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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: NZD/AUD may get a catalyst to break support from RBA Steven's semi-annual testimony today. Overnight, attention will firmly be on central bankers with BoE minutes and FOMC minutes scrutinised for signals.

RATES: NZ rates are likely to open unchanged in line with US moves.

REVIEW

CURRENCY: USD was in demand across all currency pairs as US housing indicators suggest that housing is catching up to other recovery indicators. NZD remained under pressure after GDT delivered mixed results.

GLOBAL MARKETS: A good run of US data gave the USD a boost overnight and saw USTs yields finish the session little changed after initially been weaker (see details below). European sovereign bond markets enjoyed a modest fall in yields, particularly in the periphery. The catalyst was a weak UK CPI report for July, which significantly undershot market expectations. No new geopolitical news helped equities. Euro area bourses have recovered all the ground that was lost following the end of last week's rout on Ukraine-Russia headlines, and UK and US stocks also performed well. Gold prices eased in line with the stronger USD. Crude prices weakened, with WTI particularly hit hard with investors rotating out of the September contract before it expired.

KEY THEMES AND VIEWS

US STILL LOOKING THE GOODS. There was a decent run of US data overnight with inflation hitting expectations and housing market activity picking up. Headline CPI rose by 0.1% m/m and 2.0% y/y as expected, while core inflation was 1.9% y/y. Energy prices fell by 0.3% m/m, but this was offset by a 0.4% m/m rise in food prices. The recent slowdown in the pace at which core consumer prices are rising eases some of the pressure on the Fed to start considering rate hikes, although only temporarily, with a further decline in the amount of space capacity to push core inflation above 2% in early 2015. Housing activity data was also better, following on from a stronger NAHB housing market index earlier in the week. Housing starts came roaring back in July, rising 15.7% to an annualised pace of 1093k. Single family home starts rose by 8.3% m/m, while multi-family units (apartments) rose by 28.9% m/m. Meanwhile, building permits increased 8.1% to an annualised pace of 1052k with most of the growth concentrated in multi-family unit permits. Revisions to June permits and starts data were also positive. Elsewhere headline UK CPI fell by 0.3% m/m to see the annual pace soften to 1.6% vs 1.9% in June. Core inflation was also lower than expected at 1.8% vs 2% in June, and upstream price pressures remain muted.

FIRST SIGNS OF STABILISATION? Overnight the GDT dairy auction prices showed some tentative signs of stabilisation. The TWI declined by 0.6%

with four products registering declines and three improving.

Importantly, wholemilk powder showed the first signs of stabilisation in two months, bouncing off recent lows to be up 3.4% to US$2,804/t. There was improvement across all contract periods, except for February.

However, the slope of the curve was only slightly upward pointing and combined with a 12% fall in skimmilk powder prices only portrays of bargain hunting and consolidation as opposed to a strong recovery. A bounce back is required if Fonterra's current farm-gate milk price of

$6/kg ms is to be achieved as there is still a material gap between this and the prices achieved in the last two auctions.

NZD/USD: Housing strength and a flat dairy curve...

The USD was bid across the board after US July housing starts surged, and the June decline was revised higher. The FOMC minutes have potential for a USD positive surprise, with markets expecting little. The GlobalDairyTrade auction showed stabilisation in prices, but a drop in SMP and flat WMP prices across the curve don't point to a rebound, keeping NZD under pressure.

Expected range: 0.8380- 0.8460

NZD/AUD: Testing support...

Markets focused on the mild reduction in inflationary expectations contained in the Q2 PPI and RBNZ 2yr inflation expectations, along with the RBA minutes noting a material loosening of financial conditions in Australia (thanks to lower mortgage rates). This has sent the cross to test support once again. Today's RBA testimony may be the impetus for a break.

Expected range: 0.9000 - 0.9100

NZD/EUR: Bundesbank pessimism...

EUR/USD was driven lower by US data, but NZD/USD is still outpacing it.

The European current account surplus was lower on a seasonally adjusted basis.

Expected range: 0.6270 - 0.6340

NZD/JPY: Marking time...

Both JPY and NZD are responding to USD events, with NZD outpacing JPY declines. For now NZD and USD events will dictate direction.

Expected range: 86.20 - 87.00

NZD/GBP: Weaker CPI, BoE Minutes...

GBP was again sold after CPI measures declined more than expected, giving the BoE time to be cautious. BoE minutes tonight, will be scrutinised for BoE bias, with active consideration of the timing of normalisation required to arrest GBP/USD weakness.

Expected range: 0.5040 - 0.5110

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