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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media


The NZD continued to step lower on Friday, weakening against the USD in line with other major currencies. NZD/USD closed 0.2% softer just above 0.8550.

The only local data on Friday failed to provoke a discernible reaction in currency markets, despite headline weakness in the ANZ business confidence release (see Fixed Interest). The market continues to mull the RBNZ’s words from Thursday, with chatter about possible intervention the main discussion point. We remain on the sceptical side of the debate, given that action to weaken the NZD would be inflationary, and run contrary to the current stance of monetary policy (disinflationary).

The market will not have to wait long to see whether the RBNZ put its money where its mouth (arguably) is. The Bank is set to release its intervention statistics on Wednesday. This will only cover the month of June, so in the absence of any discernible selling, the market might simply assume intervention (if any) only began in July.

We will also be keeping our eyes peeled for an update of Fonterra’s milk price forecast for 2014/15. It is due to announce its dividend intentions before the end of July, and this seems a likely juncture for a payout update. Since the first forecast of $7.00 was announced in late May, dairy prices have continued to slide aggressively while the NZD remained broadly resilient. Our current forecast for the season is $6.20. Anything below $6.00 will be sharply negative for NZD.

Today, we see support just above 0.8500, and resistance at 0.8620.


The USD was broadly stronger on Friday, with only a marginally stronger SEK preventing a clean sweep of the majors. That said, the overall moves were fairly small, with the US Dollar Index up a modest 0.2% to 81.0.

The EUR was hobbled by a disappointing IFO survey, where the ‘Business Climate’ indicator dropped to 108.0 from 109.4 expected and 109.7 previously. The ‘Current Assessment’ reading slid to 103.4 from 104.8 and the ‘Expectations’ index fell to 112.9 from 114.8. Further evidence then that the German economic recovery may already be past its peak. EUR/USD lost 0.3% to close at 1.3430, a new low for 2014.

The EUR’s loss was likely helped by signs that the EU was moving toward stronger sanctions against Russia. On Friday the EU agreed to impose asset freezes and visa bans on 15 Russian official and 18 entities. More significantly, European council President Herman Von Rompuy sent a letter to European prime ministers recommending the imposition of so called ‘Phase 3’ sanctions against Russia. According to the FT, this would ban Europeans from participating in the sale of new stocks and bonds of state-owned Russian banks, bar exports of high-tech equipment needed by Russian energy companies for deep sea drilling, Arctic exploration or shale oil projects, and impose an embargo on all weapons and ‘dual use’ goods sought by the military. Unsurprisingly, European equities took a bath, with the Euro Stoxx 50 off by 1.4%.

As a result, the euro-centric US Dollar Index starts this week on the front foot, at its best level since the start of February. Data due this week will determine whether or not this strength is justified, with the calendar packed with top-tier US releases. Wednesday sees the first reading of US Q2 GDP, where analysts are expecting a 2.9% (annualised) gain to completely reverse Q1’s loss of the same magnitude. That outturn comes just hours before the Fed’s FOMC is due to release its decision for July. This should be straightforward - another $10bn taper down to $25bn. But there will be intense interest on whether or not the Committee firms up its language on inflation or employment. On the latter, the monthly update of the US labour market is due on Friday, where non-farm payrolls are due to expand at a 200k+ pace for the sixth consecutive month. The unemployment rate is picked to remain at 6.1%.

As for the rest of the world, markets will be paying attention to Euro-zone inflation (Wed), and manufacturing PMI releases from Europe and China (Fri).

Fixed Interest

NZ swaps closed 2bps to 4bps higher on Friday, partially reversing the post-RBNZ slide. The 2-year swap yield rose by 2bps to 4.11%.

It was an understandably quieter day, with the local market looking forward to the weekend after a busy Thursday. The only local data of note was the ANZ business confidence survey, in which the headline confidence number dropped from 42.8 to 39.7 in July. But at 45.1, the "own activity" indicator is still consistent with growth well above what we and the RBNZ are forecasting. The details also showed rising pricing intentions and inflation expectations, which the RBNZ will note during its current pause in the hiking cycle.

US bond yields initially received a boost from the stronger headline readings for the June US durables goods orders report. Headline orders rose +0.7% against +0.5% expected, while orders ex-transport +0.8% versus +0.5% expected, and the capital goods non-defence ex-aircraft series gained +1.4% versus +0.5% expected. However after the initial reaction, weakness in the capital goods shipments number (-1.0% vs +1.3% expected) saw some analysts downgrading their Q2 GDP forecasts (some to now just a shade above 3%), and was one factor helping bonds reverse course. The 10-year bond yield slid 4bps for the day to 2.47%.

Today should see a sleepy open to an otherwise busy week. There are no local data due, and markets will likely maintain a holding pattern ahead of US housing and manufacturing data tonight.

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to

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