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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The markets will focus on US payrolls tonight with expectations heightened for a good result. Any disappointment would see USD sold heavily. British data should continue to support GBP tonight.

RATES: Expect NZ interest rates to open higher following global moves, and to remain on the back foot for most of the day. US 10yr Treasury bond yields hit fresh two-year highs overnight, and markets are looking for a reasonably solid non-farm payrolls number after a strong ISM Services report.

REVIEW

CURRENCY: USD strength overnight was most evident against the EUR with a dovish ECB President and weak German data. NZD and AUD have held up well against the USD with no comment by the BOE supporting GBP.

GLOBAL MARKETS: Our London colleagues report that it was a whippy day in markets, with the lift in US 10yr Treasury bond yields to close to 3.00%, and the drop in EUR and GBP the headline acts. The culprit: better US data combined with a dovish assessment from ECB President Draghi. Other currencies also finished weaker against the USD on the day, but the euro was the clear underperformer. Equity markets closed generally higher.

KEY THEMES AND VIEWS

Waiting for US non-Farm Payrolls Data Tonight. "Payrolls" is likely the most watched of US data releases, and expectations for August data to be released tonight centre on a gain of 180k, and for the unemployment rate to hold steady at 7.4%. Although that expectation is close to the +176k gain in the ADP measure of employment, the surge in the all-important ISM Services measure of employment from 53.2 to 57.0 (released overnight) suggests a larger gain, as does the steady decline in claims. Whatever happens, the data will inform markets as to the timing and degree of Fed tapering. We expect QE to be trimmed back by US$10bn at this month’s FOMC meeting, but are inclined to say that at a whisker below 3.00%, the US 10yr Treasury bond is fully priced, and it looks like a case of sell the rumour, buy the fact. That’s not to say we are bond bulls. Indeed, strategically, we are not, and yields have a long way to go before they reach any sense of normality. US nominal growth is set to top 3% this year and 4.5% next year. Based on this very simple metric, yields need to rise at least a percent for some sort of basic balance to be achieved. However, QE won’t be over even after the taper - it is just being trimmed back, and traditional Fed tightening (i.e. hikes) are at least a couple of years away. So there’s a limit to how high bond yields can go in the short term. For NZ, given the now very steep curve, and expected returns levelling out at the NZGS 12/17s, we see no point in taking duration given the risks.

OTHER EVENTS AND QUOTES

- The BIS’s triennial FX and derivatives turnover survey was released overnight. It showed that FX market trading volumes grew from an estimated US$4.0trn per day in April 2010 to US$5.3trn in April 2013. FX swaps remain the most common product, followed by spot FX. By currency, the NZD remains the 10th most actively traded, accounting for 2.0% of turnover - its highest ever share. The AUD accounted for 8.6% of turnover, also setting a new record. The GBP’s share fell to 11.8%.

- The BOE left policy unchanged and made no accompanying statement, as is standard practice.

NZD/USD: US strength...

US data was strong overnight yet NZD/USD has held in well. Jobless claims reduced and the employment subseries in the ISM non-manufacturing series improved to 57 from 53.2. Both these releases indicate strength in employment in the US, ahead of tonight’s payrolls which would keep USD bid.

Expected range: 0.7840 - 0.7940

NZD/AUD: Strength…

NZD has been gaining against AUD and technically the risk of a correction lower has receded, but has not been eliminated.

Expected range: 0.8600 - 0.8670

NZD/EUR: ECB…

The ECB was dovish, weighing on EUR overnight. German factory orders were also weaker than expectation making EUR the favoured short against USD overnight.

Expected range: 0.5980 - 0.6100

NZD/JPY: Whatever it takes…

No change from the BOJ but a reiteration of determination to do whatever is necessary to create inflation. Also a commitment to ease further if a proposed increase in sales tax dents the economic recovery.

Expected range: 78.40 - 79.50

NZD/GBP: BOE…

No change and no broadside against the markets. This has been determined as tacit acceptance of market pricing in yield increases and should continue to support GBP going forward.

Expected range: 0.5000 - 0.5070

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