 0.8610.


No data, no liquidity - with the US and the UK offline for the day, there was little movement in currencies overnight. The US Dollar Index is just a smidge weaker, down 0.2% at 80.30.

The EUR saw modest gains against its peers, as investors returned to euro-area assets after the weekend’s elections. Most mainstream media headlines trumpeted the rise of far-right nationalist (and euro-sceptic) parties in France, the UK, and Greece. But markets took note of the fact that the (pro-Europe) governing coalitions in Greece, Italy, and Spain finished first in their countries. As a result, peripheral European bond yields and equity markets rallied. For one, Italy’s benchmark equity index gained 3.6% on the day. This dynamic helps explain why the EUR popped higher as European markets opened for trading. EUR/USD is 0.1% stronger at 1.3650.

In the hills above Lisbon, the ECB is holding what will be an annual retreat of policymakers and academics (purportedly Europe’s answer to Jackson Hole). ECB President Draghi slipped no market-moving comments in the various remarks he delivered, simply noting the need to be watchful for a potential "negative spiral" of low inflation and falling inflation expectations. Markets fully expect some further policy loosening at the 5 June meeting, most likely in the form of a rate cut.

We also watch developments in the Ukraine with interest. Newly-elect Ukrainian President Petro Poroshenko looks to be acting more decisively than the interim government in dealing with the separatist east. Ukraine’s military used fighter jets and paratroopers to deal with a rebel militia group that had taken over an airport terminal. Moscow will not be pleased by this apparent move toward retaking the east.

Tonight, a flurry of US data will attract the attention of a market hungry for directional cues.

Fixed Interest

It was a quiet day as markets anticipated holidays overnight in both the UK and US markets. NZ yields closed down around 3bps across bond and swap curves.

NZ 2-year swap is back at 3.95%, not far from April lows. The market continues to price almost a 90% chance of a 25bps hike from the RBNZ on 12 June, but only 125bps of cumulative hikes in the next two years. We anticipate the RBNZ will ultimately deliver more than the market expects. This provides hedging opportunities for borrowers. NZ 5 and 10-year swap rates also sit 3bps lower at 4.38% and 4.76% respectively.

In the absence of any direction from UK and US markets, German bunds traded fairly tight ranges overnight. 10-year yields traded between 1.40% and 1.43%. Meanwhile the mid-May surge higher in peripheral European spreads to ‘safe haven’ Bunds has been reversed. For example, Italian-German 10-year spreads that touched 195bps last week are now back at 157bps.

Today domestic markets will again be lacking catalysts. There are no NZ data releases scheduled. Tonight US durable goods orders, consumer confidence and the Richmond Fed manufacturing index will be released, which may provide some direction for Treasury yields.

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to

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