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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media


CURRENCY: The RBNZ will be an early driver with markets looking for clues as to the timing of rate hikes. Australian unemployment will also have an impact today but the medium term moves still relate to US developments.

RATES: Kiwi rates are expected to open unchanged ahead of the RBNZ this morning, although there was a pickup in activity noted in the London session.


CURRENCY: The US dollar was broadly stronger last night as the threat of political dysfunction into 2014 receded with a bipartisan deal. EUR and JPY bucked that trend strengthening in both cases.

GLOBAL MARKETS: Our London team reported a quiet session overnight, with little data of note. Equities were weaker on signs that US Congress was would agree a bipartisan budget deal that removes another hurdle to a tapering. US bond yields sold off a touch, with Medley Advisors flagging a Dec/Jan taper and rumours circulating that Bernanke could step down early (Yellen’s confirmation expected any time soon). EUR outperformed despite dovish comments from the ECB’s Coeure that low inflation may require a cut in the deposit rate. NZD and AUD weakened a touch, while the CRB index was little changed despite a 0.8% fall in oil prices.


US BUDGET DEAL WOULD REMOVE ANOTHER HURDLE TO TAPERING. The proposed US Congressional budget deal would remove one further hurdle to Fed tapering in the near term. The announced bipartisan budget deal would see automatic spending cuts eased by US$63bn over the next two years (March’s sequester), with an effective spending limit of US$1.01tr to be put in place. The deal would also cut the budget deficit by US$23bn over the next 10 years without an increase in taxes - by lifting airline passenger fees and raising contributions to federal pensions. While the numbers are pretty small in the scheme of things, the budget deal should give policymakers more confidence there won’t be a repeat of October’s partial government shutdown in the early stages of 2014. At the margin, the deal will also reduce fiscal headwinds that had been stunting the US recovery in 2013. But a word of warning - the budget deal doesn’t lift the debt ceiling, indicating US political brinkmanship could still provide event risk in 2014.

RBNZ PREVIEW: MPS TO FLAG RATE HIKES FROM Q1. The RBNZ is widely expected to leave the OCR unchanged at 2.5% for a 22nd consecutive meeting. However, we expect RBNZ interest rate projections will signal rate hikes from Q1 (from Q2 in September), albeit with a similar 4.7% endpoint for the 90 day bill rate. We anticipate an upgrade to the near-term economic outlook, while rhetoric around the inflation outlook is likely to be stepped up as the Governor looks to cement his inflation-fighting credentials. The NZD has risen in the past quarter; but export prices remain close to record highs, immigration has surged, confidence indicators signal a lift in base momentum and the labour market has turned up. Inflation looks set to move towards the mid point of the RBNZ’s band in the second half of 2014, suggesting a 2.5% OCR is not compatible with the economic outlook. Still, we’re not expecting an aggressive tightening cycle, but the OCR will need to be repeatedly tweaked. Current market pricing seems fair - with 8bps of hikes priced for January (32%) and 26bps for the March meeting. We’re currently in the "March-hike" camp, although wouldn’t discount an earlier move.

NZD/USD: Taper, Congress and the RBNZ...

The bipartisan budget deal was viewed favourably by markets and added to downward pressure on NZD/USD. The probability of a December reduction in QE has also been steadily increasing, ensuring NZD remains capped. The RBNZ will be the main driver today with a market positioned for some guidance about when the 2014 rate hikes will start. Should we not receive any new information the NZD will remain capped into the FOMC next week. Signs the RBNZ is considering January hikes would support NZD, whilst confirmation of March should leave the NZD unchanged.

Expected range: 0.8150 - 0.8300

NZD/AUD: Employment…

NZD/AUD will have a busy day today. Firstly the RBNZ is sure to cause volatility, and then at 13:30 we receive Australian November unemployment which is forecast to increase to 5.8%.

Expected range: 0.9000 - 0.9140

NZD/EUR: EUR strength…

The EUR strengthened last night counter to the recent trend for USD strength as German CPI was confirmed at 1.6%, two-tenths higher than October.

Expected range: 0.5940 - 0.6040

NZD/JPY: Yen Strength…

USD/JPY has failed to punch to new highs and drifted off last night, which when combined with NZD/USD weakness saw this cross fall rapidly.

Expected range: 83.50 - 84.50

NZD/GBP: Under pressure…

Markets are increasingly looking at the lofty GBP/USD, with concern leading to downward pressure on GBP. However for the moment it remains stronger than NZD.

Expected range: 0.5000 - 0.5060

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