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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The Q2 Quarterly Survey of Business Opinion (QSBO) is expected to in decline from Q1 peaks, keeping pressure on NZD. Australian business confidence and US small business optimism are also drivers.

RATES: Some receiving interest was evident in the early London session, with later payside interest for longer maturities. Local yields are expected to open unchanged.

REVIEW

CURRENCY: NZD and NOK found demand in a market where equities declined and yields fell. CAD weakened after indicators suggested the BoC has time on its hands. EUR found demand against weaker fundamental data.

GLOBAL MARKETS: Markets were largely range bound with no major data or keynote speeches to provide direction. US equities eased from record highs, with some high profile analysts bringing forward their expected timing of Fed hikes. European equities were also down. Government bond yields rallied, with US 10 year yields down 2bps to 2.62%, with falls in core European yields and a narrowing to bunds for Eurozone peripherals.

The CRB index dipped 0.9%, led by falls for grains and energy. Gold prices fell.

KEY THEMES AND VIEWS

DIVERGENCES. Further evidence of the current divergence between the euro area and US business cycles continues to emerge, with weaker than expected German industrial production data following the steer provided by weakening manufacturing sentiment and confirming that the Eurozone's economic recovery has slowed sharply over the last few months. The Bundesbank appears confident that the German economy will re-accelerate over the second half of this year, with the bounce in the July Sentix euro area investor confidence reading providing some sympathy for this view. Despite this, a slowing Eurozone economy and high euro suggests that the ECB has more work to do to tackle the risk of deflation. With this taking place when the risk profile is tilting towards an earlier start to Fed tightening, we are likely to get action in one form or another.

NZIER QSBO at 10am today. Despite signs of slippage, the Q2 QSBO is expected to depict a still-healthy pace of expansion. Pricing, investment and employment intentions are also expected to ease somewhat.

Our focus will be on the capacity metrics, which are expected to remain somewhat elevated, reaffirming the need for the OCR to move higher, which will support the NZD despite softer signs on the export commodity price front. Also released today will be the June NAB business confidence survey, providing a timely comparison for how well the two Trans-Tasman economies are faring. Whether the confidence data will accord with the widening NZ interest rate differential embodied in current market pricing remains to be seen.

OTHER EVENTS AND QUOTES

- German industrial production slumps: The 1.8% May drop was the third monthly fall in a row. Weakness was evident in the intermediate

(-3% m/m), consumer (-3.5% m/m) and construction goods (-4.9% m/m)

sectors. Even the core manufacturing component fell by 1.6% m/m.

- Canada data mixed: May building permits were much stronger than expected (+13.8% m/m) but this was tempered by a lower June PMI

(46.9), the 4th consecutive monthly drop.

NZD/USD: Sought...

Demand emerged for NZD in an otherwise featureless night. There was little news flow to justify the move, equally little support from traditionally correlated instruments, with: equities weaker, commodities lower, US bond yields lower, CAD weaker, and AUD/USD relatively unchanged. The Q2 QSBO is expected to follow ANZ Business Confidence in falling, pressuring kiwi.

Expected range: 0.8720- 0.8790

NZD/AUD: Reversal...

A lift in Australian data (AiG Performance of Construction Index, and the ANZ Job Advertisements June release), was not enough to stop a NZD/AUD reversal. This cross is approaching our medium term sell zone between 0.94 and 0.95. Direction will come from the Q2 QSBO and Australian business confidence.

Expected range: 0.9320 - 0.9380

NZD/EUR: Germany topping out...

German industrial production continued with weaker signs for the European economy, declining 1.8%. Weaker Spanish industrial output added to the notion, yet EUR rallied overnight, offsetting some of the NZD gains.

Expected range: 0.6420 - 0.6470

NZD/JPY: Trade implications...

Japanese PM Abe is in Australia today, although meetings in NZ yesterday did not provide any market moving material. Watch for defence agreements with Australia today that may have trade implications.

Expected range: 88.90 - 89.60

NZD/GBP: British industrial production...

GBP underperformed overnight. Industrial and manufacturing production this evening are the perennial underperformers of British releases, so weakness will be mostly ignored.

Expected range: 0.5080 - 0.5140

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