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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Nigel Farage, UKIP leader and prominent figurehead in the Brexit campaign, resigned as party leader.

- Equities gave back some recent ground, but markets were quiet give the Independence Day holiday in the US.

OUTLOOK

UPCOMING TODAY: Locally we get the NZIER QSBO (10am), QVNZ house prices (12pm) and ANZ Commodity Prices (1pm). In Australia we have the trade balance and retail sales (both 1.30pm) and the RBA decision (4.30pm).

CURRENCY: The mantra seems to be, "if in doubt buy Kiwi" again. The market’s love affair with yield and all-things-not-Europe remains supportive.

RATES: Will open broadly unchanged following a quiet London session, but with the TWI at 77.2 (cf RBNZ assumption of 71.6), the bias is lower.

REVIEW

GLOBAL MARKETS OVERVIEW: Financial markets activity was very lacklustre with the July 4 holiday in the US. Equities gave up some ground, with UK’s FTSE 100 closing down 0.8%, Germany’s DAX falling 0.7%, and France’s CAC40 down 0.9%. Stories have surfaced of German dissatisfaction with EU head Juncker; suggesting part of the blame for Brexit rests with his stance on negotiations with the UK in February. UKIP leader, Nigel Farage, has stepped down as party leader. The politics of the Brexit vote continues to play out and central banks remain cautious. As financial volatility has receded, that’s good news for global financial conditions. But it doesn’t alter the fact that caution on behalf of central banks, the forthcoming Brexit negotiations with the EU and the wave of elections in Europe next year (The Netherlands, France, Germany) have raised political risk in Europe. We expect continued portfolio flows out of the region, intensifying the hunt for yield and safety/remoteness. FX majors were range-bound, but the commodity currencies caught the bid.

DATA PULSE

OVER THE EDGE. With the US out for Independence Day there was no data there, but UK June Construction PMI data fell sharply. No surprises there.

COMMENTARY - KEY THEMES AND VIEWS

TRACKING TWO SCENARIOS AT THE SAME TIME. When the Reserve Bank published its JuneMPS, it also published two alternative scenarios detailing how it might deal with the two obvious risks in each direction for the economy. In the first scenario (involving a higher TWI), more cuts were needed, yet in the second (strong house prices) it said hikes were needed. So what do you do when you’re simultaneously tracking down both scenarios at the same time? Over the medium term, it seems logical that the bank would cut, but hit the housing market with a targeted (macroprudential) policy response to blunt the impact of lower rates. But that doesn’t make it easy to make a decision in August any easier, especially given the Bank’s limited macroprudential war chest, and data suggesting that most housing investors aren’t really high LVR borrowers anyway. Over time, we do expect rates to converge (i.e. OCR cuts to narrow the wedge to global rates) - it’s inevitable. But as to when and by how much - it’s hard to argue with much clarity at this juncture. For our part, we expect the NZD to remain elevated and for bellwethers like the 2-year swap to continue grinding down to 2%. Let’s not also forget there are moving parts elsewhere too - with today’s RBA decision and Friday’s US non-farm payrolls the next two big cabs off the rank.

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