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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD was the worst performing major currency, falling 0.6% against the USD on the back of a lower milk payout forecast and stronger US data. NZD/USD hovers just below the 0.8500 mark this morning.

Fonterra revised is 2014/15 milk price forecast down to $6.00 per kg of milk solids, from the initial $7.00 forecast made in May. That compares to the previous season’s milk price of $8.40, and was at the lower end of what the market had been expecting (probably in the region of $6.30-$6.50). Of course, a downgrade was widely anticipated, given the negative combination of tumbling auction prices and a still-elevated NZD.

The market was still negative NZD going into the announcement, and had it been on expectations, then a mild relief rally might have been expected. But the low-ball estimate simply added to downward pressure.

Today, the local building permits data will likely play second fiddle to the RBNZ intervention statistics release, and certainly so against the marquee US data outturns tonight. For what it’s worth, we’re picking some mild growth in permits.

On the intervention statistics, we note that this data is for June. So even if there is no sign of selling, the market might remain on its toes until the July results are release (at the end of August). The RBNZ has bought or sold less than (net) NZ$20mn every month over the past 12, and we would consider anything less than $50mn as insignificant. Anything more than $100mn might be interpreted as a sign of ‘passive’ intervention, and would put the market on notice.

Today, we eye key support at the 200-day moving average (0.8450). This trend line has not been broken since the emerging-market sell-off in late July. We see initial resistance at 0.8540.

Majors

The USD is firmly stronger overnight, thanks to a bumper consumer confidence reading. The US Dollar Index is up 0.2% to 81.2, extending its recent rally to take it within spitting distance of the 2014 high (81.4). To be sure, much of this has been helped by EUR’s continued collapse, but the broader BBDXY has also performed strongly. The USD gained by more than 0.2% against all the major currencies last night.

US consumer confidence surged to 90.9 in July, from 85.2 in June, against expectations of a much more modest improvement. This takes the index to its highest point since October 2008. While the magnitude of the improvement looks slightly suspect, the overall trend is supported by declining petrol prices, equity market gains, still-low interest rates, and a strengthening labour market.

The only other event of any note was BoE Deputy Governor Broadbent’s speech in London, in which he struck broadly dovish notes. Broadbent suggested that a sluggish global recovery would weigh on the UK’s own growth in the future, beyond the current sharp economic rebound.

The Western sanctions regime against Russia continues to toughen, with the EU agreeing on measure which target the country’s energy, defence, and financial sectors. The US also added three more Russian banks to its sanctions list.

The USD’s recent gain has no doubt been given a fillip by mounting expectations that rate hikes are more likely to come before the Fed’s current forecasts suggest. The balance of this week could make or break this notion. Tonight, investors will closely watch the ADP employment report, the advance Q2 GDP reading, and the FOMC statement. But perhaps the real litmus test will be the inflation and employment reports on Friday night, which will help determine how close the Fed is to fulfilling its dual mandate.

Fixed Interest

NZ swaps finished the day slightly lower on Tuesday, after a fairly active session. The 2-year swap traded in the widest range since mid-July.

Swap yields opened higher, as local names looked to make use of the pull-back in rates seen over the past month or so. But as the session wore on, receiving interest reversed these gains, with the 2-year swap closing 1bp lower at 4.08%. It seems as though offshore investors remain sceptical about how much further the RBNZ’s hiking cycle can go in the near-term, and anticipate some further declines in short-end interest rates.

Offshore, last night saw a notable rally in European bonds, with Germany’s 10-year yield dropping 3bps to 1.12%. These are even lower levels than seen at the depths of the European debt crisis. UK bond yields also fell by 3bps, helped by dovish comments from BoE Deputy Governor Broadbent (see Majors). Nervousness regarding the EU’s harder stance on Russia is a likely contributor to the appeal of bonds. US bonds followed their trans-Atlantic peers, with the 10-year Treasury yield down by 3bps to 2.46%.

Tonight marks the start of the week’s main events, all from the US. First off the rank is the ADP private payrolls data, followed by the advance reading of Q2 GDP, and then capped by the FOMC statement to be released in the early hours of the NZ morning.

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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