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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The focus today is on Japan with the Q2 GDP final read, current account, and a potential decision on a consumption tax. China also has CPI, PPI, and new loans. US consumer credit will be a driver overnight.

RATES: Expect NZ interest rates to open under downward pressure following global moves, courtesy of a disappointing US non-farm payrolls outturn.

REVIEW

CURRENCY: US payrolls disappointed and USD was sold across the board. German industrial production was weaker than expected, continuing the weaker run of European data. British IP was also weak, keeping GBP in line.

GLOBAL MARKETS: Markets on Friday were dominated by significant downward revisions to the key US non-farm payrolls data. US 10-year Treasury yields dropped nearly 6bps after touching 3.00 percent prior to the release, while falls in bond yields in core European nations were larger. Portugal’s yields bucked the trend, rising nearly 12bps, as markets continue their trend of sharply differentiating sovereign risks. Equity markets held up reasonably well: the main US indexes were flat to very slightly down, while the Euro Stoxx rose 1 percent. In commodities, the CRB index rose a touch. Dubai spot oil eased slightly, as did gold.

KEY THEMES AND VIEWS

Payrolls data disappoint. As we noted on Friday, markets had priced in a solid US non-farm payrolls result, if not a decent chance of an upward surprise. In the end, the headline came in just a little under expectations (+169K vs. +180K expected) but there were large downward revisions to the July data: from +162K reported originally to +104K, with smaller downward revisions to June as well. In the separate household survey, the unemployment rate fell 0.1 to 7.3 percent, but it was entirely due to a discouraged worker effect, as people left the workforce (the participation rate fell sharply from 63.4 to 63.2 percent). The bad-news-is-good-news camp (more stimulus) were left uncertain about whether the labour data were bad enough. After some to-ing and fro-ing, markets decided to sell the USD. US labour data might seem far away from us in NZ but it matters hugely, for all that payrolls data in particular are poorly estimated and prone to large revisions. The US Federal Reserve’s plans to taper their third round of quantitative easing have seen global long rates rise sharply, including in New Zealand. The Reserve Bank’s Graeme Wheeler is influencing the short end, but the big story at the moment is Fed Chair Ben Bernanke (and the question of who will shortly replace him). Bernanke has tied the QE tapering schedule firmly to the recovery in the US labour market; this data is having a serious say on NZ mortgage and term deposit rates.

OTHER EVENTS AND QUOTES

- Russian President Vladimir Putin has said Russia would assist Syria in case of an external attack but later clarified that this would involve arms support rather than direct intervention. The stakes in the US "damned if you do, damned if you don’t" poker game continue to rise.

- China’s exports rose more than expected in Q2, rising 7.2 percent on a year earlier. On the other hand, imports (+7.0 percent) rose less than expected, good for the trade surplus but suggesting subdued domestic demand. Exports to the UK and US rose for a second month.

NZD/USD: USD weakness...

All about disappointing payrolls data. While the general consensus is that the Fed is still more than likely to change policy next week, this result reiterates that it will be a slow process, with the carry available in NZD attractive.

Expected range: 0.7950 - 0.8080

NZD/AUD: NZD liquidity…

The NZD found less liquidity on the run higher, leading this cross to regain 0.87. In a weak USD environment NZD is likely to stay bid.

Expected range: 0.8650 - 0.8750

NZD/EUR: German IP…

German data was weak on Friday with industrial production declining 1.7%. This indicates that the nascent recovery in Europe is under threat and should keep EUR underperforming on cross. The resistance at 0.6150-75 is now a focus - should it break the extension could be quick.

Expected range: 0.6050 - 0.6150

NZD/JPY: 2020 Olympics…

Tokyo is to host the 2020 Olympics, giving PM Abe more political capital to implement reforms. Consumer confidence and equities are likely to be immediately lifted by this impact. Yen could take another leg weaker if Abe deems the Japanese economy to be strong enough to take the legislated consumption tax increase next year.

Expected range: 79.25 - 80.75

NZD/GBP: British industrial production…

British industrial production was flat in July, one of the few bits of data that point toward challenges for the GBP. EUR weakness will also weigh on GBP.

Expected range: 0.5075 - 0.5200

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