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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD traded a tight range on Friday, to end the week only slightly lower, just below 0.8490.

There was a dearth of local data on Friday. The NZD/USD traded between approximately 0.8470 and 0.8500. A weaker USD on Friday night (see Majors) failed to benefit the lacklustre NZD. The NZD therefore marginally under-performed most of its peers, hampered by the risk aversion that prevailed in the early hours of Saturday morning.

On the crosses, the most striking move was for the NZD/JPY. This gapped from around 87.20 to below 86.70, before later clawing its way back to end the week around 86.90. The catalyst for the fall was negative headlines from the Ukraine crisis (see Majors), that raised the appeal of the ‘safe haven’ JPY.

Meanwhile the NZD/AUD ended the week just above 0.9100, having failed to break convincingly below this level on Friday. We remain tactically long the NZD/AUD at 0.9090, targeting a move back toward 0.9260.

It’s a slow start to the week with only the July BNZ Performance of Services Index scheduled for today. The previous reading was well in expansion at 54.7 and we expect another solid reading today. However, this is unlikely to be a major market mover. Key support for the NZD/USD remains at 0.8400., while resistance is eyed at 0.8510.

Majors

The ‘safe haven’ CHF was one of the best performing currencies on Friday night. The NZD was the only major currency to underperform a weak USD.

The USD was on the backfoot on Saturday night in the backdrop of disappointing US data (University of Michigan Consumer Confidence, 79.2 vs. 82.5 expected). However, it was geopolitics headlines that really decided the mood for the night. In the early hours of Saturday morning, headlines announced that Ukraine forces had attacked the Russian armed (aid) convoy that had crossed the Ukraine border. This increased demand for the likes of ‘safe haven’ assets such as the CHF and US Treasuries. The CHF rose 0.40% against the USD.

The JPY also received a boost following the headlines. From 102.60, the USD/JPY gapped to 102.40, before settling around 102.30.

Elsewhere ranges in major currencies were relatively tight. The AUD sits at 0.9320 as we enter the week. It is a quiet start to the week across the Tasman with no market-moving data scheduled for today. However, all eyes will be on the release of RBA Minutes tomorrow and the RBA Governor’s semi-annual testimony to the House of Representatives on Wednesday.

It is also a quiet start to the US calendar with only the NAHB house price index scheduled for tonight. Highlights will come later in the week with the Fed’s Minutes on Wednesday night, and Fed Chair, Yellen’s speech at the Jackson Hole conference at the end of the week.

Friday night’s commentary from Fed speakers showed that the full range of views are still being debated. Bullard said "the market is trading too dovishly compared to the committee". Meanwhile, Kocherlakota said "you hear a lot of concerns that it is time for us to exit… raise rates. But boy, it’s a mistake to go too early". In this context of divided opinion, the hard data remains important. In this regard, the market will closely watch the release of US July CPI tomorrow night.

Fixed Interest

The NZ swap curve flattened on Friday. On Friday night, US 10-year yields dipped to 2.34%.

NZ 10-year swap declined 4bps, to 4.64% on Friday, while 2-year remained fairly steady at 4.05%. The 2-10s curve has therefore pushed back towards recent lows of 59bps. On an outright basis, NZ 10-year swap is now at its lowest level since early-August last year.

Following on from the strong NZGB tender on Thursday, NZ bond yields also ground lower on Friday, also following offshore moves. The yield on NZGB23s declined 4bps, to 4.15%. This is its lowest level since late-July last year.

US 10-year yields dipped to new lows since June last year, at 2.34%. A disappointing US University of Michigan Consumer Confidence survey early Saturday morning had set the tone toward lower yields. However, geopolitics was the proximate cause of yields breaking lower.

Given these offshore moves and follow through in Aussie bond futures, it seems downward pressure will remain at the long-end of the NZ curve at the start of the week. There is little on the domestic agenda to curtail the move. The BNZ July PSI will be released today. While it is expected to be solid it is unlikely to be market moving.

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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