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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD gapped higher in the earlier hours of this morning to above 0.8220, before returning to sit at 0.8200.

The overnight GDT auction showed average dairy prices to be unchanged from the previous event. While that will come as a relief to some, after recent sharp falls in prices, it did not appear to be the reason for the sharp move higher in the NZD earlier this morning. Rather, the NZD was benefitting along with many of its peers from a lurch lower in the USD (see Majors).

The NZD also showed notable moves higher relative to the EUR and JPY in the early hours of this morning. The NZD/JPY has moved up from 87.40 to trade above 87.80 currently.

However, the NZD/AUD subsided overnight. From highs above 0.9070 last evening it sits below 0.9020. We continue to see the cross trading around 0.9100 by year-end.

Today, the domestic focus will be the release of the NZ balance of payments data. We expect the current account deficit to show a reading of 3% of GDP. This might be as good as it gets, as we anticipate deterioration to about 5% of GDP next year. Aside from that, the market’s attention will be clearly focused on the US FOMC meeting early tomorrow morning (6am NZT).

Majors

There was not a lot going on in currency markets until early this morning when the USD fell sharply against most of its peers. The AUD has outperformed.

Having trundled sideways for most of the night, the USD index plunged early this morning. The move is being blamed on comments by a closely followed Fed commentator (Hilsenrath). He suggested the Fed might not remove the "considerable time" code words from its repertoire at tomorrow morning’s meeting. He felt the central bank might simply "qualify it". That markets would shift so sharply on a single commentator is bemusing, but shows how touchy the market is approaching tomorrow morning’s meeting. It also shows how far expectations for less dovish Fed rhetoric have come. The USD index sits around 84.00 this morning.

Most major currencies lurched higher as the USD fell. The AUD/USD was a key beneficiary. From below 0.9040 it now trades above 0.9100. Earlier yesterday, the AUD had shown little response to the release of RBA minutes (see Fixed Interest). These contained no significant blow to the currency, although the RBA is widely known to prefer a lower AUD.

European currencies also benefitted from the drop in the USD. The EUR had been little moved earlier in the evening by the release of the September German ZEW survey. This showed current conditions fell sharply to 25.4 (40.0 expected), but was offset by better than expected, forward-looking expectations (6.9 vs. 5.0expected). However, as the USD lurched lower the EUR/USD popped from 1.2940 to above 1.2990, before returning to trade around 1.2970.

UK data overnight showed UK CPI in line with expectation, at 1.5%y/y. Data also showed UK house prices rising 11.7%y/y. But once again the notable move in the currency was saved until the shift in the USD this morning. From 1.6220 the GBP/USD has moved up to trade around 1.6280.

Tonight, the Bank of England minutes and the UK employment report will be released. Eurozone and US CPI data is also due. But the main focus will be the US FOMC meeting at 6am (NZT).

Fixed Interest

NZ swaps and bonds closed down 2-5bps across the curve yesterday. Overnight, US 10-year yields traded a tight range to sit at 2.57% at present.

Data wise there was little to drive the NZ market yesterday. Yields drifted lower on the back of the previous night’s shift down in US yields. While the RBNZ is seen firmly ‘on hold’ for now, there is diminished ‘real economy’ paying to offset receiving interest in swaps. NZ 2 and 5-year swap closed down 4bps, at 4.03% and 4.40% respectively. For borrowers we continue to see hedging opportunities below 4.00% on 2-year swap.

Yesterday’s RBA minutes were largely as expected. They repeated key themes: house prices and credit are still rising; there are better signs for confidence and non-mining capex intentions; but unemployment and the AUD are still too high. Overall, the RBA is still anticipating that "the most prudent course was likely to be a period of stability in interest rates", so they are on hold for a long time.

The RBA is however becoming slightly more concerned about the growth in house prices that "warranted ongoing close observation". House prices are clearly the main hurdle for the RBA to cut. The market continues to price less than a 20% chance of a cut in the year ahead.

Overnight, in the backdrop of positive US equity markets, US 10-year yields were fairly range-bound. US 2-year yields dipped around 2bps after Fed commentator (Hilsenrath) suggested the Fed will likely not drop the "considerable time" code words from its rhetoric i.e. to describe the time between the end of QE tapering and the start of rate hikes. US 2 and 10-year yields sit at 0.53% and 2.57% respectively.

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