Since yesterday’s report, the USD has been hit twice, firstly by more dovish than expected FOMC minutes and secondly by comments by US Treasury Secretary Mnuchin. The USD major currency TWI is down about 0.6% since that time, with the NZD one of the biggest beneficiaries.
The FOMC minutes from the last meeting revealed a split committee weighing up positives and negatives to the inflation outlook, with no smoking gun to suggest that it would be moved to hike again as soon as next month. Importantly, “several” members weighed up the risks of weaker growth and inflation stemming from the possibility of additional appreciation of the USD.
The USD softened after the minutes, but was then supported following publication of an interview with US Treasury Secretary Mnuchin in the WSJ. He praised the strength of the USD, signalling that it reflected confidence in the US economy and was a “good thing” in the long run. Those USD-positive comments stood in contrast to those of President Trump recently, who said that the USD was “too high” and he would be seeking a “level playing field” with respect to trade with China and Japan.
However, in a second interview overview – overnight with CNBC – Mnuchin’s comments helped drive the USD lower. He saw the impact of tax policies feeding into the economy in late-2018 and that he had some concerns with the plan to introduce a border tax. The former is too late in the eyes of the market, which is already long USD in anticipation of an earlier fiscal stimulus, while the latter policy was seen to be highly USD-positive. Any backtracking on the border tax proposal is clearly USD-negative. Mnuchin’s tone about China was positive, saying that he had a “very good conversation” with his Chinese counterparts and he would use the six-monthly Treasury review of foreign exchange markets to decide if China was a currency manipulator, a contrast to pre-election rhetoric of making that call on “day one” of Trump’s presidency.
After starting yesterday around the 0.7160 mark, the NZD is now trading around 0.7230, after respecting last week’s high just over 0.7240. Our fair value model estimate still sits around the 0.74 mark so there is scope for further upside without becoming stretched if the USD sees further selling pressure. Early yesterday, Fonterra confirmed its FY2017 milk payout forecast of $6 per kg/milk solids but that wasn’t market-moving. Economist estimates are closer to the $6.40 mark so Fonterra’s forecast is still seen to be on the conservative side.
The AUD has under-performed during the broadly based USD sell-off, not helped by the release of soft capex numbers yesterday. Nevertheless AUD/USD is back above the 0.77 mark, while NZD/AUD has pushed up to 0.9370 after reaching as low as 0.9303 some 36 hours ago. This reinforces the 0.93 level as an area of strong support and our view of the cross range-trading in a 0.93-0.97 zone for much of this year remains intact.
GBP has outperformed and sits at 1.2545, with NZD/GBP down to around 0.5760. We’re not sure why as the only news of note we can see is Austrian Chancellor Kern saying that Britain should be charged about €60 billion when it leaves the EU, reflecting the financial obligations previously agreed to such as pensions and EU projects. It’s a figure that has been bandied about in unofficial circles, and this the first time an EU leader has been prepared to say it. The EU wants agreement on the exit cost before negotiations begin on any possible trade deal. Negotiations are going to get messy this year.
NZD/EUR broke through 0.6850 overnight as the EUR couldn’t keep pace. We see a threat of 0.70 breaking over coming weeks or months if political risk in Europe intensifies. That said, risk has subsided a little. French bonds were supported following reports that centrist rival Bayrou would support independent Macron in his effort to prevent far-right Le Pen from winning the French Presidential election. A new poll showed that in a head-to-head battle, Macron would beat Le Pen by a margin of 20 percentage points.
This has supported a modest rally in European bond markets, seeing falls of 4-5bps in 10-year yields across the key markets. This theme has rubbed off on to US Treasuries, with yields down 2-3bps across the curve. The 10-year rate trades at 2.39% this morning. The downward trend was temporarily broken after Mnuchin said that it “makes sense” for the US to be issuing longer term debt like 50-100 year maturities. But the blip up was less than 2bps and wasn’t sustained and the comment had more impact on the 30-year bond.
The Fed minutes didn’t have a significant impact on March pricing for a rate hike, with the market already sceptical that the Fed would go ahead anyway. Probability calculations sit between 34-43%, depending on whether Fed Funds or OIS pricing is used.
NZ rates were lower across the board, reflecting the global tailwind, including lower US and Australian rates. The 2-year swap rate fell by 2bps to 2.33% while the 10-year swap rate fell by 3bps to 3.495%. The government’s tender of $150m 2037 bonds was well supported and that ended the day down 5bps at 3.94%.
Today sees the RBA’s Lowe testimony to Parliament. We’ve heard enough from him over the last week or two, so he is unlikely to reveal much new. The overseas economic calendar is light so it should be a fairly quiet end to the week.
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