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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Australian home lending and ANZ AU job adverts are the Asian markets focus today. US Atlanta Fed President Lockhart will be watched overnight for Fed reaction to payrolls weakness.

RATES: Kiwi rates are expected to open down 2-3bps with the curve to flatten following global moves.

REVIEW

CURRENCY: Soft US payroll data let to broad USD selling, with the negatively positioned AUD outpacing even the normally illiquid NZD. Weakness in UK production has markets cautious over GBP prospects.

GLOBAL MARKETS: US non-farm payroll data disappointed massively on Friday, which led to a sharp and swift market reaction. In its wake the USD was sold heavily, with the G10 majors all gaining strongly. Well, all except the Canadian dollar, which suffered and even worse employment report that was released at the same time. Sovereign bond markets in Europe and the US have rallied strongly. The 10-year UST yield dropped 10 basis points to 2.86%. The major US equities initially fell in early trading before managing to recover to be flat to slightly up at the close, while European bourses gave up earlier gains, but remained in positive territory on the day. Earlier, GBP/USD was sold on the back on a disappointing UK industrial production report, but the NFP result saw this reverse and finish up.

KEY THEMES AND VIEWS

WHAT NOW FOR us MONETARY POLICY? The non-farm payrolls result of a 74k rise was much weaker than expected (consensus forecast was for a 197k rise). Most have discounted the result as being hit by the severe winter weather in December. From the non-seasonally adjusted household survey the number of workers with a job that reported being unable to work, because of the bad weather was 274k. This was well above the 166k long-term average for the month of December. The decline in construction (-16k) and recreation (-11.6k) hiring, as well as a dip in weekly hours worked also indicative that bad weather played a role. Otherwise, revisions to prior months were again positive (+38k) and the unemployment rate unexpectedly dropped 0.3 ppts to 6.7%. The drop in the unemployment rate was largely for all the wrong reasons though, with the participation rate falling to 62.8%, matching October as the lowest since 1978. Chatter will now turn to what the data means for the Fed on the 28th-29th January. There are two major issues to grapple with - firstly, whether the FOMC will keep QE unchanged at its new USD75bn/mth pace, or push forward with another USD10bn reduction. It is never wise to read too much into one result. Employment growth over the 3-months to December has averaged a moderate +172k/m. Overall, our near-term model of employment and other indicators of the labour market suggest much stronger monthly employment gains at more than 200k/month. Therefore, our baseline remains that a lift in the underlying economy will produce solid employment gains in 2014. This implies a moderate monthly reduction in the Feds asset purchases as the year progresses - although it might not always be constant. The second issue is, given the fall in the unemployment rate to 6.7%, whether the Fed will lower its unemployment threshold from its current 6.5%. This was the threshold originally intended to signal that the Fed would at least begin to consider raising the fed funds rate. Last month change of language to borrowing costs will stay low "well past" that level suggesting it has already been lowered.

NZD/USD: Old man winter strikes...

Friday’s non-farm payrolls sent NZD up almost 1c against the USD. However, this has only returned Kiwi to levels seen Wednesday last week. The payrolls report was weak enough for markets to attribute the weakness to the weather, however the weak report should see NZD firm this week, especially if the QSBO tomorrow is as strong as the ANZ Business Outlook survey.

Expected range: 0.8260 - 0.8340

NZD/AUD: AUD outperforms…

For once the AUD had more topside in it against the USD as the overly short AUD market squeezed the most on the weaker payrolls. We continue to be of the opinion that AUD weakness is fully priced as is NZD strength, so the logical direction for this cross is lower.

Expected range: 0.9180 - 0.9260

NZD/EUR: French surprise…

French industrial production was stronger than anticipated, up 1.3% vs 0.4% forecast, a nice surprise from the weakest core EU country. Spanish industrial output was also above forecast at 2.7%, although negative revisions to October offset this. Dutch Industrial production declined 0.5% in November.

Expected range: 0.6050 - 0.6110

NZD/JPY: Stable despite large moves…

Yen strengthened dramatically after US payrolls, but slightly underperformed NZD leaving this cross essentially unchanged.

Expected range: 86.00 - 86.80

NZD/GBP: Flat production…

Industrial and manufacturing production was flat in November against expectations for increases. Some cracks are showing in the strong UK story and like NZD, the GBP seems priced for perfection.

Expected range: 0.5010 - 0.5060

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