Financial Markets Wrap
5 January 2017
NZD hit in December
•
•
•
Increased Fed-hike expectations lead to mid-month NZD slump…
…despite stronger fundamentals for NZD, including firmer NZ rate hike expectations
NZ bonds underperform
NZD/USD over December 2016
NZD/USD
Strong US ADP
employment and other
data
PM Key
0.7250
0.7200
US FOMC hikes rates; extra hike
projected for 2017...Yellen
argues her "high pressure
economy" speech misinterpreted
resigns
0.7150
Commodity currencies (NZD,
AUD, CAD) out of favour,
despite favourable risk
appetite environment
0.7100
0.7050
0.7000
0.6950
US unemployment rate
dives but wages fall
NZD falls by more than
1% for third consecutive
day on no news...USD
well bid post Fed
China seizes US
meeting
drone in South
China Sea
0.6900
0.6850
0.6800
01-Dec
05-Dec
07-Dec
10-Dec
14-Dec
17-Dec
NZ GDP
+1.1% q/q
for Q3
China's Xi says he's
open to China growing
below 6.5% GDP target
21-Dec
24-Dec
28-Dec
31-Dec
Intraday
Source: BNZ, Bloomberg
Quick Outlook
December ranges
NZD/USD
Short-term looks oversold, so chance of some near-term recovery. But early-year risks
include environment post-Trump inauguration and usual China capital outflow risks.
Ultimately, Kiwi expected to track downwards in 2017 with strong USD backdrop.
0.6860 – 0.7240
NZD/AUD
Closed 2016 near the top of its trading range so near-term resistance, but mediumterm risk remains to the upside – NZ relative growth outlook favoured and increasing
chance of RBNZ tightening in the second half, while little chance that RBA tightens.
0.9510 – 0.9650
NZD/GBP
Invoking Article 50 by the end of Q1 will put the spotlight on Brexit risks. Uncertainty
will keep UK economy subdued. NZD/GBP steady to higher over coming months.
0.5560 – 0.5720
NZD/EUR
EUR0.70 could be threatened over coming months as political risk intensifies in the
region, with the Dutch general election in March and France’s Presidential election in
April-May the next focal points.
0.6550 – 0.6810
NZD/JPY
The rout in the yen in Q4 reflected the big global bond sell-off. Consolidation in bond
yields would help see the yen consolidate over coming months. That should see
NZD/JPY range trading in the low 80s.
80.20 – 83.70
90-day BB
Flat, with little chance of monetary policy adjustment over coming months.
research.bnz.co.nz
1.99% - 2.05%
Page 1
Financial Markets Wrap
December 2016
Broadly based USD Strength in December
NZD/USD Weaker in Q4, But Flat/Up on Crosses
Currency Performance in December
AUD
JPY
NZD
GBP
CNY
EUR
CHF
CAD
-3
-2
Source: BNZ, Bloomberg
-1
0
% against USD
114
112
110
108
106
104
102
100
98
96
94
30-Sep
NZD/GBP
NZD/USD
NZD/AUD
NZD/EUR
NZD/JPY
21-Oct
11-Nov
02-Dec
23-Dec
Source: BNZ, Bloomberg
December was a month of two halves for the NZD, with the US Fed’s mid-month policy announcement
proving to be a game-changer. In the first half of the month, the NZD drifted up through USD0.72, as
the USD consolidated after its strong run over the previous two months, including the surge higher after
Trump’s surprise Presidential victory. The surprise resignation of PM Key had little impact on the
market, helped by a smooth transition to the new PM English.
Strong USD
impacts NZD
mid-month
Driven by
firmer Fed hike
expectations
In mid-December, the Fed’s second rate hike for the cycle, taking the Fed Funds target up to range of
0.50-0.75%, came as no surprise. What did surprise was the number of FOMC members revising up
their Fed Fund rate projections, which took the median projection to three rate hikes through 2017.
Furthermore, in the press conference Fed Chair Yellen backed away from comments made in her
October speech, which raised the possibility of running a “high-pressure economy”, allowing inflation to
overshoot 2% for a while. She said “I do want to make clear that I have not recommended running a hot
economy as some sort of experiment.” This policy guidance helped lift US rates and the US dollar as
attention turned to the economic data, which continued to surprise on the high side.
NZD down to a
6-month low
After the FOMC Statement the stronger USD was broadly based, with the NZD and AUD being two of
the weakest performers. NZD/USD fell to a low of 0.6862 just before Christmas – its lowest level since
early June – before support emerged.
