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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: A quieter end to the week expected with the key data - the Chinese retail sales, industrial production, fixed asset investment -

not due until later in the NZ session.

RATES: Lower offshore rates should dampen any residual squeeze higher.

There's still a small gap between the market and RBNZ projections, but that's likely to remain the case given the carry available at the short end of the curve.

REVIEW

CURRENCY: NZD continues to rally and has taken AUD with it. Weak US retail sales weighed on USD more broadly. The announcement of possible macroprudential policies in the UK weighed on GBP late in the session.

GLOBAL MARKETS: Northern hemisphere equities were mixed, but US markets are down. US bond yields are down as are those of core European sovereigns, but yields are up across the periphery. Gold is up.

KEY THEMES AND VIEWS

RBNZ's MPS STILL SINKING IN. Interest rate markets and the NZD continue to grind higher in the wake of yesterday's MPS, reflecting a combination of adverse positioning, sheer disbelief that the RBNZ has the resolve to go it alone in a world of easy money, scepticism over NZ's near term growth prospects. But the reality is that NZ.Inc is still humming, with annual growth running above 4%. Yet even after yesterday's move, the OCR stands at just 3.25%. But while many outside NZ had their sights pinned on falling dairy prices, as we have pointed out several times in recent weeks; down at 2 The Terrace, as the Governor looked out the window, he wasn't looking at dairy cows - rather he was looking at his Bloomberg terminal, noting how flat the yield curve had become, and how much tighter funding margins were. And as he gazed across to 1 The Terrace, he saw that the fiscal stance had been eased to the tune of 1% of GDP over the next 4 years. He may have also noticed a few more jets flying in, bursting with migrants coming to (or returning to) NZ. All of these factors were key drivers of yesterday's resolute "business as usual"

delivery from the Governor. And uncomfortable as it may be, by keeping up the rhetoric, slowly but surely he is putting upward pressure on the belly of the curve, the aim being to take away the opportunity afforded to banks to offer cheap 2 and 3 year fixed rates. Overall inflation may be low, but as the RBNZ has been at pains to point out, non-tradable inflation is uncomfortably high. Earlier RBNZ Governors have slept easy when the NZD has taken care of inflation for them, but in most cases the NZD had plenty of upside left in it at the beginning of the cycle. By contrast, Governor Wheeler is in the unenviable position of starting his tightening cycle with the NZD already at extreme levels. This is hardly ideal, but it is what it is. We now fully expect a follow up hike in July, and market pricing now more closely reflects that. The NZD may become a factor in July, but at this stage it feels like something that will have more of a bearing later in the year. Indeed, the RBNZ's projections allow for a mild fall in the NZD. If that doesn't happen, that could allow scope for a lengthier pause over Q4. For markets, more upside is possible, but the currency and rates cannot keep going higher ad infinitum. At some point something has to give. We suspect the worst is now behind is, but we may well see further capitulation. Hang on to a NZD position long enough, and it will "roll" back into the money!

NZD/USD: Risk of a July rate hike from the RBNZ lifts the kiwi...

NZD/USD gained a full 1.5% following the RBNZ rates decision and statement, with a strong possibility of a rate hike in July boosting the market. Tonight's US data releases, producer prices and consumer confidence, are unlikely to trigger a significant reaction in the cross.

Expected range: 0.8640 - 0.8750

NZD/AUD: Weak Australian employment ignored ...

The AUD wavered for only an instant in the wake of the weaker Australian employment report yesterday. Instead, the strong move in the NZD dragged the AUD higher, somewhat muting the rise in the NZD/AUD.

Expected range: 0.9170 - 0.9260

NZD/EUR: Solid euro area production makes little impression ...

Better than expected euro area industrial production data failed to make a dent in NZD/EUR, with the RBNZ's more hawkish stance the dominant theme for the cross. As a result, NZD/EUR rallied to a new 13-month high.

Expected range: 0.6350 - 0.6440

NZD/JPY: BoJ policy meeting the key risk ...

All eyes will be on today's Bank of Japan policy meeting, although no new action is expected. As such, focus on BoJ Governor Kuroda's post-decision press conference will likely contain the most pertinent information on the outlook for Japanese monetary policy.

Expected range: 87.90- 88.90

NZD/GBP: Sterling strength dampens NZD/GBP rally ...

Another impressive performance in the kiwi against the sterling following yesterday's RBNZ announcement. A late announcement from UK Chancellor Osborne that macroprudential policies may be introduced took the cross even higher as it implies that BoE interest rates would be lower for longer.

Expected range: 0.5130 - 0.5190

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