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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: New Zealand QV house prices are unlikely to impact NZD, but should highlight that house prices remain a factor for the RBNZ. EUR remains the offshore focus with German industrial production expected to keep pressure on EUR from a fundamental perspective.

RATES: After a very quiet night on Friday expect rates to open unchanged to a touch lower.

REVIEW

CURRENCY: Markets consolidated as expected on Friday. EUR was under pressure as markets gained further evidence that Germany is slowing.

GLOBAL MARKETS: Markets were exceptionally quiet on Friday with the US closed for the Independence Day holiday. There was a slow grind lower in rates as markets continued to digest Thursday’s very strong payrolls data. Equities fell in Europe on the back of disappointing German factory orders. Commodities were mixed, with energy prices generally down a touch.

KEY THEMES AND VIEWS

MONETARY/PRUDENTIAL POLICY CONFLICT. In their annual report this week the Bank of International Settlements - the central banks’ bank - warned that global financial markets are well past irrational exuberance and into hallucinatory euphoria. As politely as possible, they identified ultra-loose global monetary policy as the culprit, and warned of seriously brewing banking and financial risks. "Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on." In short, take your medicine - you’re only making it worse. The BIS sounded similar (ignored) warnings prior to the Global Financial Crisis, and many analysts now agree with them, laying the crisis at the feet of monetary policy that focused on tame CPI inflation and ignored asset price bubbles. Central banks hit back over the weekend, with both Janet Yellen (Fed) and Mario Draghi (ECB) saying monetary policy was not the appropriate tool for addressing financial stability, and that macro-prudential policy must deal with any risks. Of course, in many nations the central bank is responsible for financial stability as well, and one wonders what the financial stability team at Sweden’s Riksbank made of the 50bps cut last week in response to mild deflation, in the face of a roaring housing market, for example. How will this all end? You never know of course, but one doesn’t have to look very far back in time at all to find a not dissimilar set of circumstances and see how that panned out.

OTHER EVENTS AND QUOTES

- "There is a disappointing element of déjà vu in all this." Claudio Borio, head of the monetary and economic department at the BIS.

- "The global economy is gathering speed, though the pace may be a bit less than we previously predicted." IMF Managing Director Christine Lagarde signalled a cut in the IMF’s global growth forecasts is imminent on the back of weak investment in particular. The IMF also warned that large-scale public investment projects must be fiscally sustainable in the long run. French President Francois Hollande has called for Europe to consider exempting investment spending from deficits as regards the EU’s fiscal rules.

NZD/USD: Drifting…

NZD drifted a little lower, but markets were very quiet with the US out for Independence Day. The NZ Q2 QSBO (Tuesday) should follow the lead of ANZ Business Confidence and decline off its highs. However, NZD direction remains driven by the US. The FOMC minutes (Wednesday) are the pivotal event this week.

Expected range: 0.8700- 0.8765

NZD/AUD: AUD support…

AUD rebounded on Friday after a torrid week. The NZ Q2 QSBO and NAB Business Confidence on Tuesday, as well as Australian Employment on Thursday, will drive direction for this cross. We prefer fading any further strength.

Expected range: 0.9300 - 0.9370

NZD/EUR: Germany topping out…

German Factory orders declined 1.7% m/m in May, adding to evidence that the German economy is topping out. The EUR has largely remained immune to weaker German data, but should eventually succumb.

Expected range: 0.6390 - 0.6450

NZD/JPY: USD driving…

JPY remains static against the USD, but speeches by Japanese PM Abe this week on the topics of Japan’s Self-Defence Forces and the TPP talks are important for long-term exposures.

Expected range: 88.90 - 89.60

NZD/GBP: BoE week...

The BoE is not expected to change policy this week, but markets will be watching for any nuances regarding timing of future hikes. Sterling should remain strong against NZD, as the BoE continues to transition.

Expected range: 0.5060 - 0.5120

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