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Tuesday February 25, 2014 - 19:13:36 GMT
Westpac Institutional Bank - www.westpac.co.nz

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NZ Morning Thoughts - FX & IR

NZ Morning Thoughts - FX & IR

 

Imre Speizer

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Markets were relatively calm overnight. There was brief volatility in the EUR, attributed to concerns around a sovereign debt default in Ukraine, but otherwise there were few events to drive markets. The US data was mixed, house prices beating estimates but consumer confidence and Richmond manufacturing both disappointing. The Eurostoxx 50 close unchanged and S&P500 is currently unchanged.

5:47AM, 26 Feb

 

Market Wrap:

Global market sentiment: Markets were relatively calm overnight. There was brief volatility in the EUR, attributed to concerns around a sovereign debt default in Ukraine, but otherwise there were few events to drive markets. The US data was mixed, house prices beating estimates but consumer confidence and Richmond manufacturing both disappointing. The Eurostoxx 50 close unchanged and S&P500 is currently unchanged.

Interest rates: US 10yr treasury bond (futures implied) yields fell from 2.75% to 2.70%, the slide starting hours before any US data was released. Demand at the 2yr auction was strong.

Australian 3yr government bond yields (implied by futures) fell from 3.02% to 2.97%, the latter support level looking increasingly vulnerable, while the 10yr yield fell from 4.12% to 4.06%.  

Currencies: The US dollar index is slightly weaker again, its multi-day drift lower disturbed only briefly by EUR volatility. Late in the London session, EUR fell from 1.3767 to 1.3716 but quickly rebounded to 1.3760. Russia’s deputy Finance Minister said Ukraine faced a high probability of defaulting and the country’s currency extended its daily loss to 8%. USD/JPY fell from 102.60 to 102.01. AUD ranged between 0.9004 and 0.9040. NZD also ranged between 0.8317 and 0.8345. AUD/NZD remained stuck inside a multi-day range, between 1.0815 and 1.0850.

Economic Wrap:

US Richmond Fed factory index plunged from 12 to -6 in Feb, weaker even that Westpac’s bottom of market 0 forecast. Shipments were down 20 pts to -6, orders dropped 23 pts to -9 and jobs were down from 6 to 0. The Richmond Fed statement noted that "As a result of bad weather a few survey participants reported that manufacturing facilities experienced downtime in February, with some reductions in shipments." There was no other mention of the weather, which suggests snow disruption was not the only factor behind the plunging indices. [As a guide, in a survey of 94 firms, to get a fall of 20 pts as Richmond saw for shipments, you would need 16 respondents to downgrade their responses from increase to flat and/or flat to lower. That is more than “a few”, although the Fed economist responsible for the survey told your correspondent that “some contacts may not have reported weather impacts”] Also, factory bosses anticipated weaker business conditions in the next six months: expected shipments fell 16 pts to 17 while expected orders fell 15 pts to 15 in Feb. Note that in July last year the Richmond composite headline fell 18 pts but with no comment about possible factors from the Fed; the outlook part of the survey remained optimistic at that time and the headline bounced 25 pts the next month. The Richmond Fed has in the past led turning points in the other regional Fed indices so it is one to watch in coming months.

US consumer confidence slipped from 79.4 to 78.1 in Feb, still the second highest reading since Sep, on the Conference Board index. The present situation index rose 4.4 pts to a multi-year high at 81.7, boosted b y a further improvement in the assessment of the job market, but expectations fell 3.1 pts to 75.7, its fourth lowest reading over the past year.

US house price update. The FHFA index accelerated a tick to 7.7% yr in Dec, while the S&P-CS 20 city index decelerated from 13.7% yr to 13.4% yr in Dec.

EU Commission revised economic forecasts. Relative to November last year, the growth forecasts for the Eurozone were revised up slightly to 1.2% (1.1% in Nov) and 1.8% (1.7%) in 2014 and 2015 respectively. But the inflation forecasts were cut sharply, to 1.0% (1.5%) and 1.3% (1.5%).

