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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD sits 1.6% higher than 24-hours ago, at 0.8680 this morning. It was the best performing currency by a large margin, after the RBNZ’s meeting yesterday.

The NZD/USD gapped higher after the RBNZ’s announcement yesterday morning (see Fixed Interest). It was not so much that the RBNZ changed its tune, but rather that it did not, that caught the market by surprise. It remains committed to bringing the OCR back to ‘neutral’ in the first instance. From 0.8550, the NZD/USD initially surged to above 0.8620. It then settled into a steady overnight ascent to sit at 0.8680 this morning.

Unsurprisingly the NZD has also surged higher on all the crosses. Most striking has been the push higher in the NZD/EUR. From below 0.6320 pre-MPS, the cross now trades at 0.6400. This is the highest level on the NZD/EUR since May 2013.

Equally, the NZD/AUD received a shot in the arm yesterday morning. From close to 0.9100, the cross now trades around 0.9220. This morning the BNZ Manufacturing PMI will be released, along with NZ food prices. Important for the AUD and the NZD/AUD this evening will be the release of Chinese data (see Majors). Any disappointment in the data would likely weigh more heavily on the AUD than the NZD and visa-versa.

The next big event for the now quite heady NZD/USD will be next Thursday’s US Fed meeting. In the meantime, resistance is now eyed at 0.8700, ahead of May highs at 0.8780. Support will be found approaching 0.8600.

Majors

The USD was broadly softer overnight after disappointing US retail sales data. The NZD was the outstanding performer.

Equity markets were a softer overnight, and the oil price surged. Contributing were disappointing US retail sales data and headlines highlighting growing unrest and violence in Iraq. In recognition of the seriousness of events US President Obama referred to it as "an emergency situation", and would not rule out potential US intervention. Our risk appetite index has slipped from 82% to 79%. The WTI oil price is up 1.90%, to US$106.40/barrel. This is its highest level since it spiked in April 2011.

The "safe haven" appeal of the JPY helped underpin its performance. The USD/JPY declined from 102.10 to 101.70. However, demand for the USD was undermined by a softer than expected May US retail sales report (0.3%m/m vs. 0.6% expected). The USD index slipped from 80.80 to below 80.60. The JPY will be in the spotlight today as the Bank of Japan meets. However, it is likely too early to expect further action to ease policy as BoJ commentary has been a little more upbeat of late.

The AUD also sits a little higher this morning. Yesterday’s AU employment report showed the unemployment rate steady at 5.8%. However employment growth disappointed at -4.8k (10k consensus expectation). The AUD/USD suffered initial volatility around the release but later in the evening settled into a steady ascent. It sits at 0.9420 this morning, its highs since mid-April. Resistance is now eyed at 0.9460.

There are no AU data scheduled today but there is a cluster of China data releases this evening that will impact on AUD sentiment. China industrial production, fixed asset and retail sales data will be released. Consensus expects industrial production growth to tick up to 8.8%y/y in May.

Tonight, the US releases the University of Michigan consumer confidence indicator for June and the April Eurozone trade balance is due.

Fixed Interest

NZ swaps pushed higher by 5-10bps across the curve, following yesterday’s RBNZ meeting. Overnight, US 10-year yields declined to 2.59%.

The RBNZ stuck firmly to its guns yesterday. It remained committed to the process of ‘normalising’ the OCR. Its published 90-day bank bill track was almost identical to the March MPS, still suggesting an OCR at 5.00% by late 2016. There was also no hint of a pause at the next RBNZ meeting. We continue to look for a further 25bps hike in July before a pause during the election process.

The RBNZ repeated its mantra that the NZD at current levels was "unsustainable". However, notable by its absence was any direct reference to adjusting the OCR track due to moves in the currency. The market was clearly taken by surprise that the RBNZ did not soften its previous stance. NZ swaps jumped higher. From 4.03%, NZ 2-year swap closed at 4.13%. This is above the 4.10% level that had marked the previous highs year to date. 5-year also pushed higher by 8bps to close at 4.55%. The 2-10s curve flattened 5bps to 79bps.

Meanwhile the sell-off in NZGBs was more muted. The yield on NZGB23s rose just 3bps to 4.45%. This saw swap-bond spreads notably wider on the day.

NZ-AU spreads pushed higher, as a disappointing AU labour market report, kept a cap on AU yields. NZ-AU 2-year swap spreads broke out of long-held ranges to sit at 130bps this morning. We continue to expect this spread to peak around 150bps by year-end.

Overnight, US 10-year yields dipped on the back of softer than expected May US retail sales data. (0.3%m/m vs. 0.6% expected). In addition, an auction of 30-year US bonds attracted the highest demand in more than a year. From around 2.65%, US 10-year yields have slipped to 2.59%.

Today, the BNZ Manufacturing PMI will be released along with NZ food prices. The Bank of Japan is set to meet today, although consensus expects no major changes to policy.

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