BNZ Research

NZD Corporate FX Update

Global and domestic forces have recently driven the NZD down to a 2½-year low. Globally, the persistent downward pressure on emerging market currencies has spilled over into a weaker NZD. A stronger USD, escalating US-China trade tensions, and concern about the global growth outlook, amongst other factors, have been in play. Domestically, business confidence has fallen to a decade-low, other activity indicators have softened and the RBNZ has adopted a more dovish-than-expected policy stance.

NZD: At the whim of DJ Trump

The more dovish than expected RBNZ Statement today caused a notable fall in the NZD but we don’t see small changes in the monetary policy outlook as a key driver of currencies at present – apart from today (!) where one-sided positioning in the rates market and technical factors for the currency have exacerbated the market reaction. Our focus is directly on the US-China trade war that appears to be escalating.

NZD 1H18 Review and Outlook

With the first half of the year over it’s an appropriate time to reflect on what’s gone on and the outlook for the rest of the year and beyond. The chart below shows the performance of the NZD on all the key crosses over the first half of the year. The NZD saw a broadly based fall, with the largest falls against the USD and JPY and little change against other commodity currencies like the AUD and CAD.

NZD Corporate FX Update

We have become a bit more cautious about the near term outlook for the NZD. The USD recovery that began mid-April might have more legs, with the US economy showing more growth momentum, and we have increased conviction that the Fed will continue along its path of gradually raising the Fed Funds rate.

USD Outlook: It’s Complicated

After trending down from early 2017, the USD staged a
decent counter-trend rally from mid-April through to late
May, worth about 5% on the USD TWI-majors index and
6% on the DXY. It was a broadly based rally, accentuated
by prior heavy short speculative positioning in the USD,
emerging Italian political risk that weighed on EUR, poor
data and negative Brexit headlines that weighed on GBP,
and the lack of a renegotiated NAFTA deal that weighed
on CAD. The counter-trend rally in the USD was
instrumental in seeing the NZD fall from over 0.73 to
below 0.69, itself accentuated by prior heavy long
speculative positioning that has now been cleaned out.

Mixed Results

While New Zealand’s services sector experienced an increase in expansion levels during July, there were mixed results when looking beyond the main figure, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

Downward Trend

New Zealand’s manufacturing expansion continued its downward trend, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

RBNZ Stridently Dovish

The new regime has clearly revealed its spots with today’s Monetary Policy Statement. The question going into it was would the Governor be more concerned about the weakening growth indicators or would he be more bothered by the upward trend in both core and headline inflation? The answer is now there for all to see – weak growth won the day. Inflation forecasts were, on balance, little changed but this was not enough to prevent the RBNZ lowering its interest rate track.

Labour Market Soldiers On

The New Zealand labour market remains robust. Employment is expanding, unemployment is low, and wages are rising. A lift in the minimum wage boosting the latter. It is no one-off. Overall, the labour market looks in line with RBNZ thinking. Activity indicators support a bounce in Q2 GDP. Looking ahead, we expect employment growth to slow as labour supply struggles to maintain past momentum while there are question marks around future labour demand. Wage inflation is expected to edge higher.

Still Not Happy

Corporate New Zealand is in a funk. Whether it is uncertainty around government policy, concern around global trade tensions, or ongoing angst regarding the disease Mycoplasma bovis, businesses are not happy. Margins are under pressure from rising costs. This is clouding the growth outlook as employment and investment intentions are reined in, but at the same time seeing inflationary pressure build as more firms intend to raise prices.

Economic Expansion Maturing

Economic cycles always come to an end. We can say that with certainty. We think the current cycle has further to run but we caution that the expansion is already very mature, cracks are developing and it feels as if a tipping point is not far away. Whatever the case, we believe the operating environment for businesses and investors alike is becoming more difficult to navigate.

Can We Really Be Headed To Negative Rates?

Something about recent Reserve Bank forecasts continues to niggle us. That is, their inference of a near-zero Official Cash Rate (OCR) in real terms, right the way out to 2021. Yet the Bank has also inferred, by way of other material, that New Zealand’s neutral real cash rate is in the vicinity of 1.50%*. We are having trouble reconciling these two things, especially as the Bank is forecasting a positive output gap.

