By Mike Burrrowes and Kymberly Martin
NZD
The NZD declined slightly relative to the USD over the past 24-hours, in the backdrop of low, but stable global risk appetite. The market remains in ‘wait and see’ mode ahead of tonight’s US FOMC meeting. The NZD/USD currently trades around 0.8230.
The Fonterra milk auction, in the early hours of this morning, showed average prices declined -2.1%. Prices continue to drift lower, as expected, after their spike higher to March this year. Prices are now down around 3% from a year ago. The result had no marked impact on the NZD, but suggests the best of NZ commodity price gains are now behind us. Having said that, we do not forecast precipitous falls, from still healthy levels.
The NZD/AUD gapped lower yesterday, after the release of the RBA minutes for September. These made no mention of discussing rate cuts. They revealed the Board’s medium term concerns over inflation persist, but it is open to the possibility that recent Australian and international developments might ease those concerns.
Subsequently, the market pared its expectations for RBA rate cuts in the coming 12-months slightly, to around 143bps. However the RBA noted “technical factors meant that market pricing might not be giving an accurate reading of expectations…” The AUD/USD rose from 1.0220 to trade around 1.0260 currently, touching 1.0300 overnight. The NZD/AUD fell from 0.8070, to 0.8020 this morning.
Today, we expect the release of NZ current account and migration data. However, the key driver of the NZD will continue to be global risk sentiment, and critically the outcome of tonight’s US FOMC meeting.
Majors
The USD was relatively range-bound over the past 24-hours, as risk appetite stabilised at low levels. The AUD and JPY were amongst the strongest performers and the CHF the weakest.
Markets showed some cautious calm yesterday, ahead of tonight’s US FOMC meeting, where expectations are high the Fed will act to boost the US economy. Though its options are somewhat limited, it is expected to extend the duration of its bond holdings, in order to further lower long-term interest rates. This is referred to as ‘Operation Twist’.
Our risk appetite index (scale 0 -100%) was fairly stable at the low level of 30%. Equity markets mustered a rally, with the Euro Stoxx50 up 2.1% and the S&P500 currently flat. However, the moves higher were led by ‘defensive’ sectors. i.e investors were buying equities for yield, as opposed to buying prospects for improving growth.
In this backdrop, the USD index bobbed around, trading now at a similar level to 24-hours ago at 77.00. Similarly, the EUR traded in a relatively tight band yesterday. Early in the day, it gapped lower after the S&P downgrade of Italy’s sovereign rating (see F.I section below). However, it crept back over the course of the day. It was boosted last evening by the release of the German Zew business confidence survey that was not as weak as expected. The forward looking ‘economic sentiment’ component came in at -43.3 (-45.0 expected), suggesting downward momentum may be slowing.
The diverging performance of the JPY and CHF overnight illustrate the relative success (or determination) of the respective central banks to stem their currency appreciation relative to the USD. The CHF declined 0.80% relative to the USD over the past 24-hours, as the Swiss National Bank vehemently protects the minimum limit for the EUR/CHF at 1.200. The USD/CHF trades around 0.8900 this morning. By contrast, the JPY gained 0.20% relative to the USD over the past 24-hours. The USD/JPY trades at 76.40, not far from mid-August lows.
Tonight the Bank of England minutes will be released. The market will be in limbo however, as it awaits the FOMC meeting this evening.
Fixed Interest Markets
Following moves seen off-shore, NZ yields opened lower yesterday and traded down over the course of the day.
NZ swap yields showed some volatility yesterday, buffeted by off-shore developments. Early in the day, NZ yields were dragged lower after the announcement that S&P had downgrade Italy’s sovereign rating from A+ to A, maintaining a negative outlook. The agency cited weak growth prospects and fragile government.
Later in the day, after the release of RBA minutes, that made no mention of rate cuts, Australian yields rose, dragging NZ counterparts with them. NZ yields could not maintain the momentum however and declined into the close, down 5-7bps on the day, along the curve.
2-year swap yields have broken out of the bottom of their range since late March, to 3.19%. This takes them toward their lows of 3.10% they jagged to in early August. It is difficult to see much receiving interest around these levels, given the RBNZ is still expected to begin raising rates early next year. However, we expect the curve to continue to flatten as receiving interest is pushed out along the curve. With 10-year swap yields at 4.49% (their lowest level since January 2009) the curve has flattened slightly to 130bps.
There was less movement in bond yields. They declined around 2bps along the curve. This has resulted in swap-bond spreads narrowing even further, to around 8bps for 10-year EFP. Relative demand for bonds should occur as this spread approaches zero.
Overnight, US 10-year yields continued to bob around below 2.0%, currently trading around 1.94%. German 10-year yields traded as low as 1.74%, before returning to trade at 1.79%, as demand for “safe haven” bonds remains strong.
After the Italian downgrade, Italian 10-year yields rose from below 5.60% to 5.72%. Italian CDS spreads (a measure of default risk) spiked to new highs of 514bps. (For context, NZ CDS spreads currently sit at 91bps)
During the day, global risk appetite will continue to be the key driver of markets. All eyes will be on the US FOMC meeting tonight, to see if they implement some form of ‘Operation Twist’, as expected.
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See our interactive swap rates charts here and bond rate charts here.
Mike Burowes and Kimberly Martin are part of the BNZ research team.
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