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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Positioning will be the main driver today as markets implement their final square up into the dead zone for liquidity that is Christmas and New Year’s. We expect NZD to remain strong over the period.

RATES: Expect rates to open higher here, with pressure at the front end coming from the fallout of strong data, mortgage paying interest in the wake of fixed rate rises, and the long end reacting to the eventual rise in US bond yields that one would have thought was logical after a Fed taper, and less calming than expected forward guidance.

REVIEW

CURRENCY: USD strengthened across the board as US short end rates shrugged off their slumber to increase federal fund rate expectations. This is despite generally weaker US data.

GLOBAL MARKETS: A relatively range-bound day in the wake of the FOMC’s decision to begin tapering its asset purchase program, although bond yields did creep higher later in the session. There were a couple of data releases, but given the next main event on the calendar is Christmas, volumes have lightened up considerably. European equities traded positively, up between 1-2%, although this has not translated through to US equities, which were mixed following yesterday’s run up to a record high in the Dow. The FX majors have generally consolidated their post-Fed moves. The NZD has not benefitted particularly well from the recent run of solid data, a sign perhaps that global factors are more in focus. To be sure, the Kiwi remains elevated, but and is likely to remain so through December and into early January, when seasonal support tends to give it a boost, but with the rates market now pricing 50/50 odds of a January OCR hike, one could be forgiven for asking why the Kiwi isn’t a cent or two higher than it is.

KEY THEMES AND VIEWS

Reflecting on the fed taper. The Fed finally elected to go ahead with tapering yesterday, reducing the pace of asset purchases from US$85bn a month to US$75bn a month. Even at that reduced pace, they’ll still be the biggest bond buyer in the market - but the point is they are finally making a departure. While Bernanke reiterated that Fed policy is not on a pre-set path, he also reiterated that it is likely to be reduced "in further measured steps at future meetings". The market has read this to mean reduced at a similar pace, i.e. by $10bn a month. At that pace, it will take a year to completely wind QE down. That’s a long time for some, but not a long time for the bond market. Still, it’s crucial to recognise that the policy path is data-dependent, leaving markets to think more about the data than QE itself, and this is a key distinction to where we have been over the past few years, when the data hasn’t mattered as much insofar as immediate policy has been concerned. All eyes are now thus on the data, and of late, it has been improving, which portends of gradually rising long end interest rates. For currency markets, it was less about QE and the taper, and more about forward guidance on the Fed Funds rate given the role that interest rate differentials play in guiding exchange rates. There had been talk of reducing the unemployment rate threshold to 5.5%, but in the event it remained at 6.5%, even if the guidance shifted to anticipating keeping the Fed Funds rate low "well past" the point when that threshold (i.e. 6.5%) was met, "especially" if inflation remains below 2%. In our view that should be regarded as a positive for the USD, and the past 24 hours largely validates that.

NZD/USD: Driven by the US short end...

Higher US short end rates are driving the USD stronger, December 2016 Federal Fund expectations increased by 13bps and December 2015 by 10bps. This is despite weaker US data: the US Jobless claims 4 week trend increased to 343.5k from 330k; the US Philadelphia Fed was weaker than forecast; and existing home sales declined 4.3%.

Expected range: 0.8130 - 0.8220

NZD/AUD: Driven by flows…

Today’s NZ job ads, migration and credit card spending marks the end of Australasian data until the New Year. We do not expect today’s data to change the strong NZD story and expect this cross to be driven by flows for the next fortnight.

Expected range: 0.9180 - 0.9250

NZD/EUR: Banking union - Policy failure?

The EUR remained under pressure against the USD, with the president of the EU parliament describing the banking union agreement "as possibly the biggest policy failure since the euro crisis erupted"

Expected range: 0.5960 - 0.6080

NZD/JPY: False break?

NZD/JPY finally broke resistance at around 85.60 only to end up back where we started. Traditionally this is the cross for seasonal strength.

Expected range: 84.50 - 86.00

NZD/GBP: GBP stronger than even NZD …

The currency markets are voting on relative economic strength, marginally favouring the GBP. UK November retail sales were a tenth stronger than expectations.

Expected range: 0.4950 - 0.5020

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