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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: After a large positive surprise in July the August NAB business confidence seems unlikely to provide further support for AUD.

GBP see sustained pressure from industrial and manufacturing production.

RATES: Few kiwi trades reported in London overnight, with local rates expected to open unchanged this morning.

REVIEW

CURRENCY: GBP consolidated against the NZD, but continued to decline against USD. The USD found a broader bid after the San Francisco Fed published a report stating the markets underestimated the path for rates.

GLOBAL MARKETS: Our London colleagues reported a quiet session, with the focus on the September 18 referendum on Scottish independence (too close to call according to polls). Continued skirmishes were reported in the Ukraine, raising fears that the September 5 ceasefire may be in jeopardy. There was little reaction to the data (weaker than expected Eurozone investor confidence, stronger than expected German trade balance). Equity indices on both sides of the Atlantic were down slightly, with US, UK and core Eurozone sovereign bond yields up a touch, with higher rises for Spain and Italy. The stronger USD contributed to a 0.5% fall in the CRB index, with falls for precious metals and oil futures.

KEY THEMES AND VIEWS

CAT AND MOUSE. Research released overnight by the San Francisco Fed suggests that the low volatility across financial markets may signal investors are underestimating how quickly the Federal Reserve will raise interest rates, with the public seeming to expect a more accommodative policy stance than FOMC participants. Forecasting is a tricky business and the concern is that the public are discounting the conditionality on the outlook conveyed by the Fed. With the US economy appearing to have already hit escape velocity, the risk is that Fed tightening could inflict collateral damage to asset prices and disrupt the five year old US economic expansion. Unless, however, investors know this and are counting on the central bank put.

PONDERING THE RBNZ. The NZ economy is coming off the boil, with a few potential catalysts including the 100bps of OCR hikes, pre-election uncertainty, falling dairy commodity prices, and the still mixed rate of global expansion. However, there still remain a number of demand side supports underpinning the expansion. The NZD TWI is broadly where the RBNZ expected it to be back in June, although the currency is arguably more restrictive given sizeable commodity price falls in key sectors of late. The inflation outlook is what matters to the central bank, and the conjecture at number 2 the Terrace may likely centre on why outturns for headline and core inflation have remained so low (i.e. sub 2%) despite the economy adjudged to have a positive output gap. Reasons for the better than expected inflation and activity trade-off can either reflect transitory or more enduring influences, both of which will have implications for NZ interest rate settings and the NZD.

OTHER EVENTS AND QUOTES

- Nato's Deputy Secretary General Vershbow: "Russia is not prepared to respect the sovereignty of its neighbours and their freedom to choose their international orientation"... "And that's the root of the conflict with Ukraine." UN estimates suggest the conflict has claimed 3,000 lives since mid-April.

NZD/USD: Underestimating...

The USD found a bid overnight as NZD/USD broke to a new cycle low just above 0.8260. A report by the San Francisco Fed researchers that markets are underestimating the path of rate rises saw the USD bid reinforced.

Expected range: 0.8240- 0.8340

NZD/AUD: Can business confidence meet lofty expectations...

AUD was under pressure yesterday as weak AUD/USD positioning was squeezed out as USD found support. NAB business confidence and conditions was unexpectedly strong in July, thus August has lofty heights to meet and risks disappointing.

Expected range: 0.8880 - 0.8940

NZD/EUR: German resurgence redux?

The German trade and current account surpluses were significantly above expectations in July (with positive revisions to June) as German exports grew 4.7%. Q2 labour costs also increased and French business confidence improved against expectations for declines. Despite this the EUR made a new cycle low breaking below 1.29 against the USD.

Expected range: 0.6360 - 0.6440

NZD/JPY: Stimulus required...

Yen weakness continues to drive this cross higher. Q2 GDP and the Watchers survey both highlighted the need for increased stimulus from

"Abenomics", which is driving market expectations.

Expected range: 87.40 - 88.30

NZD/GBP: They will never take our freedom...

The Scottish independence vote continues to dominate GBP keeping it weak. However, aside from the decline on the open, USD buying impacted both NZD/USD and GBP/USD relatively equally.

Expected range: 0.5120 - 0.5200

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