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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD sat atop the G10 leaderboard for the second day running, as bulls sought a break higher. The NZD/USD is 0.4% stronger at 0.8770.

The NZD/USD spent most of the session tracking sideways, making most of its gains in a snap higher thanks to some exiting of short NZD/USD positions. Most analysts accept that NZD/USD should be lower on a fundamental basis - the Bloomberg median is at 0.83 by end-2014. But we are mindful that it is an expensive position to hold unless the currency is moving rapidly south.

The bulls looking for further upside must be frustrated by the failure to break the 6 May high of 0.8780. That said, with US data overnight giving little reason to bid the USD higher, those looking for a higher NZD likely still maintain the upper hand in the near term.

Today’s monthly trade balance data should not trouble the scorers. Should 0.8780 break, the three-year high of 0.8840 beckons. On the downside, support will become apparent around the 0.8700 mark.

Majors

The USD was little changed, as US inflation data printed largely as expected. The GBP outperformed as the BoE proposed mortgage restrictions that seem less onerous than feared.

The US inflation report overnight, which was to be the data highlight of the week, failed to spark any significant action as it essentially met economists’ expectations. The core PCE deflator rose from 1.4% y/y to pre-release expectations of 1.5% in May.

If anything, there was more attention paid to St. Louis Fed President Bullard’s remarks in a TV interview, who stated that he expects the first Fed Funds Rate hike in Q1 2015. The balance of his comments struck a similarly hawkish chord, including his observation that "The Fed is closer to its goal than many people appreciate…We’re really pretty close to normal". While the FOMC member does not have a vote on monetary policy this year or in 2015, his remarks are noteworthy due to a recent shift in his bias. Bullard has only recently strayed from broadly neutral into the hawkish camp.

In the UK, the Bank of England released a consultation paper proposing a new loan-to-income (LTI) ratio limit to mortgage lending. The proposed rule would see mortgage lenders unable to extend more than 15% of their new loans to borrowers with a LTI ratio at or greater than 4.5.

The market had expected some tightening of lending criteria, but these measures are fairly minimal. For one thing, BoE data show that around 10% of new mortgages for house purchases have a LTI rate of 4.5 or greater, so banks could actually skew their loan books further towards high LTI loans without running into the barrier. The GBP/USD bounced higher in relief, up 0.3% to 1.7030.

With the week’s data highlights already behind us, there is little to suggest we’ll get much price action into the week’s close. This morning sees the monthly Japanese inflation and employment numbers. Tonight, the U of Michigan consumer confidence is the only release out of the US.

Other news: -US personal spending rose by 0.2% m/m in May vs 0.4% exp.

Fixed Interest

NZ swaps closed up 4-6bps yesterday. Overnight, US 10-year yields dipped further, to 2.52%.

The push higher in NZ swaps yesterday was largely independent of offshore moves. This saw the likes of NZ-AU 2-year spreads push out to 145bps, and NZ-US3-year spreads to 337bps. NZ 2-year swap closed at 4.20%. We continue to see ‘fair value’ at 4.40% based on our expectations the OCR will reach 5.00% by early 2016.

NZGB yields also pushed higher yesterday, with the yield on NZGB23s, up 3bps, to 4.48%. Swap-bond spreads widened. The spread between NZGB23s and equivalent swap has widened to 38bps from recent lows close to 35bps. We expect further widening toward 55bps.

Overnight, US PCE deflator data came in close to expectation (core 1.5%y/y). However, US Treasury yields dipped across the curve on the result. US 10-year yields slipped from 2.56% to 2.52%. The fact speculative positioning in US 10-year Treasuries remains short suggests yields remain inclined to slip if data does not surprise to the upside. A 2.40-2.80% range may contain yields in the near-term.

Today, the trade balance will be released domestically, though is unlikely to be a major rates markets mover. Tonight, the University of Michigan consumer confidence survey will be released.

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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