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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Global PMIs are expected to show a benign environment conducive to a continued drift into "carry trades". The AUD could be the outperformer if ANZ’s above consensus CPI expectation eventuates.

RATES: Expect Kiwi rates to open broadly unchanged, with a bias lower.

REVIEW

CURRENCY: Markets are hunting for high and stable yields and NZD fits that bill, outperforming its G10 peers. US data strength was ignored, due to the historic volatility of the Richmond Fed series.

GLOBAL MARKETS: It was another quiet overnight trading session due to holidays. The most significant data releases were the US existing home sales report and the Richmond Fed Manufacturing Index, both of which printed above market expectations, but had little overall market impact after Friday’s big move. The major currencies generally range traded, although the AUD, NZD and GBP outperformed slightly. EM currencies did not fare are well, with TRY and ZAR both weaker on the day versus the USD. Equities had a better session with the main European bourses up over 1% and gains of 0.5-1% in the US. The better performance was spurred on by increased merger and acquisition activity across the pharmaceutical industry and expectations of more upside surprises to upcoming earnings results. Core sovereign bond markets generally sold off across the curve (yields higher). Soft commodities were stronger with weather concerns for various crops in key regions. Precious metals and energy prices were flat to weaker, led by a 2% decline in crude oil prices on increasing US stock and USD weakness.

KEY THEMES AND VIEWS

SELECTIVE SUPPORT FOR RURAL INVESTMENT IN CHINA. China’s central bank announced overnight that it will reduce the reserve requirement ratio (RRR) for some rural commercial banks. While the announcement will not affect overall liquidity in the banking system, as major banks in urban areas aren’t affected, it will support lending to the agricultural sector and is thus interesting for us here in NZ. Overall it is expected to inject as much as RMB100 billion (US$16.1bn) into the system. China is now the largest consumer of food and beverages in the world, with an estimated annual market turnover of approximately US$1 trillion. While extra investment of US$16.1bn (1.6% of total turnover) may seem trivial, this injection of liquidity is not small change when compared with New Zealand’s total rural lending of US$44 billion. This is just one of many reforms that are currently taking place within the Chinese rural sector to reinvigorate productivity growth, create more scale, cut wastage and inefficiencies throughout the supply chain, improve environmental performance and restore food safety standards. As recently noted in our last Agri Focus publication: A Winning Formula, the pace of regulatory reform is stepping up across a number of key areas and this announcement is just another sign of China’s desire to ensure long-term food security, affordability and safety. If successful, long-term it will improve the competitiveness of domestic Chinese produce versus imports. However, for New Zealand’s primary exporters it isn’t something to get overly concerned with as the Chinese food market is vast with a multiplicity of markets. New Zealand’s slice of the pie is in targeting niches and accessing the wealthiest urban households. And as previously noted, many sectors are well down the track on this one, with many sectors in the execution stage of value-add strategies.

NZD/USD: US optimism vs yield increases…

Carry was in demand again last night as NZD regained the 0.86 level and outperformed all G10 peers. This is despite further signs from the Richmond Fed that the US is continuing to spring into life. It is probably due to the excess volatility associated with the Richmond survey that it is being ignored. Today’s HSBC flash PMI from China is likely to reinforce a benign global environment which is required for NZ yield to remain attractive.

Expected range: 0.8560 - 0.8640

NZD/AUD: Australian CPI…

ANZ forecasts for Australian Q1 CPI are marginally above the market consensus. We would view weakness in this cross from an above consensus CPI as a buying opportunity.

Expected range: 0.9130 - 0.9240

NZD/EUR: April flash PMIs…

The EUR is expected to find support from the preliminary April PMIs. Europe continues to heal from its recession, but it is inflation and the ECB that remain the driver for EUR.

Expected range: 0.6190 - 0.6260

NZD/JPY: The carry trade…

NZD/JPY remains the global risk barometer, we would expect this cross to remain strong given forecasts for global PMIs to show a benign environment conducive to carry trades.

Expected range: 88.00 - 89.00

NZD/GBP: Data…

The UK has a wide variety of data releases tonight all likely to support GBP strength. The BOE minutes, Public Finances, CBI trends survey and business optimism are all expected to reinforce a growing UK economy.

Expected range: 0.5080 - 0.5130

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