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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The focus should shift back to the USD, with tonight’s Empire manufacturing, Industrial Production, NAHB housing index and the Philadelphia Fed helping to shape USD direction.

RATES: NZ rates are likely to open 1-2bps higher with the 2yr trading at 3.47% overnight in decent size. Job Ads, Consumer Confidence and PMI data, alongside a NZGS bond tender will drive direction on the day.

REVIEW

CURRENCY: NZD and AUD both strengthened overnight, reversing yesterday’s moves. UK employment details and hawkish BOE minutes supported GBP, whilst an exit from EU recession failed to boost the EUR.

GLOBAL MARKETS: The recovery in the European data flow continued as preliminary Q2 GDP data came in better than expected, allowing the Eurozone to resurface from six consecutive quarters of contraction. German bund yields were 1bp higher while peripheral spreads continued their recent tightening. The Euro Stoxx 50 ended up 0.4%. UK data also continued to print ahead of expectations, with employment growth of 69k seeing the GBP and gilt yields higher. In the US, softer than expected upstream prices (PPI unchanged in July) supported a weaker USD tone. This allowed NZD to push back above 80 US cents, while US equities were slightly in the red ahead of the close. UST 10yr yields were slightly lower having trading an intraday high of 2.73%. A Bloomberg poll showed 65% of economists expect a September start to Fed tapering, with an initial $10bn reduction expected. A poll also showed 65% of economists expecting Yellen to be the President’s nominee to replace Fed Chairman Ben Bernanke (in contrast, Paddy Power shows Summers as favourite). The CRB was higher led by a 0.9% rise in gold.

KEY THEMES AND VIEWS

eurozone registers growth after 18 months of contraction: Preliminary GDP data showed the Eurozone economy to have grown 0.3% in Q2, following six consecutive quarters of contraction. Germany recorded growth of 0.7% on the quarter, with France up a solid 0.5%. Improving Eurozone lead indicators (and now hard data) have contributed to a large contraction in peripheral bond spreads of late: Italian and Spanish 10yr spreads to bunds are now trading at two-year lows of 2.35% and 2.58% respectively. The lesser-watched Spain-NZGS 10yr bond spread has moved into negative territory in the past 24 hours, which could favour a return in demand for NZGS at today’s tender. While detailed Q2 GDP data for the periphery is yet to be released, the Greek economy remains 25% below pre-crisis levels, while the cumulative contraction in Spain, Italy, Ireland and Portugal over the past four years is around 7-9%. Growth in Europe’s periphery is a prerequisite to reigning in ever-increasing debt/GDP ratios. Today’s data is a step in the right direction; although the Eurozone’s growth speed limit will continue to be constrained by higher debt ratios and debt servicing costs (OECD estimates Eurozone debt /GDP of 106.4% in 2013). Indeed, we see another episode of Europe fiscal and economic malaise as likely once German federal elections are out of the way in late September.

OTHER EVENTS AND QUOTES

- BOE Minutes showed one dissenter to the vote introducing forward guidance; Weale wanting a shorter period that the 18-24 months for the 2.5% inflation knockout clause. Unemployment guidance was set at 7%.

NZD/USD: USD focus...

Tonight we have a US centric data focus. Empire manufacturing, Industrial Production and the NAHB housing index will all shape USD demand. As we get closer to topside resistance it seems more likely the market will need to buy USD on any surprise.

Expected range: 0.7950 - 0.8120

NZD/AUD: NZD outperformed…

With NZ retail strength yesterday and a USD-offered tone against both NZD and AUD, we saw a lack of NZD supply which helped this cross higher.

Expected range: 0.8725 - 0.8825

NZD/EUR: Q2 GDP…

Europe has ended its six quarter recession with positive surprises from France, Germany, Portugal, Spain and Italy. The Netherlands continue to disappoint; missing consensus forecasts and remaining a country to watch. Despite this, the EUR couldn’t find buyers and NZD price action drove this cross higher.

Expected range: 0.5975 - 0.6075

NZD/JPY: Kiwi strength…

This cross lifted higher again on the back of NZD strength. Lack of further fiscal reform in JPY could see yen strengthen keeping a lid on this cross.

Expected range: 78.25 - 79.25

NZD/GBP: Retail sales…

The BOE minutes saw a dissenter against forward guidance and an unchanged 9-0 vote for no more QE. This was read as slightly hawkish. Strong details were evident in the employment report, with jobless claims declining and revised lower and the lift in employment all helped GBP to keep pace with NZD.

Expected range: 0.5100 - 0.5200

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