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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- US ADP report for March points to another robust NFP on Friday.

- Fed’s Evans backs more dovish FOMC ‘dot plots’.

OUTLOOK

UPCOMING TODAY: The local focus today will be the ANZ Business Confidence Survey for March (1.00pm). February credit growth figures for Australia (1.30pm) and New Zealand (3.00pm) are also released today.

CURRENCY: Quarter end flows are likely to dominate currencies, with further demand for AUD and NZD expected. Markets await tomorrows ISM, payrolls and global PMI releases.

RATES: Despite a receiving bias still in evidence, local yields are expected to open broadly unchanged.

REVIEW

CURRENCY: The USD remained under broad pressure, and demand for Australasian yield was evident as NZD/USD broke to a new cycle high. AUD/NZD dropped wiping out the last vestiges of the surprise RBNZ OCR cut.

GLOBAL MARKETS OVERVIEW: The post-Yellen USD sell off continued overnight following comments from Chicago Fed President Evans which backed Yellen’s case for a gradual approach to rises in the funds rate this year. Evans also confirmed that global growth and risks are an important consideration for policy. The prospect of a more gradual US monetary policy tightening cycle gave European equities a solid bump higher (1.3-1.8%) and early improvement in oil prices - which proved short-lived - boosted energy stocks. European sovereign bond yields gradually rose through the session too. However, the initial gains in UST yields were trimmed late in the session as the USD rebounded and oil prices came under pressure with US crude storage at a record high and 36% above the five-year average.

ANZ’S ASSESSMENT

EYE WATERING: The NZD has crept back in focus for exporters and the RBNZ alike. For exporters the run back up above NZDUSD 0.69 and to 73.3 on the NZD TWI is proving eye watering. For dairying, the sector under the most pressure at present, the run back up is especially painful as a lower NZD is a key reason that a better income outlook in 2016/17 has been flagged. If this doesn’t prove to be the case there will be serious industry concern. While the dairy and the sheepmeat sectors remain under pressure, prospects elsewhere range from steady to stellar. New Zealand’s meat supply volumes are expected to be down by close to double digits, but this is helping to support prices and further gains are anticipated. The main horticulture crops are on track to post impressive yields, and combined with solid prices, are likely to deliver very profitable returns. Forestry prices are being supported by domestic building activity and shipping rates at multi decade lows are helping. The high NZD doesn’t seem to be putting off tourist flows either, although there will be an impact on spending. Individually these export earners don’t totally offset the pain from dairying, but collectively they provide a significant offset. That said, a sustained run up in the NZD will become increasingly problematic for the wider export sector, the level and mix of growth and the degree of inflationary pressure in the system. The RBNZ has more work to do and we expect 50bps of OCR cuts by the end of the year.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: The ADP report for March showed jobs rose 200k - a touch higher than expectations (195k) and confirming that the labour market remains robust. Revisions to February were minor at -9k, taking this measure of jobs growth in the month to 205k. However, Yellen said yesterday that the real fed funds rate is low and consistent with further improvement in the labour market, so these data are not going to change sentiment much, if at all. That said, if the labour market stays this strong (i.e. employment growth of c. 200k per month) that would put the unemployment rate at 4.7% in late Q2 according to the Atlanta Fed's jobs calculator.

- June therefore may not be as remote a possibility for a rate hike as the market is pricing at the moment (22% odds of a Fed hike). But we know that for Yellen, in the short run anyway, financial market volatility and RMB stability are very important. The VIX is currently 13.8, below where the Fed raised rates in December and USD/CNY is around where it was when the FOMC raised rates (6.46). In the short term though Asian FX may continue to do well as risk does well. It will also be interesting to see if the RBA gets drawn on the AUD next week.

- Germany: There was a slight upside surprise in the flash German CPI read for March, with HICP rising 0.8% m/m and 0.1% y/y, a tenth more than the median market forecast. The result suggests a little upside risk to tomorrow's flash euro area HICP release for March (headline +0.1% y/y, core 0.9% y/y expected).

- There was a dip in the headline Euro-zone Economic Sentiment Indicator from 103.9 to 103. Industrial and service sector confidence declined despite an improvement in March’s PMIs. By country Germany sentiment was steady, but France and Italy’s both dropped. March’s falls in euro-zone business and consumer confidence support other evidence that the region’s slow recovery is losing some pace suggesting monetary policy will remain accommodative for some time.

- It was generally a positive session for equities. The prospect of a gradual monetary policy tightening cycle in the US gave European equities a solid bump higher. The early improvement in oil prices - which proved short-lived - boosted energy stocks. The German DAX closed up 1.6%, French CAC rose 1.8% and UK FTSE was 1.6% higher. In the US the gains were more modest with the major indices all up around 0.5% at the time of writing.

- European sovereign bond yields gradually rose through the day, with 10-year yields up 2.4bps in the UK, 0.6bp in France and 1.9bps in Germany. UST yields are also higher (10-year up +3bps at the time of writing) supported by the solid ADP report. Post ADP gains in UST yields (which peaked at 1.86%) were trimmed late in the session as the USD rebounded and oil prices came under pressure with US crude storage at a record high and 36% above the five-year average. This despite oil production declining for a third straight week.

- Commodity markets were mixed. Early weakness in the USD provided broad based support, but as it rebounded this support waned.

NZD/USD: NEW CYCLE HIGH…

Kiwi broke to a new cycle high overnight as USD liquidation continued. The break opens the way for a test above 0.70, with the next solid resistance around 0.7160-0.72. US data such as ADP employment remains solid, but the change in the Fed’s reaction function was further endorsed with the Chicago President Evans stating he doesn’t fear pushing inflation above target for a ‘brief period’. Month end demand is expected to keep the NZD strong today.

Expected range: 0.6880 - 0.7010

NZD/AUD: GAP FILLED…

The last vestiges of the surprise RBNZ cut have been erased as NZD/AUD returns to 0.9040 where it was trading before the RBNZ surprise. Today markets will focus on the ANZ NZ Business Confidence read.

Expected range: 0.8960 - 0.9080

NZD/EUR: INFLATION…

European economic and services confidence slipped even as the business climate indicator picked up. Although German March CPI was above expectations, giving little reason to sell EUR.

Expected range: 0.6050 - 0.6180

NZD/JPY: SETTLING…

Risk sentiment continued to settle with this cross following equities higher.

Expected range: 77.30- 79.00

NZD/GBP: CREDIT AND GDP…

GBP remains awash on global flows, and tonight’s final read of Q4 GDP and net consumer credit releases shouldn’t change that fact. For now cable looks capped by Brexit, but NZD has broken its cap.

Expected range: 0.4770 - 0.4850

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