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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: We are expected a Friday of consolidation. Asia has little data, whilst second reads of UK and German Q2 GDP shouldn’t differ from the first reads. Jackson Hole headlines may provide some weekend reading.

RATES: NZ rates are likely to open with some pressure to the upside, in line with moves in US and Australian rates markets overnight.

REVIEW

CURRENCY: Better Chinese PMI data has encouraged long term longs of NZD/AUD to take profit. This has kept pressure on the kiwi. GBP/USD succumbed to exhaustion indicators but remains above the 1.55 pivot level.

GLOBAL MARKETS: Our London colleagues report that it was a mixed day on FX markets with choppy trade in EUR and GBP. AUD moved higher, taking NZD/AUD to a low of 0.8664 at one stage, before recovering. US Treasury bond yields rose, and equities were generally higher in Europe and North America. In terms of news flow, the day’s main releases were the flash PMIs - the aggregate euro area result outperformed, although France continues to lag, which is a niggling concern. The US Markit measure improved a touch but less than the market had expected. US jobless claims reversed their earlier sharp drop, but continue to trend lower. Layoffs are certainly easing, but the pace of hiring also matters, as does the participation rate for unemployment.

KEY THEMES AND VIEWS

FED TAPER Views Consolidate on September. US Treasury bond yields have been rising for a couple of weeks now, hitting a fresh high of 2.93% overnight. Yesterday’s Fed minutes reinforced the September timetable, leading to a final push higher. However, this was in the context a 30bps break out of the 2.50/2.70% trading range that held steady through late June and most of July, and we tend to think the market has now fully priced in a September start to tapering. NZGS 4/23 yields closed at their highest levels in 2 years yesterday, rounding out a 150bps rise from the early May yield low. The question now is; do yields at 4.7% (and expected returns of 5.5%) represent enough of a risk premium? NZ bonds are certainly trading at historically attractive spreads to Australia and the US, so some real money support is likely at these levels. But we’re watching the NZD closely, for it has fallen in recent days as views around a September Fed taper have consolidated. It’s crucial that breaks of 0.7800 (and the prior low of 0.7748) are avoided, as currency performance is key for offshore participation in bonds.

Jackson Hole Less of a Focus. Fed Chair Ben Bernanke won’t be at this weekend’s Jackson Hole symposium, choosing instead to pass up the event, leaving his deputy Janet Yellen to take the reins. The symposium has in past years been the place where strong clues as to the future of Fed policy has been revealed. However, this year, it looks to me more of a low key affair with a more international feel with Bernanke away, the event titled "Global Dimensions of Unconventional Monetary Policy", and speeches from BOJ Governor Kuroda and Bank of Mexico Governor Carstens. Of note, ECB President Draghi and BOE Governor Carney won’t be there.

OTHER EVENTS AND QUOTES

- Trading on the Nasdaq was halted for more than 2 hours due to a software malfunction. Trading is to resume at around 7.30am NZ time.

NZD/USD: Selling pressure...

Selling pressure in NZD has been evident this week, flows in NZD/AUD have kept the pressure on NZD. We expect the lower bound of the recent range near 0.77 to remain firm and view any further dips as opportunities to buy NZD against the USD.

Expected range: 0.7760 - 0.7890

NZD/AUD: China PMI…

A strong rebound in the Chinese PMI has helped expectations that Australian exports to China will remain supportive of the AUD. This combined with a greater external focus on NZ’s isolated rate hike profile, with LVR restrictions a catalyst, has led to sell flows in this cross. ANZ strategy team expects this cross to decline with a target below 0.85 in the short term.

Expected range: 0.8650 - 0.8750

NZD/EUR: French concerns…

Overall European PMIs were stronger than expected. However the French surprised by slipping lower. This keeps France firmly on ANZ’s watch list with the Dutch as potential catalysts for a change in EUR sentiment.

Expected range: 0.5830 - 0.5910

NZD/JPY: Japanese sell…

The Japanese repatriated funds last week selling both foreign bonds and stocks, reversing the trend for buying foreign bonds.

Expected range: 76.50 - 78.00

NZD/GBP: Sterling weakens

The Cable weakened in line with the kiwi yesterday leaving this cross relatively unchanged. Sterling had been showing signs of technical exhaustion, but remains above key support.

Expected range: 0.4980 - 0.5080

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