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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Currency markets will focus on Fed Chair Yellen's testimony to the Senate and BoE Governor Carney's testimony to the UK Parliament tonight. Markets will be looking for shifts in tone from both.

RATES: Not much action reported in kiwi trades overnight, with local yields expected to open unchanged to a touch higher.

REVIEW

CURRENCY: Aside from CAD, which regained some of its lost ground, there was a broader USD bid, which saw NZD/USD and GBP/USD off their highs.

Draghi's testimony made it clear the ECB would prefer the EUR weaker.

GLOBAL MARKETS: A very quiet session was reported, although more data and events (including Yellen's semi-annual testimony to the Senate Committee, and the BoE's Carney's testimony to the House of Commons)

over the next day or so will help provide direction. There were a few headlines from Draghi's testimony (see below). European equity markets continued to rebound from last week's Portuguese banking-driven rout, with better than expected Citigroup results also helping push up US equities. USTs sold off a few basis points across the curve, while core European sovereign bond markets were little changed as were those for the Eurozone periphery. Base metals were up slightly while gold prices eased and crude oil prices moved sideways.

KEY THEMES AND VIEWS

EUROZONE INDUSTRIAL PRODUCTION LOWER. The 1.1% May fall, was close to market expectations and was consistent with results from the major European economies reported last week. The sector breakdown showed that the decline was broad with only the volatile energy component rising.

Analysts attribute the May fall to the impact of the three public holidays across much of the Continent. While a June rebound is expected, the underlying outlook for the sector appears weak, with survey data indicating that the industrial recovery may have already peaked.

Comments by the IMF suggest that while there is support from non-conventional ECB measures to combat potential deflation, structural impediments to growth need to be addressed.

RBA JULY MINUTES TODAY. The minutes are likely to reaffirm that a period of stability in the cash rate is the most probable course of action. The RBA is also expected to reflect concerns over the high AUD, but let's spare a thought for the beleaguered NZ export sector, with the NZD flirting with post-float highs and the RBNZ likely to pull the trigger again in July.

OTHER EVENTS AND QUOTES

- Selected Draghi comments from European Select Committee:

Selected Bloomberg headlines suggest that Draghi largely stuck to the ECB's script. Economic outlook risks are o the downside and the ECB is ready to take further action if needed. The strong euro is a risk to the recovery. QE "falls squarely" within the ECB's mandate, with the ECB Governing Council unanimous in using unconventional measures.

Macro-prudential tools are the first line of defence on bubbles.

- IMF article comments: The Fund welcomed "the exceptional measures recently taken by the European Central Bank to address low inflation and strengthen demand". The Fund noted however that over the medium term, the euro-area economy faces "a risk of stagnation, which could result from persistently depressed domestic demand due to deleveraging, insufficient policy action, and stalled structural reforms."

NZD/USD: USD to dominate...

The USD will dominate currency markets, as we await the semi-annual Humphrey-Hawkins testimony by Fed Chair Yellen to the US Senate. Markets are expecting Chair Yellen to maintain her cautious stance, but some acknowledgement of the progress in employment and inflation toward Fed goals will be required. Markets will be looking for a reason to buy USD.

Expected range: 0.8740- 0.8830

NZD/AUD: RBA minutes...

The RBA minutes are unlikely to have new information for the market, given they have been superseded by not one, but two speeches by RBA Governor Stevens. Despite those, AUD was fairly solid overnight and should remain so.

Expected range: 0.9340 - 0.9400

NZD/EUR: The ECB and the EUR...

ECB President Draghi used testimony to the EU Economic and Monetary Policy Committee to reiterate that the ECB stands ready to act and is unanimous in their determination to do so. He stated that macroprudential policies are the first line of defence against bubbles and that EUR strength would pose a risk to the recovery, ensuring EUR strength will be hard fought.

Expected range: 0.6440 - 0.6480

NZD/JPY: BoJ...

The BoJ today is not expected to change policy. Markets believe the BoJ will be forced to act later this year so would react to any sign this.

Expected range: 88.80 - 89.60

NZD/GBP: BoE testimony...

BoE Governor Carney testifies to parliament today. The topic is the June Financial Stability Report in which macro-prudential policy recommendations were made. As such, the strength of the UK economy will be a prime topic.

Expected range: 0.5130 - 0.5170

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