With much of Europe and Asia on holiday, trading conditions have been light. US equities are up slightly, the VIX has fallen to near-historical lows and the NZD and AUD head the leaderboard.
Newsflow has been light. Trump caused some intra-day volatility in banking stocks when he suggested in an interview that he is actively considering breaking up big banks, but the move wasn’t sustained. Trump says a lot of things that don’t often pass. During local trading yesterday reports came through of the US House and Senate negotiators reaching a tentative bipartisan deal on a $1.1 trillion bill to keep the government open through the end of September. This drove a broadly based rally in the USD, but the move wasn’t sustained and by midnight had been fully unwound.
US data releases were on the soft side, with weaker than expected personal income and spending, manufacturing ISM and construction spending for March, although upward revisions for the latter were strong. After the recent spate of softer US data, Citigroup’s US economic surprise index has plunged to minus 21%. Only a few weeks ago it was close to +60%, illustrative of the sharp turnaround in US data of late. The soft economic releases only had a temporary impact on the USD, and it sits roughly flat for the day.
Of note is some recovery in the NZD. It seems a long time since we’ve been able to say that after a period of relentless selling pressure. The NZD found support close to the key technical level of 0.6850 and it is currently up 0.9% from that level at 0.6910. In our Weekly yesterday we noted that the gap between spot and our fair value estimate (0.7450) had widened to 8%, the largest since the depths of the GFC in March 2009, illustrating how much the NZD has deviated from fundamentals of late. That had set up a low hurdle rate for a rebound in the NZD. While the NZD’s correlation with risk appetite has been insignificantly different from zero this year, last night’s recovery has been in the context of the VIX index probing fresh historical lows around 10.
The AUD has also performed well and trades this morning at 0.7530, leaving NZD/AUD at 0.9175. With oil prices on the soft side and WTI back below USD 49, the CAD hasn’t kept pace and is fairly flat against the USD.
EUR is also fairly flat while the yen and GBP are down about 0.3% against the USD. A higher USD/JPY can largely be explained by higher UST yields while GBP was weaker from yesterday’s open following reports that it took EU leaders less than a minute over the weekend to agree to a harsh set of formal guidelines in upcoming Brexit negotiations. The EU wants agreement for the UK’s financial obligations on leaving the EU and EU citizen rights before any talks on future relations can begin. The UK wants trade negotiations to take place at an earlier stage in the process. No prizes for guessing who will win that battle. The EU holds all the ace cards. NZD/EUR and NZD/GBP have recovered from sub-0.63 and sub 0.53 levels respectively to EUR 0.6340 and GBP 0.5350.
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