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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: A busy session today. Australian Retail sales and Chinese inflation are the main events in the Asian session. Overnight the EUR will be the focus with the ECB, along with the BOE and US House hearing on QE.

RATES: Expect Kiwi rates to open unchanged to a touch higher, albeit outperforming global moves as receiving interest returns to the NZ front end.

REVIEW

CURRENCY: The USD performed well in the latter half of the New York session with a USD squeeze visible following the stronger ADP employment report. Strong European data was not enough to boost EUR.

GLOBAL MARKETS: Our London colleagues report a mixed session overnight. Better euro area data had little impact on the EUR ahead of the ECB tonight. Core sovereign bond yields were higher as strong US ADP employment data points to upside risk for Friday’s non-farm payrolls release. ADP employment printed gains of 238k in December, contributing to the 6bpt lift in US 10yr bond yields to 3.00%. US and European equity markets were mixed, while gold and WTI oil prices eased modestly. The immediate focus now turns to Fed Minutes from the December meeting due at 8am NZT.

KEY THEMES AND VIEWS

Eurozone data improves, eCB meets tonight. There was further improvement in the Eurozone data flow overnight, with November retail sales data rising 1.4% m/m and German factory orders up 2.1% m/m (offsetting last month’s decline). There have been other positives - with EZ tail risks abating, Ireland and Portugal exiting bailout programs, and peripheral bond yields significantly lower (Spanish 10yr yields are back to pre-GFC levels). But while the activity outlook has stabilised in 2013, the risk of deflation is of a more pressing concern when the ECB meets tonight - recall December core inflation fell to a record low of 0.7% y/y. Structural headwinds to growth remain; money supply growth is weak; unemployment remains stubbornly high (12.1%); and banks continue to deleverage. All this adds up to a dovish statement from the ECB tonight, with deflation risks of greatest concern.

december FOMC minutes due at 8am. Minutes from the US Federal Reserve’s December 17-18 policy meeting are due at 8am NZT. The Fed tapered its asset purchases by US$10bn per month at the December meeting, and markets will focus on discussions surrounding the future pace of tapering (Bernanke had indicated a similar pace of tapering was likely at future meetings which would see QE3 end by late 2014 - although tapering is on no preset course and remains very much data dependent). Markets will also look for more colour on forward guidance (the Fed noting rates will stay low until well past the time unemployment declines below 6.5%); the more balanced risk profile; and the Fed’s renewed focus on low inflation.

OTHER EVENTS

- December’s US ADP employment report was better than expected at 238k (200k exp, 229k prev), and alongside a stronger employment component from the non-mfg ISM (55.8 in Dec. from 52.5 in Nov) indicates a robust non-farm payrolls report on Friday night. Indeed, the directional change in ADP figures has been a reasonable indicator over the past year. Thus ANZ sees upside risks to the market consensus for 195k payroll gains (we’re at 205k).

NZD/USD: Strong ADP employment...

US ADP employment was well above expectations with positive revisions to November. After an initial USD squeeze into the WMR fix, the USD has been in demand as we wait for the FOMC minutes at 8am this morning.

Expected range: 0.8220 - 0.8310

NZD/AUD: Building permits and Australian retail sales…

Australian November retail sales, November building permits from both Australia and New Zealand, along with ANZ NZ Commodity Prices mean we will get some further differentiation data to support this cross.

Expected range: 0.9260 - 0.9330

NZD/EUR: ECB tonight, further strong EUR data…

The main event for EUR tonight is the ECB meeting, and while no policy changes are expected, comments at the press conference comments could provide a catalyst for currency moves. Last night, EU November Retail sales +1.4% was above expectations and the EU unemployment rate remains elevated at 12.1%, while German exports disappointed, factory orders reversed Octobers drop by rising +2.1%. Despite this positive data, the NZD was more resilient than EUR to USD buy flows.

Expected range: 0.6070 - 0.6140

NZD/JPY: A new cycle high…

With NZD resilient to USD buying and yen continuing to weaken the NZD/JPY managed to increase above 87.

Expected range: 86.50 - 87.50

NZD/GBP: BOE tonight…

The market is not expecting action from the BOE tonight as Sterling is the most resilient currency to USD optimism. Markets believe the UK recovery is second to the US in 2014.

Expected range: 0.5000 - 0.5060

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