Going against
stronger NZD
fundamentals
The NZD’s underperformance went against the usual economic drivers: (1) risk appetite was strong –
BNZ’s risk appetite index rose to its highest level in over 2-years, with the VIX index falling to around 11
at one stage, narrower credit spreads and the strong run for global equity markets continuing; (2)
commodity prices remained buoyant; and (3) NZ monetary policy expectations moved in the direction of
tighter policy for next year and beyond. Normally these factors would have led to a stronger NZD.
NZ rates
market
underperforms
NZ’s rates market underperformed as expectations for monetary policy tightening increased. NZ’s 2year swap rate increased by 18bps to 2.46% and Dec-17 bill futures showed an implied yield increase of
22bps. By the end of the month the market has priced in a full rate hike by September 2017 and a series
of hikes through 2018. These policy expectations fed through the rest of the yield curve. The 5-year
swap rate rose by 28bps to 3.05%.
US Rate Expectations Increase
3.5
Risk Appetite Index Reaches a 2-Year High
BNZ Risk Appetite Index
Fed Funds Futures Curve
90%
3.0
Fed "dot" plot @ December-2016
2.5
2.0
70%
60%
Market Pricing @ 30-Dec
50%
1.5
40%
1.0
Market Pricing @ 30-Nov
30%
20%
0.5
0.0
Jan-17
80%
Jul-17
Jan-18
Source: BNZ, Bloomberg
research.bnz.co.nz
Jul-18
Jan-19
Jul-19
10%
2014
2015
2016
Source: BNZ, Bloomberg
Page 2
Financial Markets Wrap
December 2016
Large Increase in NZ Swap Rates
4.0
Rise in NZ & US Rates Continued Through December
25
Chg in bps (rhs)
30-Nov
30-Dec
20
15
3.0
10-year govt bond yields
5
4
NZ
10
5
2.0
0
3
US
2
-5
1.0
-10
3m
6m
1y
2y
3y
4y
5y
7y
1
2014
2015
2016
Source: BNZ., Bloomberg
Source: BNZ, Bloomberg
NZ and US
rates up, but
European rates
lower
10y
The longer end of the NZ curve performed better than the curve belly, influenced by US rates. The US
10-year Treasury yield increased by “only” 6bps to 2.45%, after the market found some support after
breaching the 2.6% mark. The NZGB 10-yr rate rose by 22bps to 3.34%, taking the rise over Q4 to an
incredible 108bps. Rising bond yields weren’t a global phenomenon, with yields lower across the UK
and continental Europe and fairly steady in Japan, countries where quantitative easing policies remain
in force and where rate hike expectations are not on the radar. The ECB extended its asset purchase
programme through to December 2017, at a slightly reduced pace of €60bn per month from April 2017.
Oil prices
higher
Oil prices continued their recovery, reaching an 18-month high. Non-OPEC members agreed to cut
production following the landmark production-cut deal by OPEC members at the end of November.
Brent crude rose by around 8% to just under USD57 per barrel. Other commodities showed a mixed
performance, with strong iron ore prices, while coking coal fell after their exponential run higher. Dairy
prices were fairly flat, after a strong run. At month-end, NZX milk price futures showed an implied
Fonterra payout of $6.32, up from $6.10 at the beginning of the month.
NZ economy
going well
NZ economic data continued to run hot, with high levels of business and consumer confidence and
GDP data showing real growth up 1.1%q/q and 3.5% y/y in Q3, although previous quarters were
revised lower. Inflation expectations continued to tick upwards.
Despite the ECB’s extension of quantitative easing policy for an additional 9 months, EUR consolidated
after finding support around the 1.04 mark. Increased political risk in Italy after PM Renzi’s referendum
on constitutional reform was rejected, leading to his resignation, and ongoing concerns about the
country’s banking sector only had temporary impacts. NZD/EUR fell by almost 2% to below the
EUR0.66 mark. On NZD/AUD, NZD/GBP and NZD/JPY crosses, the monthly change was less than 1%.
For the month the TWI fell by 1.0%. Over the quarter, NZD/USD was down almost 5%, but the TWI
was up 0.5%, which highlights the strength of the USD but also that the NZD itself performed well.
