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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The Asian session has little new information for us today. Overnight, GBP could be a focus with December retail sales due. The USD remains a key driver for currencies with the data calendar remaining full tonight.

RATES: NZ interest rates will open lower today following global moves.

REVIEW

CURRENCY: Despite better headline US data the USD was broadly under pressure overnight. The Australian dollar was a notable mover reacting to yesterday’s weak employment report.

GLOBAL MARKETS: Broadly speaking, bond yields and equities are both lower, with analysts and the media blaming mildly weaker US data and disappointing earnings results by US banks and retailers. To be fair, the data was not "bad", but it wasn’t good either - US CPI was as expected, quashing concerns about an upside surprise in the wake of yesterday’s stronger than expected core PPI data. Inflation remains low in the US, with the core rate holding steady at a below-target +1.7% y/y. Jobless claims were all over the show, still presumably weather affected, and some of the detail in the Philly Fed survey like New Orders and Inventories were weak. Adding to this, there were a few articles out relating to the Euro stress testing of banks which were talking up a possible $1 trillion capital shortfall. Markets didn't like any of this news, and once bond yields broke lower, the shorts capitulated and the bellwether US 10yr Treasury yield is back where it was at the end of last week. After leading in the volatility stakes over the past few days, currencies had tighter ranges over the day, with the AUD consolidating its sell off following yesterday’s weak employment figures. The NZD remains elevated. It had been drifting off for the past 36 hours but bounced early this morning, with NZD/AUD printing fresh 8 year highs at 0.9474. Seems you can’t keep a good thing down!

KEY THEMES AND VIEWS

Short End Rates have Scope to Fall. Odds of a January OCR hike have been receding for a few days now, thanks partly to the lack of an inflation smoking-gun from the long-running and well-respected NZIER QSBO survey. But with 8bps still priced in, the market still has some thinking to do, even if opinions won’t be settled until we see Q4 CPI data on Tuesday. As we flagged in our CPI Preview yesterday, we expect a 0.1% quarterly fall in the CPI, which is slightly above the median market expectation and the RBNZ’s December MPS forecast of -0.2%. That being the case, while it is normal to get a seasonality driven weak print in Q4, it’s unlikely the CPI data will provide a smoking gun either. And while we don’t think the RBNZ should be deterred from hiking because the NZD (and especially NZD/AUD) is back near the moon, it’s the real economy that matters, and we just don’t think there’s sufficient justification yet for a January hike. That being the case, we see scope for front end rates to edge lower over the next fortnight, steepening the yield curve off what we consider to already overly-flat levels, as flagged in our piece yesterday titled NZ Forward 2s10s Swap Curve to Steepen. Whether this will put a dent in the Kiwi remains to be seen. Based on past correlations, it should, and our forecasts have the NZD gradually falling mildly over 2014. But NZD has been a "rock star" in hot demand of late, and with the global picture clouded by soft US jobs data and talk that we may see more weather-related soft January data too, expecting USD strength could be a tall order!

NZD/USD: Resilient...

Despite continued strength in headline US data, the NZD has been resilient over the last 24 hours. There were little signs of a slowing US economy from the Philadelphia Fed or Jobless claims; however, housing in the US did weaken. Tonight, US industrial production for December, Michigan consumer confidence and housing starts round out the data for the week.

Expected range: 0.8300 - 0.8380

NZD/AUD: Divergence continues…

NZD/AUD soared to a definitive 8 year high yesterday as Australian employment disappointed significantly. This cross has not sustained trading at these levels since 2005, when NZ interest rates were 175bps above Australian rates, and NZ unemployment was running sub-4% compared to Australian running above 5%.

Expected range: 0.9400 - 0.9480

NZD/EUR: EUR remains pressured…

German and European CPI was unchanged in its final read last night, but strong US data kept the EUR under pressure whilst NZD demonstrated resilience leading to strength in this cross.

Expected range: 0.6100 - 0.6160

NZD/JPY: Stability…

Yen strengthened alongside the NZD last night outpacing NZD for most of the session. However late NZD strength has seen stability return.

Expected range: 86.70 - 87.40

NZD/GBP: UK Retail sales…

The GBP may come under pressure tonight as the UK releases December retail sales. Supermarkets have reported weak sales already so weakness maybe already priced.

Expected range: 0.5080 - 0.5140

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