New Zealand bonds close higher after global dairy prices slump at latest auction

The New Zealand bonds closed higher Wednesday after global dairy prices slumped at the overnight GlobalDairyTrade (GDT) price auction, shrugging off the higher-than-expected reading in the country’s retail sales for the second quarter of this year.

At the time of closing, the yield on the benchmark 10-year note, which moves inversely to its price, slipped nearly 1/2 basis point to 2.615 percent, the yield on the long-term 20-year note slumped nearly 1-1/2 basis points to 2.925 percent and the yield on short-term 2-year also closed nearly 1-1/2 basis points lower at 1.720 percent.

The USD has weakened broadly over the past several sessions and losses are extending in response to President Trump’s latest comments on the Fed and his complaints about EU/China currency manipulation. While short-term Fed tightening expectations have remained largely unchanged, US Treasury yields have responded and softened to levels last seen in mid/early-July, eroding the fundamental underpinnings that have driven the bulk of the USD rally since mid-April, according to the latest research report from Scotiabank.

A continued unwinding of the panic trade should maintain pressure on the USD into Friday’s Jackson Hole speech from Fed Chairman Powell. Powell is not expected to explicitly acknowledge President Trump’s complaints but comments on flexibility—as Powell moves to a higher-frequency policy meeting press conference schedule in 2019—will likely compound the USD’s bearish turn as market participants price in the risk of a more discretionary tightening path.

While President Trump’s comments have had no material impact on expectations for near-term Fed tightening, the verbal interventions appears to have leaned heavily on US Treasury bears and forced an adjustment among speculative shorts whose positions had recently reached fresh record levels. Treasury yields have softened broadly in response to Trump’s comments and interest rate differentials have narrowed in in a bearish-USD manner, the report added.

Meanwhile, the NZX 50 index closed 0.51 percent higher at 9,162.61, while at 07:00GMT, the FxWirePro's Hourly NZD Strength Index remained neutral at 33.92 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex