The local calendar should provide drama today

Market wrap

Global market sentiment: Amid little news flow the overnight session was a mixed affair. Equities were weaker, as was the US dollar, but US treasury yields were slightly higher. The Eurostoxx 50 closed down 0.6%, while the S&P500 is currently down 0.7%. The VIX index, a barometer of risk aversion, rose to a two-month high.

Interest rates: A directionless evening. US 10yr treasury bond yields ranged sideways between 2.17% and 2.23%, currently at the high end of the range. A 10yr auction was mixed, awarded at market yield but with a bid-cover ratio of 2.5 (vs 2.9 12-auction average). Fed hawk Plosser tweeted modest tapering should not harm the economy.

Australian 3yr government bonds outperformed the US slightly, falling from 2.64% to 2.59%, while the 10yr yield fell from 3.48% to 3.42%.

Currencies: The US dollar index remained under downward pressure and is made a fresh four-month low. EUR made a four-month high at 1.3359. ECB member Asmussen said don’t mess with the ECB. USD/JPY fell from 97.00 to 95.14. AUD rose from 0.9460 to 0.9564 during the London morning but then slipped to 0.9475 – broadly following equities’ direction. NZD similarly rose from 0.7900 to 0.8024 before slipping to 0.7944. AUD/NZD fell from 1.2000 to 1.1895, perhaps due to anticipation of a hawkish RBNZ shift this morning.

Economic wrap

US MBA mortgage applications in the w/e 7 June rose 5% after a 11.5% fall the previous week. The rise was surprising given the rise in mortgage rates, but may be due to a rush to move before mortgage rates snap higher still.

Eurozone industrial production rose 0.4% in April following a 0.9% rise in March. The breakdown showed a good rebound from France and another robust increase from Germany but weakness in the periphery with Spain, Italy and Greece all contracting. That said, sub-50 PMI readings still point to further softness over the quarter while the recent floods are also likely to hamper production figures over the next month or so.

UK jobless claims were 8.6k less during May, better than expected, while the ILO employment measure rose 24k in the three months to April. The claimant count rate and ILO unemployment rate were steady at 4.5% and 7.8%, respectively. There was also a decent rise in average earnings. While this is encouraging, the pace of employment growth remains much weaker than this time last year and the jump in earnings appears down to deferred bonuses related to the cut in the top income tax rate.

Market outlooks

Event risk today: The local calendar should provide drama today. First, the RBNZ’s MPS tone should be more hawkish than previously, but watch out for any discussion of tweaky tools and their OCR implications. Then this afternoon we have Australia’s employment report, our economists expecting a sub-consensus 20,000 jobs shed. Tonight’s US retail sales will also be watched.

NZD/USD 1 day: Above 0.8025 says this 2-day upward correction will have much further to go, below 0.7760 says the downtrend is intact.

NZD/USD 1-3 month: We saw the first test of the critical 0.7800 support area yesterday. That test failed but we are watching for further attempts, any break below then targeting 0.7455. Long speculative positioning is being unwound, and NZ’s economic data momentum is likely to slow during the next few months, all adding to the bearish case.

AUD/USD 1 day: Above 0.9565 says this 2-day upward correction will have much further to go, below 0.9375 says the downtrend is intact.

AUD/USD 1-3 month: The contracting range since July 2011 has broken down decisively, pointing towards 0.9200 during the next few months. The Australian data flow is unsupportive, and the RBA is likely to ease further to 2.0% by Q1 2014.

AUD/NZD 1 day: Now targets the 1.1830 low of 29 May.

AUD/NZD 1-3 month: The corrective rally we were expecting to reach 1.2150 may be over. If so, the trend decline will resume to below 1.1800. Relative fundamentals (e.g. RBA easing to 2.0% vs RBNZ stuck at 2.5%) favour the NZD medium term.

NZ 2yr swap yield 1 day: Taking the lead from US and Australian bond yields overnight (see above) it should open unchanged at 3.02%. Any hawkish surprise from the RBNZ should only nudge it a few bp higher because it has been preempted to some extent.

NZ 2yr swap yield 1-3 month: The 2.80% level should now provide solid support in the event of any corrective declines if Fed QE reduction fears subside. Late-2013, though, we expect a rise above 3.20% based on NZ’s improving fundamentals and eventual RBNZ tightening in 2014.