EUR well
supported
CNY
depreciates
China’s CNY continued to depreciate against the USD but the PBoC has had some success in
maintaining the value of its CNY basket, despite ongoing pressures on capital outflows. President Xi
Jinping told top officials he is open to growth below the 6.5% economic growth target to 2020 if
holding to it would carry too much risk. Immediately after reports of this came through, the NZD fell to
its low for the month.
Oil Prices Trend Higher
NZ Economy Showing Solid Growth
Brent Crude USD
70
5
4
60
y/y%
3
2
50
1
40
q/q%
0
-1
30
20
Jan-15
NZ Real GDP
-2
Jul-15
Source: BNZ, Bloomberg
research.bnz.co.nz
Jan-16
Jul-16
-3
2005 2006 2007 2009 2010 2011 2013 2014 2015
Source: BNZ, Bloomberg
Page 3
Financial Markets Wrap
Most NZD
cross rates
show
unremarkable
changes for
the year
December 2016
For the year as a whole, there were lots of surprises, lots of intra-year movement in currencies, and
some incredible intra-day movements in currencies as well. But when we look at the annual scorecard
of NZD movements, it looks fairly unremarkable – NZD/USD up around 1½%, NZD/AUD up less than
3%, NZD/JPY down by less than 1½%, and NZD/EUR up by less than 5%. The weak CNY – a currency
which has traditionally been closely managed – and plunge in GBP are the most obvious annual
movements, with NZD/GBP up around 21% and NZD/CNY up almost 9%. On a TWI basis, the NZD rose
by 4½% for the year.
[email protected]
Monthly Performance Table
end-Dec end-Nov Change
Currencies
NZD/USD
NZD/AUD
NZD/EUR
NZD/GBP
NZD/JPY
NZD/CNY
TWI
AUD/USD
EUR/USD
GBP/USD
USD/JPY
USD/CNY
USD/CAD
USD DXY
Asia DXY
0.6934
0.9620
0.6578
0.5611
80.98
4.814
77.5
0.7208
1.0517
1.2340
116.96
6.95
1.3441
102.21
102.94
0.7083
0.9591
0.6689
0.5663
81.06
4.8852
78.3
0.7385
1.0589
1.2506
114.46
6.89
1.3437
101.50
103.59
-2.1%
0.3%
-1.7%
-0.9%
-0.1%
-1.4%
-1.0%
-2.4%
-0.7%
-1.3%
2.2%
0.8%
0.0%
0.7%
-0.6%
Equity Markets
MSCI AC Wrld, loc.
MSCI World, loc.
MSCI EM, USD
US S&P 500
Euro STOXX 600
Germany DAX
France CAC 40
UK FTSE 100
Aust S&P/ASX 200
Japan Topix
China CSI 300
NZX50
Volatility: VIX
969.6
5,361
1,831
2,239
361.4
11,481
4,862
7,143
5,666
1,519
3,310
6,881
14.04
945.6
5,214
1,825
2,199
342.0
10,640
4,578
6,784
5,440
1,469
3,538
6,897
13.33
2.5%
2.8%
0.3%
1.8%
5.7%
7.9%
6.2%
5.3%
4.1%
3.3%
-6.4%
-0.2%
5.3%
3-m th Bill Futures
NZD Dec-17
AUD Dec-17
USD Dec-17
EUR Dec-17
GBP Dec-17
97.51
97.99
98.48
100.27
99.53
97.73
98.10
98.61
100.27
99.46
-0.22
-0.11
-0.13
0.00
0.07
end-Dec end-Nov Change
NZ Rates
OCR
NZ 90day BB
NZ 2yr sw ap
NZ 5yr sw ap
NZ 10yr sw ap
NZ Govt (3/19)
NZ Govt (5/21)
NZ Govt (4/27)
1.75
2.00
2.46
3.05
3.49
2.26
2.67
3.34
1.75
2.04
2.28
2.77
3.27
2.15
2.49
3.13
0.00
-0.04
0.18
0.28
0.22
0.11
0.19
0.22
Global 10 year bond rates
US
2.45
Canada
1.72
UK
1.24
France
0.68
Germany
0.20
Italy
1.82
Spain
1.38
Portugal
3.75
Ireland
0.74
Japan
0.04
Australia
2.77
2.38
1.58
1.42
0.75
0.27
1.99
1.55
3.69
0.87
0.02
2.72
0.06
0.14
-0.18
-0.07
-0.07
-0.17
-0.17
0.06
-0.13
0.02
0.04
Com m odities (USD)
WTI Crude
53.72
Brent Crude
56.82
R/B CRB Index
192.5
Gold spot
1,148
Silver spot
15.93
Copper
250.6
Iron Ore
78.87
Coking coal
225.00
Thermal coal
88.40
Corn
352.0
Wheat
408.0
NZX Dairy WMP
3,510
NZX Milk Price 2017 NZD 6.32
50.34
52.53
189.3
1,173
16.51
262.2
72.08
271.00
87.45
348.5
402.8
3,500
NZD 6.1
6.7%
8.2%
1.7%
-2.2%
-3.5%
-4.4%
9.4%
-17.0%
1.1%
1.0%
1.3%
0.3%
3.6%
Source: BNZ, Bloomberg
research.bnz.co.nz
Page 4
Financial Markets Wrap
December 2016
Contact Details
Stephen Toplis
Craig Ebert
Doug Steel
Kymberly Martin
Jason Wong
Head of Research
+(64 4) 474 6905