Inflation Provides No Drama

There was more than usual interest in this morning’s Q2 CPI figures. Markets were cagey, sensing the possibility of a downside shock. In the event, there was no such drama. Sure, the 0.4% q/q and 1.5% y/y inflation rates were a tick under market expectations but not materially so given the general fear of something softer. Meanwhile, core measures of inflation generally edged higher. On balance, nothing to change the RBNZ outlook.

Seasonal Adjustment

New Zealand’s services sector experienced a decrease in expansion levels during June, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

Autumn Tinge

New Zealand’s level of manufacturing expansion experienced a dip in June, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

Dairy Prices Drop

Dairy prices slumped at the GDT auction overnight. There are many factors in play including a usual downward seasonal influence as GDT volumes rise. It is still early days in the dairy season, but there is now downside risk on prevailing milk price forecasts. There are some clear negatives circulating, but not all indicators are pointing downward with a lower NZD and recently underwhelming world milk supply growth chief among those on the price supportive side.

Outlook for Borrowers: Post-June OCR Review

At the June OCR Review, the RBNZ kept the OCR on hold at 1.75%, as universally expected. There were some subtle changes in language however. The RBNZ said the OCR will remain at 1.75% “for now”, in the May MPS the wording used was “for some time”. The RBNZ also said the next move could be a rate cut or rate hike, but removed the previous reference to the risks being equally balanced.

RBNZ Will Move Rates Sooner

The RBNZ is closer to moving interest rates. That is the key message from today’s OCR review. What is less clear is in what direction. Be that as it may, we stick with our view that the cash rate is more likely to rise than fall and that the Reserve Bank will be bringing forward that rate hike, from its previously published early - 2020, in due course.

Easing Talk Premature As Confidence Slumps

A number of the indicators in today’s ANZ Survey have slipped to levels not seen since the global financial crisis. Unsurprisingly, this has got a number of folk talking about the prospect of near–term rate cuts in New Zealand. But we still think that such talk is premature, as CPI inflation is set to move back to the mid-point of the RBNZ’s target range within six months.

GDP Underdone and Understated

We see these figures as being ”the first leg of the double”. For some time now we have been pushing the view that GDP would surprise the RBNZ to the downside while CPI inflation would surprise to the up. GDP was lower than both RBNZ and Treasury assumptions. But we still forecast Q2 CPI inflation of 0.6% compared with the central bank’s 0.4% pick. On this basis, we caution market participants against getting too dovish on future RBNZ actions based on misses in real economy outcomes.

Not So Positive

This morning’s Balance of Payments (BOP) headlines were about as non-threatening as they were anticipated to be. The year to March 2018 current account deficit printed at $7.9b, or 2.8% of GDP – exactly in line with market expectations (and ours). But the undercurrents suggest an expanding deficit is in train – the degree to which is worth keeping a tab on.

Order Up

A lift in new orders/business contributed to New Zealand’s services sector experiencing a lift in expansion levels in May, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

Q1 GDP Preview – Downside Risks

For a good while now, we have been wary about how this year’s Q1 GDP will go. We remain so. The reasons for this still stick out. And moribund business confidence and cooled consumer sentiment, since the change in government, obviously haven’t helped.

When Further Below Par Is Not Good

Moving further below par is great if you’re a golfer. But not if you’re a business survey of expectations, like the one updated by the ANZ bank this afternoon. Its net confidence measure slipped back to -27 in May, from -23 in April. Of course, these ongoing struggles in confidence don’t mean the economy is going to underperform. But the survey’s own-activity expectations do. They have a far better correlation to GDP growth. And in May they slipped to +14, from +19. This was further south of the norm, of +28. Fore!

Macroeconomic Risks From NZ Cattle Disease

The economic risks associated with cow-disease Mycoplasma bovis are rising. The Government plans to cull 152,000 cows to try and eradicate the disease, equivalent to around 1.5% of NZ’s total cattle population. This will affect production. Costs are rising and much uncertainty remains. Restricted movement of animals will dent industry efficiency and productivity. Downside economic risks need monitoring.

