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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: ANZ expects a smaller than consensus trade surplus for May to be announced today, but NZD should remain strong. German CPI will be important for EUR. Otherwise we expect currencies to consolidate.

RATES: Expect Kiwi rates to open broadly unchanged despite lower US bond yields.

REVIEW

CURRENCY: NZD maintained strength leaving it the strongest currency over the last 24 hours. GBP strengthened after macro prudential measures were announced. EUR weakened as markets pondered if the ECB could do more.

GLOBAL MARKETS: US data was reasonably positive overnight. The May PCE rose to 1.8% y/y (vs 1.6% in April) and core lifted to 1.5% (1.4%).

Other gauges of prices movements also show inflation is moving in the right direction. Personal incomes rose 0.4% m/m, but spending was a touch softer than expected at 0.2% m/m. Initial claims data (312k)

suggested that the labour market remained firm. However, despite this fixed income strength remained and yields continued to drift lower. Bund yields hit a fresh low of 1.24%, the lowest in almost 14 months and within spitting distance of the record low close of 1.165%. The driver of this seems to be a combination of the ECB's lower for much longer approach and a general preferred allocation into higher quality product.

But while bunds have rallied the spread to Spanish and Italian government bonds has widened over the past few weeks. Equities continued to trade poorly with softness in both Europe and the US. In the commodity space, grain prices rose slightly (+0.7%), but energy prices were softer with oil prices falling after a reported air assault on Tikrit.

KEY THEMES AND VIEWS

CAUTION REQUIRED. Today's trade data for May is expected to confirm a widening annual trade surplus. The April trade data showed a seasonally adjusted fall in meat, dairy and forestry volumes, with our expectation being that this will continue. We also expect to see a seasonal rebound in imports, which will deliver a $200m monthly surplus. While up on last May, this will be the lowest monthly surplus since last October. The next few months are expected to show a deterioration in the annual trade position as lower commodity prices feed through into export receipts and the domestic-centric nature of the expansion lifts the demand for imports. The trade position depends crucially on export commodity prices. Recent price action for both forestry and dairy have been concerning. Additionally some of the same dynamics that have affected these two sectors are now beginning to be reported for others (read:

Meat). Most of the pressure seems to be around the Chinese market where over excited traders seems to have bitten off more than they can chew and are now offloading product before shelf life deteriorates too much.

With many sectors lacking inventory data it seems we are flying blind on the drawdown, so caution is required. This means in the near-term the downward correction many not have run its course and any bounce back is likely to be further off.

OTHER EVENTS AND QUOTES

- Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens. We are increasingly in agreement with his line of thought and see the US bond market as complacently overpriced.

NZD/USD: Still strong...

There was little in the US data to drive direction, with most releases meeting expectations. Notably, the US consumer remains cautious with personal spending increasing 0.2% m/m against expectations of 0.4%. New Zealand's trade balance is expected to remain in surplus this morning, although ANZ is expecting a smaller surplus than the consensus.

Expected range: 0.8740 - 0.8820

NZD/AUD: Kiwi to continue to outperform...

New Zealand's trade balance and a speech by RBA Assistant Governor Kent on real estate are unlikely to change the trend of NZD outperformance.

Expected range: 0.9260 - 0.9320

NZD/EUR: Can the ECB act further?

Ahead of next week's ECB meeting, markets took EUR lower as unidentified sources were reported by MNI as saying the "ECB may not have reached the lower bound on key rates". For now EUR remains under pressure.

Expected range: 0.6410 - 0.6480

NZD/JPY: Japanese CPI...

Monthly Japanese CPI releases along with the jobless rate and retail trade data may lead to yen volatility today. However, we still expect this cross to follow NZD/USD fortunes.

Expected range: 88.900 - 89.50

NZD/GBP: Loan to income restrictions

The BoE implemented macro prudential measures. However, the restrictions were less stringent than the market feared and GBP strengthened. Banks must stress test mortgages against a 3% rate increase and loan to incomes ratios should not be above 4.5 for more than 15% of a bank's new lending.

Expected range: 0.5130 - 0.5180

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