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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD cooled off slightly on Friday, paring its post-RBNZ gains. The NZD/USD fell 0.3% to 0.8670.

The dip lower was in line with the AUD and much of the emerging market set, likely a reflection of cautious risk sentiment given developments in Iraq (see Majors).

The GBP’s outperformance over Friday helped shunt NZD/GBP lower by 0.5% to 0.5110, back toward its pre-RBNZ levels. The NZD has held its gains against the EUR, consolidating, just above the 0.6400 level.

Coming up this week, the Q1 GDP report looks to be the marquee event. We are expecting a year-on-year gain of 3.7%, building toward the 4.0% mark by the end of the year. While the information due this week is fairly dated, we suspect it will serve to remind offshore investors of NZ’s outperformance on the global scale, especially in the wake of the RBNZ’s rate hike and stern commentary last week.

Today, initial resistance is at 0.8700, with support around 0.8630.

Majors

Price action over Friday was relatively subdued after a fairly hectic week. This morning, market sentiment is likely to be dictated by rising violence in Iraq and (to a lesser extent) the Ukraine.

Civil war looks to be an apt description for events currently unfolding in Iraq, OPEC’s second-largest oil producer. Over the weekend, Sunni extremists claimed to have executed 1,700 Iraqi Army soldiers, supposedly all Shiites. Even if the claim is proved to be unfounded, the intent (to fuel sectarian violence) is likely to be successful. Oil prices edged higher on Friday, with WTI up 0.4% after Thursday’s 1.9% surge.

The prospect of rising oil prices continued to take its toll on emerging market currencies, which generally weakened against the USD on Friday. Worst hit was the Indian rupee, which lost 0.9%.

Ukraine will observe a national day of mourning today for 49 military personnel killed as a plane was shot down by rebels. The escalation comes amid reports of Russian tanks coming into the hands of separatist forces. Adding to tensions, Russia is threatening to shut off gas supply to the Ukraine if it misses a deadline to pay $1.95b of debt for past supplies. The deadline is 6pm Monday GMT.

Quite separately, the GBP is up 0.7% from early Friday levels after BoE Governor Carney struck an unexpectedly hawkish note in a speech to London’s bankers. He said, "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced... it could happen sooner than markets currently expect". This, after a distinctly dovish quarterly Inflation Report just a few weeks ago, provoked an appropriate surge in GBP to 1.6970, within striking distance of the 1.70 level that was rejected in early May.

This week, all eyes are on the US Federal Reserve (Thu morning), with growing speculation that the central bank might be forced to acknowledge (modestly) rising inflation. Today, the RBA’s Chris Kent comments on the labour market, which will be of great interest to Australia watchers. Later on, the US Empire manufacturing index and industrial production will attract attention.

Other news: -US core PPI -0.1% m/m vs +0.1% exp. -US U of Mich. consumer confidence 81.2 vs 83.0 exp.

Fixed Interest

The NZ swap curve flattened on Friday as short-end yields continued to push higher while long-end yields followed offshore lower. US 10-year bond yields ended the week at 2.60%.

The short-end of the NZ swaps curve extended its post-MPS moves on Friday. NZ 2 and 5-year closed up 5 and 3bps respectively to end the week at 4.18% and 4.57%. 2-year is now at its highest level since July 2010, although 5-year is still almost 20bps below January highs.

The recent rapid rise in yields has reduced ‘value’ in the swaps curve. However, we still see decent value in hedging interest rate risk on a 2-4-year time horizon based on our OCR forecasts. We see current 2-year ‘fair value’ around 4.50%. We also see 2-year approaching 4.80% by year-end.

Longer-dated NZ swaps followed the decline in offshore yields on Thursday night. NZ 10-year swap ended Friday 1bps lower at 4.91%, resulting in a flattening of the 2-10s swap curve to 74bps, its lowest levels since January 2009. We expect further flattening to a trough of 50bps in the year ahead.

Meanwhile NZ bond yields pushed higher by 3-4bps across the curve on Friday. The yield on NZGB23s now sits at 4.48%, back to where it traded in late April. We see the yield on 23s at 4.95% by year-end, although this will be an outperformance relative to swap on our forecasts.

On Friday night, US 10-year yields pushed up from 2.60% to 2.64% before returning to their original level.

The highlight of the domestic agenda for rates markets this week will be Thursday’s Q1 GDP release. Consensus expectations are already pretty high at1.1%q/q (3.7%y/y), in line with our own and the RBNZ’s forecasts. This limits the chance of further upside surprise. Today, the PSI will be released. We would not be surprised to see some moderation in the same vein as last week’s PMI.

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to www.research.bnz.co.nz.

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