NZD Consolidates Through July

Currency markets were relatively stable through July, with low volatility across the key majors. CNY was a notable exception, with significant weakness evident, encouraged by an easier monetary policy stance adopted by the PBoC. At times, there were spillover effects for the NZD, but overall it maintained its poise and traded in a tight range, showing signs of consolidation through the month after the steep fall from mid-April to end-June.

NZD Struggles In June

The NZD showed a broadly based fall over June as global and domestic factors weighed...Fresh 2-year low reached for NZD/USD...NZ-US rate differentials continued to fall

NZD Eventually Finds Support During May

May was an eventful month that incorporated some turmoil in emerging markets, swings in oil prices, a meltdown in Italy, and US-China trade tensions. Amidst all that, the record will show the NZD TWI relatively flat for the month, albeit driven by some divergent swings on NZD crosses.

NZ Linkers Post-RBNZ: Better Fundamentals And Very Cheap

In early May, we entered a NZ breakeven inflation (BEI) widener position, buying the 2035 NZ linker and selling the 2037 nominal NZGB at 146bps. Our rationale for the trade was based on our expectation that annual NZ CPI inflation would move to 2% this year and this should ultimately be reflected in wider breakevens. Furthermore, with breakeven inflation below most measures of core inflation, we believed the position provided a ‘buffer’, or margin of error, in case our inflation forecasts were too high.

Outlook for Borrowers: Post-August MPS

How Long Will The NZ 10 Year Remain Decoupled From The US?

The US 10 year Treasury yield has increased almost 100bps from the local trough reached last September. Over that same period, the NZ 10y swap rate is unchanged – see Chart 1. NZ is not alone; Australian, European and Swedish swap rates have barely increased over that same period.

Trade Idea: Buy LGFA 2023 vs. NZGB 2023

Intermediate maturity LGFA-NZGB spreads have widened over the past two months. The constant maturity 5 year LGFA-NZGB spread reached the widest levels since early 2017 last week, although it has since retraced some of that move – see chart 1.

An Update On NZ Funding Pressures (Or Lack Thereof)

NZ BKBM-OIS has retraced from a peak of 31bps in late April to almost 20bps currently. In contrast, Australian 3m BBSW-OIS is 54bps and remains at historically elevated levels. The divergence between NZ and Australian bills-OIS has raised some questions among market participants around the respective drivers of the two markets.

Trade Idea: Receive November 2018 OIS

The RBNZ OCR Review contained a less firm commitment to keeping rates on hold. The Statement said that the RBNZ sees the OCR on hold “for now”; in the May MPS the wording used was “for some time”. Additionally, the RBNZ removed the reference to an equal balance between the risk of a rate cut and rate hike.

The Neutral OCR Could Be Below 3.5% - Implications For NZ Rates

The neutral cash rate can be thought of as the level of the OCR that is neither stimulatory nor contractionary for the economy. In an idealized world, when the OCR is at neutral, growth should be about trend, the output gap zero and inflation stable at target.

Housing New Zealand Limited (HNZL) – A New High Grade Issuer

Housing New Zealand Corporation (HNZC) is responsible for the provision of state housing in New Zealand. It currently owns or manages 63,000 properties across the country.

Government Bond Supply And The Outlook For Swap Spreads

The Budget last Thursday sprung a few surprises in terms of the outlook for debt issuance (some of which the team outlined in Fiscally Sound But Risks Building). Some of the key headlines from a debt market perspective were...

Revving On the Spot

Wednesday’s Q2 retail trade report appears prone to feed fears of a stalling in consumer spending. Formally, we expect a 0.2% increase in the quarter (2.0% y/y), after the bare 0.1% gain reported for Q1 (3.6% y/y). However, this is based on the monthly electronic card transactions we have to key off these days, which have been a lousy indicator to the quarterly retail sales outcomes of late. There is still hope for Q2 retail trade to look OK…especially via upside potential in auto volumes.

Where Is The Fiscal Stimulus?

There is much to consider in the macroeconomic landscape at present. This follows from the surprisingly dovish RBNZ statement last Thursday, the lack of any visible boost from NZ’s fiscal stimulus and, looking internationally, intensifying concern around Turkey’s economy.

