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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Australian Q2 GDP should keep pressure on NZD/AUD today, while attention switches to the global service sector, with general risk perception driven by the Chinese, European, and UK service PMIs.

RATES: Local yields are expected to open higher following global moves.

REVIEW

CURRENCY: The USD was bid after the ISM surged, with broad based strength evident. NZD was under sustained pressure after the GlobalDairyTrade auction showed further declines with weak details.

GLOBAL MARKETS: The main release overnight was the US ISM manufacturing series for August. It didn't disappoint, printing a strong headline result of 59 (exp. 57) and had robust details (see below). This set the tone for a generally stronger USD, especially against NZD and AUD.

Commodity prices eased on the back of the stronger USD, especially precious metals and energy (crude oil). The ISM also supported the case for earlier interest rate rises from the Federal Reserve. This led to a steady sell-off across European and US sovereign bond markets, with 10yr yields rising 5-7bps in the core markets. Equities eased with yields higher, but were largely unchanged with few other macro releases, or headlines of note to stimulate direction.

KEY THEMES AND VIEWS

THE GOOD: Starting with the good news from overnight: the US economy looks to be starting to reach escape velocity. There was a further surge in the ISM manufacturing index to a three-year high of 59 in August, while July construction spending rebounded. This supports other signs of a strong and broad-based US recovery. The detail of US ISM pointed to additional strength with the new order component, which is the most forward looking component jumping to a 10-year high of 66.7. Other points of strength were new export orders, production and prices paid.

Combined with the alternative Markit manufacturing PMI (57.9) this points toward strengthening momentum in the US manufacturing sector. The employment index was steady, which given the focus of the Fed on the labour market might slightly discount its effect on earlier interest rate rises. However, the level is still buoyant and supports our view of an above consensus print for non-farm payrolls this Friday of 260k.

THE BAD AND THE UGLY. The not so good news overnight was another drop in dairy prices. The GDT-TWI registered a 6% drop, with declines across all products. The market appears to be struggling to digest the seasonal lift in New Zealand supply and the recent Russian sanctions on EU dairy exports looks to be flowing through in full force. The effect of the Russian bans is showing up in skim-milk powder, which last night dropped a further 9.5% and is now back 26% since sanctions were announced. In times of surplus milk, Europe gravitates toward SMP (and butter)

production due to a longer shelf life compared with other products and government support programs. So despite European supply now heading into the seasonally lower period and the European Commission announcing last week they will open Private Storage Aid until the end of the year the market seems to be anticipating high supplies. Dairy farms will need to budget accordingly with a material gap between current spot prices and Fonterra's current $6/kg MS forecast. We would suggest toward the bottom of our current forecast band of mid-to-high $5's/kg MS. But even this looks optimistic given last night's results.

NZD/USD: US accelerating, while dairy stagnates...

Stay short NZD/USD. The USD was bid as the US economy continues to accelerate. The ISM increased to 59, with broad based strength evident in the details - seventeen of eighteen sub-industries reporting growth.

The dairy auction declined 6% with poor details putting NZD under continued pressure.

Expected range: 0.8260- 0.8350

NZD/AUD: Q2 GDP...

ANZ forecasts a strong Q2 GDP for Australia today. The consensus is for 0.4% q/q, while ANZ is expecting 0.6% q/q. This should keep NZD/AUD under pressure. However, we caution against reading too much into one quarter, as the non-mining recovery remains tentative. RBA Governor Stevens is also giving a speech, which may temper any AUD gains.

Expected range: 0.8900 - 0.8980

NZD/EUR: Services PMIs...

European services PMIs are forecast to remain unchanged, albeit in expansionary territory, a counter point to weakness in manufacturing.

However, EU retail sales are forecast to contract, and markets are likely to keep pressure on EUR going into the ECB tomorrow night.

Expected range: 0.6280 - 0.6360

NZD/JPY: Yen weakness countered by kiwi...

USD/JPY has been a star performer breaking up into a new range, but NZD declines have mitigated some of this impact.

Expected range: 87.00 - 87.80

NZD/GBP: Construction activity...

Construction activity surged in the UK, and the Services PMI is expected to maintain strength. However, the GBP is increasingly pricing in risk of a Scottish "yes" vote which would send GBP significantly lower.

Expected range: 0.5020 - 0.5070

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