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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD slid along with most major currencies as the USD rallied broadly overnight, but took an additional hit from yet another poor dairy auction. NZD/USD is down 0.7% at 0.8320.

The GlobalDairyTrade Index tumbled a further 6% in the auction overnight, taking the cumulative decline since early February to 45%. But offsetting the bad news for Fonterra (and other dairy producers), the NZD actually responded to the declines, unlike the negative auctions earlier in the year.

Yesterday, the ANZ commodity price index fell by 3.3% m/m in August, reflecting falls in dairy prices, offset by gains in beef and aluminium. Overall, though, prices for NZ’s exports sit at a 17-month low.

On the crosses, NZD/EUR is down sharply, after EUR was resilient to the USD gains across the rest of the board. The cross is by 0.8% at 0.6330, but remains in the range maintained by the 50- and 100-day moving averages. These two technical struts have largely contained NZD/EUR since late July. We expect a drift lower to 0.62 by year-end.

Note that NZD/USD slid below 0.8300 overnight, for the first time since February. Technically, there is strong support at 0.8260. For today, we expect dips toward 0.8280 to be bought, with initial resistance at 0.8350.

Majors

The USD is up strongly over the past 24 hours, having rallied curiously in the Asian session, and then justifiably extending these gains on upbeat US data. The broad Bloomberg Dollar Spot Index is up 0.4%, to within spitting distance of its 2014 high.

During our day, the USD rallied sharply against the majors, on no notable data or news flow. The inspiration seemed to come from traders successfully targeting the recent highs in USD/JPY around 104.50. That USD strength percolated throughout the G10 FX space, and held its gains.

Of course, the move worked with the grain of burgeoning USD optimism, as improving US data adds to the case for Fed Funds Rate hikes by mid-2015. Last night’s outturns did not disappoint on this front. The US ISM manufacturing index defied expectations of a pull-back from an already very-high 57.1, instead pushing to 59.0. Separately, construction spending surged in August, up 1.8% m/m against expectations of a 1.0% rise, with positive revisions to July’s data. Unsurprisingly, the USD benefitted, strengthening by 0.7% against the JPY for the day to 105.10, nearly its highest in 2014.

Along with the JPY, the GBP was a serious underperformer against the USD, but this time with politics in the limelight. The latest YouGov poll saw the ‘No’ camp for Scottish independence lose ground markedly, with the difference between the pro- and anti-union just 6 percentage points. A month ago, the pro-union camp was leading by full 22 percentage points. The increased prospect of a victory by the pro-independence camp saw GBP/USD slide 0.7% to 1.6480.

Yesterday, the RBA largely left the press statement unchanged at its August meeting, and still anticipates "a period of stability in interest rates". With the neutral bias firmly in place, our NAB colleagues expect the RBA to remain on hold through to late 2015. The AUD was left unchanged after the statement, but took part in the broader sell-off against the USD. AUD/USD is 0.6% lower at 0.9280.

Today sees Q2 GDP in Australia, where we expect to see a 0.2% q/q rise. In addition, RBA Governor Stevens is due to speak to an economics audience in Adelaide.

A swathe of service PMIs are due (China, Japan, Europe, UK), but these generally see little market reaction. Of more interest will be the second reading of euro-zone GDP, and US factory orders.

Fixed Interest

NZ interest rates sit largely unchanged after yesterday’s session, which was fairly subdued. After the close, Rentenbannk announced that it priced a further NZ$100mn on its 2024 line, which explains the mild downward pressure on swap yields. The 2-year swap closed unchanged at 4.07%.

The US bond market came back from the long weekend on a tear, with the 10-year Treasury yield surging 8bps for the session to 2.42%. Some of that can be attributed to a strong performance from US data (see Majors).

German bonds also lifted off lows, with some commentators pointing to doubts about how close the ECB is to launching a new asset-purchase program. Given how far European yields have fallen in recent weeks (German 10-year down 28bps in August), a bit of a pull-back seems justified. This dynamic helps to explain why EUR struggled to find fresh depths against the USD overnight, and unlike most of its peers, held its ground, sitting at 1.3130.

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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