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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD lost ground against the USD on Friday night along with all its peers, weakening by 0.3% to 0.8130. It opened slightly higher this morning and pushed toward to 0.8160 on a mild relief rally after the National government was convincingly returned to power at the weekend’s General Election.

We don't expect this rally to extend materially, with the USD story likely to overwhelm it as the week wears on. With NZ commodity prices yet to bounce, and the RBNZ on hold until the end of Q1 2015 at least, there seems little reason to be bullish NZD in a rising USD environment.

The initial rally in GBP as Scotland’s referendum results rolled in (see Majors) saw NZD/GBP test 0.49, but we sit back at 0.5000 this morning. With the spectre of political risk now lifted, we expect NZD and GBP to fall against the USD at largely the same pace. We see NZD/GBP at 0.49 by year-end.

NZD/AUD continues to benefit from the AUD’s relative underperformance against the USD, with the cross printing at 0.9120 this morning. This is a timely return to our end-September target of 0.91, around which we expect the cross to oscillate through to mid-2015. In the near-term, we see a risk that the recent move higher extends toward 0.93.

Today, with no local data of note, we expect a fairly subdued session. We mark initial resistance at 0.8190, and initial support at 0.8100

Majors

The USD strengthened across the board on Friday, sweeping the majors 10-0. The Bloomberg Dollar Spot Index gained 0.3% to rest beneath its recent highs, and looks ripe to make further gains this week.

Most pundits would have picked the GBP to rally as the Scottish referendum saw the independence movement fall short of its goal. 55% of voters electing that Scotland remain part of the UK. While the GBP built on the previous day’s gains as the results rolled in, it lost ground after the final tally. GBP/USD weakened by 0.7% to 1.6300 on the day, to sit middle of the pack amongst the major currencies.

The AUD and the EUR were amongst the biggest losers, both shedding just over 0.7% against the USD. Iron ore prices fell by 1.6% on Friday, taking it to a fresh cycle low of $81.70. This likely contributed the AUD’s softness. We also note that currency volatility seems to have settled at a higher level, with AUD/USD 3-month implied volatility sitting at 8.5%, having dragged its heels around 6.5% for much of Q3 2015. Higher volatility tends to erode the value of high-yielding currencies such as the AUD, which have been the targets of carry-trade investors.

There was no market-moving data on Friday, and the calendar looks fairly light for the week ahead. Highlights include a swathe of PMI releases out of Europe and China, and the third reading of US Q2 GDP, which is expected to be upgraded.

Tonight sees ECB President Draghi testify in front of European Parliament, where he will no doubt be asked about the low uptake of the TLTRO programme last week. Perhaps EUR’s sell off on Friday was some defensive positioning ahead of any swipes Draghi might take at the single currency. The Fed’s William Dudley is due to be interviewed tonight, in the first piece of Fedspeak after last week’s FOMC meeting.

Fixed Interest

NZ swap closed up 1-3bps on Friday. On Friday night, US 10-year yields drifted down from 2.65% toward 2.57%.

There was a general pay tone in the NZ market on Friday, although most activity was seen at the longer end of the curve. Some of the interest to pay at the long-end may be resulting from investors looking at spreads to offshore (AU in particular) that have come in sharply. These are beginning to look attractive to position for widening.

NZ 2-year swap closed up 1bps, at 4.06%, while 10-year closed up 3bps, at 4.70%. Similar moves were seen in bonds, with the yield on NZGB27s closing up 3bps, at 4.48%.

On Friday night, in the absence of key data releases and broadly flat equity markets, US Treasury yields drifted lower. The move was mostly seen at the long-end of the curve, resulting in a notable flattening of the US curve. US 10-year yields declined form early evening highs above 2.65%, to end the week close to 2.57%. It appears the range-highs since May, of 2.68% will be difficult to break without a firm catalyst. However, we continue to see yields back at 2.75% by year-end before pushing higher next year.

Over the weekend, the NZ general election results showed the incumbent government (National) returned to power with greater support than at the previous election. It looks likely it will have a majority government. This will broadly mean the policy status quo. The removal of the uncertainty that inevitably comes with political change may add to the bid for NZGBs today. But this should anyway be solid given the rally in offshore bonds on Friday night, mimicked by Aussie bond futures. We expect lower NZ long-end yields, resulting in some curve flattening.

Aside from politics there is only the NZ Westpac Consumer Confidence index to look out for this morning. Tonight, ECB President Draghi speaks to the EU Parliament.

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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