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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: We would expect USD to find a cautious bid, as markets search for answers to the USD sell off. Australian employment will drive NZD/AUD, while the ECB should keep EUR capped overnight.

RATES: NZ rates are likely to open with a bias lower and a flattening in the curve following overseas moves.

REVIEW

CURRENCY: A large sell flow in USD/JPY on the CME (20% of daily volume in 5 minutes) is regarded as having triggered USD selling. AUD, CAD, NZD, and JPY all posted solid gains against USD, while EUR and GBP saw smaller gains.

GLOBAL MARKETS: Rising geopolitical tensions set the market tone, with the Polish PM Tusk warning of a growing risk of a Russian invasion of the Ukraine. US equity indices are currently unchanged on the previous close, whilst the 0.2% fall in Q2 Italian GDP and the softer tone to European data contributed to the 0.7% fall in the Eurostoxx and FTSE 100. Core sovereign bonds rallied (US 10yr Treasuries down 1bp to 2.47%, German 10 year bunds down 7bps to 1.1%), with yields lifting in Italy

(+6bps to 2.81%) and the Eurozone periphery. Safe haven demand contributed to rises in gold and silver prices, whilst oil prices fell.

KEY THEMES AND VIEWS

SILVER LININGS. While the NZ story is not as ambiguously strong as it was a few months ago, there is still much to crow about. The NZ jobs machine rolls on with 82,000 jobs created in the past 12 months, and New Zealand's unemployment rate hitting a five year low in contrast to the flattish 6% rate across the ditch. Were it not for prior lifts in labour force participation (the 3rd highest on record at present), New Zealand's unemployment rate would be closer to 4% by now. Yes, lower dairy incomes will have an impact, but courtesy of the 6%+ annual growth in nominal labour incomes, overall household incomes will keep going up, underpinned by more jobs and rising wages. More widespread gains are a clear plus for consumer spending. The Canterbury rebuild rolls on, net PLT immigration is on track to hit record highs, and we have only observed a mild increase in actual mortgage borrowing costs despite 100bps of OCR lifts. Barring global meltdown, the next move in the OCR will be up, leaving carry as a key NZD support.

SOLVENCY CONCERNS. The 0.2% drop in Italian Q2 GDP (-0.3% y/y) confirmed Europe's fourth largest economy ended H1 in recession, and with public debt at more than 130% of GDP and growing, fiscal solvency fears are likely to resurface. Hard to fathom why Italian 10 year bonds are only 35bps above US counterparts at present. While the 0.9% June lift in Italian industrial production was a step in the right direction, the economy needs to quickly return to the growth path and funding costs remain low so that another nasty fiscal accident is avoided. An ageing population adds to woes.

OTHER EVENTS AND QUOTES

- US trade deficit narrows: The decline in the deficit to USD 44.5bn, a five month low, suggests that the 4% annualised Q2 GDP print will be revised up. Imports fell by 1.2% m/m, whilst exports edged up by 0.1% m/m.

- UK industrial production disappoints: Weakness in mining and quarrying (-1% m/m) and oil and gas (-1.3% m/m) contributed to the softer than expected 0.3% rise.

NZD/USD: USD selling...

NZD/USD rose after the USD was sold across the board overnight. A large sell trade in USD/JPY triggered the selling, but spread to other crosses. Despite the safety bid, AUD was the largest gainer, dragging CAD and NZD along for the ride.

Expected range: 0.8440- 0.8520

NZD/AUD: Australian Employment...

Australian employment will drive this cross today, although markets are expecting an unchanged 6% unemployment rate. This cross spent much of the night consolidating on yesterday's declines.

Expected range: 0.9040 - 0.9120

NZD/EUR: ECB...

Markets are expecting the ECB to keep the pressure on the EUR tonight.

Italian industrial production strengthened last night, but was quickly overshadowed by weakness in Q2 GDP which declined 0.2% q/q.

Expected range: 0.6310 - 0.6370

NZD/JPY: Brief dip...

Apart from a brief dip when USD/JPY was sold, this cross remained stable overnight, consolidating on yesterday's decline.

Expected range: 86.20 - 86.80

NZD/GBP: Weak data ahead of the BoE...

British Industrial and Manufacturing production continued its disappointing run. The data undershot expectations, with production only growing 0.3%. The July NIESR GDP estimate was also weak growing at 0.6%

down from 0.8% in June. The BoE should remain unchanged tonight.

Expected range: 0.5010 - 0.5080

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