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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: All eyes are on tomorrow's FOMC decision. We think the Fed could surprise the market by being a little less dovish than expected.

Such an outturn would give the USD a boost. Locally, this morning's Q1 balance of payments data is expected to be NZD supportive.

RATES: Local yields are expected to open relatively unchanged despite higher US yields.

REVIEW

CURRENCY: The USD received a boost following the stronger than expected May US inflation data, particularly versus emerging market currencies.

The dovish RBA minutes weighed on the AUD. A small rise in dairy prices wasn't enough to boost the NZD after the large fall in early June.

GLOBAL MARKETS: USTs sold off following the higher than expected May US CPI print with 10-year yields up nearly 5bps at the time of writing.

Core European sovereign bond yields were also higher, although UK gilts lagged following a softer than expected May UK CPI print. Equities in both the US and Europe were also modestly higher.

KEY THEMES AND VIEWS

OVERNIGHT DATA WRAP. The May US CPI reading was stronger than expected with the annual headline result increasing to 2.1% y/y and core to 2.0%

y/y. The monthly headline rise (0.4%) was the biggest increase in 15 months and consistent with inflation moving back closer to the FOMC's targeted objective. We are of the view that Yellen might acknowledge this more balanced price environment and steady improvement in jobs creation tomorrow. Meanwhile the May UK CPI reading was weaker than expected with headline inflation falling to 1.5% y/y and core to 1.6%

y/y. The headline result was at its lowest level since October 2009, led by weakness in transport and food prices. The data will confuse the new found expectation of an earlier than expected rise in interest rates, but the BoE does seem to be somewhat focused on the speed of the recovery, particularly in the labour and housing markets. Separately, the ONS reported that April UK house prices rose 9.9% y/y. In Germany the June ZEW investor survey showed a rise in the current conditions index to 67.7 - its highest reading since July 2011. However, economic expectations fell for the sixth month in a row, highlighting continued geopolitical concerns and investors being unimpressed by recent ECB action. For the euro zone as a whole, expectations recovered a bit though, snapping four months of declines. In other data the annual growth rate of euro zone hourly labour costs fell from 1.6% in Q4 to just 0.9% in Q1. Labour costs fell outright in Italy, Ireland and Cyprus and rose by just 0.5% in Spain, confirming that wage adjustment is continuing to weigh heavily on income growth in the south and periphery.

But even in Germany, where unemployment is at a post-reunification low, labour costs rose by just 1.1% in the year to March, suggesting that inflationary pressure remains very weak.

DAIRY PRICES STABILISE. Overnight dairy prices stabilised with wholemilk powder prices up 2.4%, following the unexpected 8.5% fall in the first auction in June. Near-term contracts for milk powders saw stronger price support, suggesting buyers covering immediate needs. This could be some of the latent demand from other countries starting to pick-up after earlier missing out to China, and it becoming more affordable following the recent price declines. The more modest price action for later delivery contract periods suggests buyers are awaiting the start of the 2014/15 NZ season to see how the supply response evolves elsewhere before committing to higher prices. This suggests a period of consolidation in coming auctions.

NZD/USD: All eyes on the balance of payments and FOMC ...

There are two key risk events on the cards for NZD/USD over the next 24 hours - the FOMC decision and the local balance of payments report.

Overnight, NZD weakened after a bigger than expected rise in US inflation. Should the Fed surprise with a more hawkish stance tonight, this move could extend.

Expected range: 0.8610 - 0.8730

NZD/AUD: Cross lifts on dovish RBA ...

The rebound in NZD/AUD pushed through prior resistance at 0.9250 following the release of dovish RBA minutes. Direction today will come from the NZ current account data (ANZ expects -2.7% of GDP).

Expected range: 0.9220 - 0.9320

NZD/EUR: Struggling to push above 0.6400 ...

NZD/EUR consolidated around 0.6390 today with limited macro influences from either NZ or the euro area to drive momentum. Today's NZ balance of payment report is the key focus for this cross, although we could also see a different reaction in NZD and EUR to tonight's FOMC announcement.

Expected range: 0.6360 - 0.6440

NZD/JPY: Japanese trade figures in focus...

A tight trading range around the 88.40 level has endured since Friday.

We could however see a break in this trend following today's release of Japanese trade data for May. The market expects the trade deficit to deteriorate.

Expected range: 87.90- 88.90

NZD/GBP: A further shift in debate from the BoE minutes?

The overnight release of weaker than expected UK CPI data had only a fleeting impact on the cross, with the BoE seemingly more focussed on the speed of the economic recovery. Watch tonight's BoE Minutes for signs of a shift in debate further toward possible rate hikes by the end of the year.

Expected range: 0.5060 - 0.5160

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