Bonds: Catch-up plays in NZD - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, expects that it is possible that after the recent surge, yields may consolidate in coming sessions but the currency markets may still be playing catch-up to the surge in yields and inflation expectations.

Key Quotes

“Consider firstly that the plunge in global yields to record lows forced investors into a ‘search for yield’ and made a number of currencies stronger than might normally be associated with their thinner yield advantage.”

“The NZD is a case in point.  Its 1.75% cash rate looked attractive in a world where many competing yields were negative.  We noted over recent months a higher than usual correlation in the NZD to a global bond yield index.  The fall in global bond yields also helped explain the NZD out-performance against lower yielding AUD and CAD.”

“These commodity currencies are being supported by higher commodity prices.  However, higher commodity prices themselves are contributing to higher inflation expectations and higher yields.  As such, high yielding commodity currencies are getting mixed messages. While higher commodity prices may improve their terms of trade, they also threaten to see a further unwind of carry trades in these currencies.”

“NZD is one of the most vulnerable currencies to a deeper correction.  Global bond yields have rebounded to levels last seen in February.  US bond yields have risen even more significantly, rising to a high for the year. Meanwhile, the NZD has risen much of the year despite several RBNZ rate cuts and a significant fall in its 2-year yield advantage over the USD.    If the NZD/USD was able to ignore the slide in its yield advantage this year due to a fall in global bond yields and associated ‘search for yield’, the sudden reversal in the bond yields in the last week or so since the Trump election may yet cause the NZD to slide significantly to reverse its gains this year and reconnect with its 2-yr yield spread.”