By Kymberly Martin
Overnight the NZD inched higher relative to a weak USD, retesting the 0.800 level before drifting down to around 0.7950, having started the evening around 0.7930. Improving risk appetite was a broad theme in markets overnight with strong rallies in global equity markets, a tick up in the CRB global commodities index to 366 and a surge in the WTI oil price to US$111.
Fonterra’s milk auction earlier in the week also showed that global dairy prices remain buoyant. Although average prices were close to flat relative to the previous auction prices remain at an elevated level, 15% above the end of last year.
The NZD lost ground relative to a strong AUD, that itself was buoyed by positive risk appetite and commodity prices. The NZD/AUD fell from around 0.7500 to close to 0.7440. With strength in European currencies relative to a weak dollar, the NZD declined versus both the EUR and GBP overnight. The NZD/EUR eased from around 0.5510 to around 0.5470, while the NZD/GBP ended the night around 0.4840, down from around 0.4860 at the start of the evening.
As we head into the Easter break the NZD/USD may retest 0.800 although we see resistance around this level, and we eye support at 0.7880.
Majors
USD weakness was a key theme overnight as risk aversion subsided with the VIX index (a proxy for risk aversion) declining to 15.17 the lowest level since June 2007. The USD index fell from around 74.90 to 74.40.
The EUR was a key beneficiary, continuing its recent ascent from around 1.440 to close to 1.4510 overnight, now at the highest level since January 2010. A successful Spanish debt auction overnight, also likely helped EUR sentiment, dampening fears of contagion in the region.
The GBP also rode higher on the EUR’s coat-tails. From around 1.6340 it ended the night around 1.6400. The released BoE minutes were no more hawkish than the March ones. The vote remained at 6-3 in favour of keeping rates unchanged, with little evidence from the minutes that it is a Committee leaning towards raising rates any time soon.
The AUD continued its recent stellar performance relative to the weaker USD, reaching for new heights at around 1.0670.
This evening the US leading indicator and Philadelphia Fed survey will provide further indicators of how the US economic recovery is developing, and how far the Fed is away from beginning to unwind its very accommodative policy stance.
Fixed Interest
The most significant development was the announcement by the NZDMO of a massive $1bn debt issuance today split between $200mn 13s and $800mn 19s. Both the bond and swap markets responded swiftly with meaningful sell-offs. Yields on 21s rose from around 5.69% to around 5.73%, while 13s yield rose from around 3.45% to 3.48%, resulting in a steeper Government bond curve. The market appears to be taking seriously the reality of increased Government bond supply.
Swap yields also showed similar reactions to bonds, with 10 year swap yields rising from 5.45% to 5.55% and 5 year yields showing a rise from 4.60% to around 4.71%. With long end swap yields rising more than similar dated bond yields the negative EFP spread has narrowed. This adds interest to the bond tender today, as it may deter some EFP related buyers.
Elsewhere US Treasury yields rose as bonds sold off relative to a strong rise in equity markets. (Euro Stoxx 50 up 2.23% and S&P up 1.3%) The relative performance of the two assets was driven by a further tick up in risk appetite and positive sentiment given a good start to the S&P500 earnings reporting season. With 60 of the S&P500 companies having now reported, close to 80% have surprised positively.
In European debt markets a successful long-term bond auction by Spain, attracting solid investor demand, helped to calm concerns that the economy would suffer contagion from its struggling neighbours. It auctioned 10 year bonds at an average yield of 5.47%.
Today
Look out for NZ credit card spending and ANZ-RM consumer confidence data for indications of how nationwide consumer activity is holding up post the Christchurch earthquake, plus today’s DMO auction.
Kymberly Martin is part of the BNZ research team.
All its research is available here.
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15 Comments
Are people watching this?
Long term interest rates are rising because the New Zealand government is likely to borrow up to NZ$20 billion this year, according to ANZ. The official borrowing plan is for NZ$16.5 billion this fiscal year, but at the current rate it is likely to rise.
I think part of this massive increase in recent weeks is the NZDMO storing up now in case financial markets freeze again later this year (quite possible with the Euro debt crisis and the US budget crisis).
But all this borrowing will cost all New Zealanders either directly through the interest payments on the debt (retrieved from either future taxes or future spending cuts) and through higher interest rates for all long term borrowing (through higher corporate bond yields and bank bond yields).
Less than a third of this borrowing is related to the earthquake. See below.
Most is to pay for bribes made by middle of the spectrum politicians to convince voters to put them into power and keep them. Working for Families, Interest free student loans, free early education, and the tax cuts for the rich. All of these were meaures that have blown out the budget deficit in the last 5 years.
