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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

NZD/USD continues to break lower, with the 0.8200 level broken on the back of a much more cautious RBNZ. The NZD is 0.6% weaker against the USD this morning, sitting at 0.8175.

The RBNZ softened its rate track as widely expected (see Fixed Interest). The vindication of this view saw a break below 0.82, helped by continued vitriol against the NZD’s strength. Governor Wheeler declined to talk about FX intervention, confirmation of which would have likely seen a much sharper reaction in NZD.

The USD rally continues to be the defining feature of the FX landscape, and AUD’s failure to hold gains following an unbelievably strong employment report (see Majors) weighed on NZD. Overnight, NZD/USD tested the top of significant support in the 0.8140-0.8160 area, but was rejected. We see rallies limited to 0.8250 today.

NZDAUD has had a whippy 48 hours. We were pleased to see the cross poke its head above 0.90 on Wednesday night, but those gains were undone by the RBNZ and AU employment report yesterday. However, the AUD remains a focal point (see Majors), and we pick a return to 0.90+ territory in the near-term. We see NZD/AUD at 0.91 by year-end.

Majors

Every time you think the USD might pare its rally ahead of the FOMC next week, perhaps sell off on a bout of profit taking, it simply keeps pushing higher. It’s just a matter which major assumes the role of whipping boy, and for now, it remains the AUD. The broad Bloomberg Dollar Spot Index is up another 0.2%, and it looks likely to breach its mid-2013 high in the near-term. That break would see the USD at its strongest since 2010.

The market seems to have wrung its money’s worth from EUR and GBP weakness in the near-term, and is still using JPY and NZD as vehicles to push the USD higher. But in the latter part of this week, the AUD has been the biggest loser.

Not even an eye-popping resurgence in Australia’s labour market health could keep the AUD above water. To be sure, the market took the data with an enormous pinch of salt, given its ridiculous strength. Australia added 121k jobs in August, beating the market expectation of +15k eight times over. This was the highest ever monthly gain in the series’ 36-year history. Off the back this, the unemployment rate improved sharply to 6.1% (from 6.4%), despite a jump in the participation rate.

The Australian Bureau of Statistics insists that it carefully checked its data and found no aberrations to report. But analysts caution that severe payback is due next month. Our NAB colleagues take is that the ‘true’ level of unemployment lies somewhere between 6.1% and 6.4%. They also do not see yesterday’s outturn changing the RBA outlook, where NAB expects the Bank to remain on hold through to at least mid-2015.

The AUD initially spiked half a cent higher on the stunningly positive headline gain, but has more than reversed those gains. It sits near fresh six-month lows at 0.9090, down 0.7% for the day. That it has lost more ground than NZD, which had an RBNZ tailwind lower, tells much about market sentiment around the AUD.

Elsewhere, the JPY continued to weaken, rising above 107 for the first time since late-2008. This came after BoJ Governor Kuroda visited Japan’s Prime Minister Abe for the first time in five months. Not that they revealed discussion about anything exciting, with Kuroda simply re-stating his willingness to ease policy further, should progress toward the 2.0% inflation target look at risk. He should strike the same line at a scheduled speech tonight.

On the data front, euro-zone industrial production and US retail sales will be highlights, along with China’s monthly data flurry due on Saturday. We strongly doubt any of these data have the potential to significantly derail further USD upside.

Fixed Interest

NZ swaps closed down 4-6bps following the RBNZ’s meeting. Overnight, US 10-year yields traded a tight path above 2.50%.

The RBNZ maintained a clear tightening bias at its meeting yesterday. However, as expected its published 90-day bank bill track showed a less assertive track ahead. It implies a resumption of rate hikes around March next year. But the Bank has made the published track purposely vague, which could imply a rate hike any time between this December and next September. The Bank also reduced its OCR track further out to suggest it now sees the OCR peaking around 4.50-4.75%, compared to at least 5.0% previously.

As a result, NZ swaps closed down across the board. 2-year swap closed down 6bps, at 4.05%, while 10-year closed down 4bps, at 4.69%. At 64bps, the 2-10s curve is at its highest level since early-August.

Across the Tasman, AU short-end swaps lurched higher after the release of the AU employment report. AU 3-year swap gapped from 3.05% to 3.14% before later returning to end the day around 3.08%. The market now prices virtually no chance of a rate cut from the RBA in the year ahead, and more than a 50% chance its cash rate will be 25bps higher by the end of 2015.

Over a data-light night, US yields showed little direction. US 10-year yields traded a tight range between 2.51% and 2.54%, sitting at 2.53% at present. Today, the BNZ PMI and NZ food prices will end the domestic data week. US August retail sales will be the focus for rates markets tonight.

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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