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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Q2 CPI ensures NZD will remain in focus. After dairy declines markets will be ready to sell NZD on any weakness. GBP remains a focus with the monthly employment report, and the USD has the July Beige Book.

RATES: Expect NZ rates to open with a mild bias higher today.

REVIEW

CURRENCY: The NZD was sold after a weak GlobalDairyTrade auction, but price action was muted. GBP took a leg higher after CPI surprised positively, while USD buyers found some positivity in Yellen's comments.

GLOBAL MARKETS: US Treasury yields were broadly unchanged from last night's close, but this masks reasonable intra-session volatility. Gilt yields are higher, and so is GBP, but the NZD is lower. Grain prices kept tumbling, and this surely bears watching. But equities have done well on earnings results.

KEY THEMES AND VIEWS

BUSINESS AS USUAL FOR YELLEN. Fed chair Yellen maintained her current forward guidance but downplayed the lift in inflation, stressing the need for current monetary policy settings to play their role in supporting the "incomplete" recovery, particularly in the labour market.

At face value, the prepared text looked dovish, but in the Q+A session Yellen appeared more upbeat. US GDP slumped in Q1, and the Fed will want to be sure that pothole is well behind them and that the economy is on a sustainable upswing before normalising policy, with Yellen noting there had been "false dawns" before. The Fed is watching Q2 activity closely, but activity indicators suggest the economy is dong better than what's implied by GDP alone, whilst the labour market has improved faster than expected, she noted. Yellen said that there was no mechanical way of telling when the first lift in the Fed Funds rate will occur, instead stressing that the FOMC has given guidance, will be looking at the progress made towards its dual mandate, and that almost all participants on the FOMC expected rates to start rising next year, ending 2015 at around 1%.

DAIRY PRICES FALL FURTHER. The GDT Index declined by 8.9% at last night's fortnightly auction, led by a 10.9% fall in whole milk powder prices and 7.1% drop in skim milk prices. The NZD/USD was hit reasonably hard, although it's hard to know how much to ascribe to the GDT result and how much to ascribe to US Fed chair Yellen's speech, which was released around the same time. We did expect this auction to be softer, but an 8.9% fall seems significant, and one could be forgiven for thinking that the reaction (a third of a cent move) was pretty tame, particularly given other events around the world that surely provide grounds for caution for both risk-seeking and the carry trade.

NZ Q2 CPI KEY TODAY. We expect a +0.4%q/q (+1.8%y/y) result, which is a shade higher than the RBNZ's +0.3%q/q forecast. This number will certainly help shape expectations for monetary policy. But while we expect a July hike, we also acknowledge that CPI alone does not hold all the keys, and we're surprised that the market is so steadfast in its assumption that July is a done deal (it's 90% priced in) given softer dairy and grain prices, the high NZD, the moderation in housing, and an Australian market gunning for an RBA cut.

OTHER EVENTS AND QUOTES

- UK inflation surprised significantly higher, giving GBP a huge boost.

- Germany's ZEW survey disappointed, with Current Conditions falling for the first time in 8 months, finally following Expectations, which have been falling for 7 months. But they now have the FIFA World Cup!

NZD/USD: Dairy declines...

The GlobalDairyTrade Price Index fell a further 8.9% taking the falls in 2014 to 34.4%, well above the 27% fall assumed by the RBNZ in the June MPS. The NZD reaction has been muted, falling only 40 pips to rest on support at 0.8760. We expect further falls, but note the market will wait for Q2 CPI at 10:45 this morning. Dairy falls should change the market reaction to CPI, with markets ready to sell weakness.

Expected range: 0.8680- 0.8800

NZD/AUD: NZ CPI...

CPI should drive this cross today, with markets ready to sell NZD on weakness. We remain of the opinion that 0.94 marks the beginning of the long term sell zone.

Expected range: 0.9340 - 0.9400

NZD/EUR: Confidence declines...

The German ZEW survey continued to decline. The theme for Q2 was one of waning economic activity, and so far data suggests this trend will continue into Q3. EUR/USD was sold after markets thought Yellen had some positive comments in her annual testimony.

Expected range: 0.6400 - 0.6480

NZD/JPY: BoJ...

The BoJ left policy unchanged yesterday, like the USD/JPY. This cross remains beholden to NZD/USD moves.

Expected range: 88.60 - 89.30

NZD/GBP: CPI surprise...

British CPI surprised the market sending this cross lower, before the dairy declines sent it on a second leg lower. GBP remains a strong economy with a central bank transitioning policy. NZD has been through this process and provides valuable lessons. We expect this cross to decline.

Expected range: 0.5060 - 0.5130

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