Wage Inflation To The Fore

When the week is all done and dusted we are expecting to report: rising inflationary pressure; a further tightening in the labour market; but signs that economic growth is losing its momentum. An interesting cocktail that will pose conflicting signals for market watchers.

Trading Places

We expect June’s merchandise trade figures to affirm the idea of a sizable bounce-back in net export volumes in the June quarter (good for GDP), but also a slight drag still coming through on the annual current account.

Shoe-Gazing on Inflation

With nervousness about tomorrow’s June quarter CPI inflation not proving robust, there is even more reason to consult the various core measures. Amongst these, the Reserve Bank’s sectoral-factor version for non-tradables will be worth checking out. It ticked up to 2.6 y/y in Q1.

Pique Performance

There will be no prizes for guessing that tomorrow’s NZIER Quarterly Survey of Business Opinion (QSBO) will offer a shakier view on the economy than it did three months ago. The question is; how much worse? But also bear in mind that a good deal of the angst relates to policies, and capacity constraints, which are bound to inflate costs.

RBNZ OCR Preview: Where There’s A Will

“The Official Cash Rate will remain at 1.75 percent for some time to come”. That’s not our emphasis, but the opening policy line from May’s Monetary Policy Statement (MPS). Yes, it was followed by the Bank stating that the direction of its next move “is equally balanced, up or down.” But, practically, the “will” was strong, and indicates the way. It will take a lot to budge the Reserve Bank from its on-hold mentality.

GDP Riding the Clutch

Any underperformance in Q1 GDP growth is likely to reflect identifiable drags of a transitory nature, which, in turn, should support the idea of stronger growth in Q2. Acceleration post Q1 is certainly the message from the latest Performance of Manufacturing and Services Indices.

Manufacturing Survives Slings and Arrows

Our worst fears around Q1 GDP look to have been allayed. Still, it’s looking relatively slow. In particular, manufacturing activity appears to have dodged a number of bullets during the March quarter.

A Sapping Start to 2018

Our production-GDP growth estimate for Q1 has edged down to 0.5%. And even this is sweating on the three remaining key partials – any one of which could yet print a clanger. But as nervous as we are on this, we still believe GDP growth in Q2 will largely make up for any perceived deficiencies in Q1. Providing consumer spending holds up OK, that is – with spiking fuel prices arguably more than offsetting the (selected) government hand-outs due to the household wallets from 1 July.

Cattle Disease Adds To Business Angst

Thursday’s ANZ business survey will arguably be the market’s focal point. However, the immediate attention will be this afternoon’s government announcement on how it plans to tackle the cattle disease Mycoplasma bovis – a factor in the agriculture sector’s current pessimism, despite strong commodity prices. We will monitor this process intently, including for any significant impacts it might have on our macro-economic views.

BNZ Markets Today

Commodity currencies outperformed on Friday while the USD was the weakest of the majors, supported by a more positive outlook for US-China trade tensions. The rates market was little changed.

BNZ Markets Today

Reports yesterday that the US and China would resume trade talks – albeit low level ones – has boosted risk appetite. US equities reversed yesterday’s falls, helped also by strong corporate earnings, while commodity prices and most EM currencies have also risen. Amidst a sharp rise in the offshore Chinese Renminbi, the NZD and AUD are amongst the better performing currencies, although the moves have been pretty modest.

BNZ Markets Today

There is a general risk-off tone to markets over the past 24 hours, with emerging markets remaining under pressure, despite a further recovery in the Turkish lira. There has been some spill-over via lower global equity markets, commodity prices, and bond yields. The USD has continued to strengthen, although mainly against emerging market currencies. The NZD made a fresh low overnight, but hasn’t been overly affected thus far by the pick-up in risk aversion.

BNZ Markets Today

The USD has continued to push higher overnight, with the Bloomberg dollar index making a new high for the year. The Turkish lira appreciated and this helped support a general recovery in risk appetite.

