June A Good Month For Commodity Currencies

Transcription

1 June A Good Month For Commodity Currencies NZD, AUD and CAD all performed well in June Signs of coordinated major central bank guidance later in the month causes a significant sell-off in the rates market NZD/USD GDT dairy auction +.6%, sixth consecutive rise Exit poll shows shock UK election result NZD/USD over June 217 Fed raises rates; little change to projections Soft US CPI data NZ Q1 GDP +.5%, soft No good reason for NZD rally in usual illiquid Monday trading conditions Strong ANZ NZ business outlook survey Soft US consumer confidence and housing data RBNZ leaves rates and policy guidance unchanged Co-ordinated major central bank "removal of policy accommodation" tone more evident, but NZD a bystander.71 NZD/USD NZD/AUD NZD/GBP NZD/EUR NZD/JPY Soft US payrolls and wages Tight 1½ cent range last few.75 Strong US ADP weeks with upward drift in employment, auto sales, NZD Fed speakers boost USD.7 1-Jun 5-Jun 7-Jun 12-Jun 14-Jun 17-Jun 21-Jun 24-Jun 28-Jun 1-Jul Intraday Quick Outlook Time for some consolidation. Speculative positioning in NZD is long and USD is looking oversold. Potential for some better US data over coming months after a weaker-than-expected run would help. There were signs of consolidation during June and that seems appropriate after the earlier strong rally. Both central banks are likely reluctant to move away from neutral stances for now. The.95 mark seems like a fair mid-point for a consolidating range. More hawkish BoE rhetoric has recently trumped the more precarious political backdrop ahead of Brexit talks. The battle between these two forces will determine how GBP fares from here. The ECB is now firmly in play, with Draghi signalling removal of policy accommodation. That is highly EUR-supportive and negative for NZD/EUR. Due for a bit of consolidation after a blistering run. Cross vulnerable to a hit in risk appetite, although fundamentally we remain negative on the yen. June ranges day BB Flat, with little chance of monetary policy adjustment over coming months. 1.93% %

2 Commodity Currencies Supported in June Currency Performance vs. USD in June JPY CNY CHF GBP EUR AUD NZD CAD % against USD NZD Mostly Higher Last 3-Months 16 NZD/GBP NZD/USD 14 NZD/AUD NZD/EUR NZD/JPY Mar 21-Apr 12-May 2-Jun 23-Jun Commodity currencies outperform NZD/AUD closed flat for the month A big swing in oil prices but net lower Coordinated central bank guidance towards firmer policy ECB s Draghi change in tone was notable Commodity currencies were well supported in June, with the NZD, AUD and CAD the best performers during the month. NZD/USD ended the month 3½% higher. The USD remained under pressure, with soft payrolls, wages and CPI data not helping the cause. A weaker USD represents an easing in global financial conditions and this generally supports global commodity prices and commodity currencies. The NZ export commodity price index continued its upward march (see chart below), despite the key whole milk powder commodity showing about a 5% fall for the month. The AUD was supported by a rebound in its key commodity prices, with iron ore prices up 14% and thermal coal up 1%. NZD/AUD continued its strong 3-month recovery before meeting selling pressure just over the.96 mark as NZ/Australia commodity prices began to diverge. The cross ended the month flat around the.955 mark. Oil prices came under significant downward pressure during the month as traders worried that the OPEC-led curb on production would not be enough to eat into higher inventory levels. WTI crude was down 15% for the month at one stage to approach USD 42 per barrel, before a late-month recovery saw it finish at about USD 46, still 5% lower for the month. Despite lower oil prices, the CAD was supported by key Bank of Canada leaders indicating a bias to tighten policy. Indeed, as the month progressed it became clearer that a coordinated attempt was under way by the major central banks to suggest that a removal of policy accommodation was appropriate. The Fed s mid-month 25bp hike in the Fed Funds rate came as no surprise, but communication that the Fed was unperturbed by recent weakness in inflation and expected it to be only temporary came across as hawkish. The market remained unconvinced and continued to price in a future rate track well below the (unchanged) median expectation of the FOMC. Alongside more hawkish Bank of Canada commentary, the Bank of England s MPC showed a split 5-3 vote in favour of keeping the policy rate unchanged. Three members voted for a hike and later Chief Economist Haldane and Governor Carney indicated they both had a tightening bias, albeit voted for unchanged rates. The ECB joined in on the action. Late in the month President Draghi indicated that the strength of the euro area economic recovery would ultimately allow some removal of policy accommodation. US Inflation Falls to a 2-year Low 2.5 US Core CPI m/m%.5 y/y% NZ Commodity Prices Reach a Fresh High NZ Commodity Prices 14 Jan-14 Jan-15 Jan-16 Jan-17 CBA NZ commodity price index (SDR terms)

