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Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
The US dollar and US interest rates
fell during an overnight session devoid of major events. US equities made a
one-month low shortly after the open but then stabilised, the S&P500
currently up 0.3%. US small business confidence beat consensus but had little
market impact. ECB officials (Weidmann, Bonnici) played down the risks of
Eurozone deflation, while Fed dove Kocherlakota implied US rates would be on
hold beyond 2015.
6:13AM, 09 Apr 2014
Global market sentiment: The US dollar and US
interest rates fell during an overnight session devoid of major events. US
equities made a one-month low shortly after the open but then stabilised, the
S&P500 currently up 0.3%. US small business confidence beat consensus but
had little market impact. ECB officials (Weidmann, Bonnici) played down the
risks of Eurozone deflation, while Fed dove Kocherlakota implied US rates would
be on hold beyond 2015.
Interest rates: US 2yr treasury bond
yields are unchanged at 0.40%. 10yr yields fell from 2.72% to 2.67%, still
inside the 2.60%-2.80% range which has prevailed since early February. A 3yr
auction went well, awarded at 0.5bp below market yield.
government bond yields (implied by futures) tracked sideways between 3.03% and
3.06%, while the 10yr yield ranged between 4.08% and 4.11%.
Currencies: The US dollar index
fell by around 0.6% and is now back at mid-March levels. EUR rose throughout,
from 1.3740 to 1.3812, the less-dovish ECB-speak dampening expectations of QE.
USD/JPY fell from 103.00 to 101.55, the yen outperforming the majors following
the BOJ’s on-hold decision. The weak US dollar allowed the AUD to resume its
two-month old rally, rising from 0.9290 to 0.9366 – a four-month high. NZD rose
from 0.8640 to 0.8681. AUD/NZD rose from 1.0755 to 1.0795.
US NAHB small business optimism
from 91.4 to 93.4 in March, recovering three quarters of the 2.7 pt drop in
February which at least in part was due to disruption caused by the heavy snow,
although the three consecutive rises in the index from November to January when
the weather was already causing significant problems is a little difficult to
reconcile. Despite the latest rise, the previously reported intention to hire
net balance fell from 7% to 5% in March (from January’s high of 12%).
US job openings rose from 3.8mn to 4.2
million in February. Firms hired 4.6 million new employees that month, and shed
4.4 million, down a little on 4.4 mn in January (before rounding). Of those
separations, there was a slight rise to just under 2.4 million quitters in
February. Lower separations, more quitters and more hirings and openings are
all indicative of an improving labour market.
Canadian housing starts plunged 17.7% in March, led by
a 25% fall in multiples although single family starts were down 5.4% on top of
a 3.9% fall in February. The March annualised starts pace of 157k was the
lowest since the 2009 recession. Meanwhile in February, building permits fell
11.6%, led by the residential sector, down 21%, while non-residential approvals
rose 6.6%. Belated warning of the starts decline! Plenty of evidence here that
the housing market is losing momentum, but will it be BoC Governor Poloz’s forecast
UK industrial production jumped 0.9% in February, led
by a 1.0% gain in factory output, which saw its annual pace of growth rise to
3.8% yr, its fastest in three years, in contrast to the recent moderation in
the PMI factory survey from its November high.
Event risk today: Quarterly US company
earnings reports start today with bellwether Alcoa. Then in NZ we have
electronic retail spending, followed by Australian consumer sentiment plus
lending data. Overnight in the US there’s wholesale trade and probably the
week’s highlight – the FOMC minutes.
AUD/USD 1 day: The next target in
this multi-month rally is 0.9450.
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 0.9450 looks feasible, but US dollar
strength is a risk to our view.
NZD/USD 1 day: Above 0.8680 signals a
move to 0.8702 – the multi-year high.
NZD/USD 1-3 month: Should it remain above
0.8675, the multi-year contracting range will be deemed cleared with bullish
implications. The 0.8840 record high will then be vulnerable. The RBNZ
tightening cycle will remain supportive but much is already priced in, while a
US dollar resurgence is a risk with the eventual upward turn in US economic
AUD/NZD 1 day: Minor resistance at
1.0800 but a decent consumer confidence report today will help clear that.
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 3.00%
while the 10yr should open around 4.37%.
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 4.07%, while the 10yr should open down 2bp at 5.01%.
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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