Thursday April 3, 2014 - 19:40:18 GMT
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Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
The overnight session was mixed. The
highlight event, the ECB meeting, failed to deliver any additional stimulus
but Draghi left the door open to such if inflation remains weak. That hurt
the EUR and boosted the US dollar. US services PMI disappointed slightly,
helping push US interest rates lower. The S&P500 initially made a fresh
record high but slipped following the PMI and is currently down 0.3%.
6:09AM, 04 Apr 2014
Global market sentiment: The overnight session
was mixed. The highlight event, the ECB meeting, failed to deliver any
additional stimulus but Draghi left the door open to such if inflation remains
weak. That hurt the EUR and boosted the US dollar. US services PMI disappointed
slightly, helping push US interest rates lower. The S&P500 initially made a
fresh record high but slipped following the PMI and is currently down 0.3%.
Interest rates: US 2yr treasury bond
yields were stuck around 0.45%, while 10yr yields fell from 2.81% to 2.78%.
government bond yields (implied by futures) fell from 3.13% to 3.08%, while the
10yr yield rose from 4.21% to 4.17%.
Currencies: The US dollar index
rose to a one-month high. That was mainly due to the EUR decline post-Draghi,
from 1.3805 to 1.3698. USD/JPY nudged slightly higher to 104.11 – a two-month
high. AUD initially rose to 0.9244 but retraced during the London afternoon to
0.9215. NZD found a bottom at 0.8514 early London and then consolidated to
0.8543. AUD/NZD extended its three-week rally from 1.0790 to 1.0835.
US ISM non-manufacturing rose from 51.6 to 53.1 in
March, about where it was in Dec and the weakest since Jul 2012 prior to that.
Business activity slowed to its lowest since mid 2013, but orders and jobs
ECB on hold. and enacted no new
non-standard measures after the April policy meeting. However the statement
contained more urgent sounding rhetoric about deflation risk. The ECB Council
“will consider all instruments available to us... [is] resolute in our
determination to maintain a high degree of monetary accommodation and to act
swiftly if required.. does not exclude further monetary policy easing...is
unanimous in its commitment to using also unconventional instruments within its
mandate in order to cope effectively with risks of a too prolonged period of
low inflation.” In the Q and A, Draghi explained away the low March CPI as an
Easter timing distortion (that they had not anticipated, presumably), but said
the longer that inflation remained low, the greater the risk inflation
expectations became unanchored. He then discussed quantitative easing at great
length noting that it would become a viable policy tool once the bank asset
quality review was complete and a market for well-rated, accurately priced bank
loan backed securities had been re-established ( unlikely before year end, at
the earliest, on industry estimates). The ECB is edging towards QE, but can
only do it in a way that won’t be viable for a year; or is illegal (buying
European sovereign debt); or would breach the 2013 St Petersburg commitment not
to unilaterally intervene in currency markets (buying offshore paper).
Mario Draghi has six years to go as ECB president. He would not risk his legacy
being a deflating Europe (“my biggest fear is protracted stagnation”), so when
he concurs that the risks around the inflation outlook have indeed shifted, he
will overcome those obstacles( as he did when he first cut rates in 2011,
introduced the LTROs soon after, followed by the OMTs in 2012) and enact
substantial unorthodox easing measures.
Eurozone composite PMI revised
from 54.5 to 54.1 in final March report, now the slowest reading for the year
so far, from the equal highest. The revision was mainly due to the German
services PMI being revised from 54 to 53, down from 56 in Feb and the lowest
since October last year, The French services PMI was revised up slightly to
51.5, its highest in just over two years. Still weaker than in Germany, but in
March last year, Germany was on 50.9 and France was on 41.3. The gap is closing,
because uncompetitive France with its rigid labour market, one of many factors
that will ultimately force a painful adjustment as reforms are undertaken
eventually, in the meantime has households earning incomes and spending on
services, it seems.
Event risk today: The local calendars are
empty, leaving markets to focus on tonight’s key event – the March US payrolls
report. The consensus estimate is 200,000 jobs.
AUD/USD 1 day: This downward
correction should have further to run and targets 0.9215 next.
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.
The medium term thus looks encouraging and 0.9300+ looks feasible, but US
dollar strength is a risk to our view.
NZD/USD 1 day: This correction has
further to run, targeting 0.8500- during the next few days.
NZD/USD 1-3 month: The break above 0.8600
last week has not been sustained and so we are back in the old multi-year
contracting range. The RBNZ tightening cycle will remain supportive but much is
already priced in, while a US dollar resurgence is in prospect with the upward
turn in US economic data surprises.
AUD/NZD 1 day: The break above key
resistance at 1.0740 (head and shoulders neckline) has been sustained and thus
targets 1.0950 during the weeks ahead.
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, particularly if
RBNZ has hiked three times by June.
AU swap yields 1 day: In response to
movement in Australian bond futures overnight the 2yr should open around 3.03%
while the 10yr should open around 4.46%.
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 down 2bp
at 4.07%, while the 10yr should open down 2bp at 5.07%.
NZ swap 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
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