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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- The PBoC’s reported aggressive intervention tactics in CNH were aimed at combating ongoing speculative pressures in the FX market and containing financial market volatility.

- US initial claims fell 6k to 275k, reinforcing the message from the August JOLTS survey that the labour market is continuing to improve.

- US import prices fell 1.8% m/m in August following July’s 0.9% drop and was driven by a 13.3% fall in fuel import prices.

- The BoE voted 8-1 to leave interest rates unchanged noting that recent global events hadn’t changed their central case outlook.

OUTLOOK

UPCOMING TODAY: There’s a fair bit of data out today locally, but it’s all second tier - the Business NZ PMI, Food Prices, and non-resident bond holdings.

CURRENCY: Markets should continue to reduce ‘risk off’ probabilities, but will be wary of building positions as we have Chinese August data at the weekend, and next week is the FOMC decision.

RATES: Expect the long end to remain under mild upward pressure given offshore moves. But it’s a different story for the short end, which is likely to grind lower as yesterday’s dovish MPSsinks in, steepening the yield curve.

REVIEW

CURRENCY: The USD broadly fell overnight as markets again reversed risk sentiment driven by reported CNH intervention. GBP strengthened as the BoE reinforced the sanguine message on China. NZD continued to lose ground.

GLOBAL MARKETS OVERVIEW: In an effort to dampen speculation and stabilise local financial markets, the PBoC reportedly intervened aggressively in CNH sending a very clear message that the spread between CNH and CNY was too high. Bloomberg reported that USD/CNH had its biggest one day fall since offshore trading began 5 years ago. Elsewhere, though, markets were reasonably quiet. ECB Chief Economist Praet echoed the tone of Draghi’s press conference last week saying that the ECB would be vigilant in preventing unwarranted tightening and that the QE programme is sufficiently flexible to be adjusted. Despite this dovish iteration, market attention was firmly focused on next week’s FOMC meeting, as the possibility of a Fed rate hike continued to drive an unwinding of risk. European bourses dropped, with the DAX falling 0.9%, the CAC 40 down 1.5% and the IBEX35 down 1.8%, although US stock markets bucked the trend, with the major indices up modestly at the time of writing.

ANZ’S ASSESSMENT

REFLECTING ON THE RBNZ. While we didn’t expect the tone of yesterday’s MPS to be quite as dovish as it was, we don’t have any major quarrels with it, and it once again demonstrates pragmatic thinking on the part of the Bank. Growth has softened, inflation has yet to fire, and the risk profile remains skewed lower. Against this backdrop, it made sense to cut, and to signal the likelihood that another cut was likely, albeit with the timing dependent on the evolution of data. And you have to hand it to the Bank - for they have successfully transitioned from sequential easing mode to data dependent mode without driving the NZD higher. This was always the fear - that by signalling a pause somehow the market might suddenly jump to the conclusion that the easing cycle was over, and start buying the NZD. We saw a similar effect on the AUD when the RBA delivered its last cut in May, and we know the RBNZ wanted to avoid that. And it has (at least so far), and markets seem to have taken it well. We are, of course, now in data watch mode, albeit with a hankering for a cut. While it’s only a technical projection, the RBNZ’s 90-day bill track points to "fair value" on the 2 year swap at around 2.72%. We’re just about there now. Similarly, the NZD TWI is about where it should be (in between the Q3 and Q4 projections), so markets are there or thereabouts, suggesting that unless we get any major surprises, we’re not going to get a lot of locally inspired volatility. GDP and CPI data (due next week and in mid-October respectively) are the next cabs off the rank. And it seems clear from the RBNZ’s scenario analysis in the MPS (which suggests that a 25bp OCR move will have a roughly 0.2% impact on GDP and CPI 2-3 quarters down the track) that we’d need to see a pretty big miss (like 0.2%pt or more away from forecast) on both in order for an October cut to be a real contender. We’re with the RBNZ on their 0.3% q/q Q3 CPI forecast. GDP can throw up surprises though, but again, our forecasts line up broadly the RBNZ’s (with the latter +0.6% q/q for Q2), so at this stage it’s a matter of waiting and seeing. The offshore scene is, of course, a different story, with the majority of US economists (including ours) expecting a hike next week, but market pricing not. It looks then, like it will once again be offshore where the winds of change will be blowing in from. Hang on to your hat!

OVERNIGHT SPECIFICS AND KEY EVENTS

- US August import prices fell 1.8% m/m, leaving the annual rate at -11.4%, down from -10.5% y/y in July. Weak oil prices were the primary reason for the fall but it adds to the soft inflation picture complication for the FOMC’s decision making process next week. Meanwhile, initial claims continued to show improvement, falling 6k to 285k in the week. July wholesale inventories fell 0.1% m/m vs expectations of a 0.3% rise. But following a revised 0.7% rise in June (0.9%), the outlook for manufacturing remains uncertain.

- The Bank of England Monetary Policy Committee (MPC) left rates unchanged and voted 8-1 as before to leave rates unchanged. The BoE said that recent global events hadn’t altered the MPC's central view, but that they require close monitoring. The BoE also cut its Q3 growth forecast from 0.7% to 0.6%, which reflected recent weakness in the services PMI. Underlying momentum in the economy remains firm, however, and we see nothing really to alter the view the rates are headed up, probably around Easter next year.

- European equity markets were down after three days of gains, but US markets are up, helped by solid gains from giants like Apple.

- Bond yields were generally up slightly in the key markets, with US 10 year Treasury yields up a couple of basis points, UK gilts up a half a point, but German bunds down slightly. There were no really strong themes in the market, but stronger equities and nervousness ahead of next week’s FOMC meeting have apparently added to jitters.

- Commodities were mixed but generally stronger, with the broad CRB index up around 1.1% at 7am NZT, led by energy. WTI crude futures were up around 3.5%, but softs (OJ, coffee, and sugar) were all down. Well, that may make brunch cheaper tomorrow.

NZD/USD: DRIVEN BY OFFSHORE…

The dovish message from the RBNZ yesterday allows markets to return to offshore drivers for the NZD. Last night NZD/USD was a reluctant passenger in a market broadly selling USD and buying risk. Today’s local Business PMI, food prices, and the 2027 bond auction should have little impact as markets look towards the weekend’s Chinese August releases and next week’s FOMC meeting. ANZ expects the USD to remain supported.

Expected range: 0.6270 - 0.6360

NZD/AUD: AUSTRALIAN EMPLOYMENT...

This cross was thrown back toward the bottom of the range by a dovish RBNZ and a positive Australian Jobs report. We continue to expect this cross to remain range bound overall.

Expected range: 0.8850 - 0.8980

NZD/EUR: QUIET...

The final read of German and Spanish CPI should round off what has been a quiet week for European data.

Expected range: 0.5550 - 0.5650

NZD/JPY: REBUILDING…

The NZD was able to regain some of yesterday’s lost ground against the JPY as markets toned down fears of ‘risk off’. This was partially due to reported intervention in the offshore RMB market by the PBOC.

Expected range: 75.50 - 77.20

NZD/GBP: CENTRAL CASE…

The BoE kept to the script and GBP strengthened despite an unchanged 8-1 vote. The BoE said while recent volatility leaves risks skewed it is ‘premature’ to see a change in course from the central case of normalisation.

Expected range: 0.4020 - 0.4120

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