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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: As liquidity returns, we expect broad USD strength reverting Fridays squeeze. US ISM non-manufacturing and European Services PMIs are todays focus. US Payrolls and the ECB are the focus of the weeks.

RATES: Rates are expected to open unchanged from the end of last week.

REVIEW

CURRENCY: A busy break for currencies, year highs were recorded by EUR/USD, GBP/USD USD/JPY and NZD/JPY. USD data was broadly strong, as were European PMI’s (except France). Chinese PMI’s missed expectations.

GLOBAL MARKETS: Global markets were relatively quiet over the break, there weren’t any major data surprises, with most series, except US auto sales registering solid results. On the whole US and Europe data continued to be positive, but slightly weaker Chinese PMI results continue to provide some caution. While markets were relatively quiet with less liquidity there was some whippy price action from time to time, especially for currencies. Global yields drifted a touch higher over the holiday period. UST 10-year yields moved slightly above 3 percent in the New Year before retreating on weak car sales reports and short positioning ahead of several Fed speakers. It was a similar story elsewhere with some strength for sovereign yields into the New Year before a slight pullback. The major global equity indices are largely unchanged over the holiday period, with a bit of strength between Christmas and New Year. Oil prices fell nearly US$5 per barrel in the New Year on increasing US supplies.

KEY THEMES AND VIEWS

Chinese GOVERNMENT DEBT ON THE INCREASE. One of the most interesting pieces of information released over the holiday period was China’s total central and local government debt. It was the first time such information has been released, after increasing pressure to improve the transparency around its shadow banking sector and quantity of local government debt. In total the Chinese National Audit Office estimated China’s central and local government debt to be RMB20.7trn as of June, equivalent to 40 percent of GDP. However, including contingent liabilities, China’s total government debt exceeds RMB30trn, or equivalent to 50-55 percent of China’s GDP. The results were at the higher end of expectations and in aggregate are close to the level deemed to start to be a drag on an economy’s longer-term growth potential. Local government debt was estimated to be RMB17.9trn and had grown by 12.5 percent over the last year and has almost doubled since the first audit results two and half years ago. While China’s total government debt remains low by the OECD standards and is offset to an extent by assets on the other side, it is the pace of the rise that is alarming. Build-up of leverage in the financial sector, including local government and corporate balance sheets means increased financial stability concerns and risks an adverse feed-back loop occurring between the real economy and financial sector if not properly managed. These pressures and how they are managed will be a must watch in 2014.

OTHER EVENTS

- The US ISM declined to slightly to 57 in December. The strong overall level of the series indicates a maintenance of the momentum in manufacturing activity in the US economy, backing the Fed's decision to start tapering QE. The breakdown of the subseries were good - new orders were very strong, rising by 0.6pts to 64.2, employment was up 0.4pts to 56.9, production was at 62.2, and even prices paid picked up.

NZD/USD: USD unable to hold gains despite better data...

NZD remained muted for most of the holiday period with better US data pressuring it in the first half of the break. The NZD finished the year strongly, reversing losses. After a good ISM report on Thursday and a failure for USD to continue gaining, Friday the 3rd saw a long USD market squeezed with NZD a major beneficiary of selling.

Expected range: 0.8200 - 0.8320

NZD/AUD: NZD liquidity…

This cross spent much of the break in a very tight range as there was little information to give it direction. Evidence on New Year’s Day that China may be slowing appears to be driving NZD and AUD equally. However, Fridays squeeze again showed that NZD has less liquidity available.

Expected range: 0.9180 - 0.9270

NZD/EUR: ECB focus…

The EUR/USD came under pressure in the latter part of the break, despite generally good PMI results, after squeezing to a new year high immediately post-Christmas. This saw NZD/EUR rally strongly on Friday. Little is expected from the ECB this week, but it will be a major focus.

Expected range: 0.6050 - 0.6150

NZD/JPY: Solid gains…

NZD/JPY posted solid gains as traditional year-end strength asserted itself. We expect yen weakness to continue but the pace to slow this year.

Expected range: 86.00 - 87.00

NZD/GBP: Manufacturing PMI miss…

Manufacturing PMI missed expectations although construction PMI remained strong. Markets are not expecting action from the BOE this week, although the BOE has indicated they are uncomfortable about the strength of the housing market. GBP/USD did touch a new year high over the break.

Expected range: 0.5000 - 0.5070

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