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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Australian Q2 CPI should support AUD, pressuring NZD/AUD. GBP may come under pressure should the BoE minutes not have evidence of discussions over policy normalisation. NZD should remain under pressure into tomorrow's RBNZ meeting.

RATES: Expect kiwi rates to open 1-2bps higher and for the curve to flatten.

REVIEW

CURRENCY: USD found broad data support overnight and EUR/USD finally broke below the 1.35 pivot level, clearing the way for further declines.

GLOBAL MARKETS: It was a positive overnight session for the US dollar, supported by a run of good data releases. All the US data is continuing to point to upward momentum in the economy as it enters Q3. That's encouraging news and if the economy continues to perform better than expected, then the likelihood, as Yellen said, is that the normalisation process for monetary policy should happen earlier. The short end of the UST market rallied initially, while the long end sold-off in response to the slightly lower than expected core US inflation read for June.

However, the better run of data that followed, including the Richmond Fed survey and existing home sales, saw the long-end move back to be largely unchanged at the time of writing. There was a minor sell-off across core European sovereign bond markets, which was more consistent across the curve. Equities more than recovered losses from the day before, with European bourses outperforming those in the US. US corn futures extended a slump to a four-year low as the US crop got its highest rating in a decade amid favourable weather in the US, the world's largest producer. The USDA said that 76% of corn is rated in good or excellent condition, the highest for this time of year since 2004, portending of very high yields. Soybean and wheat prices followed grain prices higher.

KEY THEMES AND VIEWS

INFLATION WATCH. Inflation trends remain front and centre around the globe for central bankers and investors, and will be important in context of the speed and magnitude of monetary policy normalisation.

Last night US June headline CPI data were in line with expectations rising 0.3% m/m and 2.1% y/y, the same as in May. Core was a bit more tame though, rising 0.1% m/m and 1.9% y/y. While the tone of the June monthly data was softer, on a 3 month annualised basis headline inflation is now running close to 4% and core at 2.4%. Combined with plenty of evidence that a decline in spare capacity is boosting price pressures in some sectors, the message is inflation is normalising around the FOMC's 2% inflation target. This makes it very difficult for the FOMC to argue that the normalisation in inflation is transitory.

Australia's CPI is out today and has a modest correlation with NZ CPI data, which last week came out a tad lower than expected. Our Australian economics team expect the Q2 CPI to reveal moderate headline inflation of 0.6% q/q June and 3.1% y/y (pops higher due to base effects). For underlying inflation, they expect the year-ended rate to drop to 2.6%

y/y due to base effects, with the 6-month annualised rate broadly unchanged. Beyond this, underlying inflation is expected to ease a little further as low wages growth filters through to a gradual softening in non-tradables inflation, with this likely to offset the impact of any further depreciation of the currency. For New Zealand it all adds up to an easing of global disinflationary pressures, which should eventually help the RBNZ out. With the RBNZ set to hike again on Thursday, a pause thereafter while everyone else catches up seems like a good plan.

NZD/USD: USD data continues to perform...

USD found good support from economic data overnight. June CPI remained stable at 2.1% y/y, consolidating around the Fed's inflation target. The July Richmond Fed was strong, and existing house sales optimistic. The NZD is likely to remain under pressure, but supported at 0.8630-40 until the RBNZ.

Expected range: 0.8630- 0.8700

NZD/AUD: Q2 CPI...

ANZ expects Australian Q2 CPI is forecast to be running at 0.6% q/q, double the quarterly rate of NZ (0.3% q/q). The AUD should continue to perform well against NZD.

Expected range: 0.9180 - 0.9260

NZD/EUR: A EUR break lower...

EUR/USD fell through the 1.3480-1.35 pivot level last night. This fall led to NZD outperforming EUR overnight, an exception to the rule.

Expected range: 0.6380 - 0.6460

NZD/JPY: Still stuck...

USD/JPY remains uneventful, leaving this cross to trail in NZD/USD's wake.

Expected range: 87.50 - 88.40

NZD/GBP: BoE minutes...

Weakness in the CBI trends releases didn't impact GBP overly. Markets look to the BoE minutes tonight, expecting to see some discussion over policy normalisation. Should there be little sign of discussion then GBP looks vulnerable.

Expected range: 0.5060 - 0.5120

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