Sunday August 31, 2014 - 20:24:26 GMT
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Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
The US dollar ended the quarter with a
flourish. UK PM Cameron raised the terror threat to the country to severe,
helping the US dollar surge to a 14-month high. US consumer confidence and
Chicago manufacturing beat estimates but had little obvious impact on markets.
Despite the geopolitical tension, S&P500 close 0.3% higher.
6:10AM, 01 Sep 2014
Global market sentiment: The US dollar ended the
quarter with a flourish. UK PM Cameron raised the terror threat to the country
to severe, helping the US dollar surge to a 14-month high. US consumer confidence
and Chicago manufacturing beat estimates but had little obvious impact on
markets. Despite the geopolitical tension, S&P500 close 0.3% higher.
Interest rates: US 10yr treasury yields
remained inside the previous day’s range, between 2.33% and 2.35%. The 2yr
yield, though, fell from 0.51% to 0.48%, steepening the curve slightly.
government bond future yields were contained between 2.62% and 2.65% and
currently at 2.64%. The 10yr yield fell from 3.32% to 3.28% before slipping to
Currencies: EUR underperformed,
falling from 1.3196 to 1.3132 (one-year low). Inflation readings were
unsurprising but the ECB is still expected to signal a path towards QE this
week. USD/JPY rose from 103.80 to 104.11. AUD slipped from 0.9363 to 0.9332,
and opens this morning at 0.9320. NZD fell from 0.8398 to 0.8357, and opens
around 0.8350. AUD/NZD ranged between 1.1140 and 1.1180.
The weekly CFTC
report on speculative futures positioning (as at last Tuesday) revealed US
dollar index longs and EUR shorts were both increased, AUD longs were increased
and NZD longs were decreased.
Economic Wrap: .
US core PCE deflator steady at
0.1% in July, holding the annual rate at 1.5% yr for the third month
running, helping to ease concerns from earlier this year that inflation might
be picking up steam in a sustained sense. Personal income rose a modest 0.2%
but personal spending fell 0.1%, as autos and utilities were shunned by
households in the early part of Q3, and savings rebuilt further despite the
weak income growth.
Uni of Michigan reported a large
3.3 pt upward revision to the August consumer sentiment index. The final August read
now shows a bounce back to June’s 82.5, completely reversing July’s fall to
81.8, rather than extending the decline to below 80 for the first time this
year. August is now the second highest reading for 2014 to date, rather than
the lowest. The revision was almost entirely due to the outlook component which
we assume reflected the rebound in equities since the preliminary survey
cut-off earlier in the month.
Midwest business surveys. The Chicago PMI rose to
64.3 in August, its third jump to above 60 since October last year. The previous
two jumps each lasted three months above 60; the Chicago PMI has thus spent
five months of the past year below 60. This regional survey has become as
skittish as the Ivey PMI in Canada, with three of the last 6 readings involving
monthly swings of 7-10 pts. Meanwhile the Milwaukee ISM fell from 63.9 to
59.6 in August, its fourth strongest reading (behind May-Jun-Jul) in two years.
Eurozone flash CPI edged
down to 0.3% yr in August, its lowest since 2009. The core CPI flash rose slightly to
0.9% yr, emphasising the point that energy and to a lesser extent food prices
are part of the low inflation story – not to take anything away from the half
dozen or so member states that are actually deflating or flirting with it. Also
news, Italy just joined the club after a month hanging around by the door, her
CPI falling from 0.0% yr to –0.2% yr in August.
Event risk today: NZ has Q2 terms of
trade, while Australia has Q2 inventories, company profits, and other
market-insensitive data. Traders are likely to focus on China’s manufacturing
PMI reports (both official and HSBC versions). The US has a holiday.
AUD/USD 1 day: Slightly weaker to
0.9300, given the positive USD backdrop.
AUD/USD 1-3 month: The RBA is expected to
remain on hold until August 2015, but markets should start pricing in the
tightening cycle by end-2014 which should eventually boost AUD above 0.9500.
Before then, though, global sentiment should dominate.
NZD/USD 1 day: Continues to head
towards 0.8310 (26 Aug low).
NZD/USD 1-3 month: The RBNZ is on hold for
the remainder of 2014. That means global factors should dominate. There are
early signs the US dollar index has found a medium term base at 79.0. If so,
the NZD/USD high of 0.8836 on 7 July should represent the beginning of a major
decline into the low 0.80s.
AUD/NZD 1 day: Consolidating the
month’s sharp rally, between 1.1130 and 1.1190.
AUD/NZD 1-3 month: A multi-year reversal
in the cross has probably begun. The RBNZ is on hold for the remainder of the
year, while the market has yet to start pricing in an RBA tightening cycle
which should launch in August 2015. The next major target is 1.1200, and beyond
AU swap yields 1 day: In response to
movement in Australian bond futures overnight the 2yr should open around 2.76%
while the 10yr should open around 3.66%.
AU swap yields 1-3 month: The 2yr has found a
multi-week base at 2.66% while the 10yr has broken below the key 3.70% and now
targets 3.50%. By late 2014, though, we would expect markets to start pricing
in RBA tightening, pushing swap yields higher.
NZ swap yields 1 day: In response to
overnight changes in US and Australian bond yields the 2yr should open don 1bp
at 4.06% while the 10yr should open unchanged at 4.55%.
NZ swap yields 1-3 month: The upward trend in NZ
interest rates remains intact, mainly due to the RBNZ tightening cycle which is
now around 40% complete. However some consolidation during the next few months
is likely since the RBNZ has signalled a multi-meeting pause.
The 2yr is expected to
be contained by 3.90%-4.20% during the next few months but should exceed 4.30%
by year end. The 10yr is vulnerable to breaking lower on global factors and now
targets 4.45%. The curve should maintain its flattening trend throughout 2014.
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