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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The RBNZ is not expected to move markets this morning. Our expectation is for a succinct statement, and a reiteration that NZD strength is not sustainable in the long run.

RATES: Expect Kiwi rates to open 1-2 basis points lower across the curve.

REVIEW

CURRENCY: The smaller than expected increase in Australian inflation weighed on Australasian currencies overnight. Global growth remains of the benign variety which will continue to support carry, against price action.

GLOBAL MARKETS: Better Euro-area flash PMI surveys combined with a very weak US new home sales report saw the euro enjoy a decent session against the dollar (although the yen also traded well). AUD and NZD continue to be weighed down by yesterday’s weaker than expected Australian CPI data. Equities in Europe and the US lost a little ground overnight in response to disappointing housing data and weak corporate earnings that reversed market momentum after five days of gains. Performance across sovereign bond markets was mixed, with US and UK rallying across the curve (but not running away as stocks did little) but other core markets not being dragged along for the ride.

KEY THEMES AND VIEWS

A strong footing? That’s the impression one gets from Eurozone PMI data overnight, with the preliminary April composite rising to 54 - the strongest read in nearly three years, and Germany leading the way. Before we go popping the champagne cork, a couple of notes of caution - the manufacturing and services PMIs for France both eased (although both came in marginally above 50). The underlying concern remains that two of the larger economies in Europe - Italy and France - are struggling to gain much traction. More worrying for policymakers who are trying to drive Eurozone inflation towards 2 percent is that service firms cut prices for the 29th month in a row and did so at a steeper pace than in March. Recall that inflation fell to just 0.5 percent in March. So we have a convoluted situation where the so-called recovery remains on track, but deflationary pressures need to be watched carefully. Tomorrow’s focus turns to the IFO for more clues.

Mixed signals for Uncle Sam. The US flash April Markit PMI eased from 55.5 to 55.4 (against expectations of a lift). But even so, at 55.5 it’s still well above the 50 threshold and a rise in new orders helped to push the backlog of work higher to 55.2 vs 54.5, implying upward pressure on capacity utilisation. Hence, momentum still seems pointed in the right direction. At the same time new home sales fell 14.5% saar in March, and February’s drop was revised lower from -3.3% to -4.5%. The March reading, at 384k, was the lowest pace of sales in eight months. Affordability, owing to strong house price inflation is being cited as a reason for the weakness as the supply of homes rose to 6 months from 5 months in February. So while April PMIs provide room for optimism, housing as a pillar of the recovery suggests the dovish tilt from the FOMC will continue.

SHORT POINTS QUICK RETURNS

- Portugal successfully returned to the bond market.

- No surprises in the BoE minutes: evidence of a broadening in activity and signs of a pick-up in investment with inflation low.

- South Africa’s Central Bank looks set to follow the RBNZ and lift rates soon with CPI accelerating to 6%, the top of the SARB's 3-6% target band.

NZD/USD: RBNZ…

The RBNZ is expected to lift rates by 25bps today. We do not expect any surprises and are looking for a succinct statement. The RBNZ are likely to reiterate that the NZD is unsustainably strong, but we do not expect any strongly worded "jawboning". New Zealand data continues to support the NZD (such as, yesterday’s migration and credit card spending), while US data continues to underperform expectations (such as, last night’s 14.5% fall in New Home Sales), making it hard for the USD to strengthen.

Expected range: 0.8540 - 0.8630

NZD/AUD: Australian CPI…

Yesterday’s smaller than expected increase in Australian CPI has reinforced the support below 0.92 for this cross. With today’s RBNZ hike reinforcing NZ’s yield advantage, we expect this support to hold.

Expected range: 0.9210 - 0.9280

NZD/EUR: April flash PMIs…

Germany is again doing the heavy lifting in Europe with German PMI increases offsetting French PMI slowdowns (although France remained expansionary). Tonight we would expect German IFO confidence to continue the fundamental support for the EUR.

Expected range: 0.6180 - 0.6270

NZD/JPY: The carry trade…

The Australasian effect has weighed on NZD/JPY, as it follows AUD/JPY lower. We would expect NZD/JPY to remain in demand with carry still a driver.

Expected range: 87.50 - 89.00

NZD/GBP: Data…

British retail sales tomorrow are expected to weigh on GBP as forecasts are for a 0.5% decline. Despite this the data trend remains lower for this cross.

Expected range: 0.5080 - 0.5150

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