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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: We remain focused on Indonesia and India to see if recent measures calm markets. Overnight the Chicago PM and month end USD buy flows are expected to keep USD strong.

RATES: Expect NZ bond yields to open lower in response to lower Treasury bond yields and higher oil prices. Rising petrol prices are inflationary in the short term, but they crimp consumer spending ability and confidence.

REVIEW

CURRENCY: Positive revisions to US Q2 GDP and jobless claims in line with forecasts have seen USD strengthening overnight. Indonesia increased rates in an attempt to calm EM jitters, but will remain a source of pressure on NZD.

GLOBAL MARKETS: Our Northern hemisphere colleagues report trading conditions were generally quiet, but that didn’t prevent the dollar from making ground against the euro as geopolitical tensions over Syria rumbled on. Equity markets were uniformly firmer and bond yields are a touch lower across the core, but this masks a fair amount of intraday volatility. Indeed, US 10yr Treasury yields reached almost 2.83% at one point, before they fell all the way back to 2.74%. Oil markets are starting to get attention as things heat up in Syria. WTI crude has dropped back slightly, but remains close to 5 year highs. It was a relatively quiet day for data with the first revision to US GDP the main focus. The Bank of Indonesia raised rates 50 bps whilst the Reserve Bank of India intervened to support the rupee.

KEY THEMES AND VIEWS

Reflecting on markets: It has been a little over a week since the NZD was knocked off its perch, so to speak, and in a number of commentaries we noted the importance of a the Kiwi avoiding making a new low for the year. So far, the Kiwi has managed to avoid making new lows, and in trend terms, NZD has outperformed AUD over the trading week. However, the NZD has spent a fair bit of time below 0.7800, and the year’s lows aren’t too far away. We thus find ourselves back at something of a turning point, and while the business-as-usual outlook for the NZD is relatively sound, the risk profile has changed fairly dramatically. Factors arguing for a higher Kiwi include better growth, strong commodity prices, and widening interest rate differentials. Indeed, according to Consensus Forecasts, the NZ economy is expected to be the fastest growing economy in the G10 in both 2013 and 2014, Earlier this week, Fonterra lifted the dairy payout to a record high. This is the classic textbook response one might give when asked why the Kiwi will hold up. But when we look beyond New Zealand’s fair shores, we have emerging market turmoil in Asia, with FX markets pummelling India and Indonesia, and talk of military action in Syria. For now, markets have been exacting in their differentiation, and the wobble seems contained. But that could change. What happens in Syria is a tricky one to decipher - we do not, after all - have any comparative advantage in calling Middle East politics. But in the past, heightened tensions in the region have often led to higher oil prices and flight to safety behaviour - neither of which is a good news story for the NZ economy or the NZD. We could afford to be sanguine if the NZD was not overvalued, and the Fed was not about to embark on its "taper". However, with the NZD at a turning point, risks are heightened. That’s not to say we are throwing the towel in - we are not - but the next few trading sessions could get interesting.

NZD/USD: Chicago PMI...

US Q2 GDP was revised higher last night strengthening USD across the board. Tonight the Chicago PMI will provide insights for next week’s ISM and payrolls, which are looking US positive. Indonesia tried to calm nerves last night by raising rates 50bps. However, selling pressure on the NZD/USD is likely to remain.

Expected range: 0.7730 - 0.7830

NZD/AUD: Side-lined…

This cross is out of focus as the market reacts to USD and emerging market issues. We expect this cross to end the week ranging around 0.87.

Expected range: 0.8650 - 0.8750

NZD/EUR: EUR weakening…

On balance European data was reasonable with confidence business and consumer in Italy and business confidence in France improving. German unemployment increased slightly and that was enough to keep EUR offered.

Expected range: 0.5825 - 0.5925

NZD/JPY: Data today…

We get further Japanese data today with National and Tokyo CPI and industrial production. CPI is expected to increase on both measures whilst industrial production should bounce back. This may cause some yen weakness as it endorses Abenomics.

Expected range: 75.80 - 77.30

NZD/GBP: GBP remains strong…

GBP remains strong against EUR weakness. For now the strength in GBP data is enough to keep this cross close to 0.50.

Expected range: 0.4990 - 0.5080

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