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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD pushed higher overnight to sit at 0.8180 this morning.

The NZD/USD traded a relatively tight range yesterday, taking little notice of the release of the August NZ PSI. This remained in solid expansion, at 57.9. Combined with last week’s solid PMI release, it suggests the economy sustains faster than average growth. Overnight the NZD pushed higher along with the AUD. The NZD/USD has rebounded to trade around 0.8180.

While the NZD was fairly range-bound relative to the AUD, it strengthened against its European peers. It has extended its bounce against the GBP as the looming Scottish independence vote remains too close to call. The NZD/GBP sits at 0.5040 this morning.

There are no data releases scheduled domestically today. The focus for the NZD/AUD cross will likely therefore be the release of RBA’s September minutes (see Fixed Interest). However, they are not expected to reveal anything too contentious for markets. A scheduled speech by RBA’s Kent, in Sydney this morning, may also be worth looking out for. The NZD/AUD trades at 0.9050 currently.

Majors

In a relatively directionless night of trading, ‘commodity-linked’ currencies (CAD, AUD, NZD) regained some of the previous day’s losses.

Markets appear to be a little in limbo ahead of this Thursday morning’s (NZT) crucial US FOMC meeting. Equity markets hovered either side of flat on both sides of the Atlantic. Commodity prices also showed only modest movements, with the WTI and gold price up 0.3% and 0.4% respectively, small bounces from recent extended falls.

US data was mixed overnight. The September US Empire Manufacturing release surprised to the upside (27.5 vs. 15.9 expected). But this was soon followed by a disappointing August industrial production number (-0.1% vs 0.3% expected). The fall may have been due to problems with seasonally adjusting autos production, but was sufficient to knock the USD index from intra-night highs, around 84.40. The index sits at 84.20 this morning.

Overnight the OECD revised down growth expectations for the Eurozone and the US, amongst others. It now sees 0.8% growth from the Eurozone this year, compared to 1.2% previously. It also called on the ECB to do more to stimulate the beleaguered region, including large-scale bond purchases. The EUR/USD sits a little lower at 1.2940 this morning.

The AUD has rebounded from early evening lows to sit at 0.9040 this morning. It appeared to largely shrug off the weekend’s China data releases. Yesterday the RBA issued a freedom of information paper on the AUD. It spoke of the AUD still being "overvalued" in order to achieve desired domestic outcomes. However there was no reference to "curbing" or "intervening" in the currency. The possibility for such activity therefore seems very low indeed. Today, the focus will be on the RBA’s September minutes. These will likely reinforce the view the RBA is on hold for a prolonged period (see Fixed Interest).

Tonight, UK CPI data will be released along with UK house prices. The German ZEW survey of the economy is also due for release.

Fixed Interest

NZ swaps closed virtually unchanged yesterday. Overnight, US 10-year yields drifted down from 2.61% to 2.58%.

In a quiet start to the week, 2 and 5-year swap showed little movement yesterday, closing at 4.07% and 4.44% respectively. The 2-10s curve remains at 63bps.

NZ bonds were a little more inclined to follow Friday’s move higher in US yields. The yield on NZGB23s closed up 2bps at 4.28%. This has seen swap-bonds spreads narrow further and are now at levels that should attract relative buying of NZGBs. The only potential hurdle this week is the supply of $200m of NZGBs for the market to absorb, from Thursday’s DMO auction. We would not be surprised to see the new NZGB 2027 bond offered at the tender.

Overnight it was also a relatively quiet start to the week offshore. The market appears to be in something of a holding pattern ahead of Thursday morning’s (NZT) US FOMC meeting. US yields drifted lower. A much stronger than expected September, US Empire Manufacturing release was soon followed by a disappointing August industrial production number. US 10-year yields trade around 2.58% this morning. Price action suggests the market may have got a little ahead of itself, in the extent it anticipates a less dovish tone at this week’s FOMC meeting.

Today, there is nothing scheduled on the domestic agenda but the RBA’s September minutes will be released across the Tasman. The market currently prices around a 15% chance of an RBA cut early next year and 80% chance the cash rate will be 25bps higher at end -2015. This pricing does not appear unreasonable at present. The hurdle for the RBA to cut again will be high.

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