Senior Economist
+(64 4) 474 6799
Senior Economist
+(64 4) 474 6923
Senior Market Strategist
+(64 4) 924 7654
Currency Strategist
+(64 4) 924 7652
Main Offices
Wellington
Auckland
Christchurch
60 Waterloo Quay
Private Bag 39806
Wellington Mail Centre
Lower Hutt 5045
New Zealand
Phone: +(64 4) 473 3791
FI: 0800 283 269
80 Queen Street
Private Bag 92208
Auckland 1142
New Zealand
Phone: +(64 9) 976 5762
Toll Free: 0800 081 167
81 Riccarton Road
PO Box 1461
Christchurch 8022
New Zealand
Phone: +(64 3) 353 2219
Toll Free: 0800 854 854
National Australia Bank
Peter Jolly
Alan Oster
Ray Attrill
Skye Masters
Global Head of Research
+(61 2) 9237 1406
Group Chief Economist
+(61 3) 8634 2927
Global Co-Head of FX Strategy
+(61 2) 9237 1848
Head of Interest Rate Strategy
+(61 2) 9295 1196
Wellington
Foreign Exchange
Fixed Income/Derivatives
New York
+800 642 222
+800 283 269
Sydney
Foreign Exchange
Fixed Income/Derivatives
Foreign Exchange
Fixed Income/Derivatives
+1 212 916 9631
+1 212 916 9677
Hong Kong
+(61 2) 9295 1100
+(61 2) 9295 1166
Foreign Exchange
Fixed Income/Derivatives
+(85 2) 2526 5891
+(85 2) 2526 5891
London
Foreign Exchange
Fixed Income/Derivatives
+(44 20) 7796 3091
+(44 20) 7796 4761
ANALYST DISCLAIMER: The person or persons named as the author(s) of this report hereby certify that the views expressed in the research report accurately reflect their personal views about the subject
securities and issuers and other subject matters discussed. No part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research
report. Research analysts responsible for this report receive compensation based upon, among other factors, the overall profitability of the Markets Division of National Australia Bank Limited, a member of
the National Australia Bank Group (“NAB”). The views of the author(s) do not necessarily reflect the views of NAB and are subject to change without notice. NAB may receive fees for banking services
provided to an issuer of securities mentioned in this report. NAB, its affiliates and their respective officers, and employees, including persons involved in the preparation or issuance of this report (subject to
the policies of NAB), may also from time to time maintain a long or short position in, or purchase or sell a position in, hold or act as advisors, brokers or commercial bankers in relation to the securities (or
related securities and financial instruments), of companies mentioned in this report. NAB or its affiliates may engage in these transactions in a manner that is inconsistent with or contrary to any
recommendations made in this report.
NEW ZEALAND DISCLAIMER: This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied
upon or used as a basis for entering into any products described in this publication. Bank of New Zealand strongly recommends readers seek independent legal/financial advice prior to acting in relation to any
of the matters discussed in this publication. Neither Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever may directly or indirectly result
from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.
US DISCLAIMER: If this document is distributed in the United States, such distribution is by nabSecurities, LLC. This document is not intended as an offer or solicitation for the purchase or sale of any
securities, financial instrument or product or to provide financial services. It is not the intention of nabSecurities to create legal relations on the basis of information provided herein.
National Australia Bank Limited is not a registered bank in New Zealand.
research.bnz.co.nz
Page 5