By Mike Jones and Kymberly Martin
After a bit of a bumpy night the NZD/USD ended the night a little higher at 0.7840 in the backdrop of broad USD weakness.
In the early hours of this morning the Fonterra milk price auction showed continued consolidation at elevated levels. The average all-products (TWI) price fell 1.1% from the previous event. This leaves dairy prices 16% higher than at the end of last year.
The price for NZ’s main commodity appears to be holding up better than broad global commodity prices. After the recent pull-back, the CRB global commodity index is now just 1% higher than at the start of the year.
The NZD/AUD showed choppy trading overnight with the NZD creeping higher relative to the AUD in the early hours of this morning. Yesterday’s RBA minutes neither denied nor confirmed the possibility of a June 7 rate hike. We believe the possibility is higher than the 15-20% the market is currently assigning to the event. However an August hike may be more likely in the absence of a near-term trigger.
We continue to highlight that recent NZD/USD gains have run ahead of our model derived “fair-value”. The NZD/USD “fair-value” on this basis sits in the 0.7300-0.7500 range.
Today we get NZ pricing data in the form of Producer Prices and Capital Goods Prices. All eyes however will be on tomorrow’s Budget and to a much lesser extent the ANZ-RM consumer confidence indicator.
Majors
The USD declined further overnight after more disappointing US data. JPY was the only currency to decline relative to the USD over the past 24 hours.
Risk appetite stabilised yesterday with our risk appetite index (scale 0-100%) moving from 64% to 66%. However there was some volatility in commodity prices intra-night and equities showed further losses.
The more significant driver of currencies was USD weakness. This came on the back of disappointing US data releases that caused the market to question the durability of the US recovery post QE2. Housing starts declined 10.6% m/m in April (a 3.6% rise expected), industrial production was flat (0.4% expected) and capacity utilisation ticked down to 76.9% (77.6% expected). The USD index pulled back from above 75.700 to 75.400.
The EUR was somewhat volatile overnight, buffeted by comments of the possibility of ‘soft’ restructuring of Greek debt and mixed messages from the German Zew Survey. The survey showed current conditions improved to 91.5 (87.5 expected) but the forward looking economic sentiment component fell to 3.1 (4.5 expected). The EUR ultimately benefited from USD weakness rising to above 1.4220 after starting the evening around 1.4180.
The GBP had a surge early in the evening after UK CPI for April came in above expectation at 4.5% (4.1% expected). It later gave up some of its gains ending the night around 1.6240.
The AUD also showed volatility overnight. Yesterday’s RBA Board minutes repeated comments of members assessing ‘carefully the evolving outlook for growth and inflation’. After the minutes and last week’s surprise fall in employment, traders appear to be pricing just 15-20% chance of a rate hike in June. We still believe the odds are somewhat higher than that, though it is far from a certainty.
Today’s Australian Wage Price Index for Q1 will be critical in this regard. A meaningful pick up (1.2%) from the 1% qoq recorded in Q4 could tilt the RBA toward a hike sooner rather than later. Also look out today for Bank of England and US Federal Reserve minutes.
Fixed Interest Markets
It was a quiet day in NZ rates markets with yields a little lower. US 10-year yields fell below 3.15% and EU finance ministers say ‘soft’ restructuring of Greek debt is a possibility.
There appears to be little momentum in NZ interest rate markets with bond yields inching down another couple of basis points along the curve. The yield on 21s is around 5.17% and 13s at 3.15%. Swap yields were virtually unchanged.
More significant were declines in US 10-year yields. These followed the release of disappointing housing and industrial production data that raised doubt regarding the durability of the US recovery. US 10-year yields fell from 3.17% to 3.12%, the lowest levels seen this year. Similarly 2-year yields have fallen below previous troughs to a level last seen in December, around 0.52%
The chairman of EU finance ministers Juncker said that a ‘soft’ restructuring of Greek debt may be possible, although he opposed a major restructuring of Greek debt. He conceded Greek public debt was unsustainable and any restructuring would be contingent on further fiscal austerity and privatisation measures. The yield on 5-year Greek bonds remains around 16%, down from 18% in late April. Signs of further contagion within the European periphery seem contained at present.
The decline in US long bond yields may provide the impetus for further declines in NZ long yields today, although most attention will remain focused on tomorrow’s Budget.
See our interactive swap rates charts here and bond rate charts here.
Mike Jones and Kymberly Martin are part of the BNZ research team.
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