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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 very similar level to yesterday morning, just below 0.8550 currently.

In a quiet day, the NZD/USD made a bid for the 0.8580 level early yesterday afternoon. After this failed the NZD/USD then drifted lower overnight, succumbing to broad USD strength (see Majors). As a consequence, the currency is back at similar levels to yesterday morning, as the market once again awaits the Fonterra payout announcement.

It is likely the payout for the 2014/15 season, may be announced this morning. We expect 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. The initial knee-jerk response to this could see the NZD/USD test support around 0.8500. This level has marked the lows on the NZD/USD since mid-March.

Otherwise the key release to watch today is the ANZ business confidence survey. This currently remains at highly elevated levels, so some fall could easily be absorbed without threatening growth forecasts. More interesting however may be the survey’s pricing intentions components. The RBNZ tracks these for signs of inflationary pressures.

Meanwhile the NZD/AUD has slipped a little further overnight to 0.9230. Near-term crucial support for the cross is eyed in the 0.9160-80 window. More broadly we see the NZD/AUD trading in a 0.9200-0.9400 range to year-end.

Majors

A stronger USD was the key theme as US and UK markets returned from their respective Monday holidays.

Equities inched a little higher in Europe and the US as our global risk appetite index (scale 0-100%) remains at a fairly hearty 78%. US bond yields remained tightly range-bound.

There were a handful of 2nd tier US data releases overnight. April durable goods orders surprised with a modest 0.8% rise, mostly due to a surge in defence orders. US consumer confidence was shown rising to 83.0 in May (81.7 previously). This likely reflected improving labour market conditions along with the recent rise in equity prices and decline in borrowing costs. This underpinned a steady rise in the USD index that took hold from last evening. From 80.20 it now sits just below 80.45. Resistance is seen at 80.60, the early April highs.

Both the EUR and GBP weakened in this backdrop. The EUR will likely continue to feel some pressure heading into the ECB’s June 5 meeting. President Draghi indicated yesterday that policy makers are ready to add further stimulus to the regions’ reluctant economy. The EUR/USD sits at 1.3630 this morning.

Meanwhile the USD/JPY briefly put its nose above the 102.00 level early this morning. It has subsequently slipped back to sit just below that level. However, any further JPY weakening would be welcomed by the Bank of Japan as it strives for its 2% inflation target.

Today, AU construction work done will be the key data release across the Tasman. Tonight, German and Eurozone consumer confidence and business climate indicators will be released along with German employment data. Consensus expects German unemployment to remain steady at 6.7%.

Fixed Interest

NZ yields closed down 1-2bps yesterday. As the US market returned after Memorial Day, US 10-year yields traded tight ranges above 2.52%.

In the absence of local data releases yesterday, NZ swaps closed down slightly, with 2-year at 3.93% and 10-year at 4.74%. The yield on NZGB23s has once again slipped just below 4.30%. NZ-US23s spreads sit about mid-range at 194bps. Similarly, NZ-AU spreads sit at 64bps.

As Northern hemisphere markets returned from their Monday holidays, they absorbed a host of 2nd tier US data releases. However, none were sufficiently notable to nudge US 10-year yields out of a fairly tight 2.52%-2.55% range. Meanwhile German equivalents continued on a fairly steady downward path, to trade at 1.39%. Peripheral European spreads to German bunds failed to extend their post European-election-inspired compression.

Today will bring the domestic data highlight of the week, in the form of the ANZ business confidence survey. Of particular interest will be the pricing intentions components of the survey. The RBNZ will be watching these closely as leading indicators of inflation. There are no scheduled US data releases tonight, aside from MBA mortgage applications.

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