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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Australian employment report today should introduce some volatility to the market, but it is unlikely to change AUD and NZD currency trends.

RATES: Kiwi rates are expected to open unchanged, but with a slight bias lower for yields following global moves overnight.

REVIEW

CURRENCY: The BOE introduced forward guidance, but the market was well positioned and sent GBP higher. European data was strong as well supporting EUR and NZD has shrugged off any export concern.

GLOBAL MARKETS: Equities and commodities continued to grind lower overnight. In Europe the FTSE 100 finished back 1.4%, but other main indices moved a touch higher. In the US the main equity indices were a touch weaker as expectations continue to firm that tapering of QE will commence in Sept/Oct. Sovereign bond yields were generally lower. The Bank of England introduced explicit forward guidance for monetary policy, and while the initial reaction was a sell-off in sterling and a rally in gilts, these moves quickly reversed as markets realised that the BOE could commit to an earlier withdrawal of monetary policy stimulus if the labour market improved sooner than expected. In commodity markets energy and grain prices remained under pressure - crude oil was 1% lower at the time of writing.

KEY THEMES AND VIEWS

bank of england introduces forward guidance. The BOE adopted explicit forward guidance akin to the US Federal Reserve for monetary policy overnight. The announcement was broadly in line with market expectations, with the MPC committing to keep its current easing bias firmly in place at least until the unemployment rate reaches a minimum threshold of 7%. The BOE forecasts the unemployment rate to remain above 7% until at least Q3 2016, flagging at face value a continuation of very accommodative monetary policy for another three years. The big uncertainty around the BOE’s forward guidance is the unemployment rate forecast. This will be affected not only by the pace of the recovery in activity in lifting employment growth, but also the rebound in productivity and assumptions around labour force participation. These factors mean that there are wide confidence bands around the BOE’s forecasts for the unemployment rate. The market also has a degree of scepticism around the BOE’s unemployment forecast given the Bank’s poor track record on its inflation and growth forecasts.

australian labour force preview. The Australian unemployment rate is expected to have risen further in July to 5.8% according to market expectations. However, following the jump in June and it running ahead of the level implied by the ANZ job ads series our Australian team believe the risk is for a retracement back to 5.6%. Given that many interpreted the post-meeting RBA statement as maintaining a more neutral bias, markets are looking to the labour force report to guide near-term interest rate expectations. That said, our Australian team’s view is that the September federal election all but rules out more policy easing in September and that the next window of opportunity for rates to be lowered (if at all) would be November.

NZD/USD: New Zealand employment...

The details of yesterday’s unemployment releases were more optimistic than the headline increase in unemployment. NZD has now well and truly shrugged off any export quality issues, losing only to Yen and GBP overnight.

Expected range: 0.7920 - 0.8020

NZD/AUD: Australian unemployment…

NZD is firmly back in control on this cross and new highs seem likely. Australian unemployment today is expected to weaken further, but even a positive surprise seems unlikely to dent NZD dominance much.

Expected range: 0.8800 - 0.8910

NZD/EUR: German Industrial production…

German industrial production was strong last night continuing the data support for EUR strength. However, NZD outpaced EUR as the export issues were firmly consigned to the rear view mirror.

Expected range: 0.5930 - 0.6030

NZD/JPY: BOJ…

There is nothing expected from the BOJ today, as the market continues to unwind structural short yen positions. We believe we are getting close to the end of this unwind process though.

Expected range: 76.50 - 77.50

NZD/GBP: Forward guidance…

The BOE introduced explicit forward guidance tying the interest rate to the unemployment rate. The market was well prepared for this and GBP was much stronger as markets followed the improving data.

Expected range: 0.5080 - 0.5160

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