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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- The USD regained some ground ahead of next week’s crucial FOMC meeting, but the probability of a July rate hike remained stable at 18%

- With the notable exception of bonds, which kept rallying, "risk on" trades that have benefitted recently experienced a wave of profit taking.


UPCOMING TODAY: Card spending and our Monthly Inflation Gauge.

CURRENCY: NZD likely to consolidate on yesterday’s gains, but stretched.

RATES: Will open lower following global moves, with bonds again in demand.


GLOBAL MARKETS OVERVIEW: Some trimming of risk positions ahead of next week’s FOMC meeting was evident. Following strong gains recently, EM FX gave back some ground vs USD which was also driven by the cut in rates from the Bank of Korea. In the next two weeks there is the FOMC and BoJ policy meetings, UK "Brexit" referendum, Yellen testifying to Congress, US May retail sales and CPI. The market is very dovish on the Fed, and the risk to current positioning is that the FOMC comes out more balanced with two rate hikes as a central case for H2, which would allow them to maintain their optionality on policy settings - data dependent of course. That thinking may have been behind the less gung-ho risk appetite yesterday. Oil and the major global equity indices were down, but it would seem that fixed income and gold may be benefiting from Brexit concerns. US Treasury yields fell further.


US DATA MIXED, UK BETTER. Initial jobless claims fell 4k to 264k in the latest week. UK April goods trade data were better than expected at £10.5bn and the March deficit was also revised down to £10.6bn.


RBNZ BACK IN DATA-WATCH MODE: Reflecting on yesterday’s MPS, and what it means for the future - with each of the RBNZ’s two alternate scenarios (one involving a much stronger TWI and deeper rate cuts; the other involving a stronger housing market and a the need for rate hikes) looking equally credible at this juncture, the only certainty is uncertainty. As to which one transpires, only time will tell. But it is clear that the Bank’s next move depends crucially on the data. That might sound obvious - it always depends on the data - but the key difference this time is that despite the Bank’s maintenance of an easing bias, it feels like the Bank has moved from a position of "when rather than if" to "if rather than when" another cut is needed. Indeed, it is clear that at this juncture, the Bank doesn’t feel that the economy needs stimulus, and that what happens next depends on how house prices, the currency and global policy settings evolve. That’s a far cry from where we were in March, when all the talk was about a follow-up cut. At this stage, we ascribe just over a 50% chance of a cut in August, and will be keeping a close eye on our inflation gauge, what the Fed does, and the NZD. While we note that the Bank assumed that it might have to take the OCR to 0.75% if the TWI holds steady, that scenario was based on an assumption that it was an insatiable demand for yield that holds the Kiwi up. But if it is driven by an improvement in commodity markets or better relative growth, there is less reason to be concerned. So while we see merit in "fading" the NZD spike higher - on the simple view that it remains too high - and that a macro-prudential response is coming (which will help cool the housing market), we’re not ready just yet to fully embrace the idea of a sub-1% OCR!

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