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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The RBNZ will decide NZD/USD direction, but we expect NZD to decline in the coming weeks. The EUR is unlikely to find support from July activity updates, but China and US updates should be supportive for growth.

RATES: NZ yields are likely to open a touch higher following pre-positioning in the London session ahead of the RBNZ OCR Review this morning.

REVIEW

CURRENCY: Australian Q2 CPI drove AUD/USD higher, taking NZD/USD with it. BoE Minutes and a Governor Carney speech put pressure on GBP, after highlighting greater uncertainty about the trajectory for rates.

GLOBAL MARKETS: Not too much to report from overnight with BoE Minutes the main focus. As it happened, markets interpreted the Minutes to be slightly dovish with GBP lower and short sterling rallying by around 5bps as some MPC members believed "an early increase in rates may raise shock vulnerability." BoE Minutes also discussed the employment vs wage growth divergence and how this made the assessment of 'slack' in the economy more difficult. Markets are pricing the first hike in the BoE's base rate for January. In other markets, European bond yields ended lower across the board (with German 10yr bund yields posting a record low close of 1.14%), while equities enjoyed small gains despite reports of the downing of two Ukrainian fighter jets. Crude oil prices gained on the heightened geopolitical concerns, while US 10yr Treasury yields treaded water around 2.46% amid a dearth of US data.

KEY THEMES AND VIEWS

CROUCH, TOUCH, PAUSE OR ENGAGE? We expect the RBNZ to hike the OCR for a fourth consecutive meeting (to 3.5%) at today's July OCR Review before pausing to assess the impact of earlier hikes over the second half of the year. However, a rate hike today is not the done-deal the market is pricing (85%) and we would only assign odds of two-thirds given the material tightening in financial conditions in recent months. Dairy prices have fallen 34% year to date (in excess of the RBNZ's projection for a 27% fall over 2014), the NZD TWI is 1.5% above June MPS projections, while the Bank is yet to see a smoking gun on the inflation front (with CPI potentially printing sub-1.5% y/y in H2 - compare that to 3% y/y inflation in Australia and an on-hold RBA). Indeed, we can see arguments against hiking today. But the RBNZ appears to have backed itself into a corner following strong forward guidance in June, and the path of least resistance favours another rate hike today, or the Bank risks losing credibility. The RBNZ will also want to maintain policy traction through the belly of the curve. Otherwise the Bank risks mortgage rates falling, which could give the housing market a second wind (especially in light of record net migration flows). The bigger picture remains one of GDP growth returning to trend and inflation gradually rising over the medium-term, with today's RBNZ statement likely to reiterate that future tightening will be increasingly data-dependent. Post-July, we expect the RBNZ to pause until March 2015, which strategically favours being "cautiously received" the NZ front-end and short the NZ dollar.

ANZ BRINGS FORWARD ITS FED RATE HIKE CALL. ANZ has officially brought forward its call for the first hike in the Fed Funds Rate to March 2015

(from June) as the FOMC approaches its dual mandate faster than earlier anticipated. Policy normalisation is still expected to be gradual, though the transition to higher US rates is likely to be disruptive for some markets as the extended period of low volatility comes to an end.

For NZ, earlier Fed hikes are likely to culminate in a lower NZD/USD and steeper yield curve.

NZD/USD: All down to the RBNZ...

Yesterday kiwi was dragged higher by AUD/USD strength. Today it will be the NZD/USD turn to drive direction. The RBNZ controls the fate of the NZD. Should they hike (as expected) and remain hawkish (unexpected) then NZD will almost certainly squeeze higher, and we would sell a rally of this type. The NZD should be free to decline (following commodity prices) from either a hike - with a pause signalled, or an unexpected cut.

Expected range: 0.8550- 0.8780

NZD/AUD: Q2 CPI...

AUD outperformed after Australian Q2 CPI increased yesterday. We expect NZD/AUD to remain under pressure from the RBNZ today. Later, China's July advance PMI is expected to add further support to AUD.

Expected range: 0.9110 - 0.9280

NZD/EUR: European July activity...

The EUR is unlikely to find support from July's flash PMI tonight.

Markets expect activity to continue to slow across both manufacturing and services.

Expected range: 0.6380 - 0.6520

NZD/JPY: No JPY drivers...

This cross will follow NZD/USD today, with no JPY drivers.

Expected range: 87.00 - 89.00

NZD/GBP: A 'bob each way'...

The BoE Minutes continued to shift to a positive tone on the UK economy.

However, detailed discussions of labour market slack indicated more uncertainty than markets expected sending GBP lower. BoE Governor Carney also seems to be putting a 'bob each way' suggesting there is both "more labour supply than previously thought" and "spare capacity is being used up a bit more rapidly than we had expected".

Expected range: 0.5060 - 0.5150

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