Markets anticipate no move from Bollard

By Mike Burrrowes and Kymberly Martin

NZD

Trading in NZD/USD has remained very volatile over the past 24 hours. After plunging to a low of 0.8140 early in the evening, NZD/USD surged to an overnight high of 0.8260. NZD/USD is currently hovering around 0.8200.

The NZD failed to keep pace with the rising EUR overnight, falling from above 0.6000 to 0.5960 currently. Expect trading on this cross to remain volatile as the European debt crisis remains far from resolved. NZD/GBP spent the evening oscillating around 0.5200.

NZD/AUD briefly broke above the 0.8000 level during the evening, but is now trading at 0.7980. The move higher was driven by near-term weakness in AUD/USD (see Majors section below). Near-term direction on the cross will be driven by the RBNZ Monetary Policy Statement at 9am today.    

The focus first-up will be on the RBNZ Monetary Policy Statement. The recent global ructions will likely put the kibosh on the 50bp hike strongly indicated at July’s meeting, but we still expect the RBNZ signal its intention to lift rates by the end of the year. Following this we have the release of the BNZ PMI for August. We see initial support on NZD/USD at 0.8180 and resistance at 0.8250 for the day ahead.

Majors

Fickle investor sentiment towards the state of the Eurozone debt crisis continues to create volatile move in FX markets. Overnight, EUR/USD recouped some of its recent losses. However, highlighting the nervous investor mood, the “safe haven” CHF and JPY were among the strongest performers. The risk-sensitive NZD and AUD lagged the moves in the EUR.

Measures of risk sentiment in other asset classes improved modestly. The S&P500 index and Euro Stoxx 50 index gained 1.7% and 2.3% respectively. The VIX index (a proxy for risk aversion) eased from 36.6 to 34.1. Despite easing overnight, the VIX index still remain well above its long-run average around 20.

Trading on EUR/USD was again very volatile overnight. After plunging below 1.3600 during the day, EUR/USD has recovered to above 1.3750 throughout the overnight session. Sentiment towards the EUR continues to be driven by various headlines from EU political leaders. Indeed, EUR/USD began recovering off its low after the European Commission leader Barroso noted they would soon publish a study on introducing Eurozone bonds. Eurozone bonds are viewed by some as a potential solution to the current crisis.

Further supporting sentiment were hopes of supportive comments from a conference call between the leaders of France, Germany and Greece. There was an expectation the leaders would give strong reassurances Greece won't default on its debt. In the event, German Chancellor Merkel stated she was “convinced” Greece will stay in the Eurozone.

Ratings agency Moody's finally downgraded French banks Societe Generale and Credit Agricole. However, this had limited impact on the EUR as the move had been widely expected and brings their rating into line with the S&P.

The GBP has struggled overnight as the market remains nervous about the exposure of UK banks to the ‘peripheral’ European economies. GBP/USD fell to 1.5700 at the beginning of the evening, but has recovered to 1.5790 currently. Slightly better-than-expected UK jobless claims data for August (20.3k vs 35.0k) helped GBP/USD recover from its overnight lows.

AUD/USD has really struggled over the past 24 hours. After starting yesterday above 1.0300, AUD/USD fell to an overnight low of 1.0170. Early this morning AUD/USD recovered to 1.0270. The move lower occurred in the backdrop of poor risk appetite and a surprise downwards revision to Australian CPI (see Fixed Interest section below).

Expect the focus to remain on the European debt crisis for the night ahead, but there is no shortage of data to grab the markets’ attention. In terms of the data, we have UK retail sales; Eurozone industrial production; US CPI, current account, Empire manufacturing and Philadelphia Federal business survey. On top of this, ECB President Trichet is due to speak during the evening.    

Fixed Interest Markets

It was another very quiet day yesterday in NZ interest rate markets, as the market waits for the RBNZ meeting at 9.00am today.

NZ yields were virtually unchanged yesterday. A slight further flattening in the swap curve occurred, as 2-year yields rose 2bps to 3.25% and 10-yields dropped 2bps to 4.57%. The 2s-10s curve is currently at 132bps, approaching its lowest level since last November.

Moves across the Tasman were more dramatic, yesterday afternoon. The yield on AU 10-year bonds dropped from 4.16% to 4.08%, its lowest level since February 2009. This takes the AU-NZ 10-year bond spread to the lowest level since September last year, at -36bps.

Yesterday, market expectations for RBA activity were revised down further, to 155bps of cuts in the coming year, from around 140bps previously. The catalysts appear to have been a weak dwelling starts number for 2Q. In addition, the announcement of revisions to the methodology for calculating CPI that has seen the Q2 figure revised down from 0.9%q/q to 0.6%q/q. In our opinion, this firms our view that the RBA’s bias is now neutral, as opposed to one of tightening. We continue to believe that the market is over-pricing rate cuts from the RBA.

Overnight, US 10-year yields have bobbed around 2.0%. German 10-year yields rose steadily from 1.75% to 1.88%, as risk appetite has improved somewhat. Greek CDS spreads (measure of potential default) have soared overnight. However, there has been some relief in other non-core CDS spreads overnight, as the market appears to be differentiating between the prospects of an imminent default by Greece, and slightly better prospects elsewhere.

All eyes today will be on the RBNZ meeting. We expect the RBNZ to remain on hold, but to restate its intention to remove its 50bps ‘insurance’ cut, when global uncertainty recedes. In itself, this may not prove sufficient to nudge up market expectations of less than 50bps of rate hikes from the RBNZ in the coming year. Indeed, expectations for NZ currently standout amongst other key global markets as the only one where rate hikes are expected in the coming year. However, ultimately we believe these expectations will be revised higher.

See our interactive swap rates charts here and bond rate charts here.

Mike Burowes and Kimberly Martin are part of the BNZ research team. 

All its research is available here.