NZ$ consolidates as risk appetite returns with easing Greek concerns and strong China numbers

The NZD/USD has spent most of the past 24 hours consolidating in a 0.7890-0.7960 range.

The global backdrop continues to support demand for “growth-sensitive” currencies like the NZD and AUD. Keeping investors’ risk appetite on a solid footing, yesterday’s Chinese trade data revealed a much larger than expected surplus (of US$11.4b in April) and overnight Greek sovereign default fears abated somewhat.

Global stock markets posted solid gains while commodity prices clawed back more of the ground lost last week. Oil prices rallied 1.1% to around US$104/barrel while the CRB index (a broad index of commodity prices) increased 1.2%, to be up nearly 3.5% from Friday. Our risk appetite index, at around 70%, has now recovered nearly all of last week’s losses.

The buoyant global picture encouraged demand for the likes of the NZD and AUD at the expense of “safe-haven” currencies like the JPY and USD. However the NZD/USD was unable to sustain gains above 0.7950/60, perhaps reflective of a slide in the NZD/AUD. Triggered by yesterday’s impressive Australian trade balance figures (A$1740m vs. $500m expected) the NZD/AUD has slipped from 0.7370 to around 0.7340 over the past 24 hours.

This morning’s (9am NZT) RBNZ Financial Stability Report will likely emphasise ongoing, albeit bumpy, progress on the financial front, with the big “news” since the last FSR being February’s earthquake. However, also watch for any macro-economic comments the Reserve Bank might make, which could impact the NZD

Probably more exciting from a currency perspective will be this afternoon’s (2pm NZT) swathe of April Chinese data updates. Keep an eye in particular on the Chinese CPI (5.2%y/y expected, but 5.0% rumoured). A below expectations outcome may provide some legs to the NZD and AUD as Chinese tightening expectations are wound back.

Majors

Most of the major currencies are little changed relative to levels this time yesterday. The USD index spent the night trading choppily inside a sideways 74.60-75.00 range.

Overall it’s been a fairly positive 24 hours for investors’ risk appetite. Reinforcing optimism about the global economy yesterday’s Chinese trade balance figures came in roughly four times analyst expectations (US$11.42b vs. US$3.2b expected) driven by weaker than expected imports. Asian stocks posted modest gains with the positive sentiment spilling over into the offshore session. European equities rallied 1.2-1.5% and the S&P500 is currently up around 0.6%. The VIX index (a proxy for risk aversion) eased from above 17% to below 16.5%.

Against a backdrop of rising equities and strong risk appetite, “safe-haven” currencies like JPY, CHF and to a lesser extent the USD generally underperformed overnight. In fact the CHF was the weakest performing currency amongst the G10 thanks also to surprisingly benign Swiss inflation figures (0.1%m/m vs. 0.5% expected). USD/CHF leapt from 0.8740 to around 0.8820 in response.

The EUR managed a weak rally amid easing concerns about a Greek sovereign default. Not only did a Greek T-bill auction draw solid demand overnight (bid-cover ratio of 3.6) but reports surfaced (although later denied) that a €60b bailout package is being drawn up for Greece. From around 1.4300, the EUR/USD climbed above 1.4360 before eventually running out of steam.

There was little market reaction to last night’s Australian Federal Budget. This was unsurprising given most of the key announcements had been flagged in advance and the A$22.6b 2011-12 budget deficit was only slightly larger than market expectations of A$14-$20b. The AUD/USD tracked sideways through most of the night in a 7.0740-1.0820 range.

Fixed Interest Markets

It was another fairly quiet day in domestic interest rate markets yesterday. Yields were little changed, despite a modest rebound in risk appetite globally.

US 10 year bond yields rose gently from around 3.15% to 3.19% as global risk appetite improved modestly and equities and commodities showed some rebound from recent falls. The yield on US 10 year bonds (a “safe haven” asset) appears to have now bottomed at similar levels seen during the mid-March Japanese crisis.

There was very little movement in NZ swap markets with 2 year yields around 3.37% and 10 year yields close to 5.25%. The curve has flattened meaningfully since late April when the spread between 2 year and 10 year swaps was around 215bp. Now it is only 188bp.

Similarly bond markets were virtually unchanged, with 21s trading around 5.21% and 13s around 3.21%. Bond markets seem fairly balanced at present with some unwinding of EFP (swap-bond spread) trades now that EFP has returned to positive territory. Previously 10 year swaps had consistently traded below bonds for around 10 months.

Interest rate markets will be looking to the DMO tender announcement today, given recent strong demand at weekly auctions.

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

Mike Jones and Kymberly Martin are part of the BNZ research team. 

All its research is available here.