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ANZ NZ Morning Brief

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Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: It is a relatively quiet data day with consolidation in currency markets expected. NZD/AUD gains are expected to attract sellers. GBP may find further support from BoE testimony to parliament.

RATES: Local rates are expected to open higher in line with global moves.

REVIEW

CURRENCY: The NZD continued to decline as it followed AUD/USD capitulating through range lows. NZD/AUD gained as solid interest in the Kiwi in the mid 0.82's slowed the pace of NZD/USD declines.

GLOBAL MARKETS: Our London colleagues reported the health of the UK economy and the upcoming Scottish Independence Referendum remained the key focus for markets overnight (see below). Another poll was released, which showed the independence decision remains tight - the TNS survey places the 'yes' vote at 38%, just 1ppt behind the 'no' vote at 39%.

Euro area sovereign bond markets sold-off strongly in line with the move in USTs following the release of the San Francisco Fed paper suggesting investors could be underestimating how quickly the Fed may raise rates.

The UK gilt curve flattened however, with yields easing overall from their day's highs as the session progressed. European and US equities fell. The USD enjoyed a strong rally against the AUD, NZD and EM markets in particular. However, it was softer against the EUR and JPY. Gold prices moved sideways, while crude oil prices were are little changed.

KEY THEMES AND VIEWS

GOLDEN POINT TIME. It looks like the Scottish Independence Referendum is now going to go down to the wire, with last minute jockeying from the

'yes' and 'no' camps likely to keep markets on tenterhooks. This is despite a better run of UK data overnight and indications the BoE could start to raise interest rates in spring (our autumn) of 2015. Overnight data releases showed UK industrial production rose 0.5% m/m in July, its largest increase in five months and suggestive of output accelerating into Q3. The trade data were also supportive of strong growth with imports rising 3.9% m/m and exports up 2.1%, indicating that the earlier strength in the pound was not a barrier to competitiveness. Carney commented that interest rates could begin to rise by the spring of 2015, a move that would be consistent with the BoE's forecasts and 2%

inflation mandate. Ultimately the timing of the first rate hike will depend on the data, and it confirms that in line with better economic activity, the beginning of interest rate normalisation is not far off.

Markets have taken their eye off the position of the UK economy recently, but if last night's releases are anything to go to by, the recent softness has only been a pause in a dynamic upswing. As such, a

'no' vote in next week's referendum would see sterling rally sharply.

FROM FAMINE TO FEAST. Overnight US corn futures dropped to a four-year low and soybean prices remained under pressure. Near ideal growing conditions through the course of the growing season has boosted the prospect of record yields for both crops. There has also been sluggish demand with a porcine virus causing a 5% drop in the US hog herd, with previous droughts in the southern states resulting in the US cattle herd being at its lowest level in 60 years. Corn and dried distillers grains have also been rejected by China due to genetic modification issues.

This has meant far fewer exports to China.

NZD/USD: USD strength...

The NZD/USD was under continued pressure from the USD as the AUD/USD capitulated to USD strength dragging NZD/USD with it. NFIB small business optimism improved more than expected, while the JOLTS report maintained June levels, giving little reason to accelerate USD buying.

Expected range: 0.8200- 0.8260

NZD/AUD: AUD plays catch-up...

The AUD was hit hardest yesterday as the decline in NAB business confidence gave markets an excuse to buy USD's against the AUD. We would expect this cross to be under pressure, reversing recent moves, into tomorrow's RBNZ monetary policy meeting.

Expected range: 0.8920 - 0.8960

NZD/EUR: Dutch come to the party?

The French budget and trade deficits increased as expected, but Dutch industrial production and sales both improved in July reversing trend weakness. French industrial production should continue trend declines.

Expected range: 0.6340 - 0.6400

NZD/JPY: NZD driver...

NZD weakness drove this cross lower as JPY consolidated. The Tertiary industry index was flat in July, with consumer confidence continuing to decline. The data remains clear in that further policy reforms are required.

Expected range: 87.10 - 87.90

NZD/GBP: The UK economy is still strong...

Sterling outperformed NZD overnight after stronger than expected data, with the speech by BoE Governor Carney reiterating that UK rates could begin to rise by spring of 2015.

Expected range: 0.5120 - 0.5200

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