BNZ Markets Today

Turkey remains in the headlines after more volatility in the lira over the past 24 hours, but there has been limited contagion so far outside of other emerging market markets. Developed market equities are modestly lower overnight and core bond yields are little changed. The USD is stronger against emerging market currencies but is little changed against G10 currencies, including the NZD.

BNZ Markets Today

The worsening macroeconomic situation in Turkey escalated into an all-out currency crisis on Friday night, with the Lira falling 24% at one point. This triggered weakness in other emerging market currencies, broad-based strength in the US dollar and a pick-up in risk aversion. The NZD, which was already on the back foot after the MPS, has fallen further to below 0.66. NZ rates experienced another substantial fall on Friday as the market continued to digest last week’s MPS and the subsequent comments from Assistant Governor McDermott.

BNZ Markets Today

Market volatility remains suppressed but there has been some mild outperformance of commodity currencies and the yen (an unusual combination) for the day, while GBP remains unloved. US equities are flat and the global rates market shows little change as well.

BNZ Markets Today

A more positive day for the Chinese yuan dragged the AUD higher but the NZD has been left behind and is flat, even with higher risk appetite, with the S&P500 approaching a fresh high and slightly higher global bond yields.

BNZ Markets Today

Currency movements were modest on Friday, although the AUD seemed to be a beneficiary of the PBoC’s move to rein in the yuan’s depreciation. US rates were slightly lower following the key employment report.

BNZ Markets Today

Increased focus on trade tensions sees a weaker NZD, while GBP has also underperformed despite the BoE hiking rates. UST yields have slipped back below the 3%
mark.

BNZ Markets Today

Currency movements overnight have been modest, with the yen slightly stronger on slightly lower risk sentiment. The NZD and AUD have sustained the small losses seen during local trading hours yesterday. Global rates are higher, with some spillover evident from higher JGB yields.

BNZ Markets Today

On an action-packed day, market movements have been modest, with the AUD and CAD supported overnight and the NZD dragging the chain, while JPY has remained soft after the more dovish BoJ yesterday. The latter has also kept global bond rates in check.

BNZ Markets Today

The USD is weaker across the board as the new week begins, supporting a lift in the NZD towards the top of its recent range. Global rates are higher, with some nervousness ahead of today’s widely anticipated BoJ meeting.

BNZ Markets Today

It was a reasonably quiet end to the week on Friday, with the exception of a sharp decline in US tech stocks. US Q2 GDP was marginally below expectations, which triggered a slight decline in Treasury yields and the US dollar. A big week awaits – the BoJ, BoE and Fed all meet, while payrolls is released on Friday. The focus locally will centre on the labour market report on Wednesday.

BNZ Markets Today

It’s been a busy past 24 hours. Global equity markets got a boost from Trump and Juncker’s agreement to hold off on tariffs but the positive sentiment was partially dented
by a 20% fall in Facebook shares after its earnings results. The EUR fell after Draghi confirmed that the ECB wouldn’t raise rates until after next summer. The NZD has moved
lower in sympathy with the EUR and remains firmly rangebound for now.

BNZ Markets Today

US equities moved higher overnight, helped in part by some conciliatory comments from President Trump at a press conference with EU President Juncker. The USD weakened across the board, but remains within recent trading ranges. Against a backdrop of positive risk sentiment, the NZD has made further modest gains.

BNZ Markets Today

Global equities moved higher overnight, supported by more positive earnings results and China’s recent policy easing measures. Bond yields stabilized, while FX moves were also modest. EU President Juncker meets Trump tonight to discuss trade.

BNZ Markets Today

Global yields moved higher again overnight, as speculation continued to mount ahead of the Bank of Japan monetary policy meeting next week. The PBOC injected liquidity via its MLF facility, and the depreciation in the CNY contributed to a lower AUD and NZD.

BNZ Markets Today

President Trump was at it again on Friday night, blaming China and the EU for manipulating their currencies and interest rates and again questioning the Fed for raising
rates. The USD fell sharply, extending the moves from Thursday after Trump’s previous round of comments. The NZD has moved up above 0.68, helped by the broadbased USD weakness and a rebound in commodities.

