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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD sits a little higher, at 0.8520, this morning.

Yesterday’s data showed NZ Q1 manufacturing volumes rose 0.5% in the quarter. This is slightly lower than our expectation. Combined with yesterday’s wholesale trade data this has seen us finalise our Q1 GDP pick at 1.1%q/q (1.2% previously). Never mind the decimal point, anything around this pace is strong and well above trend. Recall the RBNZ (in its March MPS) had 0.8% forecast for Q1 GDP. We’ll see if they have upgraded that in Thursday’s June MPS. As for the NZD, it appeared relatively nonchalant during much of the day before pushing a little higher overnight. It trades around 0.8500 currently. Support is eyed around 0.8470. Resistance will likely be encountered on any probes toward 0.8550.

Strength in the NZD relative to its European peers was the most notable theme on the crosses overnight. The EUR is belatedly on the decline following last week’s ECB announcement, seeming to drag the GBP with it. The NZD/EUR pushed up from 0.6250 last evening to sit at 0.6290 this morning. Similarly the NZD/GBP pushed up from 0.5060 to sit just below 0.5090 currently.

Today, only NZ electronic card transactions data are scheduled for released. However, all eyes will be on the RBNZ’s meeting tomorrow morning (9am NZT). We suspect the RBNZ will show sufficient commitment to its rate hiking process to extend the near-term bounce in the NZD/USD. By year-end however, we still look for the NZD/USD to be lower and to break below the 0.8000 level.

Majors

Overnight the EUR/USD continued recent underperformance while the NZD outperformed along with the JPY.

Fairly quiet markets overnight appeared to hint at the beginning of the Northern hemisphere summer. Equities returns were clustered close to flat on either side of the Atlantic.

The EUR/USD continued its seemingly delayed response to the ECB’s policy loosening measures and commentary last week. It gapped through key support just below 1.3600 to sit at 1.3540 this morning.

The GBP/USD was also dragged lower. From 1.6810 last evening it now sits just below 1.6750. The focus for the GBP this evening will be the release of the UK employment report. The performance of the UK labour market has been one of the strengths of the economy through the recession. Consensus expects the April ILO Unemployment Rate to fall to 6.7% from 6.8% previously. We would not be surprised to see this measure hold steady at 6.8%.Either way, it is unlikely to be sufficient to engender near-term resurgence in the GBP/USD that remains around 1.3% below early May highs.

Yesterday’s May NAB business survey showed confidence survived the AU Budget intact, steady at +7. It was notable business confidence held steady, unlike the plunge in consumer confidence during this period. However current conditions did ease again, to -1 from 0 previously. The AUD remained on an ascending path after the release. The AUD/USD sits just below 0.9370 this morning, having touched intra-night highs above 0.9380. Today the focus for the AUD will be the Westpac consumer confidence reading for June.

It is relatively light on the US data front tonight. US weekly mortgage claims will be released along with the May Budget.

Fixed Interest

NZ swaps and bond yields pushed up a further 2-3bps across curves yesterday.

Good pay-side flow from the mortgage and SME sectors can once again be seen. However, there are still offshore receivers willing to take the other side of this position, preventing a sharp rise in swaps. 2 and 5-year swap closed at 4.00% and 4.45% respectively. 2-year is now around 13bps above its late May lows as the market prepares for tomorrow’s RBNZ meeting.

A 25bps hike by the RBNZ tomorrow is now virtually fully priced. The attention will therefore focus on the Bank’s commentary. The market now prices less than 125bps of OCR hikes in the coming two years. The RBNZ’s previously published (March MPS) 90-day bank bill track implied 200bps of hikes by this time. Therefore, even if the RBNZ were to slightly tweak its 90-day track to build in a little near-term flexibility, it will likely still be notably more hawkish than current market pricing.

We anticipate a push higher in yields post the MPS. However, we are also aware that global investors, immersed in European deflation fears, and the backdrop of low US inflation and a reluctant Fed, will be waiting in the wings as receivers.

In fairly quiet markets overnight that appeared to beckon the start of the Northern summer, equities were fairly flat while US Treasuries sold-off. The yield on US 10-year bonds pushed up from 2.59% to 2.64%.

Today, NZ electronic card transactions data will be released. Across the Tasman the Westpac AU consumer confidence survey is due. Tonight, a key focus will be UK employment data.

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