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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD tested 0.8400 yesterday, but has since rebounded to 0.8440, down 0.2% for the day.

The NZD looked heavy throughout the local session, but was given a helping hand lower by the monthly REINZ housing data. House prices dipped 0.7% m/m, with the annual pace dipping to +5.9% y/y from a +9.9% cyclical peak in October 2013. The slide in house sales accelerated, down 13.0% in July after falling 6.1% in June.

These data are not normally particularly market-moving, but were enough yesterday to spark a fall in NZD/USD all the way to 0.8410, the lowest level since early June. But strong technical support at 0.8400 continues to hold.

But on the back of the housing data, as well as positive AU business confidence, NZD/AUD slipped below 0.9090. We took the opportunity to recommend a tactical long position on the cross, targeting a return toward 0.9260, which is where rate differentials suggest the cross should be. We set a tight stop at 0.9040.

There is nothing on the local calendar today. Support remains at 0.8400, with initial resistance marked lower at 0.8490.

Majors

Once again, major currencies were little changed over the past 24 hours, with fairly light data and news flow. What focus markets could muster was largely dedicated to Europe, where a poor German investor survey and concern about a Russian aid convoy to the Ukraine weighed on sentiment.

Germany’s ZEW survey showed that investor confidence slumped by more than already-pessimistic expectations. The ‘current situation’ component dropped from 61.8 to 44.3 (54.0 exp.), while the ‘expectations’ component plunged from 27.1 to 8.6 (17.0 exp.). The latter is now at its lowest level since December 2012. The poor showing likely took its cues slowing growth in Germany (and the rest of Europe), as well as an overlay of concern about the West’s standoff with Russia. This result will heighten interest in Thursday night’s German Q2 GDP release, especially in light of the German Economic Ministry’s warning overnight that the data would show a loss of momentum. The disappointing ZEW survey helped EUR/USD look to test its 2014-low at 1.3330, but these losses were later reversed. Germany’s benchmark equity index (DAX) shed 1.2%, dragging the Euro Stoxx 50 to a 0.8% loss for the day.

Clearly, investors would not have been particularly thrilled with the continued tension between Ukraine and Russia, currently centred on a Russian aid convoy bound for eastern Ukraine. The West has bristled at letting the convoy into Ukraine unimpeded, wary of a stealth invasion. As this note goes to print, reports indicate that both sides are close to reaching an agreement on border inspections and control. The trucks have not yet crossed into Ukraine.

Across the Atlantic, the monthly US JOLTS report showed job openings surge to 4671 in June from 4635, against expectations for a modest decline. This has now exceeded the peak in the previous cycle (4657 in March 2007). These data are part of Fed Chair Yellen’s ‘dashboard’ of labour market health. Separately, the NFIB small business optimism index printed largely in line with expectations, with the ‘hiring plans’ component up to its highest level since 2007. The Fed’s annual academic conference at Jackson Hole is just over a week away, with the theme announced as "Re-evaluating Labor Market Dynamics". These data help build the case for an extended USD rally.

The pace of data picks up in the day ahead, with Japanese Q2 GDP and Chinese industrial production due in our session alone. Later on, German inflation, UK employment, and US retail sales data are due. The Bank of England are also set to publish its quarterly Inflation Report.

Other news: -AU NAB business conditions to +8 in July from +2, highest level since early-2010. -Statistics Canada found an error in last week’s dismal employment report, due to publish revision on Friday. CAD strengthened on speculation that revised figures will show better jobs growth.

Fixed Interest

NZ yields closed flat to down 1bps yesterday. Overnight, US 10-year yields consolidated around 2.43%.

NZ 2 and 5-year swap sit at 4.07% and 4.43% respectively. Both remain some way below ‘fair value’ based on our forecasts that see the OCR at 5.0% by 2016. However, there is a lack of obvious catalysts for a push higher at present. There are no domestic data scheduled today, although tomorrow’s retails sales data will likely serve as a reminder of the underlying strength of the economy. However, even here, consensus is already expecting 1.0%q/q (we expect 0.8%) so potential for upside surprise is limited.

AU swaps initially pushed higher yesterday after the NAB business survey showed AU business conditions at their highest levels since early-2010. However, swaps later returned to earlier levels. AU 2-year swap sits at 2.76%, as the market continues to price around a 50% chance of a 25bps cut from the RBA in the year ahead.

Overnight, despite a weak German ZEW survey, German bund yields largely traded sideways, although still close to historic lows. The yield on 10-year bunds sits at 1.06% while that on US equivalent sits at 2.43%.

Today, the LGFA (Local Government Funding Agency) will hold its tender for $285m of bonds, including $110m of the new 2020 maturity. Tonight German CPI will be in focus along with the UK employment report, the Bank of England’s inflation report and US retail sales data.

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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