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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD led the commodity-linked pack lower last night, with NZD/USD weaker by 0.6% to 0.8070 this morning.

It is a little surprising that NZD has outpaced the AUD in the move downward, since the focus in markets has been on hard commodity prices and Chinese growth. These would tend to weigh more heavily on AUD than NZD. Should those factors weaken further, we would expect the normal dynamic to reassert itself, and the NZD/AUD to benefit.

Part of the NZD’s weakness overnight likely stems from some apprehension about what Fonterra might announce as part of its annual results this morning. As we noted yesterday, should Fonterra deign to update its 2014/15 payout forecast (and it is likely that it will do so), we envisage a downgrade from the current $6.00 toward our forecast of $5.50. While there are no formal polls, we think the market is expecting a number slightly below $5.50.

This morning’s trade balance data will gain a bit less attention, but has the potential to be market moving if the deficit is significantly larger than the $1.1b expected.

Today, we see initial support ahead of the 0.8000 big figure, and resistance at 0.8120.

Majors

Commodity-linked currencies remain under pressure against the USD, despite a modest bounce in a Chinese manufacturing gauge. EUR managed to keep its head above water despite downbeat PMI releases. The USD continues to grind higher, with the Bloomberg Dollar Spot Index up 0.1%.

As discussed yesterday, the HSBC flash PMI for China was hotly anticipated, with the market dreading a poor result. As it happened, the measure bounced from 50.2 to 50.5, beating expectations of a slide to 50.0. While hardly a full offset to the negative news flow around China’s growth prospects, it did provide some mild relief on the hour, with AUD heading back above 0.8900.

But these moves were short-lived, with AUD investors keeping an eye on metals prices, which continue to print new cyclical lows. Iron ore fell another 0.5% yesterday, and the London Metals Exchange Index is off by 1.4%. The latter is a key component of our NAB colleagues’ AUD ‘fair value’ model. AUD/USD is 0.3% weaker for the day at 0.8840, a fresh six-month low.

Assisting this move lower in high-yielding currencies (NZD, AUD, BRL the biggest losers on the day) was a tick higher in market volatility. The VIX Index rose to its highest since early August, as markets noted the step up in American-led military action against ISIS in the Middle East. Equity markets suffered, helped by US moves to block tax inversion deals. This weighed on the healthcare sector in particular.

In Europe, the flash estimates of September PMIs made for ugly reading. The headline euro-zone manufacturing index slipped from 50.7 to 50.5, and the headline services index also edged lower, from 53.1 to 52.8. France continues to underperform Germany, with the former’s manufacturing index in contractionary territory for the fifth consecutive month. It is slightly surprising, then, that EUR managed to hold its ground, sitting 0.1% for the day at 1.2860.

It is a fairly quiet day ahead in terms of data flow, with investors likely to remain watchful for China- or commodity-related news. The RBA’s Financial Stability Review could prove interesting, should Governor Stevens choose to indicate that the RBA is considering macro-prudential tools to curb house price inflation. So far, the RBA have shown little interest in such tools, but the debate is gaining momentum in Australian financial circles. The introduction of macro-prudential tools would push the prospect RBA rate hikes further into the future, and likely erode support for the AUD, at the margin.

Other news: -US Markit manufacturing PMI printed 57.9 vs 58.0 exp. -US Richmond Fed manufacturing index +14 vs +10 exp.

Fixed Interest

NZ swap and bond yields closed down 1-4bps yesterday. Overnight, US 10-year yields slipped from 2.56% toward 2.53%.

It was a relatively quiet day in the NZ market yesterday, in the absence of domestic data. NZ 2 and 10-year swap closed down 1 and 4bps respectively, resulting in modest flattening of the curve. The 2-10s curve now sits at 60bps. The 2-year swap sits at 4.03%. We see little on the data-front, in coming weeks, to prompt the NZ short-end out of its current tight range.

Meanwhile, NZ bond yields declined 3-4bps yesterday, further widening swap-bond spreads. The yield on NZGB23s now sits at 4.20%. NZGBs could come under some switching pressure, given the fairly chunky LGFA tender scheduled for today. A total of $NZ270m of bonds is on offer across three maturities 2020, 2021 and 2023. We expect the market may take some effort to digest the $NZ140m of LGFA2023s, resulting in a fairly wide (7-10bps) successful bid range. The shorter-dated bonds may be tighter.

Overnight, Eurozone and US September PMI data came in not far from expectation. Each remained clearly in expansion (above 50) despite the French sub-components remaining in contraction. German 10-year yields were tightly range-bound, trading at 1.01% this morning. US equivalents drifted down from 2.56% toward 2.53%. We see a 2.45-2.85% range through to year-end with a year-end target of 2.75%.

Today NZ trade balance and LVR data will be released. Tonight’s focus will be the German IFO survey of business and US new home sales.

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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