Wednesday September 3, 2014 - 20:15:16 GMT
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Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
Initial optimism faded. Early in the
London session markets reacted positively to reports of a Russia/Ukraine
ceasefire. However, optimism soon turned to scepticism and the initial
bounces in equities and interest rates reversed. Eurozone and US economic
data appeared to have little impact. The Eurostoxx 50 closed up 1.2% but the
S&P500 is now down 0.1%.
6:01AM, 04 Sep 2014
sentiment: Initial optimism faded. Early in the London session markets
reacted positively to reports of a Russia/Ukraine ceasefire. However, optimism
soon turned to scepticism and the initial bounces in equities and interest
rates reversed. Eurozone and US economic data appeared to have little impact.
The Eurostoxx 50 closed up 1.2% but the S&P500 is now down 0.1%.
Interest rates: US 10yr
treasury yields initially rose from 2.42% to 2.47% on the Ukraine news but
later reversed to 2.41%. A disappointing US factory orders report may have
contributed to the latter part of the decline. The 2yr yield similarly spiked
from 0.52% to 0.54% and then retraced.
3yr government bond future yields peaked during early London at 2.75% and then
fell to 2.69%. The 10yr yield similarly bounced from 3.42% to 3.47% and then
Currencies: The US
dollar index slipped from the 14-month high made during the Asian session. EUR
initially rose from 1.3126 to 1.3160 but reversed around noon London to 1.3133.
USD/JPY fell from its Asia session peak of 105.31 (eight-month high) to 104.76.
AUD outperformed yesterday, helped by a decent GDP report and RBA Governor
Stevens’ comments. It extended the domestic session rally from 0.9300 to
0.9351. NZD partly followed the AUD, rising from 0.8300 to 0.8332. AUD/NZD
continued to rise overnight, reaching 1.1238 – a 10-month high.
Economic Wrap: .
US factory goods
orders rose 10.5% in July, with the known 23% rise in
durables, led by aircraft and autos, partially offset by a 0.7% fall in
non-durables. Factory inventories rose just 0.1% in July, after an average
monthly gain of 0.5% in Q2. Separately, the NY ISM fell from 68.1 to 57.1 in
August, the sixth time in just over a year that the survey has crossed the 60
threshold, indicative of a seriously volatile data series about a solid
The Beige Book of
regional economic conditions characterized growth as "moderate" or
"modest" in 10 of the 12 regions.
Bank of Canada on
hold at 1.0%, maintaining its neutral bias with respect to the timing and
direction of the next change to the policy rate.
sales volumes fell 0.4% in July, with Germany, France and Spain
all recording declines (Italian data not yet available).
UK BRC shop price
index rose from –1.9% yr to –1.6% yr in August. The
BRC does have impressive leading qualities - there is not a CPI turning point
or pause in trend since 2009 that has not been presaged by the BRC by 2 to 4
UK PMI services
rose from 59.1 to 60.5 in August, its highest since October
last year. Respondents in the services sector, less exposed to the stalled
Eurozone economy than manufacturing, seem relatively unperturbed by
geopolitical tensions. The construction PMI yesterday had revealed similar
sentiment in that sector.
Event risk today: Locally
we have NZ house prices (QV) and Australia’s trade balance and retail sales.
The main event, globally, will be the ECB meeting and ensuing press conference
by Draghi. US data includes private sector employment, labour costs, and
AUD/USD 1 day:
Yesterday’s events put AUD back on a positive footing and we target 0.9374
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: Last
night’s bounce could extend to 0.8350 today but it looks corrective and should
eventually give way to a resumption of the downtrend below 0.8290.
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: Clearly
broke its 1.1130 to 1.1190 seven-day range and targets 1.1270 next .
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 that 1.1660.
AU swap yields 1
day: In response to movement in Australian bond futures overnight
the 2yr should open around 2.81% while the 10yr should open around 3.79%.
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
NZ swap yields 1
day: In response to overnight changes in US and Australian bond
yields the 2yr should open down 1bp at 4.06%, while the 10yr should also open
down 1bp at 4.61%.
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.
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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