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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media


CURRENCY: There is a lack of first tier data today, so currencies are likely to be driven by emerging markets concerns.

RATES: Expect local rates to open higher following US moves.


CURRENCY: Markets worried about the EM last night leading to a flight from risk. The ARS (Argentinean Peso), TRY (Turkish Lira) and ZAR (South African Rand) are all in free fall, for distinct rational reasons but markets will worry about the rational later.

GLOBAL MARKETS: Our London colleagues report a wild session in markets. While the European PMI data was better (significantly boosting EUR) the dominant release was the HSBC/Markit manufacturing PMI for China. It fell from 50.5 to 49.6. While that was not a large fall, importantly it signalled contraction for the first time in six months. While interesting, the real activity and volatility was in EM space. The Argentina peso slumped 15% while the Turkish lire, the ruble and the rand all hit new lows against the USD. Volatility is surging and there are signs of real stress, with one bank reportedly saying that "Russian banks are fighting for liquidity". Against this background, bond yields fell sharply, completely ignoring the PMI data. US 10yr Treasury bond yields now sit at 6 week lows, below 2.8%, continuing what has been a decent correction since weak non-farm payrolls data. German bund yields hit a two month low and peripheral spreads widened - partly helped by ex Bundesbank chief Axel Weber’s negative comments about the risks of renewed Eurozone problems later on. Unsurprisingly both credit and equities came under pressure, and the USD is lower. While we cannot ignore global news, we would expect the NZD to be more insulated than most currencies from EM gyrations, but what happens in China is clearly very important. On that note, we see commodity prices have broadly held steady.


So, what does it all mean for NZ? In the past few days we have seen Thailand declare a state of emergency in Bangkok, China’s PMI fell below 50, a circa 15% collapse in the Argentine peso, and there is talk of a liquidity squeeze in Russia. It all sounds very 1990s: we have been here before. At the margin, it is all negative news for a small open economy like NZ that is highly dependent on trade with the rest of the world. At this early stage, what is going on offshore doesn’t look to have enough of a head of steam, or enough plurality (in terms of there being hotspots in selected pockets, rather than what’s going on being a universal issue) to derail the growth or policy outlook here. But it bears watching, particularly given that in many ways, New Zealand is "going it alone" in the developed world growth stakes. As a nation, we don’t have enviable debt or productivity statistics, but we are growing strongly and interest rates are set to rise. Had EUR (clearly a key barometer for euro sentiment) not been rallying, we suspect NZD would be on the skids. The risks out of all this for the NZD are clearly to the downside, but for now, the domestic story and EUR strength ought to provide a buffer.


- ECB President Draghi: "We are indeed seeing encouraging signals and the first signs of economic recovery in the euro area, but the recovery is still weak and distributed unequally. Overall, the risk of setbacks is great. I would be very wary of overly optimistic forecasts".

NZD/USD: Still a risk currency...

NZD remains one of the stronger currencies after NZ data yesterday confirmed domestic strength, but at heart it is still a risk currency and if EM concerns escalate it will head toward the bottom of its band where it should find support thanks to the strong domestic story.

Expected range: 0.8220 - 0.8320

NZD/AUD: Domestic insulation…

The NZD with its strong domestic economy would be more resilient than AUD to any escalation in risk aversion keeping this cross strong as it makes another cycle high close to 0.95.

Expected range: 0.9400 - 0.9520

NZD/EUR: PMI strength…

PMI strength in Europe saw EUR/USD finally break away from the 1.35 pivot. With EM concerns escalating the EUR looks a safe bet for the moment.

Expected range: 0.5950 - 0.6100

NZD/JPY: Japan the traditional Asia safe haven…

The Yen is the traditional Asia safe haven so would benefit from risk aversion.

Expected range: 85.00 - 86.50

NZD/GBP: Following EUR lead…

Sterling followed EUR’s lead higher with Cable (GBP/USD) breaking above 1.66, despite weaker January CBI sales.

Expected range: 0.4960 - 0.5020

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