BONDS: NZGBS: Weaker As S&P Warns About Current Account Deficit
NZGBs close 16-17bp weaker with bond rating comments from S&P regarding the current account deficit weighing on the market going into the bell. NZ/US and NZ/AU 10-year yield differentials pushed respectively 5bp and 12bp wider.
- Q4 Current Account data released today showed a worse-than-expected deterioration with a -8.9% of GDP print (8.5% expected).
- BBG ran with comments from S&P that it would need to see the current account deficit narrow over the next 12 to 18 months otherwise there would be “increased pressure on the AA+ rating.”
- Swaps are 11-19bp cheaper, implying wider short-end and tighter long-end, with the 2s10s curve 8bp flatter.
- RBNZ dated OIS firms 5-22bp. April meeting pricing closed with 25bp of tightening. Terminal OCR expectations closed at 5.36%.
- Locally, Q4 GDP is slated for release tomorrow. After remaining surprisingly resilient in the face of aggressive tightening, recent data has become patchier.
- With BBG consensus expecting -0.2% Q/Q versus the +0.7% forecast by the RBNZ in its February MPS the local market has potentially another domestic driver to focus on tomorrow.
- In the interim, the market will likely keep an eye on U.S. Tsys through the release of U.S. PPI and Retail Sales data.
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NZD: No Standout Macro Driver Last Week; Rate Differentials, Commodities Longer Term Drivers
NZD/USD consolidated last week, the pair finished last week ~0.4% softer from last Monday's opening levels, dealing in a narrow ~2% range over the week. The table below presents levels of correlations between NZD and key macro drivers (note the yield differential reflects swap rates).
- There was no dominant macro driver however 10 year yield differentials and Global equities both provided some direction.
- Kiwi looked through strength in Agriculture prices, which didn't appear to provide much support to the NZD.
- Over the longer time frame 2,5 and 10 year rate differentials and Global Commodity prices provide the main drivers of the NZD.
Source: Market News International (MNI)/Bloomberg
US TSYS: Marginally Cheaper
Cash tsys sit ~1bp cheaper across the major benchmarks. TYH3 deals at 112-20+, -0-01+, a touch off the base of todays 0-05+ range. There has been little in macro headline flow today, tsys are retesting lows from Friday as global FI cheapening theme continues to dominate.
USD: US Data Momentum Recovers Ground Against Other Major Economies
The USD has started the week positively. The BBDXY is up close to 0.20%, last around the 1239.50 level. Earlier highs were above 1240, while last week we ran out of steam around the 1243.50 region in the aftermath of the payrolls print.
- Focus rests with the CPI print tomorrow in the US, although the general trend in yield momentum still remains in favor of the USD. The first chart below plots the US-G3 2yr spread government bond yield spread (unweighted). The spread is back to around +240bps, we were close to +215bps in mid Jan.
Fig 1: USD Index Following Yield Spread Momentum Higher
Source: MNI - Market News/Bloomberg
- The skew of data surprises, as measured by the Citi indices, has swung back in the USD's favor as well, see the second chart below. Earlier in the year we were around cyclical lows in terms of US data surprises relative to other major economies. We have since recovered some ground, although on average, the US data surprise index is still below that of other major economies/regions.
- Interestingly, the Citi US index is now back at 24, close to fresh highs going back to May of last year.
- We may need to see continued US data relative outperformance to see a further recovery in USD indices.
Fig 2: USD & Relative Data Surprises Against Other Major Economies/Regions
Source: Citi/MNI - Market News/Bloomberg
