Monday June 2, 2014 - 20:38:57 GMT
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Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
The US dollar and US interest rates
rose. Germany's CPI for May undershot expectations and added to the case
for ECB easing later this week. US data was mixed, the widely followed ISM
manufacturing report creating market volatility after it was released three
times due to errors. The correct update showed manufacturing activity
continued to expand, helping the S&P500 (currently +0.1%) make a fresh
6:16AM, 03 Jun 2014
Global market sentiment: The US dollar and US
interest rates rose. Germany’s CPI for May undershot expectations and added to
the case for ECB easing later this week. US data was mixed, the widely followed
ISM manufacturing report creating market volatility after it was released three
times due to errors. The correct update showed manufacturing activity continued
to expand, helping the S&P500 (currently +0.1%) make a fresh record high.
Interest rates: US 2yr treasury bond
yields rose from 0.38% to 0.40%. 10yr yields rose from 2.47% to 2.54%, the
2.40% low made last week expected to hold this week.
government bond yields (implied by futures) ranged between 2.74% and 2.79%,
while the 10yr yield rose from 2.65% to 3.71%, in tandem with US yields.
Currencies: The US dollar index
extended the rally which started on 8 May, making a four-month high. EUR
remained weighed down by expectations the ECB will ease on Thursday, falling
from 1.3635 to 1.3588. USD/JPY rose from 102.00 to 102.48 – a one-month high.
AUD extended an earlier selloff which resulted from some disappointing data,
falling to 0.9235. NZD suffered from US dollar strength, falling from 0.8475 to
0.8441 – a three-month low. AUD/NZD fell to 1.0915 but rebounded in NY to
headline figure in the US ISM May manufacturing index
shows that the sector should continue to be a positive force in the economy for
the rest of the year. The ISM released a corrected purchasing managers index of
55.4, which reflected a 0.5 point increase from the previous month's figure.
The error was due to a software issue which applied April's seasonal adjustment
factors to the May report. The sub-indices were a mixed bag of relatively sharp
changes, with the production, prices, and customer inventories showing healthy
increases, and employment, supplier deliveries, order backlogs and imports all
posting sizable drops. Overall the report showed more increases than declines,
which might be partially due to bounce back from the harsh winter.
German May HICP inflation fell to
0.6% y/y from 1.1% y/y in the previous month, with prices down 0.3% m/m.
The national rate dropped to 0.9% y/y from 1.3% y/y, weaker than expected. The
sharp deceleration adds to the arguments for further easing from the ECB on
Event risk today: It’s an action-packed
day. First there’s NZ terms of trade. Then in Australia we have retail sales,
balance of payments and the RBA meeting. Finally, there’s China’s
manufacturing PMI (HSBC version). Tonight there’s Eurozone CPI and
unemployment, and US factory orders, NY ISM, and small business sentiment.
AUD/USD 1 day: Amid today’s minefield
of Australian event risk, 0.9210 below looks vulnerable.
AUD/USD 1-3 month: The downward
correction since April remains in progress, targeting the 0.9150-0.9200 area.
Longer term, the RBA is expected to remain on hold until August 2015, but markets
will start pricing in the tightening cycle by late 2014 which should boost AUD
NZD/USD 1 day: Continues to target
0.8430 near term.
NZD/USD 1-3 month: Remains in corrective
mode and should fall further to at least 0.8400. The market is expecting an
RBNZ track downgrade on 12 June, which should maintain downward pressure.
Beyond that, though, there is a decent risk of a rebound.
AUD/NZD 1 day: The 1.0900 support area
should hold during the day ahead.
AUD/NZD 1-3 month: The break above the bullish
neckline at 1.0900 implies a larger move to around 1.1400. The catalyst is
likely to be increasing pricing for eventual RBA tightening, assisted by a
rebalancing of relative speculative positioning.
AU swap yields 1 day: In response to
movement in Australian bond futures overnight the 2yr should open around 2.85%
while the 10yr should open around 4.06%.
AU swap yields 1-3 month: The 2yr is heading
towards the lower boundary of the multi-month 2.80%-3.05% range. The 10yr
should retest 4.00%.
NZ swap yields 1 day: In response to
overnight changes in US and Australian bond yields the 2yr should open up 1bp
at 3.94%, while the 10yr should open 3bp higher at 4.76%.
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 4.20% during
the next few months. The 10yr could slip to 4.60% during the next month,
following the US, but should rise above 5.20% late in the year on the RBNZ .
The curve should flatten throughout 2014.
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