The NZD has started the week on the front foot. After shooting higher yesterday morning, the NZD/USD spent the overnight session consolidating in a 0.8385-0.8430 range.
Currency markets were fairly quiet overnight. Investors were reluctant to tip their toe in the water ahead of an expected announcement on the second Greek bailout package (possibly around noon NZ time).
Still, optimism a Greek deal could be just around the corner kept investors' risk appetite underpinned. European equity markets and the EUR/USD scratched out modest gains through the offshore session.
It's worth noting, NZ interest rate differentials widened noticeably yesterday. This mostly reflects a jump in local swap rates (see Fixed Interest section), against stable offshore interest rates. NZ-US 3-year swap spreads leapt from 245bps to 259bps, while the NZ-AU equivalent rose from -122bps to -112bps. This boost to the relative yield attractiveness of the NZD amounts to increased "fundamental" support for the currency. Indeed, plugging the higher NZ-US rate spreads into our short-term valuation model sees NZD/USD "fair-value" move up by around � cent, to a 0.7450-0.7750 range. This all tends to fit with our view that further gains are in the offing for the NZD/USD this week.
Looking ahead, markets' immediate focus is Greece. Should a second bailout deal be announced today, expect "risk-sensitive" assets like the NZD to outperform. However, there's also some local event risk to watch for.
Across the Tasman, it's an RBA-fest today with the February minutes released at 1:30pm (NZ time) followed by a speech from Governor Stevens at 3:30pm. Should either of these events cause markets to reassess the 40bps of easing still expected from the RBA, the AUD/USD and AUD/NZD could track higher.
Closer to home, today's inflation expectations survey will be the main event of the NZ data week. We're looking for the key 2-year ahead annual CPI expectation in the survey to edge down only a tad, from its very elevated 2.8% reading in November. We suspect the RBNZ will be looking (hoping?) for a more marked fall.
The USD continued to weaken against most of the major currencies overnight. However, trading volumes were relatively light and most currencies traded relatively tight ranges.
For the most part, markets remain in a holding pattern, awaiting news on Greece. European finance ministers are still locked in meetings negotiating the terms of the second Greek bailout. Reports suggest a press conference will be held around midday NZ time today.
Despite a dearth of news, market sentiment has generally retained a rosy hue. Early reports of progress on Greece's bailout package (including agreement on lowering the interest rates on Greece's first EU/IMF bailout) helped investors' mood, as did a surprise spike in Italian industrial orders (5.5%m/m vs. 0.4% expected).
European equity markets rose and sovereign credit spreads narrowed. The FTSE index increased 0.7%, the French CAC 40 rose 1%, and the German DAX climbed nearly 1.5%. Oil prices jumped 1.8% and the CRB index (a broad index of global commodity prices) lifted 0.3%.
Broad Greek optimism and improved risk appetite saw the EUR lead most of the major currencies higher. Indeed, the EUR/USD spent the night grinding up towards 1.3300, to trade at around 1.3250 currently. The rest of the majors notched up modest gains of 0.1-1.0% against the USD.
Investors are likely to remain on tenterhooks until an announcement on Greece's bailout deal is made. So keep your eyes on the news wires from around late morning. There is no doubt a deal has been partly priced into markets in recent sessions. However, confirmation of such would still likely spur a relief rally. EUR/USD could easily break through the top of its recent 1.3020-1.3320 range, with "risk-sensitive" currencies like the NZD and AUD likely to share in the gains.
NZ swap yields broke beyond ranges yesterday, closing up 10-15bps. Bond yields also got dragged up 9bps.
NZ swap yields had a decent leg up yesterday from the open. 2-year yields moved quickly from 2.96% to 3.05% before finding a point of liquidity. They closed at 3.06%, their highest level since early November, with the next resistance level now at 3.20%.
A combination of better NZ data recently, improving global risk appetite, and an RBA that failed to meet market expectations for a rate cut, has seen the market push expectations for RBNZ rate hikes higher. The market now prices 25bps of hikes in the coming year. We expect 75bps, so ultimately yields have further to rise, in our view. Today's RBNZ 2-year-ahead inflations expectations number could give the market further excuse to push yields higher. We expect the reading to nudge down only a tad from the elevated 2.8% November reading.
There were significant moves in the swaps mid curve also, with 5-year yields rising 15bps to 3.78%. Resistance is now seen at the 4.0% level. NZ swap yields have also risen relative to AU equivalents. The NZ-AU 3-year swap spread moved from -122bps to -112bps.
Moves in bonds were slightly less dramatic, though the curve still moved up around 9bps.The yield on NZGB 21s closed at 4.10%. US bonds were not trading overnight due to a US holiday. NZ-US 10-year bond spreads have therefore broken higher to 210bps, their highest level since November. If NZ yields can maintain upward momentum, independent of contained US yields, the next trading range is 225bps-260bps. We see NZ-US 10-year bond spreads peaking in this range in H2 this year.
Expect upward pressure on NZ yields again today given generally positive sentiment overnight, and solid equity market performance. This could be exacerbated by a stubbornly high inflations expectations reading today.
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