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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The US is out for Independence Day, and the rest of the world only has minor economic events. Markets should consolidate and digest the strength in US payrolls.

RATES: Expect NZ rates to open slightly higher in line with moves in US Treasuries following stronger US data overnight.

REVIEW

CURRENCY: The NZD/USD again surprised in its resilience to broad USD buying. However, it did have company with its commodity cousin the CAD the strongest currency. SEK was hit hard by a 50bp cut by the Riksbank.

GLOBAL MARKETS: It was all about the market reaction to payrolls overnight, and unsurprisingly bond yields continued to rise and the USD strengthened. US 10yr yields were 5bps higher immediately following the data though met with buying interest to be 2bps higher at 2.64% heading into the close. The front end of the curve suffered more with 2016 eurodollar implied yields rising 5-6bps and the Fed fund futures contract shifting the first hike from October 2015 to September.

Equities rallied across the board.

KEY THEMES AND VIEWS

CLOSER TO THE MANDATED OBJECTIVES. There was relief for the economic bulls in the US with June payrolls rising 288k (215k exp). The 3mth average is now 272k, the 6mth average is 231k and unemployment fell to 6.1%. The rise in jobs was broad based, though real wage growth (0.2% m/m) remains subdued and this ties in with broader measures of labour market utilisation such as the underemployment rate (12.1%) remaining high. However, stepping back, achieving the Fed's dual mandate is closer. If jobs growth continues at current levels, the unemployment rate will be at 5.5% by the end of the year (courtesy of the Atlanta Fed's job calculator) - that's within "coo-ee" of the Fed's estimate of the equilibrium rate (5.2-5.5%). We have jobs growth picking up, headline inflation at 2.1% y/y and PCE inflation running at 1.8% y/y

(the FOMC's target for Q4 was 1.5-1.7%). We can expect debate at the FOMC on the appropriate settings for monetary policy to intensify, though we suspect the Fed will be slow to change its guidance and any shifts will be in a gradual fashion. The green shoots of recovery have turned brown before. We'd expect to see US yields rise further over the coming weeks as investors look to reduce exposure and those who have deferred hedging start to bite the bullet. Higher yields are USD supportive and reversification (capital flows from periphery into the core) looks set to return as a thematic. The million dollar question is when all this turns NZD/USD negative; we suspect soon.

GROWING DIVERGENCE. Whilst the improved tenor of US data is turning attention towards less dovish nuances from the Fed, the ECB is sticking to its dovish script with last night's communication underlining existing forward guidance that rates will remain low for a prolonged period and that the ECB Governing Council is unanimous in its decision to take further action using unconventional measures, if that is deemed to be necessary. As President Draghi suggested "our job isn't finished".

The strength of the currency has been disinflationary (i.e. a problem), but it is not a policy target. If the ECB had their way the euro wouldn't be going up, but neither is it really going down (last night's movement being muted all things considered).

SWEDEN CUTS RATES. The Swedish Riksbank cut its repo rate by a greater than expected 50bps overnight (-25bps expected) to 0.25%.

NZD/USD: Holding up a little too well...

With payrolls unequivocally strong, NZD/USD should be lower, yet after testing 0.8720, is now only 20 pips below yesterday's average. We expect NZD/USD to decline from here.

Expected range: 0.8700- 0.8765

NZD/AUD: Not jawboning but...

RBA Governor Stevens acknowledged the RBA's limited ability to "jawbone"

the currency, but said "investors are under-estimating the likelihood of a significant fall". The market took this comment and another about having room to ease further, (the full comment did not suggest the RBA needed to ease) and drove AUD/USD lower, sending NZD/AUD higher. Weaker May retail sales data confirmed AUD weakness.

Expected range: 0.9320 - 0.9390

NZD/EUR: ECB...

The ECB was unchanged and further details regarding the TLTROs and potential ABS purchases are broadly supportive for the EU economy.

Bigger news came from the Swedish Riksbank which cut rates by 50bps to 0.25%, and highlighted that wider European policy settings will remain low.

Expected range: 0.6390 - 0.6450

NZD/JPY: USD driving

Attempts to drive NZD/JPY lower after payrolls were rebuffed. Yen weakness against USD and NZD resilience, meant NZD/JPY is higher than it started.

Expected range: 89.00 - 89.90

NZD/GBP: Services...

The UK services PMI disappointed falling to 57.7 from 58.6. However, Sterling took little notice and maintained its strength. Probably, because the level indicates UK service activity is still the strongest in the G10.

Expected range: 0.5080 - 0.5140

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