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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD is down 0.5% against the USD, the worst performing major currency on the back of another large slide in dairy prices, as well as broader USD strength. NZD/USD sits just below 0.8770 currently.

While Fed Chair Yellen stuck broadly to script last night, the market chose to read between the lines, and price in the odds of an earlier rise to the Fed Funds Rate (see Majors). While Dr Yellen was addressing lawmakers, Fonterra’s GlobalDairyTrade auction concluded with the GDT Price Index plunging another 8.9%. Prices have fallen in 10 of the last 11 auctions, with the cumulative decline from the early-February peak now at a stunning 35%. We had long forecast lower prices for NZ’s key commodity export on the back of rising global dairy supply, but even we are a little taken aback by the magnitude in the year to date.

In the wake of that, the decline in NZD/USD actually looks fairly modest. But importantly, the fall has likely broken the back of any near-term push towards the post-float high of 0.8840. A modest upside surprise in today’s Q2 CPI print should struggle to propel NZD/USD back above 0.8800.

On the crosses, note that GBP’s outperformance yesterday saw NZD/GBP fall a sharp 0.8% to 0.5120. This took the cross through support at the 100-day moving average. We still favour a further decline through to year-end, seeing 0.49 by the end of December.

Today, we see support at 0.8720 as a first stop, and the big figure 0.8800 as initial resistance.

Majors

The US dollar is stronger across the board overnight, as investors read between the lines of Fed Chair Yellen’s testimony to Congress. The big dollar was denied a clean sheet against the majors thanks to GBP outperformance on the back of a punchy UK inflation report.

The initial batch of headlines from Fed Chair Yellen’s monetary policy testimony to the Senate Banking Committee revealed nothing new. But a knee-jerk reaction lower in yields and the USD were gradually more than reversed.

Scratching around for clues on the market moves as Yellen spoke, the market seemed to react to a phrase containing the same line from her 18 June post-FOMC meeting press conference about policy moving more swiftly if the data were stronger: "If the labour market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned."

To be clear, the first line on policy was based on the uncertain nature of the economy and financial markets and how the Fed decisions would remain dependent on incoming information. However all financial market observers know that US data has been stronger of late and we’re one month on. So while Yellen has not strayed too far from script, the market has decided that the skew of risks point to an earlier start to Fed Funds hikes than currently expected. And rightly so, in our minds. The US Dollar Index is up 0.3% to 80.4.

Today’s reaction is a glimpse of a market that may be becoming more discerning, more questioning of Yellen’s relentless dovishness. The moves so far are modest and we’ve all been burnt here before, but perhaps this is the first sign of a shift in assets towards the idea of the Fed having to alter its policy guidance in the not too distant future. We remain hopeful that this will come at least at the FOMC’s 18 September meeting, if not at the mid-August Jackon Hole gathering.

The GBP was the only major not to weaken against the USD overnight, after UK CPI inflation accelerated by more than expected in June. The core measure leapt from 1.6% y/y to 2.0%, much faster than the 1.7% expected. GBP/USD is 0.4% stronger at 1.7140, but we suspect these gains could easily evaporate tonight if headline wage growth is as weak as our UK economists expect.

Today, China’s monthly data dump of retail sales, fixed asset investment, and industrial production data will be accompanied by the quarterly GDP print. Following that, the market will be watching the UK employment report, US industrial production and housing market data, and Round 2 of Dr Yellen’s appearance on Capitol Hill.

Fixed Interest

NZ interest rate rose yesterday, partly reflecting moves offshore, and exacerbated by one-way traffic in the local market.

The NZ swap curve opened 1bp higher, thanks to the sell-off in US Treasuries on Monday night. Local banks continue to clear mortgage-related flow, and in the absence of any resistance from receiving interest, interest rates drifted higher. Swap rates closed up 3bps for the day, with the 2-year rate at 4.22%.

Overnight, US Treasuries saw a bit of a rollercoaster ride in the wake of Fed Chair Yellen’s comments in her semi-annual testimony. The initial headlines looked like repetitions of well-known messages, disappointing expectations for a less dovish lilt. But further into her hearing, the market read between the lines (see Majors for more details), and US Treasuries more-than-reversed an initial decline in yield to rise as high as 2.57% at the 10-year tenor. That rise was pared as an equity market sell-off weighed, with the 10-year rate currently 1bp higher for the day at 2.55%.

Today, NZ Q2 CPI will be the key release, with us and the market both expecting a rise to 1.8% y/y, from 1.5% previously. For what it’s worth, the RBNZ’s June projections show that they expect 1.7%, but we doubt that a minor miss either side would stop the Bank from hiking rates again in July.

Other news: -German ZEW survey weaker than expected on both current situation and expectations measures. -US retail sales +0.2% m/m vs +0.6% exp, but previous releases revised upward. -US Empire manufacturing index at 25.6 vs 17.0 exp.

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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