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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD was the best performing major against the USD last night, though to be honest, it did not take much. NZD/USD is just 0.2% higher at 0.8380.

Yesterday, the Q2 terms of trade data managed to turn a few heads. Defying every economist polled, the terms of trade actually rose on a quarterly basis, up 0.3% q/q (vs -3.5% expected). While the headline reads positively, it actually hides negative undertones. For one thing, while exports fell (as broadly expected), import prices fell faster, which is disinflationary. Second, the fall in export volumes (-5.3%) was on the hefty side of estimates, and puts a downside bias on Q2 GDP growth. But in a sleepy trading session, the NZD hardly budged.

Today, we expect to see another decline in the monthly ANZ commodity price index, to the tune of 3.4%. Note also that Fonterra’s GlobalDairyTrade auction will take place overnight.

Initial support and resistance levels are unchanged from yesterday, at 0.8300 and 0.8420 respectively.

Majors

With US markets closed for Labor Day, it was another day in the doldrums, as many market participants feared. Major currencies were limited to trading within 0.2% of Friday’s closing levels against the USD. At the very margin, the USD strengthened, with the Bloomberg Dollar Spot Index eking out a 0.1% gain.

If there was a theme for yesterday, it would likely centre on manufacturing data. The two PMI readings for China confirmed slips in the pace of manufacturing activity in August. The HSBC version managed to worsen from its flash reading of 50.3 to print a final 50.2, barely in expansionary territory. Chinese equity markets interpreted this as a sign that officials may move to bolster the economy. The Shanghai Composite gained 0.8% for the day.

In Europe, where governments are hardly in a position to provide any similar scale of fiscal stimulus, the news was little better. The final reading for the euro-zone PMI saw the headline index dip to 50.8 in August, from an initial reading of 50.7, and a much healthier 51.8 in July. This does not bode well for GDP growth for Q3, after the flat reading in Q2. For what it’s worth, German Q2 GDP was confirmed to have contracted by 0.2% q/q, though with some compositional adjustments (investment weaker, trade stronger).

Even the UK, until recently a G10 outperformer, looked sickly. There, the headline PMI plunged to 52.4 in August, from a revised 54.8 in July (prev. 55.4). That outturn was worse than forecast by any economist. Our London-based NAB colleagues see GDP growth slowing in Q3, after the strong 0.9% q/q print in Q2.

Tonight, the highlight will be the US ISM manufacturing index. Ahead of that, the last of Australia’s GDP partials will be released (net exports, government spending). Yesterday’s inventories data for Australia were better than expected, but NAB’s forecast for Q2 GDP (due Wed) remains at +0.2% q/q.

Fixed Interest

NZ interest rates were marked higher at the open yesterday, but there was little follow-through from there. The apparent appetite from local mortgage books and corporates to pay fixed rates helped the 2-year swap close 1bp higher at 4.08%.

Globally, bond markets were fairly subdued, given the US Treasury market was closed. German 10-year bonds slipped a further 1bp to 0.88%.

In terms of the ECB meeting on Thursday, market pricing suggests a 50% chance the Bank will cut its policy rate by 10bps. In contrast, only 5 of 47 analysts surveyed by Bloomberg expect a change in rates. We sit with that camp.

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to www.research.bnz.co.nz.

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