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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Oil prices were under pressure following OPEC’s inability to agree on a cap for production. This effectively abandons its long time strategy of limiting output to control prices.

- St Louis Fed President says "it was probably a mistake to delay from [raising rates in] September" and that he "will argue for a move in December".

OUTLOOK

UPCOMING TODAY: Our ANZ Truckometer for November (10.00am) and Manufacturing Activity for Q3 (10.45am). Offshore there is the November Australian NAB Business survey (1.30pm) and China’s trade balance.

CURRENCY: Chinese trade figures for November and Australian November Business confidence are the key events today, adding to downside pressure on commodity currencies.

RATES: Local yields should open lower, with a bias to flatten the curve.

REVIEW

CURRENCY: Oils declines sent commodity currencies (particularly CAD) lower. The USD was broadly strong. NZD/USD gave up Friday’s gains and USD/CAD rose to 11 year highs

GLOBAL MARKETS OVERVIEW: It was a quiet night for economic releases, but there were some substantial market moves for commodities and European sovereign bonds overnight. Crude oil prices remain under pressure following OPEC’s announcement that it would not be cutting its production ceiling from 30mn bpd. At the time of writing, near-dated WTI has slipped 5.3% to USD37.80/bbl, while Brent is trading around USD40.90/bbl, some 4.9% below last week’s close. The dollar recovered a little from last week’s falls, particularly versus the commodity currencies. European sovereign bond markets rallied, reversing some of the strong moves following the ECB announcement. 10-year yields were 9-12bps lower across major euro area and UK bonds. USTs enjoyed a smaller rally of 2-6bps across the curve. Equity markets were mixed. French and German bourses traded higher, but UK, Spanish and Italian stocks are weaker and US equities were down 1% in early trade. Iron ore prices continued to tumble, down 2.4% from Friday’sclose to USD39.06/t.

ANZ’S ASSESSMENT

LOOKING TO THE SKY. The farming season continues to be a challenging one for some regions. While holiday makers will be looking for good weather over the Xmas/New Year period, farmers on the east coast from Dunedin through to the Wairarapa will be looking for rain. While conditions are quite variable, many areas within these regions continue to suffer from fairly significant soil moisture deficits. Now that the effects of El Nino are forecast to continue through to the autumn period, it seems likely that many of the already dry areas are in for a tough summer period. Farmers generally seem well prepared and are already taking action. That said, dairy farmers in these regions don’t need any more challenges and many other livestock farmers don’t have the same access to irrigation as dairying. Those who are facing their second significantly dry summer, don’t have irrigation, or water takes are already being restricted (such as parts of North Canterbury) face more difficult and potentially expensive choices. There are a lot of moving parts as always, but these conditions and their impacts on agricultural production and soft commodities markets will need to be closely monitored through the next few months.

OVERNIGHT SPECIFICS AND KEY EVENTS

- There were few significant macro data releases or news events overnight.

- US: In an interview with the Washington Post, St Louis Fed President James Bullard said that last Friday’s "strong" employment report "shows it was probably a mistake to delay from [raising rates in] September" and that he "will argue for a move in December". Bullard also doesn’t believe a mechanical 25bp hike every set period (like every meeting in 2004-06) would be optimal. Rather, he believes it is critical that policy remain data-dependent.

- Taiwan: Exports for November undershot expectations falling 16.9% y/y. This cemented a clear downward trend since mid-2014. Exports to all major trading partners fell across the board, reflecting poor global external demand. Exports to China and Hong Kong led the charge falling 19.6% y/y. Exports to ASEAN were also weak, falling 19.3% y/y and shipments to the US and Europe fell 10.9% and 6.1% respectively. Imports were a touch better than expected (-13.7% y/y), but had some one-off elements. The data reinforces the trade challenges in the region and suggests a risk of another contraction in GDP for Q4.

- Europe: German industrial production for October rose 0.2%, but was weaker than expected (exp. 0.7%). This potentially signals a slowing in GDP growth in Q4. The main area of concern was the output in consumer goods fell for the 4th consecutive month, suggesting that the recovery in household spending might be slowing.

- European sovereign bond markets rallied, reversing some of the strong moves following the ECB announcement. 10-year yields were 9-12bps lower across major euro area and UK bonds. USTs enjoyed a smaller rally of 2-6bps across the curve. The main driver appears to be weaker energy/oil prices weighing on future inflation expectations.

- Equity markets were mixed. French and German bourses traded higher, but UK, Spanish and Italian stocks are weaker and US equities were down around 1% in early trade. Iron ore prices continued to tumble, down 2.4% from Friday’s close to USD39.06.

- Crude oil prices remained under pressure following OPEC’s announcement that it would not be cutting its production ceiling from 30mn bpd. At the time of writing, near-dated WTI has slipped 5.3% to USD37.80/bbl, while Brent is trading around USD40.90/bbl, some 4.9% below last week’s close. Iron ore prices continued to tumble, down 2.4% from Friday’s close to USD39.06/t.

NZD/USD: COMMODITY WEIGHT….

Oil led the global commodity complex lower overnight and NZD/USD gave back its squeeze higher. With equity markets also looking weak, the long-term direction remains clear. However, the events of the last few days show that market liquidity is poor and volatility is high, leading to the suggestion that participants have patience and await range edges. Chinese trade data for November is expected to show improvements, but risks for the NZD are that it doesn’t drag the NZD lower.

Expected range: 0.6600 - 0.6700

NZD/AUD: BUSINESS CONFIDENCE…

NZD/AUD will likely take its lead from Australian business confidence, but we also watch to see if the gap between confidence and conditions can close up. Iron ore breaking below USD40/tonne suggests support for this cross.

Expected range: 0.9110 - 0.9190

NZD/EUR: POLITICS...

EUR/USD volatility continued overnight, but the record showing for the right-wing Eurosceptic Front National in Frances regional elections is a development that bears watching. The second read of Q3 GDP contains further details of the composition of EU growth.

Expected range: 0.6050 - 0.6210

NZD/JPY: NO NEED FOR NEGATIVE RATES…

BoJ Governor Kuroda said there was no need for Japan to adopt negative deposit rates. A sign of the pressure the BoJ is coming under.

Expected range: 81.40- 82.70

NZD/GBP: INDUSTRIAL PRODUCTION…

British industrial production has relatively muted expectations tonight. We continue to see upside risks for GBP from local data.

Expected range: 0.4380 - 0.4460

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