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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: NZD/USD could remain capped with April building permits forecast to retrace the strong 8.3% m/m rise in March. Markets will watch US PCE data for signs the rise inflation is broadening - likely USD supportive.

RATES: Expect Kiwi rates to open largely unchanged.

REVIEW

CURRENCY: NZD continued to underperform overnight, breaking below yesterday's support at 0.8470 as this week's softer data releases continued to weigh. In contrast, NZD/AUD is now back to December 2013 levels.

GLOBAL MARKETS: The USD swung back out of favour today, with most currencies regaining some of yesterday's losses. The NZD was a clear exception, however, with the softer data releases from earlier in the week (amazing how a loss of strength can be treated as weakness) capping the kiwi. In contrast, the AUD outperformed. US Treasuries continued to rally, with yields falling 1-2bps thus far today; the squeeze continues though one wonders about month end buying. There was also a muted rally in UK gilts, but French and German bonds sold-off a little, retracing some of yesterday's move. Equities were mixed, with continental European bourses a little lower on the day but UK and US stocks up marginally in contrast. Gold prices range traded, while those for crude oil rose slightly.

KEY THEMES AND VIEWS

US DATA WRAP. There are better things to do when one turns 35 (ok, that's a wee porky) but as I sit down at my desk the first observation is that the US economy slipped into reverse with GDP revised down by more than expected to -1.0% q/q annualised from +0.1% q/q ann. (exp:

-0.5% q/q ann.). Of course all and sundry know that Q1 was negatively impacted by the severe winter, so most are expecting a solid bounce back in the Q2. Certainly looking at jobless claims you can see some underlying strength with claims falling to 300k in the week of 24 May, down from 327k in the week prior (318k expected). This sees the 4-week average decline to 311.5k, its lowest level since August 2007 so the jobs machine (or should we say QE) is still "printing". US pending home sales were a little disappointing relative to expectations, though not sufficiently so to generate any market reaction.

RBNZ MUSINGS. The June Monetary Policy Statement is still 3 weeks away but going by market pricing the RBNZ is set to deliver one more hike and will do a David Lange and stop for a cup-of-tea (that's 1980's jargon for those not old enough to remember). That's our core view as well but one wonders about the risk profile around July. Yes we all know about the fall in the dairy payout, softness in housing and of course declining optimism (we use that term intentionally because our composite growth indicator for the economy flags a slowdown akin to downgrading from a Ferrari to a Porsche). However one wonders about three dynamics:

a) why is the change in the fiscal stance (from -3.4% of GDP to -2.3% of GDP over 4 years - an implicit boost offsetting the fall in the dairy payout) not gathering attention; b) 2-3 year fixed mortgage rates are now below where they were before the RBNZ started hiking; and c) why if you were the RBNZ would you close the door on July in the June MPS ahead of CPI and GDP prints, which is effectively what the market is implying.

So we think the rates market is pushing too far (and the same with the NZD/AUD's decline). But markets will be markets and kiwi is getting dragged globally.

NZD/USD: Failing to shrug off this week's softer data ...

The kiwi remains the market underdog as some of the steam in recent domestic economic data is released. Today's expected retracement lower in the April building permits report could limit a recovery in NZD/USD for now.

Expected range: 0.8420 - 0.8510

NZD/AUD: More pain in store?

The better than expected Australian CAPEX report weighed heavily on the cross, and with another weak NZ data print due today, we could see the fall in NZD/AUD extend further to 0.9080.

Expected range: 0.9080 - 0.9170

NZD/EUR: Kiwi underperformance drives cross lower...

A range-bound day for the euro with parts of the continent observing Ascension Day. This left the weaker NZD in the driving seat for the cross. A lack of euro zone macro releases until next week should keep action relatively quiet.

Expected range: 0.6200 - 0.6260

NZD/JPY: JPY gains despite sharp slump in retail sales...

Japanese retail sales fell more than expected in April after the sales tax increase. Despite this, and the warning by BoJ member Shirai that he wouldn't rule out further monetary easing in order to reach the bank's 2% inflation target, JPY gained against both the USD and NZD.

Expected range: 85.70- 86.60

NZD/GBP: Tight cable trading range leaves kiwi in the driver's seat...

As per the euro, a relatively subdued trading range for cable overnight meant the underperformance in the kiwi was the key driving factor behind the weaker cross. This theme is likely to continue today with no significant releases due until Monday's manufacturing PMI report.

Expected range: 0.5020 - 0.5090

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