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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The NZ Budget should highlight the strong domestic story for NZD, while US CPI, Regional Fed surveys and price action in the US bond market will drive USD.

RATES: Expect NZ yields to open sharply lower following the strong rally in global bonds, with US 10yr Treasury yields at the year’s lows.

REVIEW

CURRENCY: The GBP was the weakest link overnight as the BOE assessment of inflation and the labour market remains dovish. Yen strengthened the most as global yields fell.

GLOBAL MARKETS: Sterling was the "shaker and groover" today following a dovish BOE Inflation Report. But the Kiwi would have none of it - indeed, NZD crept slowly higher overnight. US data was limited and the market response to the significantly stronger than expected US PPI report was muted, although it does lend upside risk to tomorrow’s CPI. Markets remain focussed on the ECB, and its apparent commitment to action next month, with Reuters running a story today that the ECB is "preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms". Although Bundesbank Chief Weidmann did say today that nothing was agreed with regards to new policies, with the ECB awaiting upcoming data before making any decisions, he had said earlier that the Bundesbank would support ECB action if it is needed, and German support is assumed. ECB Chief Economist Peter Praet also stated that the measures include a negative deposit rate.

KEY THEMES AND VIEWS

GENTLEMEN PREFER BONDS: Indeed, it would seem that some do, with US 10yr Treasury bonds rallying to the year’s lows overnight as traders scramble to cover shorts. Short positioning has been pared back in recent weeks, but the market remains deeply short, especially in 5yr and 10yr bonds, putting the market in no position to digest the dovish BOE news and profit-taking in equities. That said, there is a lot of data out in the next two days in the US, including CPI, the Empire and Philly Fed mfg surveys, and housing data, all of which will shape market views on the path of Fed policy. Still, it is certainly difficult to be overtly bearish the quality bond markets (and that includes NZ) given the convergence in European peripheral spreads, the narrowing in credit spreads in general, and perhaps more importantly, the distance one has to go across the horizon before we get any clarity on the timing of the first lift in the all-important Fed Funds rate. And we now have the ECB readying their bat as they stand at the mound. Of course, here in NZ, things are going from strength to strength, with a surplus in the next fiscal year to be announced in today’s Budget, and the RBNZ in rate hike mode, even if NZD strength may lessen the need for late cycle hikes. Lower US Treasury bond yields will give the NZD an additional boost, and ironically, a flatter yield curve puts even more pressure on the OCR. Oh no, global woes, who’d have ’em?

OTHER EVENTS AND QUOTES

- Tax cuts, did you say? Radio NZ reports that both National and Labour aren’t ruling out tax cuts later on as surpluses give them flexibility. "Mr Key said any tax cuts would not be announced in Thursday's Budget, and National would have to decide before the 20 September election if it wanted to include them as part of its campaign promises".

NZD/USD: US Yields…

US yields broke lower testing toward 2.5% in the 10 year space, despite stronger than expected producer prices. The NZD/USD has been relatively correlated to US yields, and declines in US yield will make it hard for NZD/USD to weaken. The NZ Budget should only reiterate the strong NZ economy, while US CPI and Regional Fed surveys provide support for USD.

Expected range: 0.8640 - 0.8720

NZD/AUD: NZ Budget…

There was little market reaction to the Australian Budget and we see similar prospects for the NZ Budget, although, the relative budgetary position should support NZD.

Expected range: 0.9190 - 0.9280

NZD/EUR: Final April CPI…

With the focus on deflationary prospects in Europe the final read of April European CPI tonight will be a driver for the EUR. ECB commentary continues to suggest the hurdle to actual QE is relatively high and June action (if any) will be cuts to the deposit and refinancing rates.

Expected range: 0.6300 - 0.6350

NZD/JPY: Offsetting…

Both JPY and NZD have strengthened leaving this cross relatively static.

Expected range: 87.75 - 88.75

NZD/GBP: Employment and Inflation…

GBP was under pressure as the BOE estimated spare capacity in the employment market of around 1-1.5% of GDP. Inflation projections were also revised lower in the BOE Inflation report. This assessment allows the BOE to remain on the side-line for longer than the market anticipated sending GBP lower.

Expected range: 0.5150 - 0.5200

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