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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Expect the early Asia session to be very quiet with Australia enjoying the day off. However, Singapore is likely to continue to focus on EM concerns, along with the London and NY sessions.

RATES: Expect bond yields to open lower yet again following US moves.

REVIEW

CURRENCY: Markets continued to follow the EM contagion theme. This caused another night of "risk off". Safe havens of Yen and CHF were in demand and NZD and AUD saw plenty of sellers.

GLOBAL MARKETS: Sparked by tension in EM, demand for safe haven assets and currencies was clearly evident with yen performing strongly. Meanwhile, US Treasuries were well supported with the yield on the 10-yr note falling to 2.72%. Equities remained under pressure. Most European bourses fell, as did key US indices. The data calendar was limited with the only release of significance being Canadian CPI for December. It fell 0.2% m/m, with the core rate down 0.4%. Annual headline inflation was 1.2%, close to the bottom of the BOC’s 1-3% target range, this encouraging expectations that the central bank will remain extremely dovish. Having made new cyclical highs, GBP experienced a wave of profit taking as BoE Governor Carney noted that the appreciation in sterling could continue to act as a headwind to growth in coming months. The market read this as bearish, although on reflection all Carney did was acknowledge that the pound was strong whilst also noting its beneficial impact on helping to keep inflation low.

KEY THEMES AND VIEWS

Emerging MArket Wobble Continues. The major theme of the day has to be emerging markets, with the most obvious issue to come to grips being whether what’s going on (for we can’t call it a crisis - not yet anyway) is becoming more generalised, or is still country and issue specific. On Friday we noted that what was going on had neither a sufficient head of steam up, nor the plurality to derail things here in NZ. However, it is less easy to be so dismissive this morning, with European peripheral bond spreads widening sharply to German bunds, and the list of worst performers in terms of 1 week currency returns reading like a who’s who of emerging markets - Argentina, Turkey, Russia, Brazil, Chile, South Africa. Against this backdrop, the NZD is hanging in there, with domestic factors presumably putting it at the top of the heap in terms of the commodity currencies. But it is JPY and CHF that have put in the most spectacular performances - clearly indicative of safe-haven buying. What’s going on thus bears watching - very closely.

OTHER EVENTS

- BOE Governor Carney: "The MPC has noted that when the time eventually comes to begin to move away from emergency settings of policy, any such move would be gradual. The degree of stimulus will remain exceptional for some time. That should help reassure British business that the path of interest rates will be consistent with a sustained recovery - that is, with escape velocity…..This recognises that many of the headwinds holding back the economy will remain for some time yet. Public and private balance sheets continue to be repaired. World demand remains weak and the appreciation of sterling will hold back the expansion of net exports. And there remain strains in the financial system despite good progress on post-crisis repair."

NZD/USD: Fighting fear…

The NZD remained under-pressure as global markets focused on the fear of an Emerging Market (EM) contagion. There is little in the way of data to divert markets from their EM focus and we expect EM concerns to drive currency markets today.

Expected range: 0.8120- 0.8280

NZD/AUD: NZD reslience…

The NZD is more resilient to USD appreciation than the AUD, which should see this cross remain strong in today’s session.

Expected range: 0.9400 - 0.9550

NZD/EUR: German IFO…

The German IFO confidence survey is expected to remain strong overnight helping EUR weather the EM storm. However, the widening of Spanish bond spreads suggest the EUR is not immune to EM concerns.

Expected range: 0.5950 - 0.6100

NZD/JPY: Safety of the yen…

In times of risk aversion the yen remains one of the world’s safe havens, along with the CHF. The unwinding of the consensus long USD/JPY positioning is also adding to yen demand seeing this cross trade lower.

Expected range: 83.00 - 85.00

NZD/GBP: Sterling headwinds...

BOE Governor Carney noted that the strength of the GBP would create headwinds to British growth. This caused the GBP to fall back through resistance against the USD, although the outlook for this cross is still one which favours GBP over NZD.

Expected range: 0.4920 - 0.5050

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