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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD drifted lower with its commodity-linked brethren (AUD and CAD) overnight, before staging a recovery early this morning. NZD/USD sits largely unchanged from yesterday’s open, at 0.8130 currently.

The drop lower in AUD and CAD, driven by China growth concerns (see Majors), saw NZD/USD dip its feet briefly below the 0.8100 mark last night.

The AUD’s continued underperformance has seen NZD/AUD rise steadily through the evening, currently 0.5% stronger at 0.9150. Given the chance, the market is in the mood to push AUD lower still, and that should see NZD/AUD make further gains. A weak China PMI today would likely see a peek above 0.92.

There are no local data due today. Investors will be eyeing the announcement of Fonterra’s annual results, due sometime tomorrow (likely before 9am). These should be accompanied by an update to the current $6.00 kg/MS payout forecast for the 2014/15 season. Most analysts pick a downgrade. We are picking a $5.50 payout, based on current conditions.

Today, initial support remains at 0.8100, ahead of the more solid 0.8060 level. We eye resistance at 0.8180.

Majors

Commodity-linked currencies were the focus overnight, as renewed concerns about a slowing China weighed on oil and iron ore. CAD and AUD weakened by 0.6% against the USD, the biggest change amongst the major currencies.

China’s economic data have been surprising soft over the past month, with the Citigroup economic surprise index for the country falling from +50 in early August to -41 as of yesterday. In some quarters, this had generated hopes that local authorities would announce stimulus policies to help stoke growth, since China looked at risk of not meeting its 7.5% y/y GDP growth target for 2014.

That optimism was hosed down yesterday, after the news media picked up a statement from China’s Finance Minister Lou Jiwei, posted on the PBoC website. There, Lou noted that China was experiencing stable growth, and that there would not be any major policy adjustments. Not helping the mood was a Reuters article doing the rounds yesterday, which suggested that Chinese leaders would accept growth below target this year, and set a lower target still for 2015.

With an uptick in demand from government stimulus looking less likely, commodity prices slipped. Brent crude oil is down 1.4% to $97.0, just above its 2014-low. A slip below $96.2 would mark two-year lows. Iron ore fell by 2.3% to 79.8, a fresh five-year low.

The AUD will remain the centre of attention in this environment, and looks very heavy. Should today’s flash reading of the HSBC PMI for China disappoint, a quick trip to AUD/USD’s 2014-low of 0.8660 beckons.

Elsewhere in the world, ECB President Mario Draghi kept the EUR subdued by hinting that the use of additional unconventional tools within the ECB’s mandate remained an option very much on the table. It would be a stretch to think that the purchase of sovereign bonds is currently within the mandate (Germany’s central bank would strongly argue that it is not), but investors continue to price in the chance that the ECB may have to resort to that ‘nuclear’ option.

Across the Atlantic, the market largely ignored soft US home sales data (-1.8% m/m vs +1.0% exp). NY Fed President Dudley was true to (mildly) dovish form by arguing that the Fed should exercise patience on rate rises, to let the economy "run a little hot" and generate inflation closer to the 2% target. Separately, Philly Fed President Plosser announced that he will retire in March, depriving the FOMC of a vocal advocate of rate hikes sooner rather than later. The hawkish wing of the Fed was already set to lose the similarly-outspoken Dallas Fed President Fisher, due to retire in April. We do not anticipate that this will materially shift the Fed’s future rate path.

As noted earlier, the HSBC China PMI will be the main event in our day. Tonight, European and US PMI outturns will be highlights.

Fixed Interest

In a relatively quiet start to the week, NZ swaps closed down 2-4bps. US 10-year yields traded sideways around 2.56% overnight.

Yesterday’s move lower in NZ yields appeared to reflect Friday night’s moves offshore. In this regard, longer-dated yields declined more than short-dated. 10-year swap declined 4bps, to 4.67%, while 2-year closed down 2bps, at 4.04%.

Meanwhile, NZGB yields declined 5-6bps. This move mimicked offshore moves but was also likely assisted by the removal of overhanging election uncertainty. The yield on NZGB23s closed down 6bps, widening swap-bond spreads. We anticipate further widening.

Overnight, German bund yields declined after comments from ECB President Draghi. The key part of Draghi's speech was on Asset Backed Securities (ABS) purchases. The ECB’s intention is to add covered bonds, but there is no appetite to go down the credit curve for now. He also said, "We stand ready to use additional unconventional instruments within our mandate…to further address risks of a too-prolonged period of low inflation." Draghi is likely being purposely ambiguous, but the market appears to take his comments to mean that full-blown QE is a possibility. German 10-year yields declined from 1.03%, back toward 1.00%.

Meanwhile, in a data-light evening, US 10-year yields paddled sideways around 2.56%. Today, there are no domestic data releases scheduled. Chinese, Eurozone and US PMI data will be released.

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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