There has been little newsflow to kick-start the week but risk appetite is higher as Middle East tensions settle. US equities rebounded after a weak run, the UK FTSE100 closed at a fresh closing high and commodity currencies have outperformed. The NZD has consolidated above the 0.59 mark and is flat to higher on the key major cross rates. There have only been small changes in US Treasury yields.
It has been a typically quiet start to the week. After a streak of three weeks of losses and last week’s more than 3% fall in the S&P500 being the largest in over a year, US equities have rebounded. The index is currently up almost 1½%, ahead of a busy earnings week.
The UK FTSE100 closed at a record high for the first time in more than a year, supported by rising expectations of rate cuts, the weaker GBP and the index exposure to recently rising commodity prices.
GBP is the weakest of the majors, falling to a fresh five-month low of 1.23 overnight before regaining some poise, and now down only 0.1% at 1.2355. Fresh in investors’ minds is BoE Deputy Governor Ramsden’s dovish speech on Friday night where he suggested the Bank’s inflation forecasts were now tilted to the downside, hinting that this could change his view on the policy outlook towards easier policy. This resulted in lower UK rates, with a further fall overnight. The market now prices in a much better than even chance (64%) of a June rate cut, 30bps of easing priced by August and 59bps for the year. The UK 2-year gilt is down 6bps.
NZD/GBP is up 0.7% since Friday’s close, edging towards 0.48. Commodity currencies have outperformed, supported by better risk appetite. There was no further escalation of Middle East tensions over the weekend after Israel’s symbolic retaliation towards Iran on Friday, helping oil prices return to their lows for the month. Brent crude is down slightly, trading around USD87 per barrel.
The NZD and AUD caught a bid in early Asia trading and have sustained the move overnight, showing gains of ½% since Friday’s NY close. The NZD currently trades at under 0.5920 and the AUD is up near 0.6450. NZD/AUD is flat at 0.9175 but the NZD is higher on the key crosses. With EUR and JPY roughly flat against the USD, NZD/EUR and NZD/JPY crosses are up in the order of 0.5-0.6%. The only economic data release of note, although not market moving, was euro-area consumer confidence pushing up to a fresh two-year high.
The US Treasuries market has had an uneventful trading session. Ahead of a heavy week of Treasury supply with $183b of debt due to be auctioned, the inclination of investors was to take rates higher, but modestly lower European rates have been a supporting factor. After trading a high of 4.66% near the NZ close, the 10-year rate fallen a little to 4.62%. The curve is slightly steeper.
Global forces saw NZ rates marked higher yesterday. Recall that at the NZ close on Friday, the market was still in risk-off mode after early reports of Israel retaliating against Iran. The retracement of the earlier fall in global rates saw the NZ market play catch-up, resulting in NZGBs marked 6-7bps high, with swap rates up 5-6bps.
On the economic calendar over the next 24 hours, PMI data across Europe and the US are released tonight, with most expected to show small gains in April from March.
[chart;daily exchange rates]
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