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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD fell in line with its peers against the USD overnight, down 0.6% to 0.8280.

The move could have extended further, but the 0.8260 level stamped its credentials as strong technical support, with the NZD’s sell-off bouncing just above that. That level marks a 50% retracement of the rally from June 2013 (0.7684) to July 2014 (0.8836). A break through here would open up a quick move down toward 0.8120.

However, the farther it falls ahead of the RBNZ, the sharper a potential squeeze higher becomes, should the Bank fail to deliver on near-unanimous expectations for a more dovish tone. This is not our central scenario, but remain wary of the risks. In that scenario, we expect a rally in NZD/USD to be limited to around 0.8450. With the broader USD rally still intact, we struggle to see a case for NZD/USD above 0.85. Our short-term ‘fair value’ model suggests that NZD is should already be trading in a 0.7720 - 0.8280 range.

Today, electronic card spending data are unlikely to be market moving. Initial support remains at 0.8260. We expect rallies to struggle to break 0.8350.

Majors

The USD continues to spring higher, in a night of FX moves with few proximate data or news events to explain them. GBP/USD extended its referendum-related losses (see yesterday’s note) to be 1.3% weaker than at last week’s close. The EUR/USD briefly gained a 1.28 handle, and after a mild rebound, looks to be heading back into that territory..

The orderly weakening in JPY over yesterday seems the most likely culprit to have inspired a broader USD strength. Traders looked to be targeting stops above 106 in USD/JPY, but the move ran out of steam just above that level. Poor economic data released in Japan yesterday morning helps to justify JPY weakness. The final reading of Japan’s Q2 GDP printed at -7.1% y/y, worse than the initial reading of -7.0%, and the sharpest contraction since Q2 2009. The estimated contraction in capital investment was doubled to 5.1% q/q. One tailwind to a weaker JPY is the building expectation that the authorities (in Abe’s government or in Kuroda’s BoJ) will be forced to step into

More curious was the underperformance of AUD/USD, which fell by 1.0% to 0.9290. There were no Australian data of note, though China’s August import data were surprisingly weak at -2.4% m/m (+3.0% exp). Analysts pointed to a continued slowdown in industrial metals. To the extent that this reflecting softening demand for Australia’s core exports (read: iron ore), AUD weakness is justified. But that story is inconsistent with reports of record iron ore shipments of from Port Hedland. Instead, the weak value of imports likely reflects falling prices. Iron ore fell by 8.1% over August.

Supporting the stronger USD story was a San Francisco Fed research piece doing the rounds, which noted that investors are expecting a more accommodation than the FOMC itself suggested in June. The median FOMC member saw the Fed Funds Rate at 1.13% by end-2015, which translates to 63bps of hikes from the current 0-25bp band. In contrast, market pricing implies the first hike by October 2015.

To be clear, this is not fresh information. The market knew this back in June, but chose to undershoot the FOMC’s median partly due the assumption that Fed Chair Yellen saw a much more accommodative track than the median member. We do not put much weight on the idea that this particular note sparked fresh interest in the USD. Rather, it simply played with the grain of an existing bias.

The broad rally overnight saw the narrow US Dollar Index up 0.6%, and the broader Bloomberg Dollar Spot Index 0.7% higher. This pushed the latter easily through its 2014-high, and leaves it just 1.0% shy of the peak during last year’s ‘taper tantrum’. The market certainly has high hopes for next week’s FOMC meeting.

Today, highlights will be NAB’s business confidence survey for Australia, and UK industrial production. Japan’s consumer confidence and machine tool orders data have not been particularly market-moving of late, but could be worth watching, given investor interest in JPY.

Fixed Interest

NZ interest rates were unchanged in an extremely quiet trading session for local markets yesterday. The whole curve was marked down by 1bp, with the 2-year swap closing at 4.07%.

Of course, the local market is wary of moving too much ahead of the RBNZ’s meeting on Thursday. We expect the RBNZ to be more dovish, but we still see the 2-year swap to break much below 4.0%. The market currently prices an OCR not much above 4.25% in two years’ time. The Bank’s medium-term commitment to ‘normalise’ the OCR will likely help keep short-end yields supported.

Offshore, US 10-year Treasury yields rose by 1bp to 2.47%, its highest level in a month. Rather than being data-driven, analysts point to a sizeable chunk of supply due this week as weighing on bond prices (and lifting yields).

Other news: -German exports strong at +4.7% m/m (+0.6 exp), but imports weak at -1.8% (+0.2% exp).

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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