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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- A very quiet start to the week with the US on their Labor Day holiday.

- China’s FX reserves recorded the largest monthly decline on record.

OUTLOOK

UPCOMING TODAY: It’s a busy day for local releases, with August readings for the activity and pricing sides of the economy from the ANZ Truckometer (10am) and the ANZ Monthly Inflation Gauge (1:00pm). A moderate increase is expected for Q2 manufacturing sector volumes at10:45am, with our Q2 GDP pick currently a modest +0.3% quarterly increase. The NAB business confidence survey for August is the pick of the Australian data. Chinese August trade data is due to be released today.

CURRENCY: ANZ proprietary indicators will set the tone for the NZD this morning, while AUD will look to NAB business confidence and today’s RBA speech on property markets and financial stability. However the event for the day is likely to be Chinese trade.

RATES: There is marginal upward pressure for kiwi rates, with some payside interest evident in London overnight.

REVIEW

CURRENCY: The NZD underperformed overnight as markets continue to look toward the RBNZ for a catalyst. GBP found solid strength at the start of BoE week. AUD was stable as China sentiment stabilised.

GLOBAL MARKETS OVERVIEW: Monday’s US holiday led to very thin trading and quiet trading conditions, with stocks, yields and FX trading in tight ranges overnight. European equity indices were up despite yesterday’s modest fall in the Shanghai composite. Core and peripheral euro area sovereign bond yields rose, with a widening in peripheral spreads to bunds, whilst UK gilt yields eased. The CRB index was weighed down by large falls for oil prices. Gold prices also eased.

ANZ’S ASSESSMENT

POLICY DIVERGENCES CREATE DILEMMA. The G20 meeting at the weekend highlighted an overall global growth outlook falling short of expectations. The Chinese economy is slowing, despite the best efforts of policymakers who face a tricky balancing act of trying to prop the economy up versus putting in place structural reforms that will improve competitiveness. The weaker emerging market backdrop looks to have been the catalyst behind more dovish central bank rhetoric of late, and hence the good old fashioned central bank ‘put’ looks set to remain in place for a while yet. With odds of a September Fed hike at just 32%, the market seems to be betting that concerns over the Chinese economy and the associated financial market volatility will be enough to stay the Fed’s hand, although there are sound domestic grounds for the Fed to start hiking. The reality is that there is unlikely to be a perfect time to raise rates in a fashion that would minimise fallout to emerging market economies and wider asset prices, outside of the gradual and data dependant route in which Fed members have been at pains to emphasise they will take. There are limits to what low interest rates can do, and delivering durable growth can be a bridge too far.

OVERNIGHT SPECIFICS AND KEY EVENTS

- Germany: Industrial production gained 0.7% m/m (mkt: 1.1% m/m) in July, while June was revised higher to -0.9% m/m from -1.4% m/m. The gains were broad based, with construction (3.2% m/m), energy (1.9% m/m) and manufacturing (0.3% m/m) all gaining.

- China: China’s FX reserves for August came in at USD3557.4bn, down "only" by USD93.9bn from July. This is the largest monthly decline on record. Positive FX valuation and interest gains amounted to roughly USD16bn in the month, so the actual drawdown (i.e. FX intervention) was around USD110bn, which should be seen as the minimum intervention conducted given that we suspect PBoC also intervened via forwards which don’t show up in the headline FX reserves. Markets will likely read the figure as a bit on the light side. We await the PBoC net FX purchase data due in a week or so to provide another indication of the likely size of intervention.

- Australia: Recent market volatility and China-related news flow may have weighed on today’s Australian NAB business confidence report but we will watch business conditions more closely given the positive trend in the AiG business surveys.

- Despite yesterday’s 2.5% fall in the Shanghai composite, European equity indices were up overnight. The Euro Stoxx 50 gained 0.6%, the DAX was up 0.7% and the CAC40 rose 0.6%, which follows falls towards the end of last week. Miners posted the biggest gain of the 19 industry groups on the Euro Stoxx 600. Glencore Plc jumped 7 percent after saying it will sell assets and shares to cut net debt. The FTSE 100 was up 0.5% overnight.

- European Government bond yields were up in thin trading. Ten year German bund yields were up 1bp to 0.67%, with yields for Italy, Spain, and Portugal up 2bps, 7bps and 6bps respectively. Yields on 10 year UK gilts fell 2bps to 1.81%, likely helped by the reinvestment of maturing debt into longer-dated gilts as part of the BoE QE program

- Commodity prices were down again, with the CRB index down 0.9% at the time of writing (7am NZT). Energy prices led the falls (down 2.5%), with milder falls for livestock, precious metals and industrials. Prices for soft commodities and grains rose. Gold prices were down 0.2% to a two week low as investors continued to sell metal from exchange-traded products.

- Concerns that producers will be unable to co-ordinate production cuts continued to weigh on oil prices, with WTI and Brent crude down 3.9% and 4% respectively to USD44 and USD47.60 per barrel. Bloomberg reports another Russian official ruled out co-operation with OPEC on cutting production, adding to over-supply concerns.

NZD/USD: ANZ PROPRIETARY INDICATORS…

The NZD underperformed overnight continuing to slide lower despite a lack of impetuous on a quiet US Labour Day holiday session. We look to today’s ANZ Truckometer, and ANZ Inflation Gauge to provide direction. Markets continue to look forward to this week’s RBNZ meeting as a reason for further weakness, a theme we feel is misplaced.

Expected range: 0.6230 - 0.6320

NZD/AUD: CHINA...

AUD/USD held steady as NZD/USD fell overnight as China sentiment was more optimistic. Chinese equities dropped 2.5% after a four day weekend, but markets felt this fall was less than could have been expected. Attention will be on NAB business confidence and RBA Head of Financial Stability Luci Ellis speaking on property today. Both have potential impact for AUD.

Expected range: 0.8980 - 0.9090

NZD/EUR: GERMAN IP...

German industrial production rebounded and European equities held steady, in turn keeping EUR stable. NZD is likely to remain the driver today.

Expected range: 0.5580 - 0.5660

NZD/JPY: RELUCTANT TO RALLY…

Despite markets reducing demand for safe havens like JPY this cross remains reluctant to rally. It continues to signal heightened risk concerns.

Expected range: 73.80 - 75.30

NZD/GBP: GBP BOUNCE…

Sterling snapped a losing streak overnight bouncing off support ahead of 1.51. While there was little data to drive it GBP was the strongest G10 currency overnight, and NZD the weakest.

Expected range: 0.4050 - 0.4140

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