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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD/USD sits a little lower, at 0.8750, this morning.

Yesterday’s release of the ANZ business survey for June showed business confidence falling to 42.8 from 53.5 previously. The ‘own activity’ indicator slipped to 45.8, 12.4 points below its February peak. The level of this index is still consistent with GDP growth of around 5.0% (above our own peak pick of 4.3%). However, as we anticipated the currency responded to the loss of momentum rather than the outright level of the index. The NZD/USD slipped from above 0.8780 to evening lows below 0.8730. It has subsequently clawed its way back to trade at 0.8750 this morning, assisted by broad USD weakness overnight.

The NZD is also softer on most of the major crosses. The NZD/EUR and NZD/GBP extended recent pullbacks. The NZD/GBP trades around 0.5120 this morning. In the bigger scheme of things it remains well within the broad 0.4900-0.5300 range that has contained it for the past year.

Heading into today’s RBA meeting and China PMI releases (see Majors), the NZD/AUD sits at 0.9290. The China data may prove the greater influence on the AUD if the RBA toes a familiar line. Any negative surprise on the China PMI data would boost the NZD/AUD although likely take its toll on the NZD/USD.

In the early hours of tomorrow morning, we also have the latest GDT dairy auction scheduled. We think prices have a bit further to fall yet, and see last auction’s 0.9% rise in prices as a relief rather than a game changer. NZD/USD support will be found approaching overnight lows around 0.8730. Resistance will be encountered approaching 0.8800.

Majors

The USD was weaker again overnight, in the backdrop of fairly quiet markets. European currencies were key beneficiaries.

Equities provided fairly flat returns overnight. It was also a fairly quiet start to the week in credit markets. Our global risk appetite index (scale 0-100%) remains at a healthy 82%.

Currencies traded tight ranges until the early hours of this morning. There was little response to last evening’s Eurozone CPI data that showed core inflation rising at 0.8%y/y (0.7% expected). This is unlikely to be sufficient for the ECB to change its future course of action. i.e. intended further policy stimulus.

Later, in the early hours of this morning, the release of the Chicago PMI, which slipped from 65.5 to 62.6 (63.0 expected), prompted the greater response. The USD index slipped from 80.00 to 79.80. This was despite subsequent strong US pending home sales data for May (6.1%m/m vs. 1.5% expected).

As the US slipped, European currencies benefitted. The EUR/USD rose from 1.3650 last evening to sit above 1.3690 this morning. Similarly, the GBP/USD rose from 1.7040 to trade above 1.7100 currently. This is the currency’s highest level since October 2008.

As we approach the RBA’s meeting today the AUD/USD trades just below 0.9430, having traded as low as 0.9390 intra-night. We expect the Bank to restate its neutral stance today (see Fixed Interest). Key resistance for the AUD/USD remains at the April highs of 0.9460. Support should be encountered approaching 0.9380. Other crucial data releases for the AUD today will be the official and HSBC readings of the China manufacturing PMI (1pm and 1.45pm NZT respectively). Both are expected to remain above the critical 50 level that demarks expansion from contraction.

Tonight, Eurozone unemployment data will be released. The Eurozone and UK PMI will also be released along with US ISM prices paid data. The latter have taken on greater importance as the market attempts to gauge whether the recent tick-up in US inflation data is, in fact, just "noise" (US Fed Chair Yellen).

Fixed Interest

In a quiet day of trading, NZ swaps and bonds closed virtually unchanged yesterday. Overnight, US 10-year yields traded a tight range.

NZ 2 and 5-year swap closed at 4.20% and 4.59% respectively. Yesterday’s ANZ business survey confirmed slowing momentum in the NZ economy. This may draw offshore receivers back into the NZ market, capping short-end yields below ‘fair value’. We continue to see 2-year ‘fair value’ at 4.40% based on our OCR forecasts.

Today marks the first day of the 2014/2015 fiscal year. The NZ DMO previously announced they intend to launch their new 2027 bond in the first half of 2014/2015. We are therefore alert to the potential for further announcements soon.

Overnight, there was limited reaction to release of Eurozone CPI data. Yields on German 10-year bunds remain near historic lows, at 1.25%.

Meanwhile US 10-year yields briefly spiked above 2.54% overnight after stronger than expected US pending home sales data for May (6.1%m/m vs. 1.5% expected). Subsequently yields have returned to trade at 2.52%.

Today, there are no domestic data releases scheduled. Across the Tasman we anticipate the RBA will maintain its neutral stance. But we anticipate it will keep alive the debate about whether monetary policy is accommodative enough to rebalance the economy. The market currently prices a 35% chance of a 25bps rate cut from the RBA in the year ahead. We agree the chances of a rate cut are higher than of a rate hike in the coming year.

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