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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: NZD appears to be finding a base around 0.8470 after steadily declining in the overnight session following yesterday's fall in ANZ business confidence and a lower Fonterra payout. NZD/AUD is back to the bottom of its 2014 range, but may find support from a soft Australian Capex report.

RATES: Expect Kiwi rates to open lower and the curve to flatten in response to the break lower in US Treasury yields.

REVIEW

CURRENCY: The USD continued to strengthen against most EM and developed market currencies (JPY being the notable exception), driven by flow and positioning rather than fundamentals. NZD was the biggest underperformer, breaking down through earlier support at 0.8530.

GLOBAL MARKETS: It was a busy night for markets despite little US data.

Weakness in Eurozone M3 data and a 15k rise in German unemployment figures heightened expectations of policy easing from the ECB next week, triggering falls in EUR (now below 1.36) and a 5bp fall in German 10yr bund yields. Dovish comments from the ECB's Mersch that the corridor of interest rates could be cut added to the move (though already widely expected). UK gilt yields also fell following a weak CBI retail report, with lower European yields a key contributor in US 10yr Treasury yields breaking through key technical support (with yields marked down 7-8bps to 2.44% heading into the close). The global "reach for yield" has returned. Meanwhile equity markets were little changed, while a stronger USD led to a dip in gold and crude oil prices.

KEY THEMES AND VIEWS

WEAK EUROZONE M3 GROWTH SUPPORTS THE CASE FOR ECB EASING. Weak Eurozone money supply data helped markets firm up expectations for additional policy easing from the ECB at next week's policy meeting. M3 money supply growth eased back to 0.8% y/y in April (from 1.1% in March and versus expectations of 1.1% y/y) - its lowest levels since September 2010. The ECB is already concerned about disinflation risks and looks to M3 growth figures as a key indicator for future inflation trends. Thus the weaker money supply data makes it increasingly likely the ECB will revise down its inflation forecasts and cut interest rates next Thursday. Foreign capital inflows have been the one main factors supporting positive growth in M3, and we believe there's a risk money supply growth slips further should the ECB decide to cut the deposit rate into negative territory. The ECB's Mersch added a little more to ECB policy discussions overnight, noting that "the bank assumes the interest rate corridor will remain unchanged, with any narrowing of the corridor likely to add constraints on the money market". He added that next week's policy meeting could produce a combination of different measures, a belief already widely held by the market.

AUSTRALIAN CAPEX PREVIEW. The key focus for Australasian markets today will be the 1.30pm (NZT) release of firms' capital expenditure plans for 2014-15. With mining investment clearly falling (iron ore prices are down more than 25% since the start of the year), our focus is on the investment plans of non-mining firms (we're looking for a headline figure of around AUD55bn). Low interest rates are expected to support a lift in business investment and construction activity in the non-mining sector, although capex plans could be adversely affected by the negative news flow surrounding the Australian Budget. ANZ expects headline Q1 capex to fall 0.5% q/q (market -1.5%).

NZD/USD: Weaker business sentiment weighs...

Yesterday's fall in ANZ business confidence continued to weigh on NZD overnight, with broad-based US dollar strength adding to the move lower.

While a base around 0.8470 has been tentatively established (the lowest level since mid-March), a lack of domestic data could see NZD/USD at risk of further downward pressure if today's Australian Capex report is weak.

Expected range: 0.8450 - 0.8540

NZD/AUD: Possible bounce in store ...

Downside risks to the non-mining investment intentions component of today's Australian Q1 CAPEX report could trigger a bounce in NZD/AUD from the bottom of its 0.9150-0.9500 range seen over 2014.

Expected range: 0.9160 - 0.9240

NZD/EUR: Euro down despite better confidence results...

Next week's ECB policy meeting remains a major driver of moves in the euro. Official comments continue to hint at a policy adjustment, including (but not exclusively) rate cuts. Continued softening in money supply growth adds weight to the case for more accommodative monetary policy.

Expected range: 0.6220 - 0.6270

NZD/JPY: JPY bucks trend, gains modestly against the dollar...

Japanese retail sales data and a speech from BoJ Board member Shirai could generate some volatility in this cross today.

Expected range: 85.80- 87.10

NZD/GBP: UK CBI reported retail sales trends a negative for cable...

GBP weakness was partly due to the sharp fall in CBI retail trends, albeit more than offset by the decline in the kiwi overnight.

Expected range: 0.5060 - 0.5110

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