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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- There was risk-off sentiment overnight driven by weakness in the Asian session/data (Chinese February trade data and downgrade to Japanese Q4 growth) and positioning.

- BoE Governor Carney warns of the threat to UK financial market stability from uncertainty stemming from the upcoming UK vote on EU membership


UPCOMING TODAY: NZ card spending (10.45am), credit growth in Japan and Australian home loans and investment lending.

CURRENCY: Currencies will likely look to commodity prices for direction today, with data flow light. UK production may move GBP, although ECB and RBNZ tomorrow are the big focus.

RATES: The local curve is likely to open flatter this morning given receiving interest in the London session.


CURRENCY: The USD regained some strength overnight as a risk-off tone entered markets. The CAD and AUD bore the brunt of the move while the NZD also declined. Safe-haven JPY broke through 113 and EUR strengthened.

GLOBAL MARKETS OVERVIEW: Risk-off sentiment returned overnight, driven by weakness in the Asian session/data and positioning. Weaker than expected Chinese trade data for February and a downgrade to Japan’s already poor Q4 GDP weighed on sentiment early on. This saw equity markets weaken, bond yields fall, the USD and JPY strengthen and oil prices ease. Oil prices were additionally weighed down by expectations that US crude inventories are expected to continue to rise this week despite reductions in supply, as shale oil rigs lay idle.


COMMODITY CONUNDRUM. Commodity price direction and the health of the Chinese economy remain in sharp focus. Yesterday’s Chinese trade balance for February was worse than expected. However, Chinese New Year also occurred during this period and is likely to have had an impact on activity. Looking at year-to-date trade figures, recent restocking activity and current known inventory levels for some key sectors paints a slightly more positive forward looking picture. That said, any significant rally in commodity prices is expected to be capped for now. With cost-curve analysis showing many sector participants struggling at current price levels, a reduction in investment, a recalibration of business models and the supply response is likely to shape the 2016 outlook. However, the supply side does tend to take time to respond and depends heavily on the production lifecycle of different sectors. Supply reductions over time will help trigger an improvement in prices, but high global stocks and weaker demand growth than recent years are likely to cap these through to at least the latter half of 2016. As inventory levels normalise, the demand backdrop will need to improve to allow price gains to be sustained. Dairy prices certainly look like they are starting to ‘bounce along the bottom’. Near-term there seems potential for markets to improve further over the next couple of auctions, driven by declining seasonal volumes on GDT, buyers trying to lock-in low prices, general improvement in commodity prices recently (especially oil), China stimulus and normalisation in stream returns between WMP and SMP/milkfat (this played out at last auction and WMP has further to go). If this does play out, it would seem Fonterra might have gone a tad too far yesterday by downgrading its milk price to $3.90/kg MS and assuming no change in market pricing into the year-end.


- UK: Bank of England (BoE) Governor Mark Carney offered a politically-neutral perspective on the UK’s upcoming referendum on EU membership at his hearing before the UK Parliament’s Treasury Select Committee. Carney refrained from providing a comprehensive BoE analysis of the economic advantages and/or disadvantages of EU membership for fear that it would be interpreted as an ‘official’ recommendation on EU membership (one way or the other). Instead, the BoE’s analysis was limited to financial and monetary stability, and he did focus on the short-term impact that heightened uncertainty in the event of Brexit would have on such areas as inflation, sterling, domestic demand, financial stability, foreign investment and London City. That said, the BoE is still taking mitigating actions to manage the risks around Brexit to ensure the financial system’s resilience and make contingency plans for either outturn at the referendum on 23rd June. In this vein, yesterday the BoE announced that it will hold three additional indexed long-term repurchase operations (iLTROs) on 14, 21 and 28 June. The operations will offer unlimited funds to commercial banks up until 8 December in order to offset any threat of a bank run and broader risks to the bank funding market in the event that the UK votes to leave the EU on 23rd June. Liquidity will continue to be offered to the market via the bank’s other facilities including its regular weekly USD repo operations. Carney felt that the announcement of the additional liquidity operations (with a long lead time) reinforced the bank’s accountability for financial stability.

- Germany: Industrial production was stronger than expected following the lead from factory orders data. Not only was there a strong bounce in January IP, rising 3.3% m/m, but there was a 0.9ppt upward revision to growth in December, which lifted the annual pace of growth to 2.2%. Strength was evident across most sectors bar energy and intermediate goods which achieved only small rises. Manufacturing and mining production was up 3.2% m/m and construction rose by 7% m/m.

- The second estimate of euro-zone GDP in Q4 showed the consumer recovery, which boosted growth last year, is losing momentum. While domestic demand growth picked up lead by government spending, household spending growth slowed from 0.5% to 0.2%.

- A strong day for fixed-income (yields lower) with a variety of drivers throughout the day. Positioning and yield highs in 10-year USTs (1.918%) saw early retracement. This continued with a strong 2036 Gilt Auction helping maintain a bid tone. UK 10-year yields end the session back 9.6bps to 1.38%. Latter in the session softer energy prices saw US 10-year treasury yields push even lower to 1.82% (-8.6bps) at the time of writing.

- Equity markets suffered in the risk-off environment and opened lower following the Asian session. European equity markets closed around 0.5% - 1% lower, while the major US bourses are 0.3-0.6% weaker in early trade. Weakness centred on energy, materials and industrial producers.

- Commodity prices bucked their recent improving trend with the CRB index back 1.2%. Near-dated WTI crude oil is 2.7% weaker at USD36.90/bbl at the time of writing, while Brent is trading down 2.3% at USD39.90/bbl following the release of a Bloomberg survey which showed that US crude inventories are expected to have risen last week. Soft commodities and grains had a better session eking out slight improvements.


A risk-off tone brought NZD/USD lower as the market digested weaker than expected nominal trade growth from China. Locally, Fonterra’s downgrade to its milk price forecast also weighed on NZD. Today, card spending data should have a minimal impact on the eve of RBNZ. NZD will continue to trade with global sentiment in the run up to a volatile day for trading tomorrow.

Expected range: 0.6730 - 0.6825


Iron ore’s flash-rally sputtered out overnight and the AUD subsequently declined during London trading. However, NY traders brought the currency back, which saw NZD/AUD fall below 0.91. Australian home loan and confidence are the data highlights today. Expect NZD/AUD to range trade on global sentiment, with the RBNZ a catalyst for a breakout tomorrow.

Expected range: 0.9035 - 0.9120


Data is light today. If risk-off trading continues, expect a modest bid for EUR/USD. However the market remains core short the EUR. A squeeze higher in EUR/USD before the ECB meeting tomorrow cannot be ruled out.

Expected range: 0.6090 - 0.6190


JPY rallied on safe haven flows. Machine tool orders for February will be watched after six consecutive months of double digit growth contraction.

Expected range: 75.75 - 76.90


Production is expected to rebound in January, which may see the market focus more on fundamentals rather than ‘Brexit’ risks. Biased lower.

Expected range: 0.4730 - 0.4795

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