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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: We expect relative stability in currency markets today. NZD should continue to find demand on dips below 0.8550, and we would expect EUR to remain under pressure after German IFO confidence.

RATES: Kiwi rates are expected to open unchanged to a touch higher with decent receiving interest seen in the London session.

REVIEW

CURRENCY: The EUR remained under pressure as PMI activity data highlighted the divergences within the EU recovery, and USD/JPY strengthened - following yields higher. CAD and NZD found support but moves were small.

GLOBAL MARKETS: A rather eventful day during the European trading session. While most currencies gave back earlier gains against the USD, TRY and ZAR extended earlier gains after the Turkish and South African central bank meetings. The performance on equity markets was mixed although most European bourses have managed to finish the day higher despite a wobble over lunch, although Italian equities were weighed down by banking stocks. Sovereign bonds were mixed - US Treasuries sold off on a better Markit PMI (56.2) but core euro zone bonds rallied a couple of basis points. Gold and oil prices were little changed.

KEY THEMES AND VIEWS

EUROPE’S FLASH PMI’S; RECOVERY INTACT. Good news for Europe on the face of it, with momentum continuing at a decent pace according to the latest flash PMI results for May. In the detail, the Eurozone composite PMI fell by just a tenth to 53.9 in May (as expected), but this was driven by a rise in the services PMI to 53.5 vs 53.1 (exp: 53.0) and a fall in the manufacturing PMI to 52.5 vs 53.4 (exp: 53.2). However digging into the detail we note clear divergences. Another set of solid PMI numbers out of Germany - that beast keeps on rolling on - indicating that the economy continues to recover at a decent clip. In contrast the French side was disappointing with the composite measure of momentum in activity falling below the crucial 50 line into mild contractionary territory. Regular readers may recall our Sovereign risk framework where we use a combination of negative (i.e. debt) and positive (i.e economic flexibility) metrics to assess a nation’s sovereign risk and lo and behold France ranks poorly, in the same camp as Italy et al. The problem for a lot of indebted nations is not the debt itself; it’s the lack of economic growth. Simply eying real 10 year yields versus GDP growth, we note the latter is lower than the former in the likes of France; that’s problematic in the sense that fiscal solvency is getting worse before you’ve even borrowed another dollar. The necessary ingredient for fiscal solvency is, and always will be, economic growth.

SHORT POINTS, QUICK RETURNS. The Thai army staged a military coup after imposing martial law. While the initial reaction is obviously negative, our Asian research team believes that "a coup brings a functional government and an effectively stimulatory fiscal policy which is desperately needed that much closer." So we’re siding with the glass being half-full. Fitch is said to have upgraded Greece to B from B-; which is akin to moving from bankruptcy to insolvency. US home sales are on the ascent (1.3% m/m) but still short of expectations; those sort of nuances will keep the Fed cautious.

NZD/USD: Testing…

Housing continues to be a concern for the US as existing home sales disappointed. Jobless claims lifted from last week’s seven year low, but at 326k, remained relatively on-trend. There was cause for optimism from the preliminary US Markit PMI (manufacturing) which increased to 56.2.

Expected range: 0.8520 - 0.8590

NZD/AUD: China impacts relatively equal…

The Chinese flash PMI while still contractionary was stronger than anticipated yesterday. Markets initially tried to drive NZD/AUD lower on that news, but were firmly rebuffed overnight, indicating good NZD support.

Expected range: 0.9250 - 0.9320

NZD/EUR: Divergence within Europe…

France manufacturing activity drops back into contraction, highlighting the divergences in the Eurozone and keeping the focus for EUR squarely on the ECB in a fortnight. For now, EUR looks set to remain under pressure.

Expected range: 0.6240 - 0.6300

NZD/JPY: Yen following yields…

The yen has weakened again in line with its correlation with US yields. It has also found support in Japan Post Insurance increasing equity allocations - a move that supports "Abenomics", and thus a weaker yen.

Expected range: 86.60 - 87.50

NZD/GBP: A minor miss…

There was some selling pressure on GBP overnight as the CBI trends series underperformed expectations, and public sector borrowing increased more than forecast. Q1 GDP unrevised and healthy at 3.1% y/y, overshadowing the minor miss from the other releases, but GBP seems primed for stronger results, so risks are for disappointment.

Expected range: 0.5060 - 0.5120

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