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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD sits marginally lower, at 0.8770, this morning.

The NZD trickled lower early yesterday morning following the GDT global dairy auction, continuing to ease lower after release of the ANZ commodity prices index yesterday afternoon (-0.9%, June). The fall reflected not only softer dairy prices but also declines in forestry prices. This is consistent with our forecast 10% correction in the nation’s terms of trade (from 40-year highs) over Q2/Q3 this year. However, as yet, the currency appears to be taking a fairly sanguine view of such developments. The NZD/USD soon rebounded from early afternoon lows below 0.8750. It was not until the USD surged higher early this morning that the NZD was jolted lower again. But the damage remained limited, with the NZD/USD back at 0.8770 this morning.

On the crosses, greatest strength was seen on the NZD/AUD. The ascent was initially inspired by disappointing AU trade figures (see Majors). A steady uptrend held throughout the night with the NZD/AUD currently trading at intra-night highs of 0.9290. As there is no data scheduled on the domestic agenda today, the NZD/AUD will take its cues from AU data releases (retail sales, building approvals).

Tonight, the NZD’s fate will be decided by the US payrolls release (see Majors). We continue to see NZD/USD support approaching 0.8730. Resistance will be encountered approaching 0.8800.

Majors

USD strength was the key theme overnight. The AUD has been the weakest performer over the past 24-hours.

The USD lurched higher last night after the release of the US ADP employment report. It surprised to the upside with a 281k increase in employment in June (201k expected). Although not necessarily a reliable leading indicator, this result provides upside risk to the consensus pick of 215k for tonight’s US payrolls data. From around 79.80 prior to the release the USD index now trades at 79.95.

Meanwhile, Fed Chair Yellen stuck to script in a scheduled lecture last night. She said financial stability should be addressed via macroprudential tools rather than through monetary policy. Playing down the risk of financial instability she said she saw only "pockets of increased risk-taking". She did express some concern regarding low volatility across asset classes which may suggest markets are under-pricing future risks.

The EUR and JPY were both direct casualties of the USD move overnight. From above 1.3680 early last evening, the EUR/USD now trades just above 1.3650.

There was a fair amount of volatility in the GBP/USD overnight. Initially it shot higher on the back of a stronger than expected UK construction PMI (62.6 vs. 59.8). This comes hot on the heels of the previous night’s manufacturing PMI surprise. However, the GBP/USD later succumbed to post-ADP USD strength. As a consequence, it sits just a little higher this morning at 1.7160.

Weakness in the AUD was initially inspired by yesterday afternoon’s release of the AU trade balance (-1911m vs. -200m expected). The downward momentum was then cemented by the surge higher in the USD early this morning. The AUD/USD sits at 0.9440 this morning. The focus for the AUD today will be the release of AU retail sales data (1.30pm NZT). AU building approvals will be released at the same time.

Tonight is all about US payrolls data. However, market expectations are now likely higher than the ‘official’ consensus expectation. A notable upside surprise may be required to spur further USD strength. The ECB also meets tonight (see Fixed Interest). EU retail sales data is also due along with EU and UK services and composite PMI measures. Finally, UK house prices will be released. All in all, there is plenty to provide currency volatility (relatively speaking) tonight.

Fixed Interest

NZ swaps closed down 1-5bps yesterday. Overnight, US 10-year yields pushed up to 2.62%.

The previous night’s soft GDT dairy auction may have tempted receivers back to the NZ market. As NZ commodity prices slump while the NZD remains elevated the market may be pricing a more gradual OCR hiking path ahead.

NZ 2-year swap closed down 1bps at 4.22%, as 10-year closed down 3bps at 4.90%, resulting in further flattening of the 2-10s curve. But the main focus of the day was the pricing of the new 2027 maturity NZ Government bond. It attracted strong demand with more than NZ$2.4b bids for the NZ$1-2b offer. The deal priced at the lower end of the price guidance range, at a 21bps spread to NZGB 2023s. The yields on NZGB 2023s closed down 2bps at 4.43%.

Overnight, US yields gapped higher in response to the upside surprise in the US ADP employment report. US 2-year bond yields shot from 0.46% toward 0.49% while 10-year yields popped from 2.55% to sit above 2.61% this morning.

It is a quiet day on the domestic agenda today. Across the Tasman, today’s data highlight will be retail sales. Tonight it will be all eyes on US payrolls release. With expectations now likely quite high, a notable upside surprise may be required to boost US yields further. In this context the ECB’s meeting tonight will be a bit of a sideshow. This is particularly true as it is not expected to announce any new policy measures after its ‘big reveal’ at its last meeting.

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