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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: We have a very quiet week ahead of us with little in the way of data today to drive markets. Thus existing ranges and trends look entrenched.

RATES: Kiwi rates are likely to open broadly unchanged, with some pressure to the upside given the move higher in US Treasury yields.

REVIEW

CURRENCY: Friday ended with weaker US confidence data and the USD was a touch weaker. NZD shrugged off weakness, testing resistance above 0.81. The euro was notable in its quick reversal after USD weakness.

GLOBAL MARKETS: A quiet finish to the week, with the day’s data flow having little impact on markets. There was a mild rally in European sovereign bonds (except UK gilts, whose long-end yields kept pushing higher) and peripheral bond spreads to Germany narrowed. US Treasuries sold off, with 10-year yields now nudging 2.83 percent. Equities turned positive into the close, with the major European bourses up 0.3-0.7 percent. The main US indexes lost a little ground. Commodity markets also saw prices higher. Gold lifted a touch, while Dubai crude oil held more or less steady.

KEY THEMES AND VIEWS

EGYPT ON THE EDGE. Egyptian financial markets are starting to show the impacts of days of turmoil and violence following a crackdown by the military government on protests against the deposition of democratically elected Islamist President Mohamed Morsi. Egyptian shares fell almost 4 percent on Friday, with the main index down 5.5 percent in a week - but one would have to conclude it is holding up remarkably well, in that it remains 18 percent higher than its late June trough. Meanwhile the yield on 3-month treasury bills rose 18bps at an auction versus the week previous (to 11.44 percent). To put that into context, yields at this maturity have plunged 311bps since the military deposed Morsi in early July. But nonetheless markets clearly believe the nation’s default risk has risen: five year credit default swaps (CDS) have risen to more than 800 basis points, which puts Egypt amongst the 10 riskiest governments in the world to lend to, according to CMA data. The budget deficit has widened to 14 percent in the year ended June, meaning the Government has an urgent need to raise funds. The Middle East has become an increasingly important market for New Zealand, taking 10 percent of NZ’s dairy exports (Egypt 3 percent) and 5 percent of meat exports. The numbers are relatively small, but the region has been growing in importance, providing a useful degree of diversification: NZ’s dairy exports to Egypt have grown from under $100m in 2005 to nearly $380m in the 12 months to June. We fully expect another blow-up in Europe, quite possibly within the next year; China and Australia are slowing; the US is walking a tapering tightrope; the BRICs are looking vulnerable; Japan’s fundamentals remain abysmal. Meltdown in the Middle East would be yet another headwind for the global economy.

OTHER EVENTS AND QUOTES

- Preliminary print for US consumer confidence disappoints. The University of Michigan preliminary print for August was at 80.0 vs. 85.2 expected (last 85.1). The result was driven by a fall in both the current conditions and expectations series.

NZD/USD: Solid foundations...

The NZD shrugged off Friday afternoon weakness and tested resistance above 0.81. Demand for NZD remains solid with US data remaining patchy. Focus this week will be on the FOMC minutes on Wednesday and global flash PMIs on Thursday.

Expected range: 0.8000 - 0.8150

NZD/AUD: NZD continues to perform…

The week is relatively short on Australasian data. Today NZ PSI and tomorrow’s RBA minutes should do little to change the relative valuation. For now we expect any weakness to remain an opportunity.

Expected range: 0.8775 - 0.8875

NZD/EUR: EUR reaction notable…

It was notable how quickly EUR reverted after weaker US data saw EUR/USD spike higher. For now EUR seems the weaker of the two currencies.

Expected range: 0.6020 - 0.6125

NZD/JPY: Back toward resistance…

This cross is approaching solid resistance around 0.80. This week gives us little in NZD or yen-focused data and we expect US data to drive this cross.

Expected range: 78.20 - 79.80

NZD/GBP: Q2 GDP on Friday…

There is little to drive this cross directly until Friday when we get preliminary Q2 GDP. For now GBP/USD has less topside resistance nearby versus NZD/USD.

Expected range: 0.5150 - 0.5250

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