UK  CBI retail survey showed reported sales jumping from 14 to 37 in Feb, higher even than Dec’s 34, and suggesting that the recent pull-back in the official retail sales figures from Jan after surging in Dec, may be reversed. Also the BBA reported that bank approvals for new mortgages rose to a new post 2007 high of 50k in Jan, the last month of subsidised mortgages under the funding for lending scheme.

Market Outlooks:

Event risk today: Event risk is minor. The NZ data calendar is empty, while Australia has minor (for markets) construction work done. US data tonight includes new home sales and there’s Fedspeak from Rosengren.

AUD/USD 1 day: Continues to aim higher, 0.9080 the next significant target.

AUD/USD 1-3 month: The RBA’s recent shift in bias plus net short speculative positioning should support AUD during the weeks ahead, 0.9100 feasible. However, there remains a question mark around Australia’s economy, with tension between strong business sentiment and weak consumer sentiment not expected to be resolved until the second half of this year. 

NZD/USD 1 day: Continues to aim higher, 0.8360 the next significant target.

NZD/USD 1-3 month: Stuck in a 0.8050-0.8400 sideways range, probably until the RBNZ starts hiking on 13 March. Once the tightening cycle is underway, though, we expect a rally towards 0.8550 which should be reached by mid-year.

AUD/NZD 1 day: Stuck in a narrow 1.0810-1.0860 range.

AUD/NZD 1-3 month: Initially, higher still, possibly as far as the 1.12-1.15 area, short speculative positions unwound further. By mid-year, though, we expect another stab at 1.05 below. The multi-year decline has already undershot fair value by around 7% we estimate. That said, over/undershoots have historically been worth 10%, suggesting there is potential for lower still, especially once the RBNZ cycle is underway. Our base case is the 1.02-1.05 area should mark the cycle bottom later this year, but  we wouldn’t entirely rule out 1.00.

AU swap yields 1 day: In response to movement in Australian bond futures overnight the 2yr should open around 2.93% while the 10yr should open around 4.45%. The downside for both looks vulnerable.

AU  swap yields 1-3 month: Strong inflation readings plus the shift in stance by the RBA are partly offset by China growth worries, expected to leave the 2yr in a 2.80%-3.05% range during the weeks ahead.

NZ swap yields 1 day: In response to changes in US and Australian bond yields the 2yr should open down 2bp at 3.80%, while the 10yr should open down 3bp at 5.00%.

NZ  swap yields 1-3 month: The upward trend in NZ interest rates remains intact, mainly due to NZ’s improving fundamentals and looming RBNZ tightening. The 2yr targets beyond 3.95% during the next few months, while the 10yr targets 5.40%. The curve should flatten throughout 2014.

 

 

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Amazing Trader EVENT RISK Calendar:

Thu 16 Nov
01:30 AU- Employment
09:30 GB- Retail Sales
10:00 EZ- final HICP
14:15 US- Industrial Production
Fri 17 Nov
13:30 CA- Retail Sales, CPI
13:30 US- Housing Starts and Permits

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  • POTENTIAL PRICE RISK: HIGH to Medium Wed -- 20:30 GMT AU- Employment data.

  • POTENTIAL PRICE RISK: HIGH Thu -- 09:30 GMT GB- Retail Sales.

  • POTENTIAL PRICE RISK: Mediun Thu -- 10:00 GMT EZ- final HICP. ECB targets inflation.

  • POTENTIAL PRICE RISK: Medium Thu -- NY Morning US- Import Prices, Philly Fed, Industrial, Production, NAHB. Usually not major movers.


  • POTENTIAL PRICE RISK: HIGH to Medium Fri -- 13:30 GMT CA- Retail Sales and CPI.

  • POTENTIAL PRICE RISK: HIGH to Medium Fri -- 13:30 GMT US- Housing Starts and Permits.



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