BNZ Markets Today

The US dollar index made a fresh year-to-date high overnight, before reversing sharply as President Trump said he wasn’t happy about the Fed raising rates, which he said put the US at a disadvantage. The CNY made a new low for the year after China took further steps to ease policy. The NZD moved lower overnight, in sympathy with the moves in the CNY.

BNZ Markets Today

It was another quiet night across markets with volatility remaining very subdued. There wasn’t much new from Fed Chair Powell’s testimony to Congress but US equities and the 10 year US bond yield are slightly higher.

BNZ Markets Today

In his semi-annual testimony to Senate, Chair Powell said that the Fed intends to stick to its gradual rate rise path “for now”. US equities are higher on the day and the USD stronger but bond yields are little changed. Politics continue to weigh on the GBP, although the Government narrowly avoided defeat on a pro-EU amendment to the
Trade bill. The NZD is the top performing currency over the past 24 hours after a surprise increase in the RBNZ’s Sectoral Factor Model of underlying inflation.

BNZ Markets Today

It was a reasonably quiet end to the week, with the S&P500 edging out a small gain and closing at its highest level since February. Ahead of the NZ CPI release tomorrow, the NZD was the weakest performing G10 currency. Offshore, there will be focus this week on Fed Chair Powell’s semi-annual testimony, US corporate earnings season and Chinese activity data.

BNZ Markets Today

Risk markets have recovered overnight as China didn’t
immediately retaliate to the President Trump’s latest
threat to impose tariffs on $200b worth of imports.
Against a backdrop of better risk sentiment, the NZD has
bounced a little, but it remains near multi-year lows.

BNZ Markets Today

A bit of news over the past 24 hours. Shortly after we hit
the send button yesterday morning, President Trump
continued with plans to impose tariffs on an additional
$200b of Chinese goods by releasing a list of targeted
products. The US Trade Representative’s office said the
10% tariffs could take effect after consultations end on 30
August. If these proposed tariffs proceed, this would see
duties implemented by the Trump administration on China
cover about half of all US imports from that country. It is
another escalation in trade tensions. China condemned
the move and late yesterday afternoon said it would be
‘forced to retaliate to new US tariffs’. These developments
punctured the previously prevailing positive risk
sentiment.

BNZ Markets Today

The new week has begun with a further recovery in risk appetite amidst light trading conditions. The AUD has modestly outperformed, while trading in GBP has been whippy, driven by political forces.

BNZ Markets Today

The USD was broadly softer after the White House went
ahead with further tariffs on Chinese imports and it
weakened further after the US employment report. Risk
appetite was higher, with the market unperturbed by the
tariffs and China’s retaliatory response, which were well
anticipated. The NZD closed the week on a strong note
and modestly higher on all key crosses.

BNZ Markets Today

Trading conditions remain lighter than usual following the
US holiday, with only modest movements in currency and
bond markets against a backdrop of stronger equity
markets.

BNZ Markets Today

The US Independence Day holiday has meant quiet trading conditions and small movements in asset prices. The NZD has consolidated around the 0.6760 mark.

BNZ Markets Today

The NZD has recovered, helped by a verbal intervention by
the PBoC to help support the yuan, on a day where US
equities and bond yields have moved lower.

BNZ Markets Today

The beginning of the third quarter has got off to a rough start, with falling risk appetite seeing weaker equity markets and the NZD and AUD diving to fresh lows. Despite the negative risk tone, global bond yields remain steady.

BNZ Markets Today

The USD was broadly weak on Friday, reflecting a mixture of news and position covering ahead of month-end. This saw the NZD recover a little from a fresh 2-year low, although much of the action was in local trading hours. There remained little action in global bond markets, while NZ rates fell further.

BNZ Markets Today

The NZD has nudged down further in overnight trading,
sustaining further losses since the RBNZ’s OCR Review
yesterday, while CAD is a notable outperformer. US
equities and US 10-year yields are higher.

BNZ Markets Today

The NZD has been one of the worst performers over the past 24 hours, although much of the damage was done during local trading hours, with only a small further fall overnight to just below 0.68. Risk appetite is weaker, with US equities slightly lower and UST10s down 5bps.

