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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD sits lower this morning, at 0.8120, after drifting downward overnight and suffering post-US FOMC volatility.

Yesterday morning’s balance of payments data showed the NZ current account deficit slimmed further to 2.5% of GDP. However, we continue to expect deterioration toward 5.0% of GDP in 2015, which will be one of a number of factors that could weigh on the NZD over the longer-term.

But over the past 24-hours the fate of the NZD has been very much in the hands of USD. The NZD/USD was on a downward path but experienced a blip higher in the very early hours of this morning after a low-side US CPI reading. However, greater volatility was seen after the US FOMC meeting (6am NZT). The NZD/USD plunged as the USD initially spiked higher (see Majors). The NZD/USD is currently struggling to find its balance around 0.8120. This is around is lowest trading level since early-February. Support is now seen at the February lows in the vicinity of 0.8050-0.8060.

The NZD also sits lower relative to its European peers. After drifting lower overnight, the NZD/GBP has broken below the crucial 0.5000 level to sit at 0.4980 this morning, its lowest level since February. Meanwhile the NZD/AUD has been remarkably range-bound around the 0.9020 level.

This morning’s domestic focus will be the release of NZ 2Q GDP. This will be unlikely to provide anything to shore up the NZD. We pick 0.5 %q/q, marginally below consensus (0.6%), but more importantly a little below the RBNZ’s published forecast (0.8%). Even though the data is historic, and 3Q looks stronger, given current negative NZD momentum, the data could further weigh on the currency.

Majors

Currency markets were relatively quiet until the US FOMC meeting spurred a bout of volatility early this morning. The NZD and AUD have underperformed over the past 24-hours.

In the build-up to the US FOMC meeting, US CPI data was released and prompted a short-lived dip in the USD. US August core CPI came in slightly below expectation (1.7%, vs. 1.9% expected) to be flat m/m. However, the real excitement came after the US FOMC meeting (see Fixed Interest). The USD index initially spiked higher (presumably in response to the higher FFR ‘dot points), but has subsequently given back some of its gain. It is wavering around 84.30 at present.

The result was an initial sharp fall in most of the other major currencies, which are now still finding their level. The EUR/USD initially fell below 1.2900 but now sits around 1.2920.

Earlier in the evening the GBP had taken a step down after the release of Bank of England minutes. The committee voted 7-2 to keep the bank rate at 0.5%. No further members moved into the camp calling for immediate rate hikes. The committee emphasised "accumulating weakness in the euro area" was the most significant development of the past month. The UK labour report also showed the UK is capable of creating plenty of jobs, while wage pressures remain moderate. The July unemployment rate declined to 6.2% from 6.4%. After the FOMC meeting the GBP/USD has taken another step down to sit around 1.6290 at present.

A toll was also taken on the JPY. After the FOMC meeting the USD/JPY has lurched higher, to above 108.00 for the first time since September 2009. The Fed’s projected path toward ‘normalising’ rates contrasts starkly with the BoJ’s continued monetary policy easing.

The AUD was also jolted around in the early hours of this morning, although it had been on a generally subsiding path overnight. The AUD/USD sits around 0.9000 currently. This morning the market will continue to digest the Fed’s message. Then the RBA will release its 3Q Bulletin and monthly fx transactions data.

Elsewhere the BoJ Governor, Kuroda, is scheduled to speak in Tokyo. UK retail sales data will be released tonight along with US housing starts and the US Philadelphia Fed business survey. But most attention may be garnered by the Scottish Independence Referendum. A vote against independence could see a knee-jerk relief rally from the GBP, as a period of prolonged uncertainty would be curtailed.

Fixed Interest

NZ swaps closed down 1-3bps yesterday. Overnight, the market treaded water ahead of this morning’s US FOMC meeting.

Receiving interest remains at the short-end of the NZ curve as the market accepts the RBNZ is ‘on hold’ for a prolonged period. That said, we still see attractive opportunities for borrowers to hedge if 2-year swap falls below 4.00%. NZ 2 and 5-year swap closed at 4.03% and 4.39% respectively.

NZ bond yields closed down 1bps across the curve as the market had its eye on two events; this morning’s US FOMC meeting and today’s NZDMO bond auction. The DMO announced the auction will be for NZ$200m of their newest 2027 maturity bond. This is the first time the bond is available through tender since it was initially syndicated a couple of months ago.

Overnight, unsurprisingly, there was little action ahead of the long anticipated US FOMC meeting at 6am (NZT). However, US 10-year yields dipped slight, to trade at 2.56% after a low-side US CPI reading.

At its meeting this morning the US FOMC kept the "considerable time" code words to describe the period between the end of QE tapering and the anticipated start of rate hikes. However, the Fed’s median forecast for the Fed Funds Rate has been revised up. From 1.125% for the end of 2015, the ‘dot points’ now show 1.375%. It also introduced its 2017 estimates for the first time. These show the FFR at 3.75% at the end of 2017, in line with the Fed’s long-run estimates.

These projections are some way above Fed Funds Futures which currently price a 0.75% FFR at end 2015, and 2.44% FFR by August 2017.The initial response was for a 4-5bps push higher in yield across the Treasury curve, which has now extended. US 10-year yields sit at 2.62%.

Today, the domestic market will absorb the implications of this morning’s FOMC meeting, but then it will be all eyes on the 2Q release of NZ GDP (10.45am NZT) (see NZD). Even though the data is historic, and 3Q looks stronger, the outcome may prompt the market to further inch down expectations for future OCR hikes.

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