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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The ECB is the focus, with the potential for further liquidity to be added to the global system, supporting currencies with yield. We see this month as too early for such a program, and see risks of a EUR bounce.

RATES: Local yields will open a tad higher, with a curve steepening bias.

REVIEW

CURRENCY: NZD/AUD broke to new cycle lows after RBA Governor Stevens ruled out further interest rate cuts.

GLOBAL MARKETS: Despite a flurry of data releases, overnight was really all about Ukraine-Russia headlines. This left EUR and GBP unable to participate in a broader recovery against the USD. Early headlines of a ceasefire agreement between Russian President Putin and Ukrainian President Poroshenko triggered an initial risk-on move. However this statement was quickly refuted (a Putin spokesman said that Putin and Poroshenko did not agree on a ceasefire because Russia is not a party to the Ukraine conflict) which saw the spurt of better sentiment unwind somewhat. Only later was this clarified as an agreement of support from the two leaders on a "ceasefire process" - certainly good news in the end, but a messy way to get there. Equities and bond yields were generally higher, but yields are not as high as they were immediately after the "ceasefire" news.

KEY THEMES AND VIEWS

LOWER DAIRY PRICES STILL SINKING IN? Price action in the NZD has been pretty whippy in the past 48 hours, with it initially on the skids on Tuesday after the USD/JPY surge, only to get hammered again after yesterday's weak GDT dairy auction result. But its time below 0.83 was short-lived, and in fact it seemed to bounce on the Ukraine "ceasefire"

news, presumably on the view that less war is better for risk? Who knows, and at the end of the day it's just detail, and frankly, ranges have been pretty tight given the seriousness of the news flow. Indeed, as we detailed in our "NZ Dairy and RBNZ Update" thought piece released at 4.30pm yesterday (and available on request if you missed it), we have lowered our 2014/15 milk price forecast to just $5.25, and now think there's a case to be had for the RBNZ to move to a more neutral policy stance. Along with the sour global scene, the turn in domestic confidence and weakness in housing underneath the bonnet, this is big news. Yet the NZD and front end interest rates have barely budged.

READING BETWEEN THE (HEAD)LINES. We thought today's Bloomberg's "Top Bond" news stories were worthy of a passing comment - not so much for what each headline itself reads, but rather what they imply as a collection. Indeed, the following headlines seem to sum up the mood well

- i.e. that nobody is prepared to step up to the plate and sell bonds just yet, with the world still a pretty ugly and precarious place. First up was "Treasuries Erase Losses on Refuge Demand Amid Ukraine Skepticism", followed by "Investors See No Inflation Buying Bonds on ISM's Growth Surprise" and "Home Buyers Lose as Treasury Rally Skips Housing: Credit Markets". Perhaps unwittingly, Bloomberg has cut to the core of the mood in bond markets: scepticism in politicians and inflation, and what still seems to be a lack of policy traction where the rubber hits the road - i.e. where everyday people and businesses borrow. In that regard (albeit in Europe), we look forward to the ECB meeting tomorrow, and perhaps some clarity on an asset purchase programme.

NZD/USD: Held up by AUD...

The NZD/USD was held up by a strengthening Chinese service sector, with the HSBC Service PMI rebounding to 54.1 from 50 and the official series increasing to 54.2. AUD/USD buying also supported NZD/USD, as it outweighed NZD/AUD selling. However, we have lowered our Fonterra dairy payout forecasts, and expect the RBNZ to switch to a more neutral policy stance next week, thus we expect further declines in NZD/USD.

Expected range: 0.8260 - 0.8350

NZD/AUD: No more cuts...

NZD/AUD broke lower after Australian Q2 GDP was above forecasts, and more importantly RBA Governor Glen Stevens reinforced the view that the hurdle to another cash rate cut is very high. Strength from the Chinese Service sector also supported AUD over NZD.

Expected range: 0.8880 - 0.8940

NZD/EUR: All about the ECB...

European services PMIs were weak last night upping the ante on the ECB tonight. EUR volatility should be expected, with markets looking for a firm promise of further policy action, and some expecting policy action tonight. We see risks to the downside for this cross from tonight's meeting.

Expected range: 0.6240 - 0.6380

NZD/JPY: BoJ...

The BoJ is not expected to change policy this afternoon, but risks are for further stimulus supporting this cross.

Expected range: 86.80 - 88.00

NZD/GBP: Services and the BoE...

Services surged last night regaining the 60 area. The BoE is not expected to change policy tonight, but surprises would support GBP.

Expected range: 0.5040 - 0.5090

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