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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: A relatively quiet start to the week is expected with only Q2 GDP from Japan to drive markets today. Tomorrow, Australian business confidence and the pre-election fiscal update will help shape currency markets.

RATES: Friday saw quiet trading in London and US interest rate markets, and NZ rates are expected to open little changed.

REVIEW

CURRENCY: AUD strength was the main feature of the end of last week. An overly short market and strength in Chinese data conspired to send AUD higher against G10 counterparts.

GLOBAL MARKETS: With little in the way of data or events, Friday was a quiet session globally. Bond yields were little changed across key markets, while equity indexes also had relatively small moves. The key European bourses were up 0.2 to 0.8 percent while the main US indexes were down 0.25-0.5 percent. Commodities were generally fairly steady, with Dubai oil prices down a touch but gold up a little.

KEY THEMES AND VIEWS

fRANCE STANDING OUT FOR THE WRONG REASONS. In an interview on Friday with US Federal Reserve Bank of Dallas President Richard Fisher, France was picked out for special mention: "France worries me more than any other country" and "the risks to the economic development there can’t be underestimated". It is certainly something we have been saying for a couple of years now, based on our sovereign vulnerability index analysis. And unfortunately, economic slowdowns and fiscal vulnerability are mutually reinforcing. The data out on Friday gave little cause for cheer: it showed that French industrial production fell by 1.4 percent m/m in June against expectations of a +0.3 percent print - and against the trend of better numbers across Europe. France is Europe’s second-largest economy and during the Europe crisis of 2010 was part of the "Merkozy" rescue team. But simple maths and demographics show that France’s long-term public debt trajectory is one of the most challenging of the major economies in the region. France’s 10-year bond yield at 2.23 percent is lower than the UK’s (and not much more than half NZ’s). However, it is well off its early May lows of 1.66 percent. We fully expect Europe’s troubles to boil over again after German elections, and this time, it’s not inconceivable that France may be playing for the other team.

OTHER EVENTS AND QUOTES

- Improvement in UK data-flow continues. In Friday’s data the June visible (merchandise) trade deficit narrowed by more than expected on a rise in exports, and the contraction in June construction output was less than half that feared at -0.8 percent m/m. The pick-up in UK economic momentum is one of the reasons behind the market's scepticism over the Bank of England's 7 percent unemployment rate threshold underlying its new forward guidance - if the unemployment rate reaches 7 percent much more quickly than the BoE is expecting, the official policy rate presumably won't be held down at current levels for as long as the BOE anticipates.

- On the other hand, Canada had a very weak July household labour force survey, with total employment falling almost 40k and the unemployment rate rising by 0.1ppt to 7.2 percent despite a 0.2ppt fall in the participation rate. Public sector employment was the big drag in July.

NZD/USD: NZD stable...

The kiwi remained resilient on Friday as the market focused on strengthening AUD. Better Chinese data and weakness in US inventories and Canadian employment appear to have balanced off.

Expected range: 0.8020 - 0.8120

NZD/AUD: AUD recovery…

AUD spent the Friday session recovering and sent this cross lower. Strength in Chinese data (industrial production) and a short AUD market were the drivers behind AUD strength against G10 currencies.

Expected range: 0.8675 - 0.8790

NZD/EUR: Weaker French production…

The EUR was heavy across the board as French manufacturing and industrial production missed estimates by a large margin. That said, according to CFTC data the market has swung from short to long positioning in EUR.

Expected range: 0.5990 - 0.6100

NZD/JPY: Q2 GDP…

Japanese Q2 GDP is forecast to increase 3.6 percent q/q today, building on the 4.1 percent strength seen in Q1. This strength should provide room for the continuation of reform in Japan. Reform is the next catalyst for yen weakness.

Expected range: 76.75 - 78.00

NZD/GBP: British construction and trade…

Improvements in the UK trade deficit and construction output series kept GBP from following EUR lower overnight. For now, though, most of the GBP data strength appears to be priced. Focus later this week will turn to the BOE minutes and July unemployment figures.

Expected range: 0.5140 - 0.5240

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