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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD sits at a similar level to yesterday morning, at 0.8480, at present.

The NZD/USD experienced brief volatility after the release of the NZ 2Q labour market report yesterday morning. This is not surprising given the report initially seemed to provide something for everyone. The unemployment rate fell more than expected, to 5.6% (consensus 5.8%), but this was partly explained by an unexpected decline in the labour participation rate. In addition, the quarterly employment change was softer than expected (0.4% vs. 0.7%).

Overall, in our view, the report was quite neutral (see Fixed Interest), and that seems to be largely the conclusion the market came to. After the NZD/USD slipped below 0.8440, it consolidated in the afternoon, before creeping higher overnight, back to 0.8480. Support remains at the early-June lows of 0.8400. Resistance is eyed at 0.8520.

On the crosses, the NZD/GBP briefly dipped below the psychologically important 0.5000 level last evening. However after a disappointing UK industrial production report last night this cross soon recovered. It trades back up at 0.5030 this morning.

The NZD/AUD sits a little lower, at 0.9060. All attention today will be on the AU employment report (see Majors). Assuming no significant surprise in today’s report we would look at entering a tactical long position, targeting a return toward 0.9250 in the short-term. Currently the cross sits right on key support levels which have marked the year-to-date lows. Domestically, only QV house price data is due for release today.

Majors

Over the past 24-hours the JPY has been the strongest performer, closely followed by the AUD. The USD sits a little lower this morning.

Risk appetite remained somewhat subdued overnight. News headlines reported the prospect of a Russian invasion of Ukraine had increased as the number of soldiers near the border grows. Our global risk appetite index now sits at 62%, down from 84% a fortnight ago. European equities markets posted negative returns (Euro Stoxx 50, -7%) also assisted by disappointing EU data delivery.

European data delivery overnight was generally on the weaker side of expectation. Most notably, German June factory orders came in a -3.2%m/m (0.9% expected) to be down 2.4%y/y. This led to the EUR/USD touching intra-night lows below 1.3340, before later rebounding to 1.3380.

The ‘safe haven’ JPY was a beneficiary of the more sombre mood in markets overnight. From 102.60 last night the USD/JPY has declined to 102.00 currently.

The GBP/USD gapped lower last night after disappointing UK June industrial production data (0.3%m/m vs. 0.6%). However the GBP/USD found its feet around the 1.6830 level, before returning to trade at 1.6850.

The AUD/USD that had been on the ascendancy since last evening enjoyed a spurt higher in the early hours of this morning. It sits at 0.9350 currently as we approach the AU data highlight of the week, the July employment report. Consensus expectations are for a 13.2k change to employment and for the unemployment rate to remain steady at 6.0%.

Tonight the ECB and BoE are due to meet but neither are expected to announce any policy changes. However, President Draghi’s press conference will no doubt be dissected by the market.

Fixed Interest

There was little action in the NZ market yesterday. Overnight, US yields slipped a fraction, with 10-year yields at 2.47% this morning.

The swaps market showed little response to the previous night’s weak dairy auction, or to yesterday’s labour market report. Overall, in our view, the report showed a tightening labour market consistent with rising inflationary pressures and a requirement for the central bank to, eventually, continue progressively raising interest rates. But there is no urgency for them to do so, so the market’s fairly muted response was justified. NZ 2 and 5-year swaps sit at 4.08% and 4.47% respectively, while the 2-10s curve sits a little steeper at 66bps.

Disappointing Eurozone data delivery overnight set German bond yields into decline. 10-year yields fell from 117bps to 110bps, new historic lows. US equivalents touched intra-night lows below 2.44% before rebounding following the release of US trade data. This showed the monthly trade deficit declined to a five-month low of $41.5b in June. This suggests 2Q GDP growth estimates will need to be revised higher.

Today’s local highlight will be the AU employment report. Tonight the ECB and BoE meet though neither is expected to announce any policy changes, as the ECB remains in ‘wait and see’ mode after previous policy announcements.

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