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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- ECB President Draghi signals additional easing in December.

- Commodity and risk currencies typically outperformed, with the prospect of additional liquidity from the ECB supporting risk appetite.

OUTLOOK

UPCOMING TODAY: There is no New Zealand or Australian data out today.

CURRENCY: European PMIs tonight are likely to be interpreted within the dovish ECB framework tonight, with weakness amplified and strength discounted. Chinese property prices are expected to continue to steadily improve but the rest of the Asian data is likely to slow.

RATES: Local yields will open biased lower given the ECB’s dovish overtures.

REVIEW

CURRENCY: The EUR dropped precipitously as the ECB moved into "work and assess" mode for further stimulus. AUD and NZD were supported, but a key rational for further stimulus was EM concern, capping exposed currencies.

GLOBAL MARKETS OVERVIEW: The overnight focus was squarely on the ECB meeting, and as usual ECB President Draghi delivered - exceeding dovish market expectations. Indeed, Draghi laid the groundwork for additional policy easing, stating that the Governing Council would "re-examine" the "degree of monetary accommodation" at the December policy meeting. The prospect of further easing drove EUR/USD sharply lower, with the policy divergence between the ECB and Fed likely to widen further, irrespective of whether the Fed raises rates this year or not. AUD under performed after another major Australian bank said it would lift its lending rates. European stocks rose sharply, with the Euro Stoxx 50 closing 2.5% higher on the back of improved risk appetite and the lower euro. US equities also opened higher, following the lead of their European counterparts. US bond yields are down slightly, while core and peripheral euro area sovereign bonds rallied sharply in the wake of Draghi’s comments. The CRB index was down slightly, with prices for oil and gold unchanged.

ANZ’S ASSESSMENT

GLOBAL SPILL-OVER. For New Zealand, all eyes are again offshore, especially when you consider the ECB’s renewed dovish stance alongside what some are calling a mutiny at the Fed (with a posse of Fed members speaking out against "lift-off" in 2015), questions hanging over the efficacy of QQE in Japan, and with markets pointing to forthcoming RBA cuts. Against all that, the pressure (via the high NZD) looks like it could really start to pile up on the RBNZ. We don’t expect a cut next week, (but equally we can’t rule it out entirely), and we are becoming increasingly attuned to the prospect of global factors forcing the OCR lower. Slowly but surely, as the timing of G4 policy normalisation that was expected (by the Fed and BOE tightening and fading ECB/BOJ policy easing) gets delayed, we are becoming re-attuned to the idea that the more the NZD diverges from domestic fundamentals, the more interest rates will need to converge. This is all likely a story for 2016, rather than next week, but the point is, New Zealand yields are high in relation to global peers, putting upward pressure on the NZD, and downward pressure on already low inflation. The local economy is ticking along OK, and we’re comfortable that there are no immediate home-grown reasons for the OCR to go lower; we just don’t like what’s cooking offshore.

OVERNIGHT SPECIFICS AND KEY EVENTS

- ECB President Draghi laid the groundwork for additional policy easing in Europe, highlighting that it could occur as early as the December policy meeting. Draghi noted that concerns over emerging market growth prospects and ongoing weakness in oil prices meant that risks to euro area growth and inflation dynamics remained skewed to the downside. In light of these developments, Draghi stated that the Governing Council would "re-examine" the "degree of monetary accommodation" at the December policy meeting. He added that the ECB is considering the use of "all instruments" within its mandate in order to support activity and lift inflation back to target. This marks a significant shift from the previous policy meeting in September, in which Draghi explicitly stated that the Governing Council didn’t discuss an adjustment to the ECB’s APP. In addition, Draghi stated in the press conference that the Governing Council had now shifted into "work and asses" mode, rather than "wait and see", clearly signalling that the ECB is on the cusp of providing additional policy stimulus. While Draghi flagged the prospect of further easing, he didn’t explicitly state which instruments the ECB would employ to achieve its mandate. Indeed, during the press conference he stated that the Bank would weigh the ‘pros and cons’ of each instrument before marking a decision. In broad terms, there are two key channels through which the ECB can provide policy stimulus. First, the Governing Council could adjust its current Asset Purchase Programme (APP) by altering its size, duration and/or composition. Alternatively, it could cut the deposit rate from -0.2% further into negative territory.

- US Initial jobless claims rose modestly to 259k (mkt: 265k) from 256k last week. However, the four-week moving average declined to 263k from 265k - hitting a fresh post-1973 low. The low levels of jobless claims remains consistent with solid employment growth and further declines in the unemployment rate moving forward.

- US Existing home sales were stronger than expected, rising 4.7% m/m in September taking the annual pace of sales to 5.55m (mkt: 5.39m). This result unwinds the sharp decline recorded in August, with the upward trend in existing home sales remaining firmly intact. Meanwhile, the Kansas City Fed manufacturing survey improved to -1 (mkt: -9) in October from -8.

- UK Retail sales were much stronger than expected in September on both the headline and ex-auto measures. Headline retail sales rose 1.9%m/m, taking the annual pace of growth to 6.5%. Household goods stores unwound last month’s decline, rising 4.7% m/m, while food sales rose a solid 2.3% m/m. However, part of this strength is likely to be unwound in the coming months given that part of the boost was driven by one-off impacts from the Rugby World Cup. Nonetheless, conditions in the retail sector remain upbeat, supported by ongoing improvement in labour market conditions and solid growth in real household earnings.

- Equities were buoyed by the Draghi’s dovish stance, and the dream of a few more months of loose policy.

- US bond yields fell, with some commentators abandoning calls for Fed hikes in 2015. Peripheral European bond yields fell sharply.

- It was a mixed session for commodities. Oil prices were unchanged, while base metals weakened on the back of the stronger USD. Iron ore prices also lost ground.

NZD/USD: CONCERN OR CARRY…

The market’s instinctive reaction to the prospect of further global liquidity was to purchase kiwi for carry. However, one of the key rational (for easing) presented by the ECB was EM concerns and the global trade slowdown. With both the Fed and the ECB expressing concern over the Asian and EM growth, the environment is one where concern should trump carry for kiwi.

Expected range: 0.6680 - 0.6810

NZD/AUD: ILLIQUIDITY...

NZD demonstrated its illiquidity last night breaking above 0.94, as kiwi found a lack of sellers while AUD attracted plenty. A second factor keeping AUD capped was another out-of-cycle mortgage rate increase in Australia.

Expected range: 0.9280 - 0.9440

NZD/EUR: WORK AND ASSESS...

The ECB moved into "work and assess" mode overnight, indicating that further easing is on the cards. The ECB hinted that it could take deposit rates further into negative territory or increase its asset purchase program. EUR weakened and prospects for further weakness remain.

Expected range: 0.6100 - 0.6180

NZD/JPY: EM RISKS…

NZD/JPY rose but looks to be at risk as the rational for further stimulus is EM risks and trade concerns. This cross should be the first place "concern" shows.

Expected range: 80.60- 82.20

NZD/GBP: DRAGGED BY EUR…

This cross was dragged higher by EUR declines. However, GBP still looks in much better shape than NZD overall.

Expected range: 0.4340 - 0.4450

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