BNZ Markets Today

US equities are modestly higher after yesterday’s chunky
sell-off, led by the energy sector on higher oil prices.
Against a backdrop of a broadly stronger USD, the NZD
has underperformed, while rates markets have barely
moved.

BNZ Markets Today

Global equity markets have been rattled by focus on
escalating US-China trade tensions but there has been
limited spillover for currencies and bond markets.

BNZ Markets Today

The NZD and AUD ended the week on a positive note on a day where the USD struggled to perform against the majors. Rates were little changed for the day.

BNZ Markets Today

A generally quiet session overnight with a somewhat better mood prevailing in markets. Brushing off central bank concerns around trade tensions, stock markets are marginally higher, interest rates up a touch, while currency movements have been generally limited. Oil prices were mixed ahead of OPEC’s key meeting on Friday. The NZD has been a clear underperformer.

BNZ Markets Today

It’s been a volatile past 24 hours after President Trump’s
announcement that he was considering tariffs on $200b
worth of Chinese imports, a further escalation in US-China
trade relations. After a generalised flight to safety move
during yesterday’s Asian session, markets have recovered
some ground overnight. The EUR is weaker after a dovish
speech by ECB President Draghi . Meanwhile, the NZD
has fallen to around 0.69.

BNZ Markets Today

Markets were quiet overnight, with no fresh
developments on the US-China trade front and no major
data released. Oil prices rose over 2%, partially reversing
the falls seen on Friday, on reports that OPEC will agree to
only a small increase in production. The NZD has traded a
narrow range over the past 24 hours and is slightly lower
on the day.

BNZ Markets Today

After much anticipation, the US administration announced tariffs on $50b of Chinese imports on Friday with the Chinese government responding in-kind later that day. Commodities, commodity currencies and emerging markets reacted negatively to the threat of a “trade war”, although there has been little impact (yet) on US equities or bonds. Against this backdrop, the NZD has fallen to 0.6950, a three-week low.

BNZ Markets Today

The USD is stronger across the board while the EUR has
been hit by a dovish ECB, which has also put downward
pressure on global rates. The NZD has performed okay
under the circumstances, rising on a few of the major
crosses.

BNZ Markets Today

The USD was weaker heading into this morning’s FOMC announcement but has recovered after a more hawkish statement was delivered. UST yields are slightly higher post the announcement.

BNZ Markets Today

Market volatility remains subdued. Currency movements
have been modest although the NZD and AUD have
slightly underperformed in overnight trading. Equity and
bond markets are little changed.

BNZ Markets Today

It has been a quiet start to a huge week on the economic calendar and ahead of the historic US-North Korea leaders’ meeting.

BNZ Markets Today

On Friday, market movements were modest ahead of the weekend’s G7 leaders’ summit. The market didn’t seem to care too much about the lingering US trade tensions with other major countries, even as Trump fired off a salvo of tweets highlighting the unfairness of current trade policy. As if actively seeking to agitate other G7 leaders further ahead of the weekend meeting, Trump suggested that Russia should be brought back into the fold, re-creating the G8 forum before Russia was expelled after Putin annexed Crimea a few years ago.

BNZ Markets Today

There is currently a risk-off feel to markets, with focus on
emerging markets and this time Brazil being under the
pump. Under the circumstances, the NZD has held up
relatively well, against a backdrop of softer equity markets
and lower US Treasury yields.

BNZ Markets Research

The AUD and EUR show the best gains for the day, with safe-havens JPY and CHF dragging the chain, against a backdrop of improved risk appetite, with equity markets up, the VIX index back below 12, and global bond rates higher.

BNZ Markets Today

There has been plenty of news to digest but market
movements have been well-contained, with flat US
equities and global rates down a little. In currency
markets, GBP has outperformed, while the NZD is flat.

BNZ Markets Today

Markets have brushed off increased US trade tensions and begin the week with positive risk sentiment, helping to support the AUD and NZD, while global bond rates edge higher.

BNZ Markets Today

Italian risks receded further last night, with the Five Star
and League parties agreeing to form a government with a
new choice of finance minister and two polls overnight
showing Italians overwhelmingly favour the euro. Market
focus has started to shift back to trade tensions, with the
US imposing tariffs on aluminium and steel from the EU,
Canada and Mexico and these countries promising to
respond in kind - equity markets are a moderately lower in
response. The NZD is back above 0.70 for the first time in
almost a month.

