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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD was whipsawed by a strong US GDP number and a mixed FOMC statement, but remains slightly weaker against the USD at 0.8490.

The unquestionably positive US GDP report (see Majors) saw NZD looking south to test key support at the 200-day moving average (0.8450). But some unexpectedly dovish notes struck in the FOMC statement saw a reversal that took NZD/USD all the way back through 0.8500.

Our take on the night’s data is that it remains positive for the USD, and justifies NZD/USD being below 0.8500, for now. But the market has sold NZD heavily over the past two weeks, and looks to be running out of breath. We would not be surprised if the currency chose to settle around the 0.8500 figure (above or below) if US data on Friday contained no surprises.

Yesterday’s local data contained little of interest to the NZD. Building permits gained 3.5%, somewhat reversing the decline in May. And the RBNZ’s reported that it sold a paltry NZ$2m in the month of June, hardly living up to expectations of intervention. While we’re sceptical that the Bank has taken any substantive action, we will need to wait until at least July’s statistics are released to be sure.

Nothing on the local calendar today. Support remains at that key 0.8450 level, and we eye initial resistance around 0.8520.

Majors

Another night of USD strength (and rightly so) on the back of a strong US GDP reading. The reaction to the subsequent FOMC statement was more mixed, but the US Dollar Index is up 0.3% to 81.4, and the broader BBDXY has gained 0.4%.

The first estimate of US Q2 GDP came in at +4.0% annualised, much stronger that the +3.0% expected. Additionally, the fourth estimate for Q1 revised that quarter’s growth from -2.9% to -2.1%. This was unequivocally positive for the USD, and completely overshadowed the slight downside surprise in ADP employment (+218k vs +230k expected).

Going into the FOMC meeting, then, the market was readying itself for a further reason to push the USD higher. But the case presented was hardly clear cut.

The Fed acknowledged an acceleration in inflation, noting that the risk of persistently running below the 2% target had "diminished somewhat". In a notable change, Charles Plosser broke ranks with his FOMC colleagues. He dissented on the grounds that the Committee’s continued insistence that rates would remain low well after the end of tapering was inconsistent with the economy’s improvement to date. There were no dissenters in the previous meeting.

Both of these changes are hat-tips toward the Fed raising rates sooner rather than later. But investors were thrown by fresh dovish language on the labour market. While acknowledging the fall in the unemployment rate, the FOMC noted that "a range of labor market indicators suggests that there remains significant underutilization of labor resources". It appears that the Committee’s doves, with Yellen their leader, remain little swayed by the pace of job creation.

The initial reaction was to reverse some of the USD buying that had occurred after the GDP release, with perhaps some profit taking at play after the big dollar’s strong run this month. We remain of the view that the USD story continues to be constructive. While it is curious that some of the Fed’s other hawks failed to dissent (such as the recently-vocal Richard Fisher), we suspect it is simply a matter of time. Attention now turns to the employment and inflation reports on Friday.

The USD’s ascendancy has major currencies making significant moves. The AUD dipped through its 100-day moving average at 0.9320, but now sits just above that level. It remains 0.6% lower for the day, one of the worst performers. The EUR continues to make fresh 2014 lows, dropping through 1.3400 to sit at 1.3390 at present. The JPY weakened sharply to its worst level since April. It pulled back slightly, and sits at 102.90.

Today’s calendar certainly holds significant data releases (AU building approvals, EU inflation, Chicago PMI), but one suspects moves will be relatively limited ahead of an action-packed Friday night.

Fixed Interest

NZ swaps continued to take their cues from the rally offshore, with rates pushing lower and flatter. The 2-year swap yield shed 2bps to 4.06%, as receiving interest continues to weigh on the short end of the curve.

The US rates market moved sharply in reaction to the strong GDP print (see Majors). The 10-year bond yield rose by 9bps to 2.55%. It lost a little ground following the mixed-bag of an FOMC Statement, but recovered that later in the session.

Today, the local market will be watching building approvals data across the ditch, before settling into the ranges ahead of the US employment and inflation reports tomorrow night.

Other news: -German CPI printed at +0.8% as expected. -European consumer confidence remained at -8.4.

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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