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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The RBNZ FSR and associated press conferences are expected to reiterate that the strength of the currency is an issue for NZ. Offshore the UK employment and inflation reports will be vital for GBP.

RATES: Quiet trading reported in London overnight. Local yields are expected to open unchanged.

REVIEW

CURRENCY: NZD/USD briefly broke higher before returning to end up the second strongest currency overall (to SEK). EUR weakened due to Bundesbank comments, while US data continued to have positive and negative elements.

GLOBAL MARKETS: Overnight the main US data releases missed expectations, with further speculation of additional monetary policy accommodation from the ECB next month. The prospect of more policy support provided a small lift to equities on both side of the Atlantic. Government bond yields fell, with US 10-year yields down 5bpts to 2.61%, with European yields generally lower.

KEY THEMES AND VIEWS

OVERNIGHT WRAP - EUROPE: There was a 10pt drop in the ZEW investor expectations series for Germany in May, down to its lowest level since January last year (33.1 vs 43.2 in April). This dragged down the euro area ZEW expectations series (55.2 vs 61.2 in April) to its lowest reading since last August. Geopolitical risks from tensions over the Ukraine are weighing on sentiment and underpinning concerns about future growth. That said, the ZEW current conditions index for Germany remained firmly on an uptrend (up 2.6pts to 62.1 in May) and has defied the noticeable weakening in confidence this year, suggesting that investors are underestimating the current upswing. In other news, the Wall Street Journal quoted ‘sources’ from the German Bundesbank who stated that the central bank would be willing to support a range of stimulus measures from the ECB next month if its 2016 inflation forecasts are lowered, "including a negative rate on bank deposits and purchases of packaged bank loans".

FROM THE US: The main economic release was disappointing retail sales figures for April. The headline number rose 0.1% m/m (+0.4% expected), with ex-auto retail sales unchanged and those for the control group -which feeds into the GDP report - fell 0.1% m/m. This suggests some hesitancy in consumption as Q2 gets under way and is illustrative of the patchy nature of the recovery. Despite this, there were upward revisions for March, with the upward trend in underlying sales remaining intact.

AUSTRALIAN BUDGET: The Australian Budget unveiled a mild fiscal tightening and set the ball rolling to the return to fiscal surplus within a decade. The near-term tightening of fiscal policy will be quite modest, but will increase from 2015-16 as spending cuts kick-in. Our Australian team estimate the fiscal drag on growth to average 0.25-0.5ppts per annum. Over three-quarters of the improvement in the Budget aggregates came from planned spending cuts with a reduction in welfare, health and education spending as well as the first steps in reforming retirement entitlements. The Budget tilts the risk profile towards a delayed start of the RBA’s tightening phase and/or a more modest degree of tightening over 2015.

NZD/USD: RBNZ FSR, US Optimism and Revisions…

US Small Business optimism accelerated last night, with good details. The April miss in retail sales was partially offset but substantial positive revisions to March. These releases suggest US optimism will remain factor capping prospects for strength in NZD/USD. The RBNZ is also likely to reiterate currency concerns at the Financial Stability Report press conference this morning, which will help to keep NZD/USD under pressure.

Expected range: 0.8610 - 0.8680

NZD/AUD: No surprises…

There were no surprises for the currency from the Australian Budget. The RBNZ FSR may weigh on NZD, but cross remains well supported.

Expected range: 0.9180 - 0.9250

NZD/EUR: Bundesbank supports the ECB…

Markets latched onto a Wall Street Journal article that stated the Bundesbank would support a range of ECB policy actions sending EUR lower. Later the Bundesbank attempted to clarify comments stating the stance is not new, but EUR remained under pressure.

Expected range: 0.6280 - 0.6340

NZD/JPY: Creeping higher…

NZD and JPY have been working in unison to lift this cross. Grinding moves in both currencies have supported strength.

Expected range: 87.75 - 88.75

NZD/GBP: Employment and Inflation…

Two vital releases for the GBP today, in the Employment report and BoE inflation report, markets expect employment to track lower adding support, while inflation to allow the BoE latitude to keep rates low, which removes it. Surprises in either series would be relatively significant events for the GBP.

Expected range: 0.5070 - 0.5170

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