NZD: NZD/USD - Pares Back Gains In Asia, Potential MOU Leads To False Break

• Almost in defiance of global trends, CGB yields are lower again Wednesday as China auctions CNY170bn 1-Yr and CNY34b 20-Yr CGBs.
• The 10-Yr yield is down -1.5bps to 1.74%, just above the late April low of 1.728%
• Despite a higher than expected PPI and CPI this week and economic growth showing continued signs of improvement,  bond yields have continued to grind lower.  
• The 2-Yr is lower by -0.5bps at 1.27% and the 30-Yr flat at 2.27%
• Tomorrow China auctions CNY131bn of 7-Yr and CNY90bn of a 10-Yr
• Bond futures are up across all maturities with the 10-Yr up +.065 to reach 108.80 and push further above all major moving averages.  

There was a jump in NZ inflation expectations for a year out but two years ahead were more contained, which should reassure the RBNZ as it focuses on the medium-term. In its survey of forecasters, economists and industry leaders, 1-year inflation is expected to rise to 3.4% up from Q1's 2.6%, while 2-years ahead is only 0.1pp higher at 2.5% and believed to be within the RBNZ's 1-3% target band on that time horizon. Both the 1- and 2-year measures are the highest since Q4 2023.

• As previously outlined, NZ front-end rates continue look too hawkish relative to the RBNZ’s guidance, especially versus Australia.
• One possible expression of this that we flagged previously had been to fade front-end RBNZ pricing versus the RBA by way of the meeting date contract spread. Receiving Jul-26 RBNZ OIS versus Jun-26 RBA spread had been flagged around levels (-188bps), with scope to gravitate towards -210bps possible if the above relative policy view unfolds.
• As it currently stands, the OIS spread remains around -186bps with the cash rate differential at -210bps. 

Figure 1: NZ-AU – Cash Differential Vs. NZ July / AU Jun Contract Spread

Source: Bloomberg Finance LP / MNI 

The EUR/USD range overnight was 1.1722-1.1765, Asia is currently trading around 1.1735. The pair drifted a little lower as the USD tried to bounce with the help of higher US yields and oil. The market has again been very quick to sell US dollars, and is hoping a peace deal is still viable, can the US/China talks could get them to lean on Iran. The EUR moves have been suppressed for the last month oscillating within this tight 1650-1.1850 range. On the day, the first support is toward 1.1700-1.1730 and then the 1.1600-1.1650 area, the USD bears will be looking for this support to hold to build for another move toward the top end of the range.

• “ECB rate hikes are “increasingly likely” amid high energy prices due to the Iran war, Bundesbank President Joachim Nagel told Handelsblatt. Markets anticipate three increases in borrowing costs by year-end.” - BBG
• “German investor sentiment improved on hopes of easing Mideast tensions, with the ZEW expectations index beating forecasts even as current conditions worsened.” - BBG
• Options : Closest significant option expiries for NY cut, based on DTCC data: 1.1700(EU1.02b), 1.1900(EU1.15b). Upcoming Close Strikes :  1.1600(EU2.31b May 18), 1.1700(EU1.61b May 14) - BBG
• The EUR/USD Average True Range for the last 10 Trading days: 55 Points

Fig 1 : EUR/USD Spot Daily Chart

Source: MNI - Market News/Bloomberg Finance L.P