GBP rose after EU negotiator Michel Barnier said it was “realistic” to reach a deal with the UK by November; NZD is slightly lower against the USD, but has made multi-year lows against the GBP, EUR and JPY; NZ swap rates rose 1 to 2.5bps across the curve

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By Nick Smyth

It was reasonably quiet overnight, with little movement in developed market equities and bonds.  The GBP rose after EU negotiator Michel Barnier said it was “realistic” to reach a deal with the UK by November, while the EUR also benefitted from some easing in concern around the upcoming Italian budget.  The NZD is slightly lower against the USD, but has made new multi-year lows against the GBP, EUR and JPY. 

There was no major economic data overnight nor any fresh details on President Trump’s proposed $200b tariffs on Chinese imports.  US equities are slightly higher than Friday night’s close while the 10 year Treasury yield is down 1bp to 2.93%.  There were small gains in European equities and the Nikkei and little change in core government bond yields.  In contrast, Chinese equities remained weak yesterday after Trump’s threat to impose tariffs on all Chinese imports on Friday; the CSI300 was down 1.5% to near the lows reached late last month.  There remains a large divergence between the performance of the US and Chinese equity markets this year. 

On a slightly more positive note on the trade-front, there were signs that the US and EU could reach a deal to reduce Trans-Atlantic regulatory hurdles later this year.  After meeting the EU trade commissioner, US trade representative Robert Lighthizer noted that there could be “an early harvest in the area of technical barriers to trade”, possibly by November.

The stand-out mover the past 24 hours has been the GBP, which has risen almost 1% against the USD after the EU’s chief negotiator Michel Barnier said it was “realistic” and “possible” to reach an agreement on a withdrawal deal by November (i.e. to avoid a ‘no-deal Brexit’).  Separately, the FT reported that EU leaders would give new instructions to Barnier at the 20 September mini-EU summit to get a deal across the line, in the hope it can be agreed by mid-November (in time to be signed off by the respective parliaments). While this represents positive news, Barnier highlighted that there were still several unresolved issues, most notably how to deal with the Irish border.  The other question is whether UK PM Theresa May can steer any such agreement through the UK parliament given there is reportedly a large block of Eurosceptic Conservative MPs willing to vote against anything resembling the Chequers agreement (former Brexit minister Steve Baker warned over the weekend that as many as 80 were in this camp).

The GBP reached as high as 1.3052 after the Barnier comments, its highest level in more than a month, although it has eased back slightly to 1.3030 as we write. There was little reaction to UK economic data, where GDP beat expectations slightly but industrial production was weaker than expected.  The market figures that Brexit negotiations will have a far more meaningful impact on future BoE policy and the GBP than current UK data. 

The Barnier comments also boosted the EUR, although to a lesser extent,  which rose back to 1.16, up 0.4% on the day.  Concerns around the upcoming Italian budget continued to ease, with Finance Minister Tria saying over the weekend that the government recognised that a larger deficit would result in higher yields and greater interest expense.  Italian 2 year yields fell 17bps, with the spread to equivalent maturity German bunds narrowing below 150bps, its tightest level since the start of last month (albeit much wider than when the coalition came to power).  The Italian equity market was up over 2%. 

The NZD is down 0.2%, at 0.6520, and is one of the weakest performing (developed market) currencies on the day.  We trimmed our estimate for NZ Q2 GDP to 0.6% after yesterday’s manufacturing data, which was affected by (one-off) maintenance work at the Marsden Point oil refinery and New Zealand’s Methanex (methanol) plant. Our estimate still sits slightly above the RBNZ’s MPS forecast of 0.5% for Q2 GDP. 

NZD weakness is evident not just against the USD, but also on many of the crosses.  NZD/GBP is hovering just above 0.50, levels last seen prior to the Brexit vote in mid-2016.  Meanwhile, NZD/EUR is just above 0.56, and at its lowest levels since late-2015 while NZD/JPY made fresh lows too.  The NZD/AUD remains range-bound, and has eased back from resistance around 0.92 over the past 24 hours.  NAB’s CEO announced yesterday that the bank would not be raising Australian variable home loan rates, going against the moves taken by the three other major Australian banks. 

NZ swap rates rose 1 to 2.5bps across the curve yesterday in response to the Friday night moves in US Treasuries after the higher than expected average hourly earnings data.  These swap moves came despite a 1bp fall in the 90 day bank bill rate to 1.885%, its lowest level since February.  The long-end of the government bond curve also rose around 2bps ahead of the NZDMO’s tender of $250m 2029 maturity government bonds on Thursday. 

In the session ahead, there is NZ electronic card transactions (ECT) data, which may show some impact from the government’s fiscal stimulus to households that kicked in on July 1st.  The NAB Survey is released in Australia alongside the UK labour market report.


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