Opinion: NZ wholesale interest rates rise, helping currency and defying Bollard

By Danica Hampton NZD/USD has spent most of the past 24 hours within a 0.6700-0.6780 range. There wasn't much in the way of fresh news last night. But, modest falls across equity markets, a drop in US bond yields and softer commodity prices encouraged a bit of "safe-haven" demand for USD and JPY. Against a generally firmer USD, EUR/USD skidded from above 1.4200 to nearly 1.4100 and AUD/USD dropped about 1 cent to nearly 0.8330. Despite the "buy USD" theme seen across global markets, NZD/USD managed to hold its ground last night. Solid NZD demand was noted from a range of macro-driven funds and real-money accounts. Steady demand for NZD against AUD also provided a bit of a prop for NZD/USD. NZD/AUD climbed from around 0.8000 to nearly 0.8100 overnight.

It's worth noting, there was a sharp sell-off in NZ swap rates yesterday. The upward pressure on US yields (in the wake of Friday's US payrolls) was the initial catalyst for the NZ sell-off, but the uptrend was exacerbated by stop-loss selling. The NZ 2-year swap rate rose 14bps to 4.16% yesterday "“ its highest level since mid March. NZ-US 3-year swap spreads have pushed out to 2.57% from Friday's 2.34% and the extra yield support may also be helping underpin NZD/USD. It's worth noting, both the NZD and the 2-year swap rate are now both well above the levels seen back in April 1 "“ when the Governor released a statement expressing concern about the strength of wholesale interest rates. In the near-term, while investors remain focused on the improving global backdrop and buoyant risk appetite, we expect NZD/USD to remain well supported. Keep an eye out for the slew of Chinese data (due 2:00pm) for further clues on the global outlook. For today, we suspect dips will be limited to the 0.6720 region. Some resistance is expected around 0.6800, but a push towards 0.6850 is possible in coming sessions. The USD gained ground against most major currencies last night. Rather than basking in a post-payrolls glow, it seems last night's USD strength was more about position trimming as equities fell, US bond yields dropped and commodity prices softened. There was little in the way of fresh news overnight, but most equity markets dribbled lower. Investors seem comfortable sitting on the sidelines ahead of the FOMC decision later this week and the slew of corporate earnings from major US retailers. European equities fell 0.5-0.7% and the S&P500 is currently down 0.7%. In currency markets, investors continued to prune positions and "safe-haven" currencies like the USD and JPY were the main beneficiaries. Both EUR and GBP were hit hard. EUR/USD slipped from nearly 1.4220 to around 1.4100. Asian central banks were reportedly active sellers of EUR, as well as an array of short-term speculative accounts. Markets largely shrugged off the Eurozone's Sentix investor confidence index (which rose to -17 in August from -31.3 in July). Further clues on the state of the Eurozone economy will come from Wednesday's industrial production and Thursday's Q2's GDP release. It will be worth keeping an eye on the swag of Chinese data released today, which includes retail sales, industrial production and trade balances. Any hint that the Chinese recovery is faltering will likely take a toll on risk appetite (supporting "safe-haven" currencies like USD). Conversely, if the Chinese recovery still appears to be going gangbusters, revived risk appetite could add some weight to the USD. However, the key event this week will be the FOMC decision on Thursday. While no one is expecting the Fed to change its official policy setting, of 0-0.25%, the Fed statement will be closely monitored for changes to their economic outlook. In light of the recent slew of better-than-expected US economic data, many investors will be looking for clues on how the Fed plans to tighten monetary policy. However, we still think it's premature to be looking for any hints on how the Fed is planning to exit quantitative easing. In fact, like the Bank of England last week, the Fed could well signal that it intends to increase its quantitative easing program. As such, while the USD may remain firm early in the week, we suspect the USD Index will struggle to push above the 79.66 high reached on July 29. Editor note: See this piece on interest.co.nz yesterday about how a 'flood' of mortgage fixing was likely to push up wholesale interest rates. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.