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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Australian employment data will give direction to the NZD/AUD which remains mid-range. The ECB will be the main focus for global markets, with forward guidance on quantitative easing plans a key EUR driver.

RATES: Kiwi rates are expected to open unchanged.

REVIEW

CURRENCY: Markets consolidated after yesterday’s large USD sell off. There was evidence of USD rebounding, but it wasn’t helped by cautious comments from Fed Chair Yellen. The NZD was sold after increased "verbal intervention".

GLOBAL MARKETS: It was a quite overnight session for data releases. German March factory orders were the main data and significantly undershot expectations coming in -2.8% m/m against forecast of +0.3% m/m. This dropped annual growth to +1.5% from +6.5%. It also points to downside risks to Thursday’s industrial production numbers (exp: +0.2% m/m, +4.4% y/y). However, all this will be overshadowed by the ECB policy announcement and the following press conference. The main events overnight were, firstly, a more conciliatory tone from Putin where he said Russian troops had pulled back from Ukraine’s border and he urged separatists to delay a referendum proposed for May 11 to ease tension. Russian equities rallied over 3%, the ruble over 1% and Russian government bond yields fell over 30bps. Secondly, Fed Chair Yellen gave her testimony on the economic outlook to the Joint Economic Committee. It was mostly the usual stuff but contained a warning that "readings on housing activity... have remained disappointing so far this year and will bear watching." Her concern is that the flattening in housing activity could extend for longer than expected. The market reaction was interest rates will remain a bit "lower for longer" with the belly of the curve outperforming.

KEY THEMES AND VIEWS

YELLEN SOUNDS WARNING ON HOUSING. Overnight Yellen dismissed concerns about the stagnation in first-quarter GDP, but highlighted worries about the sustainability of the housing recovery. Yellen described the "pause" in first-quarter GDP growth "as mostly reflecting transitory factors, including the effects of the unusually cold and snowy weather" and noted that "many recent indicators suggest that a rebound in spending and production is already under way". However, she also warned that the "readings on housing activity… have remained disappointing so far this year and will bear watching." Otherwise, it was more of the same. The QE taper will continue, with purchases ending completely in the final quarter of 2014. The first rate hike won't be for a long time after this, i.e. well into 2015. And even when the Fed does begin to hike rates it will only be gradually with a low end point by historical standards. What all this means for NZ is a higher currency for longer, but only a gradual rise in interest rates as we all dance to the tune of the US.

ALL TALK BUT NO ACTION YET FROM ECB. Little new is expected from the ECB meeting tonight given the broad improvement in European data and easier lending standards. The ECB is expected to discuss the possibility of unconventional measures though. Such unconventional policy discussions will likely include a negative deposit rate and asset purchases (QE). That said, euro area core CPI inflation rose to 1.0% y/y in April from 0.7% y/y in March. Inflation appears to have stabilised around 1% y/y in recent months. The slight rise in April is likely to buy the ECB some more time before considering whether or not to proceed with further easing measures. Thus, we do not expect any change to either the policy rate or unconventional policy measures tonight.

NZD/USD: Verbal "intervention"…

RBNZ highlighted the currency in the speech about the dairy industry. Markets focused on the mention of "intervention" if "opportune" and commentary that reiterated the relationship between currency strength and the path for the OCR. Governor Wheelers cause was not helped overnight by FOMC Chair Yellen, who struck a cautious tone, which reinforced USD negative sentiment.

Expected range: 0.8630 - 0.8700

NZD/AUD: Australian employment…

The RBNZ currency focus puts this cross on the back foot despite weaker Australian retail sales yesterday. Australian unemployment will be the key driver today with ANZ and the market expecting the unemployment rate to revert to 5.9%, somewhat offset by a higher participation rate.

Expected range: 0.9240 - 0.9340

NZD/EUR: ECB…

German factory orders and French industrial and manufacturing production showed signs of fundamental weakness. However, there has been enough fundamental strength observed to overlook these releases. Tonight the key question is QE and the ECB’s plans to implement it. There is very little expectation of a policy change tonight, but forward guidance is possible.

Expected range: 0.6150 - 0.6320

NZD/JPY: JPY strength…

We continue to see risks of yen strength. BoJ minutes suggest a relatively high hurdle to further BoJ action.

Expected range: 87.50 - 89.00

NZD/GBP: BoE…

The BoE should not impact currency, no change is universally expected.

Expected range: 0.5080 - 0.5160

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