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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD was the standout performer amongst the majors overnight, rising 0.7% against the USD, to 0.8730.

Part of this is due to wider USD weakness following a woeful second-estimate of US Q1 GDP (see Majors). But the NZD was on the rise before that result, and continued to rise afterward, where other majors saw their gains pared.

There doesn’t seem to have been any news or data that sparked this outperformance. We suspect that that NZD bulls were looking for a breach of 0.8700 once again, and got lucky with the US data.

The relative outperformance meant that NZD also saw outsized advances on the crosses, taking the NZ TWI back toward post-float highs at 81.20. Certainly this won’t be appreciated by the RBNZ. We see the Bank hiking in July to get that first 100bps under its belt, before pausing for reflection through to December.

Today’s local LVR data will be of little interest to the NZD. For the moment, 0.8750 looks like the level to beat, having held on Tuesday, ahead of the more serious resistance at 0.8780. The 0.8670-8680 region continues to provide decent support, and looks unlikely to be challenge in the Asian session at least.

Majors

The US dipped lower last night, as the revised estimate for Q1 GDP printed much worse than expected. That said, most major currencies were only modestly stronger against the USD for the session.

The second estimate for US Q1 GDP came in at a -2.9% annualised rate, a much sharper fall from the original -1.0% than had been anticipated (the consensus pick was for -1.8%). This was the worst quarterly reading since Q1 2009, but much of the weakness can be attributed to the extreme weather early in the year. Most analysts expect a strong rebound in Q2, which should show growth at +3.5%, before averaging at +3.1% for the second half of 2014, according to a Bloomberg survey.

But on the day, the headlines certainly looked bleak. Compounding the USD’s woes was softer durable goods data. Exclude the volatile transportation component, durable goods orders fell by 0.1% m/m in May, against expectation of a 0.3% gain. One bright spot within US data overnight was that capital goods orders non-defense ex air (i.e. business investment) rose faster than expected at 0.7% m/m.

The USD gapped lower by about 0.3% against the majors, but has pared back some of that loss. The dip took the US Dollar Index through its 200-day moving average, and it looks likely to close below that for the first time since late May. With US bond yields drifting lower and the Fed seemingly reluctant to talk a hawkish game, the current softness in USD is understandable.

That said, we retain a constructive view on the USD, banking on a US recovery that forces the Fed’s hand, especially on the inflation front. Tonight’s main event will be an update to the Feds’ preferred inflation measure. Core PCE deflator is picked to rise to 1.6% y/y in May, from 1.4% previously, well on its way to the 2.0% target. We expect this to spark further debate on whether the Fed is perhaps being too complacent on inflation, which would be USD supportive.

Other news: -US Markit Services PMI 61.2 vs 58.0 exp.

Fixed Interest

NZ swaps pushed down 1-2bps yesterday. Overnight, US 10-year yields dipped below 2.53% after the release of US GDP but have returned to sit at 2.55%.

In the absence of domestic data releases, NZ swaps shifted down across the curve, with 2 and 5-year closing at 4.17% and 4.55% respectively. We see fundamental 2-year ‘fair value’ at 4.40% based on our OCR track (reaching 5.0% by early 2016). However, near-term we expect to see receivers likely to return at 4.20%, capping yields.

In the NZ bond space the focus remains on the imminent launch of the new NZGB 2027 bond. In the run up to the actual issuance date (yet to be confirmed) we could see some selling of longer-dated NZGBs (21s,23s) in order to free up capacity. We would therefore not be buyers of NZGB23s on spread to AU or US ahead of the tender, despite spreads moving toward/above the top of recent ranges.

Overnight, the latest revision of US Q1 GDP was released. It showed GDP growth revised down to -2.9%q/q annualised (-1.8% expected). May durable goods also disappointed. US 10-year yields gapped from 2.57% to below 2.53% on the results but later returned to trade above 2.55%.

Today is another relatively quiet day on the domestic agenda, with only the RBNZ’s latest LVR data scheduled for release. Since regulations were implemented last October, high LVR loans have fallen well below the 10% ‘speed-limit’ enforced by the RBNZ.

Tonight, all eyes will be on the release of the US PCE deflator (the Fed’s preferred inflation measure). Consensus expects a tick-up to 1.8%y/y, keeping the Fed on its toes. It may also test the Fed’s Chair’s recent statement that the recent rise in US inflation indicators was "noise".

Elsewhere, all eyes will be on the Bank of England’s Governor, Carney, as he speaks in London. He has recently come in for some flak by seeming to flip-flop on when the Bank envisages raising rates. The market currently prices a first hike by February next year.

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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