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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: We expect the NZD to find support in the 0.77’s. We remain watchful of EM contagion for risks to the downside. The employment details of the Richmond and Chicago PM surveys will be important for USD direction this week.

RATES: NZ rates are likely to open 1-2bps lower, in line with moves in US markets overnight.

REVIEW

CURRENCY: NZD remained under pressure. However, there was some strength in the Indian rupee, and capital controls in Brazil saw the real strengthen, alleviating some pressure.

GLOBAL MARKETS: A fairly dull Friday session came to a punchy end with the release of a woeful US new home sales report. A broad USD sell-off resulted, and US 10-year Treasury yields fell immediately after the news, though subsequently moderated a little. European sovereign bond markets followed the rally, after selling off earlier in the session. Equities traded higher on both sides of the Atlantic, doing slightly better in Europe (helped by better-than-expected euro area consumer confidence). Gold hit a new two-month high, and crude and base metal prices also rose on the weaker USD.

KEY THEMES AND VIEWS

US NEW HOME SALES REPORT causes pause for reflection. Just as the market appeared to have made its mind up that next month would be the beginning of the Federal Reserve tapering of QE3, along came a US new home sales report that was truly dreadful. July sales fell 13.4 percent to a 394K annualised pace. This is the biggest decline since May 2010, to the lowest level since October 2012. A 2 percent drop had been expected. To add insult to injury, most of the June upward spike was revised away (to +3.6 percent from +8.3 percent). It is notable that in recent months housing activity data has disappointed, in contrast to the continued rise in homebuilders’ sentiment. Of course, it is a monthly blip in volatile data, as optimists can point out. But the reason the market is so sensitive to it is that there are real question marks around whether the US housing market recovery is sufficiently robust to be to able handle the hefty rise in mortgage rates that we’ve seen so far (from 3.4 percent in early May to over 4.5 percent today). A derailment of the housing market recovery is not part of the normalisation plan. With US equities looking fully valued, if housing stumbles the onus is on the US labour market to drive the income growth required to make the recovery sustainable, and indicators here remain somewhat mixed. Federal Reserve Bank of St. Louis President James Bullard, a well-known dove, commented publically that in his view, the Fed did not need to be in any hurry to taper QE3 in September.

OTHER EVENTS AND QUOTES

- UN weapons inspectors will be allowed to visit alleged sites of chemical attacks in Syria. Meanwhile the US weighs up whether they would prefer to be damned if they do, or damned if they don’t, in terms of military intervention.

- The second estimate of UK Q2 GDP was revised up 0.1ppt to +0.7 percent q/q. The continued recovery, plus rising US rates, will make using forward guidance to keep long rates down quite a task.

NZD/USD: Trade...

The NZD tested lower late Friday before finally closing above 0.78. The trade balance today is forecast to show a small deficit, but overall healthy exports figures. We would expect reasonable demand for NZD when we trade with a 0.77 handle. Fears of EM contagion are likely to keep moves in the Indian rupee and Indonesian rupiah important for direction.

Expected range: 0.7760 - 0.7860

NZD/AUD: Under pressure…

This cross remains under pressure as the AUD holds firm on China stabilisation and signs the easing cycle may be close to ending. For now we do not fight the trend, as a retracement has been long overdue. However, we still favour NZD over AUD in the medium term.

Expected range: 0.8600 - 0.8700

NZD/EUR: German GDP…

There were no surprises from the headline German GDP second estimate. However, the details showed a decent boost in investment spending - a good sign for EUR in the medium term.

Expected range: 0.5800 - 0.5880

NZD/JPY: Start with yen strength…

The week has started with yen strength. There is little yen-related data until Friday and we are still waiting on true reform from Japan’s leaders before expecting trend yen weakness to resume.

Expected range: 76.00 - 77.50

NZD/GBP: Will Carney fight markets…

The first on-the-record speech by BOE Governor Carney is Wednesday night. Markets have taken a little GBP strength back on expectations that he may attempt to "correct" the markets after they sent rates and the GBP higher after forward guidance.

Expected range: 0.4980 - 0.5080

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