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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The Australian November trade balance may provide some AUD direction. Also of note is the Senate confirmation of Yellen as Fed chairman. European inflation for December and German retail sales will drive the EUR.

RATES: Expect local interest rates to open with a bias to the downside given the fall in US Treasury bond yields to new lows for the (albeit very new) year.

REVIEW

CURRENCY: The USD was generally weaker overnight as the ISM non-manufacturing survey declined. A reasonable Service PMI release from Europe saw the EUR in demand, whilst GBP declined as their release missed expectations.

GLOBAL MARKETS: Our London colleagues report that post-holiday trading has been choppy despite a lack of news, presumably reflecting still low liquidity. That said; the data has started to pick up today, although the main events - the FOMC minutes, ECB and BoE policy decisions, and the Non-farm payroll report - do not take place until the back end of the week. Today’s releases showed a continuation in the themes present at the end of 2013 - consolidation in the US and UK, a relatively softer recovery in euro area activity, and weak inflation trends. In broad terms, the main market moves today were: a broadly weaker USD; rally in the middle and long-end for the core sovereign bond markets; a small decline on equity markets.

KEY THEMES AND VIEWS

PMI Data In Focus. A slew of PMIs were released overnight across Europe and the US. The main message coming from them was one of consolidation, with the main releases either flat or lower compared to last month, but holding above the key 50 level. This means things are still expansionary. Judging by the price action it was the US ISM Non-manufacturing survey that caused the biggest stir. While the headline number dipped from 53.9 to 53.0, which was itself disappointing, the collapse in the new orders component from 56.4 to 49.4 was the bigger surprise. That said, it wasn’t all bad news: the employment component - widely judged to give a decent lead on non-farm payrolls - jumped from 52.5 to 55.8, reinforcing expectations of a decent payroll number on Friday. Recall that this is a crucial number. Yes, Fed tapering is "in the bag", but how quickly QE is eventually unwound does depend on how the US economy evolves, and while inflation is low, unemployment remains the focus. So it matters for US policy, and by definition, will impact on key NZ variables like the NZD, which by association, has an impact on the OCR. In the UK the news was better. While the headline PMI services fell from 60 to 58.8, overall the data was very strong and it can be expected that, as the UK advances through the business cycle, the pace of improvement won't be maintained. Within the PMI data, the employment component was 55.0 vs 54.2, suggesting strong labour market improvements. Additionally, the future activity index was 73.5 vs 71.1 and the incoming new business index held up well at 62.1 vs 63.1. In Europe, euro area aggregate Dec services PMI was unchanged, shifting the focus to German CPI, with the annual HICP measure coming in well below expectations at +1.2%, underscoring the lack of inflation in Europe’s key economy. The data will also potentially weigh on EUR should expectations of another ECB rate cut start to build (although a cut at this week’s meeting seems highly unlikely). With no NZ data due out today, the focus will again be on European and US data tonight.

NZD/USD: US Services...

The NZD reversed yesterday’s weakness after ISM non-manufacturing declined more than forecast. There was a bright note to the release though with the employment subcomponent improving to 55.8, which bodes well for payrolls later this week. US factory orders was also more optimistic.

Expected range: 0.8260 - 0.8350

NZD/AUD: NZD demand…

Demand for NZD/AUD was evident overnight. Australia’s November trade balance may provide some direction in an otherwise flow driven market.

Expected range: 0.9210 - 0.9290

NZD/EUR: PMIs in line…

The Services gap between France (better than expected) and Germany (worse than expected) reduced a little last night, but it still remains a concern for currency watchers. In the periphery Spain’s PMI surged to 54.2 vs 51.6, whilst Italy’s missed forecasts 47.9 vs 48.5. In all it was a positive release for the EUR. Although the German Harmonised Index of Consumer Prices (HICP) release was weaker than expected, which will be of note to the ECB.

Expected range: 0.6030 - 0.6120

NZD/JPY: Yen gains…

As the US ISM underperforms the consensus long USD/JPY position was reduced leading to volatility in NZD/JPY.

Expected range: 86.00 - 87.00

NZD/GBP: Services join manufacturing…

Services PMI missed expectations declining to a still strong 58.8 in the UK overnight. This led to a general GBP underperformance as EUR rallied strongly. The short term bias for this cross is higher now that both Services and Manufacturing PMIs have missed expectation.

Expected range: 0.5030 - 0.5090

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