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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Markets will watch RBNZ Deputy Governor Spencer’s housing speech closely, and we would expect NZD to remain capped. The AUD could gain further support from the RBA SoMP, with the RBA’s view on employment key.

RATES: NZ rates are expected to open unchanged after a quiet night.

REVIEW

CURRENCY: The EUR weakened due to the ECB. GBP remained strong as the BOE dropped its redundant threshold for employment. NZD remained under pressure, with NZD/AUD testing support after AU employment stability.

GLOBAL MARKETS: Last night was all about the BOE and ECB, with very little else of interest going on. European equities rallied, but US markets are mixed. Bond yields fell slightly, and European peripheral spreads continue to narrow.

KEY THEMES AND VIEWS

ECB HINTS AT ACTION, SENDING EUR LOWER: The ECB left interest rates unchanged as expected. But President Draghi signalled that action is possible next month, saying "The Governing Council is comfortable with acting next time, but before, we want to see the staff projections that will come out in the early June". Having hit a new high for the year at 1.3993 moments earlier, EUR/USD gapped a "big figure" lower on Draghi's remarks. Whilst the EUR is not a policy target, Draghi said it is "of serious concern" to price stability and "is something that needs to be addressed", implying that some offsetting monetary accommodation may be required. Euro area inflation has averaged 0.7% y/y in the first four months of 2014, and it is thus likely that the ECB will lower its projection for this year from the 1% forecast published in March. In March, the ECB's working assumption was that EUR/USD would average 1.36 this year, but it has averaged 1.3740, placing additional downward pressure on inflation. If indeed the ECB does decide to act next month, we feel it will opt to use conventional measures. That could involve a 10-15bp cut in the refi rate from the current 25bps. The marginal lending facility will also probably be reduced from its current 75bps whilst the ECB could opt to leave the SMP bond purchases unsterilised, which would add liquidity to the system. We are not convinced that the ECB is ready to move to unconventional monetary policies just yet. The banking system is currently undergoing a comprehensive assessment and some systemically important financial institutions may need further recapitalisation. To move to a negative deposit rate would be clearly aimed at weakening the EUR, but it could also risk sparking deposit outflows from the region with negative implications for banks' capital structures. We also do not feel that the conditions are ready for the introduction of QE. Whilst the euro has sold off today, its downside is likely to prove limited. EUR strength partly reflects strong capital inflows into the region as confidence in the euro has returned and peripheral area bonds offer relatively attractive yields. In addition, foreign capital inflows are making a significant contribution to M3 growth, which is important. Expectations of a rate cut at next month's policy meeting should provide support to euro area financial assets which will in turn support capital inflows, limiting EUR strength. It will also hone the focus on high quality yet high yield bond markets like NZ, which are back on the radar again, adding support to the NZD. While the NZD is "overvalued", it is understandably so, and we don’t see this changing until wider global forces dissipate. Given carry rather than "real economics" is the major factor driving NZD higher, much of it can be thought of as a "portfolio shift", and this is why the RBNZ are flagging the possibility that a higher NZD might dampen the need for OCR increases.

NZD/USD: Deputy Governor Spencer…

RBNZ Deputy Governor Grant Spencer delivers a speech in Auckland on the housing market today. Markets are currently focused on RBNZ commentary after the dairy speech elicited a large currency impact.

Expected range: 0.8580 - 0.8650

NZD/AUD: RBA SOMP…

After Australian employment remained relatively stable, the RBA’s Statement of Monetary Policy (SoMP) will be scrutinised today. The statement showed change in tone on employment, and further evidence of an optimistic turn would support AUD over NZD.

Expected range: 0.9180 - 0.9250

NZD/EUR: ECB…

As discussed above the key event in currency markets was the ECB and the fact they are "comfortable to act next time" in June. ANZ views EUR as a buy on dips (NZD/EUR a sell on rallies), as ultimately fundamental strength will see EUR in demand, and policy action, if it occurs would support fundamental strength.

Expected range: 0.6200 - 0.6260

NZD/JPY: JPY strength…

Yen has slowly been strengthening and there is still danger of a move lower.

Expected range: 87.00 - 88.50

NZD/GBP: BoE…

As expected the BoE was unchanged, the statements only note was dropping the redundant reference to forward guidance (7% employment threshold). Manufacturing and industrial production have been the source of negative fundamental surprises, and expectations remain fairly benign tonight.

Expected range: 0.5080 - 0.5120

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