This is debt being loaded up onto our kids (if they're stupid enough to hang around) so we taxpayers can consume more now.
Is that fair or sustainable?
Here's the detail below on how much is being spent on the earthquake.
http://www.interest.co.nz/news/53022/english-sees-nz85-bln-govt-spendin…
Finance Minister Bill English has warned the Government will spend about NZ$8.5 billion over the next few years to help rebuild Christchurch.
“The earthquakes do not fundamentally change our economic situation or the Government’s programme,” English said in a speech to the Wellington Employers’ Chamber of Commerce.
“They simply make the task of returning to surplus a little more difficult.”
English said Treasury estimated the direct cost to the Government of the two earthquakes at about NZ$5.5 billion, which would be fully provided for in the Budget on 19 May.
“About NZ$3 billion of this relates to our share of local government infrastructure, roads, insurance excesses on schools and hospitals, temporary housing and land remediation agreed after the September quake, demolition costs in the CBD, ACC costs and the business support package," English said.
“The remaining NZ$2.5 billion will cover expected costs of decisions we have yet to make – the biggest cost is likely to be remediation of land damage from the February quake. The final cost of land remediation is yet to be determined," he said.
So much for bearish candle stick patterns, this blew that one out of the water and the weekly close below .7827 seem rather unlikely now.
Compounded by the false breakout of the S&P and the USD as risk goes back on.
Does have a stench about it that they are storing up enough to see JK and Co through to the election despite how events pan out in Europe.
Re: Fixed income;
Despite the large size of today's tender the RBNZ came to the rescue: offering to fund position (RRP agreements - government collateral acceptable) to the tune of NZD 500 million during it's open market operations yesterday.
View details here: http://www.rbnz.govt.nz/statistics/govfin/d3/data.html?sheet=0
Total outstanding repo funding stands @ NZD 900million.
Furthermore, the government's over borrowing ahead of an interest rate rise/credit downgrade is equally finding it's way back into the banking system via the RBNZ.
This release; http://www.rbnz.govt.nz/statistics/rbnz/f1/data.html?sheet=1 shows the government has deposited NZD 8.458 billion with the RBNZ.
RBNZ offers the government OCR when the average cost of funding to the on lent funds to the banks is bank bill rate + 6bps (~2.70%).
Not a bad deal when one considers the average cost of government borrowings is ~5.83%.
Let me at the F12 bid key - I will take all the government offers.
This is money the Govt (aka Taxpayers) are borrowing to provide public "services". This is because the govt cannot tax us anymore, and since it refuses to spend less it must burden us not just now, but far into the future with "borrowings" and compounding interest payments. Not to be confused with the money the banks "borrow" to lend to us private citizens to drive up the price of property.
Anyway, the collective genius of our leaders and public "servants" has led to a plan.. they will inflate our debt (and our savings) away. Its a brilliant plan, except for one small downside; we become a 3rd world country again.
I'm gonna organize a " We are the Gummy-world Festival " here in the Philippines , to raise aid money , to send to you poor buggers in third-world New Zealand ........
........ Stay calm , help is at hand .............
.. anyone got Bob Geldorf's cellphone number ?
Bernard to answer your question:
In the case of open market operations the RBNZ is temporarily printing money to fund position i.e. it is cash flow positive for the the banks to buy longer dated government securities at tender and submit them as collateral at the RBNZ's OMO.
Addmitedly these funds are redeposited back to the RBNZ and get recorded as a liabilty to act as collateral for real time clearing.
Nonetheless, these bond purchase come at a cost to the taxpayer and a profit to the banks and are purchases that necessarily would not happen otherwise. The banks get to keep the collateral on their balance sheets under internationally recognised accounting rules.
If this continues indefinitely as happened back in 2004 - one institution funded (cornered) just the about the total oustanding amount of a particular issue to maturity for a positice ~4.0% return - Net result, we the taxpayer gave away in my estimate NZD 60-80 million in carry profits to a foreign Sydney based institution.
The government deposit lodged with the RBNZ bank is not a case of the RBNZ printing money, but rather the government printing it - issuing promises to pay. The proceeds (money - and there are no capital requirements for banks to hold these assets) are passed through the RBNZ which just acts as a government conduit.
The government is privatising a public liability and passing the proceeds at a discounted rate to banks to do with it as they wish. Public goods are not being purchased. And there is a significant carry loss and extra profit making potential available to the privately owned banks. We pay twice to borrow our own liabilty.
It won't even reach the average kiwi's awareness. Do you expect our media to actually hunt this information down and report it to the masses? They would rather print economists drivel and further spruike the property market.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10720725
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