The NZD/USD is trading back at the familiar 0.8070 level, having bounced off support around 0.8040 overnight.

Markets remain a little choppy and directionless. This is represented in our currency momentum model. It shows momentum has faded in significance as a driver of currency markets in recent weeks.

Early this morning the latest Fonterra milk auction delivered a strong result. We have been waiting for a decent lift in global dairy prices given market developments such as the US drought. Dairy prices rose 7.8% on average, adding to the 3.5% lift at the previous auction. This is an important result to keep current dairy payout forecasts on track when the risk of a downward revision had been starting to build. For now, NZD/USD support is seen at 0.8040 and resistance at 0.8110.

Today, the NBNZ business PMI will be released, and will likely gain some attention. To maintain its recent saw-tooth pattern, and a positive bent, the July reading needs to bounce from the 50.2 level it dipped to in June.

Tonight, US data releases will once again be important in setting the mood toward the USD (see Majors).

A period of EUR weakness, last night, that reportedly related to recycling of Swiss intervention purchases weighed on EUR crosses. The NZD/EUR popped higher to trade at 0.6570.

Majors

Trading ranges continue to be relatively contained. The USD was supported by waning expectations of further QE.

General risk appetite remains fairly well underpinned in the sleepy summer absence of negative news flow from Europe. Giving the recent improvement in sentiment the market was selective in its response to US data. It focused on the strong NABH housing index (see Fixed Interest). Our risk appetite index (scale 0-100%) remains at a healthy 72%, while equity markets have maintained recent gains. The USD index has climbed a little further to trade just above 82.60.

The EUR slumped late last evening, reportedly due to the "usual" recycling of SNB intervention flows (needed to support its stated minimum EUR/CHF level). The EUR/USD dropped from above 1.2330 to around 1.2290 currently.

The GBP/USD showed some choppy trading overnight, but moved gradually higher. The release of Bank of England Minutes show the vote to leave rates unchanged at the August meeting was unanimous. This was the first unanimous vote since January. There was also no reference to discussion of rate cuts. Some members still saw it as a "finely balanced" decision as to whether to undertake further QE. Still, overall the minutes hint at less chance of QE ahead than the market previously expected. The GBP/USD has traded up to 1.5690.

Tonight, the UK will release retail sales and the Eurozone CPI data. US housing starts data and the Philadelphia Fed survey will be closely watched by the market. The market will be looking for positives to maintain the recent improved sentiment toward the US economy and hence the USD.

Fixed Interest

It was a remarkably uneventful day in NZ markets despite the earlier moves seen offshore. NZ yields closed little changed in both swap and bond markets. We see short-end yields about mid-range at present. They continue to price the OCR will be around 5bps lower in 12 months’ time. The 2s-10s curve remains at the 113bps level.

Overnight, US data releases were mixed. CPI was contained, the Empire Manufacturing index for August was weak (-5.85 vs. 7.00 expected). Capacity utilization ticked up from 78.9% to 79.3%. The NABH housing index moved up from 35 to 37 (35 expected), the highest level since mid 2006.

In light of these last releases there appeared to be no stopping the momentum in the recent US Treasuries sell-off. 10-year yields are currently sitting at the key support level of 1.80%. Failure to find sustained buying interest at this level would open the way for yields to return to 2.0%. German ‘safe haven’ bonds have also come under selling pressure. 10-year yields are now approaching key support levels at 1.60%. These moves should add further steepening to the NZ curve today.

The NZ DMO has announced the auction for today of $100m of NZGB15s and $150m of NZGB23s. This is in line with its current policy of offering regular $250m weekly issues. Given the sell-off seen offshore it is likely demand today may continue the soft trend of the past few weeks.

Next up on the US data front tonight will be housing starts and the Philadelphia Fed survey. If the more upbeat tone in data continues, we could see US 10-year yields continue their march higher.