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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Market attention switches to the USD tonight, with Q2 GDP and the FOMC to drive market direction. Markets have been wary of buying USD ahead of tonight's headline risk. If expectations are met, USD should rally.

RATES: NZ rates are likely to open a touch lower in line with global moves.

REVIEW

CURRENCY: NZD fell after Fonterra downgraded the milk price forecast.

The 0.85 support has been tested, and direction depends on USD. Weaker Japan data drove some JPY weakness, but direction again depends on USD.

GLOBAL MARKETS: Our London desk reports a broad-based rally in European sovereign bonds and US Treasuries, attributed to large month-end extension buying and ongoing concerns in Ukraine/Russia (though implemented sanctions were taken in the markets stride). Equities were modestly stronger in Europe and little changed in US trade. Gold appeared to trade with little rhyme or reason today, rising quickly on the London open to the day's high of USD1312.50/oz before falling sharply on the US stock market open to record an intra-day low of USD1296.80. Overall the market appears happy to sell into the rallies/safe haven buying while physical flows remain muted. The CRB Index was lower, led by a 0.8% fall in oil prices.

KEY THEMES AND VIEWS

YANKY DOODLE LOOKING A BIT MORE DANDY. US consumer confidence stepped up to 90.9 from an upwardly revised 86.4 in June (far exceeding the 85.4 expected by the market), helping buoy the USD which is also being supported by the growing realisation that a change in stance from the Fed is a real possibility before the end of the year. The confidence figures represented the strongest result in the series since late 2007 and on the face of it bodes well for the household consumption and the broader economy. Of course the level is still low and we note weaker than expected Case-Shiller house prices in May, which fell by 0.3% m/m so everything needs to be put in perspective. Wages and income growth remain the missing link so attention will remain glued to Friday's payroll report. Though when it comes to US house prices we note the annual pace is still above 9%; that's a decent boost to household wealth. It's just a question of sustaining lifts in confidence for a decent period to encourage gains to be deployed into real-time spending.

WHACK. European sanctions against Russia announced overnight have been extended to include the oil sector (specified oil exploration and production equipment), defence (no surprises here), sensitive technology

(think anything that could have a military use) and long-term financing to state-owned Russian banks. On the face of it, this is the strongest action yet. No doubt we'll see more from the US side. That looks a step up in the arm-wrestle but markets appeared to take it in their stride, being largely anticipated, and we recall from last week that the Russian central bank raised interest rates 50bps. That was a move that had nothing to do with inflation. Rather raising the defences trying to get ahead of perceived capital flight risks and pressure on the Rouble. So the Rouble is down around 2% this week and the equity market by a similar margin; not immaterial but hardly capital flight stuff. In fact the past 24 hours has seen some respite after 3 days of selling in a manner akin to sell the rumour (of sanctions) and buy the fact, with the real fear, namely supply-disruptions across the energy sector, not materialising.

NZD/USD: Forecasts confirmed...

Fonterra downgraded their forecast for the milk price to NZD6.00 kg MS.

This is at the bottom of ANZ's 2 July forecast of NZD6.00-6.50kg MS.

Markets took this as a signal to test the 0.85 support and we sit on this level as we await tonight's US data. Provided Q2 GDP and the FOMC do not give reasons for a USD sell off tonight, we expect NZD/USD to continue to decline.

Expected range: 0.8430- 0.8580

NZD/AUD: Testing...

In a USD-positive environment we expect NZD to underperform the AUD.

Markets have tested through the 0.9060-80 support zone suggesting a test of 0.90 is on the cards.

Expected range: 0.9000 - 0.9090

NZD/EUR: CPI...

German and Spanish CPI releases tonight - along with EU confidence, are expected to keep pressure on EUR/USD. This pressure should mitigate NZD/USD falls leading to a slow decline in this cross.

Expected range: 0.6300 - 0.6380

NZD/JPY: JPY strength...

NZD weakness was combined with JPY weakness last night to mitigate falls. Japanese retail trade declined and the jobless rate increased, signalling more work for "Abenomics", which may weaken JPY. Japanese industrial production today is expected to deliver the same message.

Expected range: 86.40 - 87.40

NZD/GBP: Housing lending...

Despite net consumer credit declining to GBP400m (half of the GBP800m expected) mortgage approvals increased and net lending secured on dwellings was strong with positive revisions.

Expected range: 0.4980 - 0.5040

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