Tuesday April 1, 2014 - 19:33:58 GMT
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Westpac Institutional Bank - www.westpac.co.nz
Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
Risk appetite remained strong despite the mixed bag of
global economic data during the past day. US manufacturing PMI disappointed
but construction spending and small business sentiment beat expectations.
Eurozone unemployment edged lower. The Shanghai Composite closed up 0.7%,
Eurostoxx 50 up 0.8%, and the S&P500 is currently up 0.5%.
6:00AM, 02 Apr 2014
Global market sentiment: Risk appetite remained
strong despite the mixed bag of global economic data during the past day. US
manufacturing PMI disappointed but construction spending and small business
sentiment beat expectations. Eurozone unemployment edged lower. The Shanghai
Composite closed up 0.7%, Eurostoxx 50 up 0.8%, and the S&P500 is
currently up 0.5%.
Interest rates: US 10yr treasury bond
(futures implied) yields rose from 2.73% to 2.76%, still stuck in the
2.60%-2.80% range which has prevailed since February.
3yr government bond yields (implied by futures) wre stuck in a narrow
3.07%-3.09% range, while the 10yr yield ground slightly higher from 4.13% to
Currencies: The US dollar index
is little changed. EUR rose from 1.3775 to 1.3815. Safe-haven yen again
underperformed, USD/JPY rising from 103.20 to 103.71 – a one-month high. AUD
fell from 0.9280 to 0.9230, the RBA again signalling it’s on hold for some
time. NZD rose to a fresh 2 ½ year high of 0.8702 during the London morning
but then followed the AUD lower to 0.8645. A weak milk auction also
contributed, WMP falling 8.4% to mid-February price levels. AUD/NZD remained
stuck inside 1.0645-1.0705.
US ISM factory survey rose from 53.2 to 53.7 in
March, with production up 7.7 pts to 55.9, orders edging up 0.6 pts to 55.1 but
jobs slipping from 52.3 to 51.1, yet to post a rise in 2014. Although
production bounced back from the February slump, it remains well below the
60+ readings of H2 2012, as do orders, although the ISM suggest a lingering
weather effect via excess inventory rundown (accumulated during the bad
weather) might be a factor at play, but it may be that there has been a
genuine slowdown relative to where the economy was at in the second half of
last year. The alternative Markit PMI which also surveys supply/purchasing
managers was unrevised at 55.5 in the March final report, down from a
multi-year high of 57.1 in Feb, somewhat unhelpfully contradicting the ISM
story, despite both purporting to survey the same staff in the same
US IBD-TIPP economic optimism
from 45.1 to 48.0 in April (though surveyed last week), its highest since
June last year, with gains across the economic outlook, personal finances and
government policies components.
Canadian industrial product
prices rose 1.0% in Feb, with high-weighted energy, autos, chemicals and
meat all posting sharp rises in prices.
Euroland unemployment was
steady a 11.9% in Feb, and January was revised down from 12.0%,
reflecting in part lower German unemployment, revised down from 6.8% to 6.7%
in Feb and steady at that rate in March. German unemployment fell 12k
in March, its fourth straight decline. The Euroland factory PMI was
unrevised at 53.0 in March, reflecting a small upward revision to France
(52.1) and downward revision to Germany (53.7).
UK factory PMI posted its
fourth straight decline in March, easing from 56.2 to 55.3, its lowest since August
but still pointing to moderate growth in manufacturing.
Event risk today: Australia has
building approvals in an otherwise light local calendar. Tonight there’s
Eurozone PPI and US private sector payrolls.
AUD/USD 1 day: Another corrective
move below 0.9230 is in store.
AUD/USD 1-3 month: The RBA’s neutral
policy bias and net short speculative positioning have supported AUD lately.
We can now add potential economic stimulus from China’s authorities to the
list. Our multi-week target is 0.9400, with the main risk to that view being
a US dollar resurgence.
NZD/USD 1 day: Another corrective
leg to below 0.8640 is in store.
NZD/USD 1-3 month: The break above
0.8600 last week was significant, representing a break above a multi-year
consolidation range. As long as it remains above 0.8600 there is potential
for a fresh record high (above 0.8840). The RBNZ tightening cycle will remain
supportive, with a US dollar resurgence the main risk to the bullish view.
AUD/NZD 1 day: Directionless near
term, with a break outside 1.0650-1.0750 required for guidance.
AUD/NZD 1-3 month: By mid-year 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
AU swap yields 1 day: In response to
movement in Australian bond futures overnight the 2yr should open around
3.01% while the 10yr should open around 4.45%.
AU swap yields 1-3 month: Inflation prints have
upside risk for the next couple of quarters, which in turn pose upside risk
to the 2yr’s 2.80%-3.05% multi-month range.
NZ swap yields 1 day: In response to
overnight changes in US and Australian bond yields the 2yr should open
unchanged at 4.08%, while the 10yr should open up 2bp at 5.08%.
yields 1-3 month: The upward trend in NZ interest rates remains intact, mainly
due to NZ’s improving fundamentals and RBNZ tightening cycle which is now in
play. The 2yr targets beyond 4.30% during the next few months, while the 10yr
targets 5.20%. The curve should flatten throughout 2014.
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