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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Global manufacturing activity updates from China, Europe, and the US will be the main catalyst for direction, with NZ Job Ads, Consumer Confidence and 2yr inflation expectations likely to maintain NZD support.

RATES: Kiwi rates are expected to open unchanged to a touch higher with good two-way interest seen in the London session.

REVIEW

CURRENCY: GBP was boosted by stronger retail sales and a "more balanced"

BoE. The FOMC minutes revealed a discussion about policy normalisation, but provided no catalysts for it to move from discussion to action, pressuring USD.

GLOBAL MARKETS: A relatively quiet overnight with sovereign bond yields drifting higher on the back of a better performance from equities. US and German 10yr yields were 2-3bps higher, while equities rallied around 0.6-0.7% on both sides of the Atlantic. Markets were little moved following Fed Minutes, which implied that a lower unemployment rate was unlikely to spark higher inflation. There were also member discussions on the need to improve forward guidance, and the necessary tools required to control short-term interest rates once policy normalisation got underway. Earlier, GBP rallied on stronger-than-expected UK retail sales data, while the EUR got a temporary boost following less downbeat comments from ECB officials: Weidmann suggested "a June rate cut was not a done deal," while former ECB council member Gonzalez-Paramo said

"there was little downside to a negative deposit rate". WTI crude prices rallied 1.6% to reach 1-month highs of USD103.90.

KEY THEMES AND VIEWS

FOMC MINUTES TOW THE PARTY LINE. Minutes from the Fed's April 29-30 meeting indicated the Fed doesn't face a trade-off between its employment and inflation objections; with continued stimulus to push the unemployment rate lower "not expected to spark an undesirable jump in inflation". Members agreed that "early communication around their exit strategy would enhance the clarity and credibility of monetary policy";

while supporting further testing of various tools to manage short-term interest rates (including overnight reverse repos, a term deposit facility, and interest paid on excess reserves). The FOMC is undershooting both its dual mandate objectives (inflation and full employment), although ANZ expects wages to gradually lift in 2014 and 2015 as slack in the labour market diminishes. We're still projecting Fed tapering to end by October, with the first hike in the Fed Funds Rate (FFR) likely to occur in June 2015. Thereafter, we project only a modest tightening cycle with the FFR expected to climb steadily to around 2% by late 2016 - a relatively low endpoint by historical standards.

UK DATA UPBEAT. UK retail sales lifted 1.3% m/m in April (0.4% exp.) to be up 6.9% y/y - the strongest pace of growth since 2004. UK consumer credit growth has also been picking up of late, and alongside rising house prices and improving investment intentions it would appear the UK recovery has become broad-based and sustainable. At some stage this is likely to require withdrawal of policy stimulus, although to date, a higher GBP has contributed to the majority of tightening in financial conditions. BoE Minutes provided few fresh new insights, except to highlight that the debate around interest rate decisions was becoming "more balanced".

NZD/USD: Staying put...

The FOMC minutes outlined a benign environment in which the US Federal Reserve is happy to stay the course. USD weekend a touch on few fresh concerns over inflation, or signs that a change in policy was imminent.

Chinese and US flash PMIs will drive NZD from here, with signs of improvement in the China PMI required for NZD to sustain strength.

Expected range: 0.8530 - 0.8590

NZD/AUD: Minutes and Debelle...

NZD/AUD looks comfortable in the 0.92-0.94 range at present, we see little to alter this prospect in the short term.

Expected range: 0.9240 - 0.9320

NZD/EUR: Confidence...

European consumer confidence continues to improve, increasing to -7.1 in May from -8.6 in April. Europe is still running a relatively large current account surplus EUR20.9bn (nsa). Potential ECB action continues to keep a lid on EUR with ECB speakers boosting expectations.

Expected range: 0.6220 - 0.6290

NZD/JPY: BoJ...

No change from the BoJ confirmed the sell-off in this cross, although USD/JPY sellers will be getting frustrated by the inability to sustain dips.

Expected range: 86.00 - 87.25

NZD/GBP: Strong retail sales ...

Retail sales were well above expectations in the UK, increasing 1.8%

(ex-auto) in the month of April, a 7.7% annual rate of increase. The BoE minutes showed the debate around policy is becoming "more balanced". GBP looks likely to remain the strongest of the big four currencies.

Expected range: 0.5060 - 0.5120

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