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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media


The NZD continues to drift lower, with NZD/USD dipping its toes below the 0.8450 mark early this morning. Broader USD strength has the NZD 0.5% lower from yesterday.

It was a mixed performance against the crosses. With the AUD leading the majors lower overnight, the NZD/AUD continues to rebound from 0.9100, up marginally to 0.9140 today. On the other hand, the GBP’s relative outperformance means NZD/GBP slid further towards 0.50. Opening at 0.5050 today, this is its lowest since early March.

It is a busy calendar globally for our holiday-shortened week, and we are no exception. NZ releases are primary-sector focused, with three separate commodity price releases. First up today is the least timely of the three - NZ’s official Q1 Terms of Trade. It will likely show a small gain for the quarter which takes the index to a 40-year high. The recent declines in dairy prices are more for the Q2/Q3 averages. Tonight will see an update of that at Fonterra’s GDT auction, where we’d be more surprised to see a clear bounce than a further slip.

Today, momentum remains on the side of the bears, with initial support at 0.8416 eyed. That would mark a 50% retracement of the rally from the early February low to the early May peak. A breach of that would see a quick move toward 0.8350. On the topside, 0.8500 seems likely to hold.


The USD started the week on the front foot, as improving US manufacturing data looked healthier than European equivalents, which took a step backward. The AUD is weighed down by signs of a slowing property market.

A series of statistical mistakes by the ISM this morning saw some volatility around that institute’s closely-followed monthly manufacturing index. After an initial negative print and two corrections, the index apparently improved in line with market expectations in May, rising from 54.9 to 55.4. This looks to be in line with better recent results from regional surveys, as well as the Markit national PMI.

These marginal improvements looked even better when one compared them with the final readings of European PMIs. While France improved by 0.3, Germany slipped 0.6, taking the euro-zone index down from 52.5 to 52.2, the lowest since November 2013. Not helping Europe’s cause was a soft German flash inflation reading, which slipped more than expected from 1.3% y/y to 0.9%. This presents downside risks to tomorrow’s flash estimate for the euro-zone, where the consensus expects just 0.6% y/y.

Little wonder that EUR/USD is 0.3% lower today, sitting just below 1.36. The USD is stronger across the board, gaining against nearly every major and emerging market currency (a 0.01% loss against the Israeli shekel is ruining the USD’s clean sheet). The US Dollar Index is up 0.3% to 80.6, the strongest it has been since early February.

The AUD was smacked lower yesterday by another fall in building approvals to the tune of 5.6% m/m in April, driven by a sharp drop in the volatile apartments component. The market was expecting a modest rise. With building approvals falling in 6 of the past 7 months, the steam does seem to be coming out of the housing market. The 1.9% fall in house prices across the state capitals in May adds to this impression. With this taking some pressure off the RBA to tighten policy, the AUD is 0.7% lower this morning at 0.9250.

The divergence in economic data tone on either side of the Atlantic last night is a precursor to what is expected in this week’s marquee market events: the ECB policy decision (Thu) and the US employment reports (Fri). The ECB is almost certain to cut its deposit rate to below zero, and will likely introduce a long-term financing program in an effort to kick inflation higher. On the other hand, the US non-farm payrolls are expected to grow at a solid (if unspectacular) pace of 220k.

Today we’ll be watching AU retail sales, with the RBA unlikely to stray too far from a consistent ‘on hold’ message at its meeting later today. Tonight, euro-zone inflation will be the highlight.

Fixed Interest

NZ swaps ended last week 5-6bps higher. The yield on US 10-year bonds now sits at 2.54%.

As US yields have rebounded from their lows, NZ yields have followed. We continue to see steady if unspectacular paying via the mortgage book and from SME businesses, looking to take advantage of the recent dip in yields. NZ 2-year swap closed up 5bps, at 3.93%, while 10-year closed up 6bps at 4.73%.

NZ bonds also sold off. The yield on NZGB23s now sits at 4.25%. Meanwhile, while NZ observed Queen’s birthday yesterday, US bonds sold-off quite sharply at the start of the week. Initially, US yields showed some volatility around the release of the US ISM last night which came in at 55.4 in May. But the more enduring impact was for yields to rise from around 2.48% to 2.54%. Potentially, the survey’s pick-up in prices paid (to 60.0 from 56.5) may also have contributed. Aussie bond futures have followed early this morning, suggesting NZ yields will open higher this morning.

Across the Tasman it will be all eyes on the RBA today, as it announces its target rate. The RBA is seen as being on hold for an extended period. Therefore the focus will be on commentary regarding the labour market, the AUD and the investment outlook. The market currently prices around a 20% chance of a 25bps cut from the RBA in the coming nine months. AU April retail sales will also be released today. Domestically, the Q1 NZ terms of trade data will be released. We expect these to mark a 40-year peak, before moderation occurs in following quarters.

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

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