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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Markets struck a calmer tone, with comments from PBoC policymakers helping to dampen volatility.

- Minutes from the ECB's July 16th meeting were dovish.

- US Retail sales were marginally stronger than expected on the back of solid upward revisions.

OUTLOOK UPCOMING TODAY: A pretty busy day today, with NZ Q2 retail sales at 10.45am and non-resident bond holdings at 3pm, and all eyes on the CNY.

CURRENCY: After a turbulent week, markets will probably end the week with reasonable stability. European Q2 GDP and US industrial production / Uni of Michigan confidence will be the key drivers.

RATES: With very little going in Kiwi rates in the offshore session and US bond yields higher, the short end will hold steady, but long end yields are likely to open with mild upward pressure, steepening the curve.

REVIEW

CURRENCY: Stability returned to the markets, with the USD/CNY closing below the fixing - signalling stability. The USD was bid due to retail sales revisions. EUR was offered due to dovish ECB minutes and soft CPI figures.

GLOBAL MARKETS OVERVIEW: Markets struck a calmer tone following comments from PBoC policymakers, who stated that there was no basis for the currency's constant depreciation and that the adjustment was already largely complete, which helped to dampen market volatility. After selling off during the Asian session, US Treasuries were largely range bound, with retail sales and jobless claims data eliciting little reaction. Core euro area sovereign bonds sold off, but their peripheral counterparts rallied, reversing yesterday's moves. European equity markets showed tentative signs of stabilisation following sharp declines over the previous two sessions, with the German DAX and Euro Stoxx 50 gaining 0.9% and 0.8% respectively. US stocks notched marginal gains, although energy stocks continued to weaken as oil prices slid further. Indeed, Brent and WTI crude oil prices declined a further 1.1% and 2.5% respectively, as supply concerns continued to dominate. Iron ore prices bounced 1.3% to USD57 per tonne following explosions at China's Tianjin port which has disrupted iron ore port shipments and operations.

ANZ'S ASSESSMENT ALL EYES ON CHINA STILL. So far, CNY has depreciated by a cumulative 4%, with the pace of depreciation slowing yesterday. The key question now is; what appetite do authorities have for further depreciation in the short term given that this change was meant to deliver a one-off devaluation, and given China's large stock of external debt? Global markets are still unsure what to make of it, with some saying it'll derail or slow Fed rate hikes, and some saying it won't. Some are focussed on the macro impact while others are trying to figure out what it means for financial flows. The volatility (and recent dramatic drop in yields) has certainly not helped demand for local bonds, with bid cover at yesterday's NZGS tender a paltry 1.8 times. We get non-resident bond data for July today - hopefully that's a bit more inspiring.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US Retail Sales gained 0.6% m/m (mkt: +0.6% m/m) in July, although June's sales were revised up to 0.0% m/m from a previously estimated 0.3% m/m decline. Retail sales (excluding autos) also printed in line with expectations, rising 0.4% m/m, although June's data were also revised upward. However, control group retail sales - which feed directly in GDP - were weaker than expected, gaining 0.3% m/m, against expectations of a 0.5% m/m increase. Overall, upward revisions implied the report was marginally stronger than expected and suggests that consumer spending was a little stronger than previously estimated in Q2 and got off to a solid start in Q3.

- US Initial jobless claims rose to 274k (mkt: 270k) from a downwardly revised 269k. The four-week moving average edged marginally lower to 266k from 268k. Jobless claims remain at low levels and are consistent with ongoing improvement in non-farm payrolls growth and further declines in the unemployment rate. Continuing claims (for the prior week) jumped from 2258k to 2273k, against expectations of a mild fall. While that's well up on May's low of 2204k, the long term trend remains extremely encouraging.

- Europe: Minutes from the ECB's July 16th meeting struck a marginally dovish tone. While the Bank noted that there was a "growing number of indications that a turning point [on inflation] might well have been reached" inflation still remained "unusually low." The Minutes also added that it was "too early to consider inflation expectations were firmly anchored again." In terms of the economy, the Minutes noted that "The recovery in the euro area was expected to remain moderate and gradual, which was considered disappointing." Given the subdued inflation environment, the risk remains that the ECB's QE programme runs beyond September 2016.

- Equities were a mixed bag, with rises across most (but not all - the FTSE100 being a key exception) European bourses, and US equities up slightly at the time of writing. Newswires attributed the strength to an easing of the shock value of the impact of the CNY's depreciation now that the pace of depreciation has slowed; and to better than expected US retail sales.

- Bond yields were also mixed but mostly higher, with the European periphery and EM markets bucking the trend. There still seem to be a range of views out there as to what the CNY news means for markets. UK Gilts, German bunds and US Treasury bond yields all moved higher overnight, suggesting a similar driver to equity moves. This is likely to set the tone for the New Zealand open today.

- Commodities were also mixed, with the broad CRB index down around 0.5% led by energy, precious metals and industrials. The good news (for NZ at least) is that grains and livestock were the key gainers. WTI crude hit a fresh cycle low, with the September future trading at around $42.20 at 7.15am NZT. Against this backdrop, it is somewhat surprising that fixed income markets have shrugged off earlier rallies.

NZD/USD: OVERARCHING THEMES...

With USD/CNY closing below the fixing last night, it seems that today's China fixing will be lower than yesterdays, thus China recedes as a driver for NZD. This leaves markets to focus on overarching themes, mostly of USD strength. US retail sales were solid last night, with positive revisions to prior months ensuring that the US consumer is supporting Fed normalisation. Tonight we get confidence and industrial production, both expected to support USD.

Expected range: 0.6530 - 0.6630

NZD/AUD: LABOUR MARKETS...

This cross remains comfortably mid-range, leaving little reason to act for either exporters or importers. NZ Q2 retail sales shouldn't upset this balance, but RBA Lowe's speech at midday on the Australian labour markets might.

Expected range: 0.8880 - 0.8980

NZD/EUR: A GREEK SURPRISE...

Soft CPI figures from Germany, France, Italy and Spain, along with ECB minutes continue to press the idea that QE will remain a feature in Europe. Greece delivered a notable surprise with their economy growing 0.8% in Q2, amidst all the bailout turmoil. Greek productivity clearly benefited from some uncertainty. Tonight EU Q2 GDP reads should keep EUR soft.

Expected range: 0.5860 - 0.5960

NZD/JPY: THE TREND MY FRIEND...

This cross continues to have downside risks, in line with recent trends.

Expected range: 81.20 - 82.20

NZD/GBP: POISED...

This cross held its poise over the last few sessions and is set to resume trend, although there is little GBP data on the horizon to drive it.

Expected range: 0.4180 - 0.4250

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