Commodity currencies lower as oil drops almost 5% on smaller than expected production cuts; NZ budget has little impact on markets; USD recovers some ground, lost due to slightly dovish FOMC minutes released yesterday

By Jason Wong

US equities are probing fresh highs, led by the consumer discretionary sector on positive retail reports, and the VIX index is probing sub-10 levels.  However, the risk-on environment hasn’t supported the NZD as it weakens a little alongside other commodity currencies on much weaker oil prices.  UST yields have traded in a tight range.

The key news overnight was that OPEC and its allies agreed to extend curbs on oil production for another nine months through to March 2018.  While this agreement was widely anticipated, some had expected further reductions in production to offset the soaring output from US shale producers.  The disappointment led to a 4½-5% fall in crude oil prices, taking the WTI benchmark down to below USD 49 per barrel.

Commodity currencies have suffered as a result, with NOK leading the charge, down 0.8% and AUD and CAD down around 0.6-0.7%.  This takes AUD back down to around the 0.7450 mark.  This dynamic has had some spillover effect on the NZD, which is trading softer at 0.7020, but also sees NZD/AUD up to 0.9420, on track for its highest close since early February.

Yesterday’s NZ Budget had little impact on the market.  The strong fiscal accounts and tailwind from strong nominal GDP growth allowed the Finance Minister to offer some modest tax relief and benefits across a wide range of the populace, and increased infrastructure spending, without disturbing the path of lower net debt projections.  The Budget was all very nice but there was probably more interest in NZ’s fledgling space industry, with the first launch of a rocket into space (albeit not quite into orbit).  NZ will soon become the 11th country capable of launching satellites into space from within its own borders.

The USD has recovered the ground lost after yesterday’s FOMC minutes were seen to be on the dovish side.  The discussion that “it would be prudent” to ensure that evidence confirms the transitory nature of the Q1 slowdown threw some doubt into the timing of further hikes, but the market now seems less worried about that.  Data overnight were mixed, with low jobless claims confirming that the labour market remains tight, but other data were enough to soften expectations of the extent of the expected rebound in Q2 GDP.  The advance reading of the US trade balance for April showed a wider than expected deficit, while a separate report showed a drop in inventories.  The less widely followed Bloomberg consumer comfort index ticked higher, with the “buying climate” index jumping to a 15-year high.  The USD is up against against most other majors, with the overall index up around 0.3% for the day.

GBP softened after the UK second reading of Q1 GDP showed weaker growth.  After GBP looked like it was on an upward plane through the Asian trading session, it promptly fell and is currently near its session lows around 1.2940.  EUR is struggling to make further gains after its recent strong run and is looking “over-bought” on short-term technical indicators. It sits this morning around 1.12.


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