BNZ Markets Today

Pressures on the Italian bond market eased overnight, with the 2 year Italian yield falling over 100bps. There have been reports that the League and Five Star might have another attempt at forming a government (presumably with a more mainstream choice of finance minister) while Five Star leader Di Maio has made some more reassuring comments. There has been a broad-based unwind of yesterday’s flight to safety moves, with equities higher, core bond yields higher and the EUR stronger. Against a backdrop of a stronger EUR and improving risk appetite, the NZD has risen close to 0.70.

BNZ Markets Today

Last night saw an absolute meltdown in the front-end of
the Italian bond curve and serious signs of capitulation.
The 2 year Italy-Germany spread closed around 190bps (!)
wider with the market concerned the upcoming Italian
election will be seen as a de facto vote on the EU/euro.
Signs of contagion have started to emerge with core bond
yields down sharply in other markets, major equity indices
down and the JPY and Swiss Franc strengthening.

BNZ Markets Today

Italian yields have skyrocketed again and the EUR weakened, as the market prepares for new elections in Italy, likely in Autumn. There remains relatively little contagion from Italy into other markets as yet, with S&P500 futures near unchanged and FX moves reasonably modest. It was a public holiday in the UK and US overnight and there was no major data released.

BNZ Markets Today

Oil prices fell sharply Friday after Saudi Arabia said it was “likely” OPEC and Russia would boost production. The decline in oil prices in turn pushed down core bond yields and energy stocks. Focus remains on European politics, with both Italy and Spain potentially set for new elections. Italy’s President vetoed the Eurosceptic choice of Finance Minister a short while ago, leading PM-elect Conte to give up on forming a government. The market has taken the news positively, with the EUR moving modestly higher this morning.

BNZ Markets Today

Overnight market moves have been fairly modest, with a
hint of USD weakness, slightly weaker equity markets and
further downside pressure on global rates.

BNZ Markets Today

Market sentiment has soured a little, seeing safe-haven currencies like JPY outperform, softer global equity markets and lower global bond rates, with UST10s dipping below 3%.

BNZ Markets Today

Market movements have been small on a day with no
economic releases and only a few snippets of news.

New Zealand At A Glance

New Zealand threatens to move into a pseudo-stagflationary environment. Growth is slowing and we doubt that even the substantial fiscal stimulus that is being delivered will result in a significant increase in the pace of the expansion. Supply issues such as physical capacity constraints, infrastructure bottlenecks, a low unemployment rate, and declining working age population growth are major factors behind the softening. In turn, these drivers create a modicum of inflationary pressure which is exacerbated by a weakening currency and government charge increases. Against this backdrop, the RBNZ seems reluctant to shift interest rates and appears to be keen to use the full flexibility that a target range permits.

New Zealand At A Glance

The NZ economy continues to perform relatively well. And there is much to sustain momentum. This includes a sizable fiscal stimulus, which kicks in proper from mid-year. From a broader perspective, however, growth still looks inclined to settle a bit lower. That said, inflation is primed to increase, as a consequence of chronic capacity constraints, resurgent commodity prices, and a tiring NZ dollar. This will press the case for the cash rate to rise, although we expect the RBNZ will lag in this process. Risk factors coalesce around currently-stretched asset prices – here and abroad – in the context of ongoing removal of global monetary stimulus, led by the Fed.

Exports Feeling Full on Food

For most of NZ’s major agricultural industries, global markets are critical. NZ tends to export a large share of its primary production. Here we take a brief look at various industries’ recent performance through the export lens. Of course, export growth does not necessarily equate to profitability but it can be a useful barometer.

Monitoring Risks From M. Bovis

The economic risks associated with cow-disease Mycoplasma bovis are rising. The Government, alongside industry, plan to cull around 152,000 cows in an attempt to try and eradicate the disease from NZ. Production will be affected, while costs and disruption will rise. Meanwhile, prices remain generally buoyant across the primary sector.