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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: It is a relatively quiet end to the week, and we expect stability in the currency markets. NZ food prices and REINZ housing prices are not expected to provide catalyst for change.

RATES: NZ yields will open lower on global wobbles and on fresh demand.

REVIEW

CURRENCY: European banking concerns drove markets overnight. NZD/JPY the classic carry trade suffered, but NZD/USD remained relatively immune.

New York markets dismissed most of Europe's concerns, but caution remains.

GLOBAL MARKETS: Our London colleagues report a busy and volatile session overnight, and one that had many, but not all the hallmarks of your typical "risk-off" session, with the USD and yen higher, core sovereign bond yields lower, and peripheral spreads wider. Portugal has been mentioned in dispatches as the catalyst. Indeed, according to Bloomberg news, the parent company of a small Portuguese Bank missed some short term debt payments. The fact that woes at such a small bank (by employees and assets it is about 1/6th or 1/7th the size of ANZ) have caused such a ripple go a long way to show how fragile things are in Europe. The ECB remains a key backstop, but many fundamental issues remain. Anyway, Portuguese bond spreads widened around +20bps, rounding out what has been something of a rout, with Portuguese 10yr yields now up almost 70bps from their frankly irrational June low of 3.3%. Gold is up, and equity markets are generally in the red.

KEY THEMES AND VIEWS

THE STRAW THAT BROKE THE CAMEL'S BACK. Whether it was woes in Portugal, the NZD within spitting distance of its post-float high, or US 10yr Treasury yields breaking below 2.5%, but something has changed in the past 24 hours, and it has drawn fresh swap receivers out of the woodwork. And I think you have to say "rightly so", for there is certainly an increased air of uncertainty in global markets, and it does seem to be somewhat at odds with market pricing of 90% odds of a RBNZ OCR increase on July 24th. To be sure, we forecast a hike - let's be clear on that from the start. But it's a binary event - either they will or they won't, so even though we have to make a definitive call, the reality is that it is a balance of probabilities. Indeed, as we have noted several times in the past two weeks, we see the probability of a July hike as close to 70%, not 90% and certainly not a done deal. And given what we are seeing offshore now - with credit spreads widening

(quite sharply in some cases), volatility spiking higher, risk appetite crumbling, the NZD above 80 (and NZD/AUD above 0.94 at times over the past 24 hours), you'd have to say that the probability of a July hike is even lower now. We still think it's odds-on they go, but the point is, it's fluid, not set in stone, and markets are only really coming around to that now. To be fair, positioning has been problematic, and mortgage rates (and other domestic factors) are an offset. However, we'd be surprised if the market's attitude that July hike is a foregone conclusion will last into next week. Not that any of this has done anything to dent the Kiwi, which remains above 0.88. If the slide in risk appetite continues, NZD is likely to come under some pressure, but even then, it's difficult to be overly bearish. Even if the market does tame its expectations of RBNZ policy, NZ/US interest rate spreads are set to continue widening till at least the middle of next year, so shorting the Kiwi is just going to keep becoming more expensive.

NZD/USD: Relatively immune...

A classic "risk off" European session only managed to drive NZD 20 pips lower. European banking concerns were dismissed by New York, and the NZD regained lost ground. NZ food price data today will give an insight into next week's Q2 CPI, with that release and the semi-annual Humphrey Hawkins testimony the next major events for this cross.

Expected range: 0.8790- 0.8860

NZD/AUD: Australian employment...

Australian employment underwhelmed yesterday driving this cross above 0.94. While we have since declined, price action still threatens further gains.

Expected range: 0.9370 - 0.9430

NZD/EUR: Default concerns...

Concerns over the European banking system drove EUR lower, and for a while NZD. There was a 'missed payment' in the holding company structure of Portuguese bank Banco Espirito Santo, but it was the parent of the parent company that missed the payment, and the Portuguese were keen to stress that the bank is completely isolated from the group. However, the markets remain cautious.

Expected range: 0.6450 - 0.6530

NZD/JPY: Risk off...

The barometer of global fear increased last night driving NZD/JPY down to touch 89. While the NZD leg has recovered the JPY leg has not, possibly due to an overly short JPY market.

Expected range: 88.80 - 89.70

NZD/GBP: BoE...

As per normal the BoE provided no detailed statement to accompany the no change decision. GBP like NZD managed to regain most of the ground lost over European banking concerns.

Expected range: 0.5130 - 0.5170

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