Wednesday November 20, 2013 - 19:25:56 GMT
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Westpac Institutional Bank - www.westpac.co.nz
NZ Morning Thoughts - FX & IR
NZ Morning Thoughts - FX & IR
US interest rates and the US dollar
are higher. The main catalysts were a Bloomberg report that the ECB was
mulling a decrease in its deposit rate from 0.0% to -0.1%, and Fed doves
Dudley and Bullard both saying tapering will be discussed at the December meeting.
The S&P500 retreated following the Fed comments and is currently up 0.1%.
The FOMC minutes just released are causing a further spike in the US dollar.
6:13AM, 21 Nov 2013
Global market sentiment: US interest rates and
the US dollar are higher. The main catalysts were a Bloomberg report that the
ECB was mulling a decrease in its deposit rate from 0.0% to -0.1%, and Fed
doves Dudley and Bullard both saying tapering will be discussed at the December
meeting. The S&P500 retreated following the Fed comments and is currently
up 0.1%. The FOMC minutes just released are causing a further spike in the US
Interest rates: US 10yr treasury bond
yields were volatile, initially rising from 2.71% to 2.74% during the London
session, strong retail sales helping, but dipping to 2.69% following the ECB
news and Fed dove Kocherlakota saying it’s not time to taper, and then rising
to 2.76% following Dudley and Bullard’s comments.
government bond yields (implied by futures) initially fell from 3.16% to 3.10%
and then rebounded to 3.14%, while the 10yr yield similarly fell from 4.22% to
4.16% before rebounding to 4.20%.
Currencies: The US dollar index
bounced strongly following the Bloomberg report about the ECB, and then Dudley
and Bullard. EUR fell from 1.3547 to 1.3435. USD/JPY ranged slightly lower,
between 99.80 and 100.20. AUD extended its domestic session decline, from
0.9405 to 0.9361. The IMF said the AUD was 10% overvalued, adding to the
intraday negativity. NZD similarly fell from 0.8340 to 0.8287, the Antipodean
currencies being the two worst performers on the day. AUD/NZD extended its
bounce for a third day, from 1.1260 to 1.1310.
US retail sales
rose 0.4% in Oct after a revised flat outcome in Sep. In Oct a 1+% bounces in
auto sales and apparel and ongoing gains in furniture, electronics, health and
sporting goods more than offset falls in gasoline and building materials and
flat food sales. Ex autos and gas, core retail sales rose 0.3% for a 3 month
annualised sales pace of 3.6%, little changed from 3.4%/3.5% in April/July this
year but down from 5.9% in Jan 2013 and 4.5% in Oct last year. In other words,
a year or more into the current round of quantitative easing, core retail
spending growth has lost some momentum. Part of the explanation may be in the
subdued prices story.
US CPI fell
0.1% in Oct pulling the annual pace down to just 1.0% yr, its lowest since the
recession of 2009. The big ticket items in the CPI basket included a 0.1% rise
in food, a 1.7% fall in energy, a 0.2% rise in rent, flat medical care costs
and a 0.5% fall in apparel. The core CPI rose 0.1% for a steady 1.7% yr annual
core pace, down from around 2.0% yr a year ago.
home sales fell 3.2% in Oct, the third month running that sales have not risen,
consistent with pending home sales figures that show the mid-year tapering
scare boost to mortgage rates hit the market quite hard.
US FOMC minutes
showed there was wide discussion of taper techniques but few conclusions.
Other US data
included a 0.6% rise in business inventories in Sep; meanwhile Canadian wholesale
sales rose 0.2% in Sep.
prices decelerated at a –0.7% yr pace in Oct, yet another cycle low. There were
newswire reports that the ECB Council might consider a modest cut to the
deposit rate, taking it to –0.1%, as a further policy move to counter
deflationary risk, even as the Bundesbank’s Weidmann talked down the
possibility of further easing measures, raised since the last ECB Council
meeting by his ECB colleagues VP Constancio and Board member Praet.
Bank of England
minutes from the Nov 6-7 meeting showed unanimous support for the steady bank
rate at 0.5% and maintaining the stock of asset purchase at £375bn.
Event risk today: There’s little of note
locally today, NZ credit card spending routinely ignored by the market. China’s
manufacturing PMI (HSBC version) will be important, and it’s worth watching the
Eurozone PMI’s. RBA Governor Stevens speaks in Sydney tonight, and ECB
President Draghi speaks in Berlin. US data includes jobless claims, PPI, and
PMI, and there’s Fedspeak from Lacker and Bullard.
NZD/USD 1 day: Yesterday afternoon’s
reversal has flipped near term momentum to negative, 0.8250 vulnerable.
NZD/USD 1-3 month: US economic data
surprises are expected to turn mainly positive during the weeks ahead which could
hurt NZD/USD. Should 0.8195 give way, we would then be looking for a fall into
the high 0.70’s. Longer term, though, NZ’s positive economic outlook should
take NZD/USD towards 0.8675 (30 April peak) by early 2014.
AUD/USD 1 day: Yesterday afternoon’s
reversal has flipped near term momentum to negative, 0.9350 vulnerable.
AUD/USD 1-3 month: US economic data
surprises are expected to turn mainly positive during the weeks ahead which
could hurt AUD/USD. Longer term, a more neutral sounding RBA and some encouraging
data should support AUD/USD during the next few months towards 0.9730 by early
AUD/NZD 1 day: The bounce which
started on 18 Nov should extend towards 1.1350.
AUD/NZD 1-3 month: A 1.1200-1.1660
sideways range since July is in formation. However, longer term relative
fundamentals (e.g. RBA possibly easing further vs RBNZ hiking) favour the NZD
over a multi-month horizon such that a fall below 1.1200 is expected by early
NZ swap yields 1 day: In response to changes
in US and Australian bond yields overnight (see above) the 2yr should open
unchanged at 3.56%, and the 10yr should open up 2bp at 5.07%.
NZ swap yields 1-3 month: If US economic data
surprises turn positive during the weeks ahead, as we expect, NZ interest rates
should rise and the curve should briefly steepen. By Jan-2014, the 2yr should
accelerate to 3.80%+ based on NZ’s improving fundamentals and RBNZ tightening.
Thereby flattening the curve.
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