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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Major offshore events in the form of US Payrolls and the ECB will drive currency markets today. NZD may remain resilient on the demand side due to offshore investment flows, but we remain a seller on rallies.

RATES: Expect NZ rates to open unchanged to higher, in line with global moves. Receiving interest should keep 2yr swap capped at 4.25% for now.

REVIEW

CURRENCY: The NZD held up well in a market which brought USD on the back of ADP employment strength. GBP was the strongest currency though, as construction PMI gained against the consensus for a mild decline.

GLOBAL MARKETS: The overnight session was dominated by a better-than-expected US ADP employment print for June (signalling some upside risk to tonight’s non-farm payrolls data), which triggered a 5bp sell-off in US 10 year Treasury yields (to 2.62%) and broad-based USD gains. While AUD was the biggest underperformer (with further selling following yesterday’s weak trade data), GBP posted fresh 5½-year highs at USD1.7170 following a stronger than expected UK construction PMI (which increased from 60 to 62.6). NZD also largely kept pace with the USD on latent offshore demand following yesterday’s successful NZDMO bond syndication. This sees NZD/AUD back towards 0.93. Core European bond yields were also 4-5bps higher following the move in Treasuries, with peripheral spreads widening. In other data, US factory orders slipped 0.5% in May after gains in recent months. Commodity price moves were mixed, though crude prices fell 1%.

KEY THEMES AND VIEWS

ADP EMPLOYMENT SIGNALS UPSIDE RISK TO TONIGHT’S PAYROLLS. The ADP measure of US employment increased 281k in June, well above the median market estimate of 205k and the largest monthly rise since November 2012. Whether the ADP is a good indicator for tonight’s payrolls data is debatable (with ADP numbers undershooting payrolls for the past five months), although the overnight reaction in Treasuries (10 year US bond yields increased 5bps) suggests some upside risk to tonight’s payrolls print. The market consensus is for a 215k lift in June non-farm payrolls (ANZ +195k), which would see both surveys printing cumulative jobs growth of 1.2-1.3m over the first half of 2014, indicative of a strengthening US labour market. The US unemployment rate is also expected to print in line with May’s 5½ year low of 6.3%. Tonight’s average hourly earnings data will also be of interest given the US Federal Reserve’s view of still sizeable capacity in the labour market, although base effects are likely to see annual labour earnings dip below 2% y/y (before picking up next month). Speaking at the IMF overnight, Fed Chair Janet Yellen indicated there was no need to change the current course of monetary policy to address financial stability concerns, although she does see "pockets of increased risk-taking".

OTHER EVENTS AND QUOTES

- The NZDMO yesterday issued $2bn of a new Apr-2027 nominal bond at a yield of 4.68% (providing a pick-up of around 88bps to equivalent Australian bond). Demand was strong, with a book build in excess of $2.4bn and the deal printing at the lower end of initial spread guidance. Non-Australasian investors took 41% (or $824m) of the issue which could encourage some further demand for NZD in coming days.

NZD/USD: Payrolls and NZD demand…

The NZD remained very much in demand despite broader USD strength. ADP employment drove the USD strength, showing 281k jobs added in June (well above the 205k expected). Payrolls will drive NZD/USD, markets forecasts are for 215k. Latent NZD demand is still likely on the back of yesterday’s NZGS syndication (settling 9 July). Of the $2bn issued $824m went to non-Australasian investors, some of which will still need to buy NZD.

Expected range: 0.8700 - 0.8830

NZD/AUD: Australian Trade…

Every now and then a number comes out which alters market perceptions and yesterday’s Australian May trade Balance did just that. The AUD1.9bn deficit combined with negative revisions suggests NZ export declines are being matched in Australia, reversing early NZD/AUD weakness. Australian retail sales and a speech from RBA Governor Stevens will drive the cross.

Expected range: 0.9260 - 0.9310

NZD/EUR: ECB…

The ECB tonight should maintain the status quo, but with the EUR/USD above where it was when negative deposit rates were announced, expect some currency jawboning. Also important will be if the service sector can hold up.

Expected range: 0.6390 - 0.6470

NZD/JPY: USD driving

The USD is driving USD/JPY, thus US Payrolls will have an impact tonight.

Expected range: 88.60 - 89.90

NZD/GBP: Boom time...

Instead of declining from lofty levels, the UK Construction PMI increased to 62.6 (only 2pts below post-GFC highs). UK Nationwide house prices grew 11.8% y/y. Sterling remains strong, and we expect it to gain against NZD.

Expected range: 0.5080 - 0.5140

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