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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD has slipped to 0.8380 this morning. It spent most of yesterday afternoon flirting with the 0.8400 level that had marked the low on the currency since March this year. In the early hours of this morning, after a hawkish tilt to US Fed Minutes spurred broad USD strength, the NZD/USD has slipped to 0.8380. The NZD/USD appears to still be clinging on for dear-life, but a convincing break of this level would open the way for the next leg down. We continue to target 0.8000 by year-end.

The NZ TWI (the RBNZ’s benchmark) also sits lower, at 79.00 this morning. This is now in line with the RBNZ’s Q4 forecast average (see Fixed Interest).

On the crosses, the NZD is stronger relative to the JPY but generally weaker elsewhere. The NZD/AUD now sits at 0.9030., having broken through previous support levels in recent days. The cross may be influenced by the release of the HSBC China Manufacturing PMI today (1.45pm NZT). Any upside surprise (consensus 51.5) would likely favour the AUD over the NZD.

Today the domestic focus will be release of NZ net migration data. Strong net migration trends are something the RBNZ has previously highlighted as adding to demand pressures in the economy. In addition, the August ANZ consumer confidence survey will be released today. July’s reading was a very robust 132.7. Both these signs of domestic solidity could work to try and support the NZD/USD today. However, its fate may be determined by broader sentiment toward the USD as the market awaits the kick-off of the Jackson Hole Conference this evening.

Majors

The USD has strengthened against all its peers after the release of the US Fed’s Minutes.

The USD index had traded with a slight incline overnight, but surged higher after the release of US Fed Minutes early this morning. These showed continued concern that there was notable slack in the labour market, but that "the likelihood of inflation running persistently below 2 percent has diminished somewhat". Many members also thought assessment of the labour market may have to change soon if it continues to make faster progress than anticipated.

Finally, many Fed participants also noted "it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated". So overall, the balance of risk appears to be shifting. The more hawkish tone saw the USD push higher, along with US Treasury yields. The USD index sits above 82.20 currently. An abrupt toll was also taken on emerging market currencies.

The JPY has recorded the greatest losses versus the USD over the past 24-hours (-0.7%). The prospect of the US Fed reigning in monetary stimulus stands in stark contrast to the Bank of Japan’s need to continue to support the economy. The USD/JPY sits around 103.70 this morning. This is pushing toward the top of the range that has contained it since January.

The GBP experienced a spurt higher early last evening after the release of the Bank of England’s Minutes (see Fixed Interest). But the spike toward 1.6680 proved short-lived, and the GBP/USD has subsided post Fed Minutes, to trade at 1.6600.

Today, the local focus will be the HSBC China PMI release. Tonight, Eurozone and US PMI data will be released along with the US Philadelphia Fed survey.

Fixed Interest

NZ swaps closed up 3-4bps while NZGB yields closed up 6-8bps yesterday. Overnight, US 10-year yields have popped higher after the release of US Fed Minutes.

NZ swaps pushed up across the curve yesterday. 2 and 5-year closed at 4.06% and 4.39% respectively. There seems reluctance for 2-year to break below 4.00%. The fact the NZD/USD is threatening to break below 0.8400, may be contributing to sentiment. A lower currency would remove one of the key impediments (in the market’s mind) to restarting the OCR hiking process at year-end. It is interesting to note the NZ TWI (79.00) is now close to the RBNZ’s Q4 average forecast. This may start to resonate now the market is pricing only a 20% chance of an OCR hike by year-end and 35bps by a year’s time.

NZGBs also experienced a sell-off yesterday. The yield on the 2017 maturity closed up 6bps while that on the 2027 closed up 8bps. The yield on NZGB23s now sits at 4.21%. NZGB23s underperformed against both their AU and US counterparts with spreads now at 87bps and 195bps respectively.

In Central Banks Minutes overnight, the Bank of England’s showed that two of the nine members dissented in favour of rate hikes this month. This is a hawkish signal in that the Bank is inching ever closer to its first rate hike. The market has this priced for early next year. UK gilt yield gapped higher on the release but later gave up their gains. UK 10-year yields remain at 2.42%.

Overnight, the slightly more hawkish tone of the US Fed Minutes saw US 10-year yields immediately pop from 2.41% to 2.44%.

Today, the ANZ Consumer Confidence survey will be released. The HSBC China PMI release will be a focus today. Tonight, Eurozone and US PMI data will be released along with the US Philadelphia Fed survey.

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