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Sunday March 2, 2014 - 22:18:40 GMT
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NZ Morning Thoughts - FX & IR

NZ Morning Thoughts - FX & IR


Imre Speizer

The month ended on a positive note, albeit tempered by developments in Ukraine. US data was mainly better than expected (Chicago PMI and consumer confidence beat, GDP missed), as was Eurozone CPI. The S&P500 made a fresh record high but wobbled near the close (+0.3%) as news of Russian incursions in Crimea unfolded. China's manufacturing PMI (official version) slightly beat estimates.

6:03AM, 03 Mar 2014


Market Wrap:

Global market sentiment: The month ended on a positive note, albeit tempered by developments in Ukraine. US data was mainly better than expected (Chicago PMI and consumer confidence beat, GDP missed), as was Eurozone CPI. The S&P500 made a fresh record high but wobbled near the close (+0.3%) as news of Russian incursions in Crimea unfolded. China’s manufacturing PMI (official version) slightly beat estimates.

Interest rates: US 10yr treasury bond (futures implied) yields initially rose from 2.64% to 2.70% on the improved risk sentiment but retreated into the close to 2.64%.

Australian 3yr government bond yields (implied by futures) traded between 2.86% and 2.89%. The 10yr yield initially rose from 3.97% to 4.02% but completely retraced into the close.

Currencies: The US dollar index fell to a fresh one-month low after the EZ CPI report. EUR rose from 1.3700 to 1.3825, but opens slightly lower this morning at 1.3779. USD/JPY initially rose from 101.60 to 102.30 but late session risk aversion saw it down to 101.67, and it opens at 101.50. AUD extended the Sydney afternoon decline, from 0.8970 to 0.8916. NZD initially rose from 0.8390 to 0.8426 – a four-week high – but fell into the close to 0.8380. AUD/NZD drifted low from 1.0680 to 1.0627 – a fresh one-month low.

The weekly CFTC speculative futures positioning report showed AUD shorts reduced, NZD longs increased, EUR longs increased, and US dollar index longs reduced to around zero.

Economic Wrap:

US GDP growth was revised down from 3.2% annualised to 2.4% in the second estimate for Q4 13. The main drivers of the revision were personal consumption (contribution cut by 0.5 ppts, half of that due to a lower durables spending estimate) and net exports and inventories, both shedding about 0.3 ppts of their advance reported contribution. Business spending on equipment and software was revised up increasing investment’s contribution to the GDP bottom line by 0.4 ppts.  Two observations: although revised a little lower, Q4 still saw a sharp increase in household services consumption, but this was at the expense of durables spending, now the weakest quarter for several years. Westpac’s miserly forecast of 2.2% Q4 GDP growth was near the bottom of the market range (4th lowest of 87 forecasts) ahead of the advance GDP report’s release a month ago, and spectacularly wrong at the time -  or so we thought. It turns out growth did decelerate more abruptly from what we have consider to be Q3’s unsustainable 4.1% annualised growth pace.

Euroland flash CPI was unchanged at 0.8% yr in Feb, and the core rate rose further from 0.8% yr to 1.0% yr. Given that German inflation was reported 0.2 ppts lower in preliminary euro-harmonised  CPI data yesterday, this outcome suggests that inflation elsewhere in Europe might have picked up somewhat.

Market Outlooks:

Event risk today: Potential for volatility with plenty of second-tier data out today as well as developments in the Ukraine to watch. NZ has Q4 terms of trade while Australia has inventories, home sales and prices, and an inflation indicator. China has non-manufacturing PMI (official version) plus manufacturing PMI (HSBC version). The US has personal income and spending, PCE deflator, ISM manufacturing, and construction spending.

AUD/USD 1 day: Geo-political risk constraining AUD, 0.8905 below looking vulnerable.

AUD/USD 1-3 month: The RBA’s recent shift in bias plus net short speculative positioning supporting AUD somewhat. However, there remains a question mark around Australia’s economy, with tension between strong business sentiment and weak consumer sentiment not expected to be resolved until the second half of this year.  

NZD/USD 1 day: Geo-political risk preventing it from breaking above the key 0.8430 for now. Some support at 0.8345 but Ukraine is the wild card.

NZD/USD 1-3 month: Stuck in a 0.8050-0.8400 sideways range, probably until the RBNZ starts hiking on 13 March. Once the tightening cycle is underway, though, we expect a rally towards 0.8550 which should be reached by mid-year.

AUD/NZD 1 day: Gravitating towards 1.0540 below.

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, especially once the RBNZ cycle is underway. Our base case is the 1.02-1.05 area should mark the cycle bottom later this year, but  we wouldn’t entirely rule out 1.00.

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 4.35%. The downside for both continues to look vulnerable.

AU  swap yields 1-3 month: Strong inflation readings plus the shift in stance by the RBA are partly offset by China growth worries, expected to leave the 2yr in a 2.80%-3.05% range during the weeks ahead.

NZ swap yields 1 day: In response to changes in US and Australian bond yields the 2yr should open unchanged at 3.82%, while the 10yr should open unchanged at 5.00%.

NZ  swap yields 1-3 month: The upward trend in NZ interest rates remains intact, mainly due to NZ’s improving fundamentals and looming RBNZ tightening. The 2yr targets beyond 3.95% during the next few months, while the 10yr targets 5.40%. The curve should flatten throughout 2014.




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