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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD ended the week just below 0.8410.

In a relatively quiet day of trading, the NZD/USD pushed up toward 0.8430 ahead of the US Jackson Hole meeting of global central bankers on Friday night. Some broad USD strength followed Fed Chair Yellen’s address to the gathering (see Majors). The NZD was a victim along with most of its peers. However, from early Saturday morning lows close to 0.8380 the NZD/USD managed to claw its way back to end the week above the crucial 0.8400 level.

Despite some early-Saturday morning volatility, moves on most of the crosses were not particularly notable. The NZD/AUD ended the week a little lower around 0.9020. The drift lower in the cross in recent weeks has been consistent with narrowing of NZ-AU interest rate differentials. The market has reduced pricing of an RBA rate cut at the same time it has revised down its expectations of future RBNZ rate hikes. However, we expect the NZ-AU 2-year swap spread that now sits around 135bps will push back up toward 160bps by year-end. This is one factor that should help some rebound in the cross in coming months.

It is a quiet start to the week locally with no scheduled data release on either side of the Tasman today. The domestic data calendar will kick off tomorrow with the release of the NZ trade balance and RBNZ’s July data on bank’s Loan to Value Ratios. In the meantime, global geopolitical tension is likely to prevent a sharp resurgence in appetite for "risk-sensitive" assets such as the NZD. We continue to see NZD/USD support at 0.8350 while resistance is eyed at 0.8440.

Majors

The USD was broadly stronger at the end of the week. The AUD managed to marginally outperform.

Most markets traded fairly tight ranges ahead of the US Fed Chair, Yellen’s scheduled address at the Jackson Hole conference. Her speech didn’t come down firmly on one side of the fence or the other with regards to the current state of the US labour market. She did however reiterate her view that there is still "significant" slack in the labour market. But she also explicitly referenced the possibility that "increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter". Overall, the absence of a blatantly dovish bias helped push the USD index higher in the early hours of Saturday morning. It ended the week above 82.30.

The EUR/USD made a new cyclical low around 1.3220 after the Yellen comments. The move lower was partly reversed on the subsequent speech by ECB President Draghi. This was a little surprising in our view, given his support for QE looks to have gone unconditional. He spoke of the ECB’s preparation for outright purchases of ABS. Perhaps the market had expected him to go further and directly reference Govt bond purchases. The EUR/USD clawed its way back from its lows and ended the week above 1.3240.

End of week CFTC data showed USD speculative long positions extended last week, to172.4k, from 145k the prior week. This was mostly due to an extension of the net EUR short position, to 138.8 K, from 126K previously.

This week starts with a Bank holiday in the UK. There are no key global data releases scheduled until tonight. In focus will be the German IFO business survey. In the US the August Services PMI and July new home sales data will be released.

Fixed Interest

NZ yields closed flat to down 2bps on Friday. US 10-year yields ended the week at 2.40%.

There was very little activity in the NZ market on Friday as it awaited the week end’s Jackson Hole meeting in the US. NZ 2 and 5-year swap ended the week at 4.09% and 4.43% respectively. We see fair value’ around 4.50% and 4.60% respectively. This is based on our forecasts for an OCR that reached 5.0% in 2016.

The 2-10s curve sits slightly off its lows of last week at 60bps. We continue to expect this spread to flatten to a cyclical trough of 40bps by mid next year. However, the risk of near-term steepening is presented by the NZ long-end following any rebound in US long yields.

That there was some ambiguity in Yellen’s Jackson Hole comments, and that they were not outright dovish, helped push US yields higher. US 2-year bond yields rose from 0.47% to 0.49%. US 10-year yields pushed up from 2.38% to 2.44%. However, yields later returned to 2.40% after headlines announced that Russia has 18K of troops on the Ukraine border. At the same time, the Russian ‘aid’ convoy was reported to have entered Ukraine without authorisation.

There are no local data scheduled today. Tonight the German IFO survey will be released along with the US Services PMI and new home sales data.

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