Analysts at Westpac suggest that for AUD/NZD for today, there are early signs of a possible resumption of the uptrend and offered their outlook for the longer-term and rates.
"AUD/NZD 1-3 month: Higher towards 1.09. The cross remains below fair value estimates implied by interest rates, commodity prices and risk sentiment, although it is closing the gap. There’s potential for a rebound in iron ore prices this year, given high steel prices (24 May).
AU swap yields 1 day: The 3yr should open around 2.13%, the 10yr around 2.94%.
AU swap yields 1-3 month: Our RBA outlook (on hold for some time) is anchoring front end valuations. We expect 3yr swap rates to remain in a 1.8% to 2.3% range, with core inflation still below 2%. (28 May)
NZ swap yields 1 day: NZ 2yr swap rates should open up 2bp at 2.25%, the 10yr up 4bp at 3.32%.
NZ swap yields 1-3 month: The RBNZ has signalled the next cycle – a tightening one – will not start until the end of 2019. That will anchor the short end, although markets will not abandon their expectations for tightening as early as mid-2018 which means occasional spikes in the 2yr will be likely. A 2yr swap range of 2.10%-2.60% is expected. The long end will continue to follow US yields, which we expect to rise by year end. (30 Jun)."
RBNZ's assistant governor and head of economics, John Mcdermott, said a lower NZD would help rebalance growth towards tradables. He was speaking in Wellington on the subject of economic trends and had estimates of core inflation at 1.4%
Analysts at Nomura's FOMC meeting preview where they do not expect any major policy changes or announcements in tomorrow’s FOMC statement.
"We expect no major policy changes or announcements in tomorrow’s FOMC statement. Chair Yellen’s congressional testimony on 12 July, recent remarks by FOMC participants, and the minutes from the June FOMC meeting all suggest that the Committee will wait to confirm that the economy, including inflation, is on track before raising rates again. Statements from several FOMC participants – Presidents George, Kaplan and Mester – suggest that in the meeting this week they will argue to start the process of balance sheet roll off immediately. However, it seems unlikely that the Committee will take such a decision tomorrow.
First, this is an important change in policy and we think that the Committee would prefer Chair Yellen to explain the decision at a post-meeting press conference. Second, public statements from FOMC participants have not given us the sort of coordinate message that we got before the March FOMC meeting. In that case, a series of public statements from FOMC participants moved market expectations for a rate hike at the March FOMC meeting in a very deliberate, and effective, way. We have had no such communications blitz in the run up to the FOMC meeting tomorrow. We expect the FOMC to announce a decision to start to let the balance sheet roll off after its meeting in September. While we do not expect the FOMC to “pre-announce” such a decision tomorrow, it would not be surprising if the statement included some hint that the Committee expects to take this decision at the September meeting.
We think tomorrow’s statement may provide some additional nuance on how the FOMC sees the recent underperformance of inflation, although we expect the main message that the FOMC expects inflation to move up to its 2% target over the medium term to be reiterated. Other than inflation, we do not expect the statement’s views on the economy or the economic outlook to materially change."
Analysts at Westpac's market wrap up of a temperate risk-on US session...
"Global market sentiment: US interest rates, most commodities, and equities all rose – the S&P500 making a fresh record high. Solid earnings by US companies plus decent economic data helped.
Bellwethers Caterpillar and McDonald’s beat analysts’ estimates, helping indices to fresh highs and pushing the VIX index (a barometer of risk aversion) to all-time lows. US consumer and manufacturing surveys were strong, as was German business confidence.
Interest rates: US 10yr treasury yields rose from 2.25% to 2.33%, and 2yr yields rose from 1.36% to 1.39%. Fed fund futures yields firmed slightly, pricing the chance of a December rate hike at around 47%. Germany’s 10yr yield rose from 0.50% to 0.57%.
Currencies: The US dollar index initially fell to a fresh 13-month low but later retraced to be up 0.1% higher on the day. EUR jumped from 1.1650 to 1.1712 following the strong IFO German business confidence data, but later retraced. USD/JPY rose from 110.80 to 111.94. AUD remained elevated, ranging between 0.7920 and 0.7970. NZD slipped a bit, from 0.7450 to 0.7410, perhaps affected by news of a disease detected in one NZ dairy cow herd. Post McDermott, it’s modestly lower again at 0.7405. AUD/NZD firmed slightly from 1.0660 to 1.0714.
US Conference Board consumer confidence rose from 117.3 to 121.1 (vs 116.5 expected) – a 16-year high. Richmond Fed manufacturing rose from 11 to 14 (vs 7 expected). Corelogic house prices rose 0.1% in May, for a 5.7% annual gain (vs 5.8% expected; vs 5.8% in April). All 20 cities in the survey posted annual gains, low inventories supportive.
German IFO business confidence rose from 115.2 to 116.0 (vs 114.9 expected) – an all-time high, which is surprising given the disappointing PMI reading. Current conditions are strong but future expectations are more subdued.
RBNZ Assistant Governor McDermott spoke a few minutes ago on economic trends and its inflation target, with comments on the neutral cash rate (3.5%, which means 1.75% is stimulatory), inflation (sideways trend in core), and the exchange rate (lower would help)."
Crude oil rallied in the post-settlement trade on Tuesday after the API revealed that the weekly crude inventories in the U.S. dropped by 10.23 million barrels after rising 1.62 million barrels in the previous week. The barrel of West Texas Intermediate broke above the $48 mark to refresh its highest level since early June and is now trading at $48.50, up 4.6%, or $2.15, on the day.
Earlier in the day, crude oil prices gained more than 3% following a pledge by Saudi Arabia to limit its exports by nearly 1 million barrels per day next month to comply with the previously reached output cut agreement. After the meeting that took place in St. Petersburg over the weekend, OPEC called upon other members to do the same in the coming months to balance the market. Nigeria also announced that it would cap its production at 1.8 million barrels per day once it stabilizes at that level.
This latest report is seen as another sign towards a slowdown in the U.S. shale production. In an interview with Reuters, Mark Watkins, regional investment manager at U.S. Bank, argued that the lower oil prices in June and July may have been affecting U.S. shale production. He further added, "in the U.S. investors have been waiting to see where that top is in oil production and we’ve hit a tension point."
$49.15 (Jun. 1 high) could be seen as the initial hurdle for the barrel of WTI ahead of the critical $50 (psychological level) and $50.95 (Apr. 21 high). On the flip side, supports are located at $47.70 (May 31 low), $47 (psychological level) and $45.40 (Monday's low).
Data source: FX Street
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