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NZD fortunes fade

Fuseworks Media
Fuseworks Media

The NZD's buoyant start to the week, following the Chinese PMI release over the weekend, soon faded.

The NZD/USD drifted off yesterday, before finding solid support at the 0.8190 level overnight. Early this morning, after stronger-than-expected US ISM data (see Majors) the NZD/USD moved higher to trade above 0.8240 currently.

Trading in the NZD/EUR followed a similar pattern. In the early hours of this morning this cross rebounded from its lows below 0.6140 to trade up above 0.6180 at present.

The NZD/GBP bounced off a key support level at 0.5100 overnight, trading back up to 0.5140 currently. Despite a solid UK manufacturing release, when general risk appetite improved the NZD benefited relative to the GBP.

The NZD/AUD opened the week lower after the AUD originally benefited disproportionately from t he weekend's strong China PMI release. However overnight, the NZD/AUD was on the ascendancy, creeping up from 0.7880 to trade above 0.7900 currently. The cross will likely be volatile today with the 4.30pm (NZT) RBA meeting. There is currently a 50/50 chance of a rate cut priced, suggesting either outcome will likely move the currency notably.

Aside from that, in the absence of NZ data releases the NZD/USD will continue to be at the whim of global developments. In the early hours of tomorrow morning the latest Fonterra milk auction will take place. It will be closely watched given the pull-back in prices at recent auctions.


It was a fairly volatile night for currencies with the US and EUR and USD passing the baton after data releases on either side of the Atlantic. The USD index currently trades around 78.80.

The EUR was on the back foot along with European equity markets last evening, after Eurozone data releases. First, the Eurozone Manufacturing PMI for March confirmed the flash estimate at 47.7. This suggests the economy contracted in Q1 following the 0.3% contraction in Q4, thus defining a technical recession. Next up, data showed the Eurozone unemployment rate rose to 10.8% in February from 10.7% previously. The EUR fell from 1.3380 to below 1.3280 early this morning.

Subsequently, US data showed the ISM Manufacturing survey moved to 53.4 in March (53.0 expected). This boosted risk appetite as the US manufacturing sector was shown to be firmly in expansion. Consequently the USD's "safe haven" appeal subsided, and the EUR rebounded to trade back at 1.3330 currently.

As a mirror image, the USD index rose to trade above 79.10 after the weak Eurozone data, but subsequently fell back to earth to trade just above 78.80 currently. The Euro Stoxx 50 managed to close up 1.00%, having been in negative territory before the ISM data. Our risk appetite indicator (scale 1-100%) remains just below 68%.

The GBP/USD showed choppy trading overnight but is slightly higher on 24-hours ago. It was underpinned by a better-than-expected UK Manufacturing PMI (52.1 vs. 50.7 expected). The GBP/USD, at 1.6030, is now trading close to its highest level since mid-November.

The "risk sensitive" CAD, AUD and NZD had all been trading flat to slightly lower early in the evening. They were boosted by the improvement in risk appetite following the US data release. The AUD/USD traded off its lows below 1.0380 to sit around 1.0440 currently. The general down-trend in the AUD/USD since the start or March appears to still be intact however. Today's RBA meeting will be critical in this regard. The market prices a 50% chance of a rate cut. Therefore either a cut or a "hold" will solicit volatility from the currency.

Today, we also get the Chinese non-manufacturing PMI although it is less likely to impact currency markets than the manufacturing release. Tonight we get US factory orders and importantly the Federal Reserve March minutes.

Fixed Interest

It was a fairly quiet day in NZ markets with yields closing up 1-5bps across the curve. Overnight, US 10-year yields moved lower.

NZ 2-year swap yields remained fairly stable yesterday, closing up just 1bps at 3.05%. However, the curve steepened with a 4bps rise in 5-year yields, and 5bps rise in the 10-year. The 2s-10s curve has steepened to 144bps.

Bond yields closed up around 3bps across the curve. The yield on NZGB23s (reclassified as the NZ 10-year bond) closed at 4.27%.

Heading into today's RBA meeting the market is close to pricing a 50% chance of a rate cut. The NZ-AU 2-year swap spread continues to sit around -98bps, close to its highs for the year. If the RBA fails to cut today expect this spread to become more negative as AU 2-year swap yields rise.

Overnight, US "safe haven" 10-year bonds were initially in demand. This was in line with the fall in European equities after data confirmed the Eurozone unemployment rate rose to 10.8% in February, from 10.7% previously. The yield on US 10-year bonds fell as low as 2.16%. However, after a stronger-than-expected outcome for the March US manufacturing ISM, yields have moved up to 2.19%.

Aside from today's 4.30pm (NZT) RBA meeting, the focus tonight will be on the release of the Federal Reserve minutes from March 13. These are important, given that is was this meeting that initially set US 10-year yields soaring, after the official statement was less dovish than the market expected, with no hint of QEIII. Subsequently yields have given back half of their initial 40bps rise.

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