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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The week starts quietly, with no data from Australia, New Zealand or Asia expected today. The Markit Services PMI from the US will be a minor release of note as markets await larger US data releases.

RATES: NZ rates are likely to open under downward pressure in line with global moves.

REVIEW

CURRENCY: EUR traded to new 2014 lows after German confidence continued to decline. GBP found support from 3.1% y/y GDP growth in Q2, while USD was broadly bid as optimism continues to grow.

GLOBAL MARKETS: A disappointing German IFO business sentiment survey dominated sentiment on Friday. Equities fell steadily through the London afternoon on Friday as major company earnings results missed expectations (LVMH and Statoil in Europe, Amazon and Visa in the US).

Equity indexes ended down on both sides of the pond. Sovereign bonds rallied in this environment, with more negative headlines on the situation in Ukraine aiding the move. The bellwether US 10 year bond yield and 10 year UK gilt yields were both down 4bps. Commodities ended the week on a positive note, with energy, gold higher, and corn and wheat all rising.

KEY THEMES AND VIEWS

WHAT DO THE MACS SAY? The Reserve Bank of New Zealand last week called the level of the NZD "unjustified" and signalled a pause in the hiking cycle, successfully knocking 1.5c off the currency. We are still in a world where most countries would like their currencies to depreciate in order to boost export growth - and in some places, reduce deflation risk. Exchange rates are a relative price, meaning depreciation is not possible for all, with races to the bottom not tending to end well. But who has the most justification to be miffed at the strength of their currency at present? The Economist's Big Mac index light-heartedly compares currencies vs. the USD on a purchasing power parity basis using a single good, a Big Mac. The most "overvalued" by this measure is the Norwegian krone (USD7.76), and the most "undervalued" is the Ukrainian hryvnia (USD1.63). The Chinese yuan, "once the most undercooked currency in the index" is now only the 12th-most undervalued. The USD has broadly strengthened over the past 5 years, pushing the GDP-weighted average valuation from roughly neutral in 2009 to 15% undervalued against the USD today. At July 23 market exchange rates, a NZD5.90 Big Mac is USD5.11, more "overvalued" than Australia's USD4.81, the UK's USD4.93, or the euro area's USD4.95 (all around "fair value" vs. the USD with the US price at USD4.80), but not as dear as Canada's USD5.25 or Brazil's USD5.86. Upshot: the RBNZ has a point.

OTHER EVENTS AND QUOTES

- The German IFO survey fell more than expected in June, driven by a fall in both the current and expected conditions series. However, the indexes remain at elevated levels, and the flash PMIs the day before were more positive. Euro area M3 money supply growth was stronger than expected, raising hopes for a recovery in monetary conditions and a basing in inflation. The first estimate of UK Q2 GDP printed on expectations, with growth led by the services sector, while construction took a breather. The level of UK economic activity has finally recovered to above its pre-crisis peak of early 2008.

NZD/USD: USD focus...

ANZ is expecting Fonterra to update their milk price forecast this week, but otherwise the week has a distinct USD focus. Tuesday night brings the advance read of Q2 GDP, which will need to be strong or this cross will find solid support. The FOMC meeting the same night should be a relatively quiet affair, while the week ends with the monthly ISM manufacturing survey and non-farm payrolls.

Expected range: 0.8520- 0.8590

NZD/AUD: Consolidation...

There are no scheduled AUD or NZD releases that are likely to impact this cross. As such we expect this cross to consolidate at current levels.

Expected range: 0.9060 - 0.9140

NZD/EUR: Confidence...

German IFO confidence fell more than was expected on Friday. EUR looks set to remain under pressure as well, keeping this cross supported.

Expected range: 0.6340 - 0.6400

NZD/JPY: CPI...

Both the National and Tokyo CPIs fell on Friday, but both had positive elements to the report. JPY, like NZD, will follow USD data this week, leaving this cross a dampened version of NZD/USD.

Expected range: 86.60 - 87.50

NZD/GBP: Q2 GDP...

UK Q2 GDP met market expectations, growing at 3.1% y/y. Later this week we get the July UK updates to manufacturing activity, expected to outperform other developed nations.

Expected range: 0.5000 - 0.5060

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