3 Market Expectations For Rates Below the Fed US Fed Funds Rate (top of range) FOMC median projection Actual and forward pricing Global Bond Rates Rise Near End-of-Month yr Govt Bond Yields Change in bps relative to 31-May Aust. NZ Germany US May 7-Jun 14-Jun 21-Jun 28-Jun EUR driven higher, but NZD still outperforms GBP affected by opposing forces A big sell-off in the rates market Yen under pressure RBNZ clearly in neutral gear Draghi s comments were the nod the market was looking for in driving EUR higher. It broke out of a tight trading range and rose to its highest level in over a year, closing the month around After tracking up from.63 to.655 through the month, NZD/EUR came under significant downward pressure and closed the month only 2% higher at.642. GBP was driven by divergent forces. It plunged after the shock UK election result of a hung Parliament. The Conservatives managed to cobble together a coalition government with a minor party, allowing it to govern with a slim majority. GBP recovered after the split MPC vote was revealed and was further supported by more hawkish commentary from Haldane and Carney. NZD/GBP swung accordingly during the month and the net result was a 2½% gain for the month to.563. The coordinated central bank talk triggered a significant sell-off in rates markets. Rates were higher across the curve, ranging from short-term bill futures to 1-year government bonds. US 1-year Treasuries fell to as low as 2.1% after weak CPI data, but a more hawkish Fed and a sell-off led by Europe saw the rate end the month at 2.31%. Germany s 1-year rate was.23% before Draghi s policy guidance sent it much higher, closing the month at.47%. The UK 1-year rate was at.95% mid-month, before closing at 1.26%. Higher global rates while the BoJ maintained its yield curve control policy of targeting a zero 1-year rate resulted in significant downward pressure on the yen, which ended up being the weakest of the majors. NZD/JPY ended the month up a chunky 5% to The soft USD backdrop made it easy for the PBoC to control CNY, while the new formula for the rate set remained a mystery for all. CNY reached its strongest level since November, with USD/CNY down to The RBNZ s OCR review came and went with little fanfare. The bank stuck to the script maintaining its view that monetary policy will remain accommodative for a considerable period. The RBNZ and RBA now both stand out for their unmoved policy guidance amidst other major central banks adopting a less dovish/more hawkish tone. NZD Q1 GDP data were soft (again), but the monthly confidence surveys painted a more robust picture of economic momentum. The ANZ survey showed high levels of business confidence, rising pressure on capacity utilisation and rising inflationary pressure. NZ Business Confidence Remains Solid NZ Business Confidence ANZ own-activity indicator, net % NZ Inflation Pressures Increase NZ Selling Price Intentions 5 ANZ survey, net %

4 NZ rates curve higher and steeper NZ rates were higher across the curve, driven by offshore forces, with an underlying steepening curve bias. Despite the RBNZ s unchanged guidance, the 2-year swap rate rose by 12bps to 2.33%, with the sell-off confined to the last few days of the month after Draghi spoke. The OIS market moved to price in the first RBNZ rate hike by May 218, a few months earlier than previously seen. NZ s 1-year bond rate rose by 2bps for the month, underperforming the US market, with the NZ-US 1-year spread widening towards 7bps. jason.k.wong@bnz.co.nz Monthly Performance Table end-jun end-may Change end-jun end-may Change Currencies NZ Rates NZD/USD % OCR NZD/AUD % NZ 9day BB NZD/EUR % NZ 2yr sw ap NZD/GBP % NZ 5yr sw ap NZD/JPY % NZ 1yr sw ap NZD/CNY % NZ Govt (4/2) TWI % NZ Govt (4/23) AUD/USD % NZ Govt (4/27) EUR/USD % GBP/USD % Global 1 year bond rates USD/JPY % US USD/CNY % Canada USD/CAD % UK USD TWI major % France Asia DXY % Germany Italy Equity Markets Spain MSCI AC Wrld, loc. 1,6 1,57.2% Portugal MSCI World, loc. 5,822 5,818.1% Ireland MSCI EM, USD 2,171 2, % Japan US S&P 5 2,423 2,412.5% Australia Euro STOXX % Germany DAX 12,325 12, % Commodities (USD) France CAC 4 5,121 5, % WTI Crude % UK FTSE 1 7,313 7,52-2.8% Brent Crude % Aust S&P/ASX 2 5,721 5, % R/B CRB Index % Japan Topix 1,612 1, % Gold spot 1,242 1, % China CSI 3 3,667 3,493 5.% Silver spot % NZX5 7,611 7, % Copper % Volatility: VIX % Iron Ore % Coking coal % 3-mth Bill Futures Thermal coal % NZD Dec Corn % AUD Dec Wheat % USD Dec NZX Dairy WMP 3, 3,15-4.8% EUR Dec NZX Milk Price 218 NZD 6.45 NZD % GBP Dec

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