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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: An Australian focus to the Asian day today, with Q2 current account, retail sales and the RBA the drivers. Risks are for AUD weakness. Overnight the US ISM is expected to support USD keeping NZD/USD capped.

RATES: A very quiet London session in kiwi rates, with some payside interest evident. NZ yields are expected to open a touch higher.

REVIEW

CURRENCY: European manufacturing strength was confirmed last night and British PMI was very strong. In telling price action despite this, both EUR and GBP came under pressure, suggesting good news is in the price already.

GLOBAL MARKETS: A quiet session in the Northern Hemisphere overnight, with much of the US market closed for Labor Day. The improved tone on Asian markets following the weekend announcements on Syria, better Chinese PMI and Japanese CAPEX data flowed through to the European session. PMI manufacturing releases for August point to a continued pick up in the pace of activity in both the Eurozone and the UK. European equity bourses were higher across the board by at least 1.3%, and spreads to (higher) German bunds narrowed. Crude oil futures eased further, with smaller falls for gold.

KEY THEMES AND VIEWS

Happy birthday OMT. While some central banks continue to grapple with the intricacies of forward guidance, one (so far) verbal policy tool which has proved effective - the ECB’s Outright Monetary Transactions (OMTs) programme - has just passed its first anniversary. OMTs were unveiled last August following President Draghi’s pledge to do "whatever it takes to preserve the euro. The prospect of potentially "unlimited" purchases of sovereign debt brought peripheral bond yields down sharply and, crucially, prevented bigger Eurozone economies from being dragged into the debt crisis. In short, they have bought Eurozone members time to get their fiscal houses in order, without a single euro being spent so far. Smaller peripheral euro-zone economies continue to make solid inroads into addressing budget deficits. Over the next month or so, the Troika will return to Greece, Ireland and Portugal to begin their next programme reviews, and will be pleased with the progress being made. A long road, however, lies ahead. More worryingly, is that the backstop provided by the OMT has allowed some of the larger economies to relax fiscal consolidation and structural reform efforts, with Italian and Spanish fiscal deficits having fallen only modestly. So far markets have given these countries an armchair ride, but the OMT looks set for a more testing second year if no progress on the reform front is made.

MPC has work cut out for it. The UK August PMI report was much stronger than expected (57.2 vs. 55 expected), delivering the highest result since February 2011, with the new orders component increasing to 61.8, its highest level since 1994. Yet another indicator pointing to strong recovery, which will make it difficult for Governor Carney to convince markets that UK policy rates will remain unchanged for the next three years.

OTHER EVENTS AND QUOTES

- RBA decision today. With the Australian federal election due on September 7 and with the RBA having just trimmed the cash rate to 2½% in August, the market consensus is for no change. The risk profile for the cash rate remains to the downside, with ANZ expecting the RBA to reduce interest rates further before the end of the year.

NZD/USD: ISM...

Whilst the NZD/USD will be impacted by today’s Australian data, tonight’s US ISM release will be the bigger driver. Expectations are for the headline number to decline slightly, however we expect the result to keep the USD in demand and keep NZD/USD under pressure.

Expected range: 0.7730 - 0.7860

NZD/AUD: Australian data…

Today is a big day for the Australian leg of this cross. The Q2 current account and retail sales are expected to remain subdued, but expectations are also subdued so any strength could boost AUD. However, the market will be focusing on whether the RBA "has scope to easy policy further", a phrase which if reiterated could send this cross higher.

Expected range: 0.8650 - 0.8750

NZD/EUR: European PMIs…

European manufacturing strength was confirmed by improvements in the composite PMI. Notably Spanish and Italian PMIs were stronger than forecast, but EUR remains under pressure, helping this cross to strengthen.

Expected range: 0.587 - 0.595

NZD/JPY: USDJPY moves.…

Price action in USD/JPY is telling with yen weakness notable. This should keep this cross from dipping too much from here. USD/JPY broke a 3 month downtrend and the Ichimoku cloud suggesting strength.

Expected range: 76.75 - 78.00

NZD/GBP: UK PMI…

British PMI at 57.2 is the highest since Feb 2011, and new orders sub component at 61.8 the highest since 1994. However GBP is succumbing to EUR pressure and price action suggests good news is priced in.

Expected range: 0.4970 - 0.5050

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