BNZ Research

Our research team offers expert commentary on economics, foreign exchange, fixed interest and credit, to help inform your organisation’s risk analysis and decision making. 

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Currency Research

NZD: Rates a secondary force only

Jason Wong -
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- Central bank statements and expectations can kick around currencies over the very short term but we think other drivers are more important over the medium-term. Relationships between NZ-global rate spreads and the NZD have weakened over recent years.

- Risk appetite and commodity price trends are more important drivers of the NZD than interest rate differentials. Our monetary policy expectations don't have a significant bearing on our outlook for the NZD over the next year or two.

- High risk appetite - its highest level this year - supports the current level of the NZD. Our projections for a weaker NZD into year end and early next year assume that eventually risk appetite must surely fall from its giddy heights. A weaker commodity price dynamic is expected to give further weight to that view.

NZD Corporate FX Update

Jason Wong -
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The risk-loving environment provides near-term support for the NZD but our forecasts are predicated on this dynamic not lasting forever. A further Fed hike in December remains in our forecast, which supports a modest recovery in the USD and nudges the NZD down to 0.70 by year-end. The NZD is then projected to hover around that level through 2018.

NZD Corporate FX Update

Jason Wong -
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The risk-loving environment provides near-term support for the NZD but our forecasts are predicated on this dynamic not lasting forever. A further Fed hike in December remains in our forecast, which supports a modest recovery in the USD and nudges the NZD down to 0.70 by year-end. The NZD is then projected to hover around that level through 2018.

NZD/AUD: A deserved fall on fundamentals

Jason Wong -
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NZD/AUD has fallen alongside our short term model estimate, given the recent strong outperformance of Australian commodity prices (metals surging ahead) and the toning down of NZ rate hike expectations.

This fundamental shift needs to be respected, and our NZD/AUD projections have been downgraded accordingly alongside a material upgrade to NAB's AUD forecasts. Our short term FV model estimate, which can get kicked around by commodity prices, has fallen to 0.9170.

We now see, broadly speaking, a 0.91-0.95 range for the cross through to the end of next year, with the higher end more likely prevailing later in the period. The near-term threat is a breach of 0.91 if metal prices continue to rally, alongside a possible knee-jerk reaction to any NZ political uncertainty.

Corporate FX Strategy - NZD Corporate FX Update

Jason Wong -
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After a strong run through to the end of July, the NZD has significantly underperformed, driven by a confluence of factors. Net speculative positioning has been and remains net long NZD at elevated levels, setting the scene for a contrarian move downward. NZ commodity prices have softened over recent weeks. Soft inflation data have supported the RBNZ’s policy stance to keep rates low for an extended period. Risk appetite has fallen on increased US-North Korea political tensions. And the NZ election race has become a closer call after a change in leadership from the main Opposition party, adding a measure of uncertainty to the outlook.

NZD Corporate FX Update

Jason Wong -
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From the current NZD/USD level at a year-to-date high, we see the balance of risk weighed to the downside over the rest of the year. However, a return to a sub-0.70 level is contingent on the (over-sold) USD staging a recovery, after its steady broadly-based decline over recent months.

A Delay to Expected NZD/USD Weakness

Jason Wong -
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- A pushing out of the expected recovery in the USD sees our near-term NZD/USD forecasts revised up, pushing out the expected fall in NZD/USD by a quarter. NZ’s terms of trade also look to be on a stronger path.
- Our end-Q3 NZD target is revised up a few cents to USD 0.71 and end-Q4 target nudged up a cent to USD 0.68. While the current NZD remains well below our short-term fair value estimate of around USD 0.75, there has been a wedge between actual and fair value all year. We aren’t expecting the NZD to rise much further over the near term. The gap is more likely to be closed by fair value nudging lower, than the NZD appreciating further.

The NZD’s recent strong appreciation from around USD 0.6865 just seven weeks ago has slowed as it approaches a key area of technical resistance around the 0.73 mark, a level it has yet to close above since February (using New York closes). After six consecutive weekly increases, the NZD could close this week down slightly.

Economy Watch

A Centrist GDP Outcome

Craig Ebert -
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- Q2 NZ GDP expands 0.8% (2.5% y/y)
- No real surprise (for RBNZ included)
- But nominal GDP growth "just" 5.4% y/y
- No great fodder for election debate
- As growth indicators remain robust in Q3
- But immigration falls again in August

There might yet be some important implications for New Zealand’s economic outlook from Saturday’s election. But with that race still looking very tight we cannot presume to amend our views on anything at this point. Today’s Q2 GDP report certainly can’t be considered fodder for one side of the election debate or the other, when it comes to arguing the underlying health of the economy.

NZ Less Vulnerable

Doug Steel -
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- Current account deficit smaller than expected
- Part of a trend reduction in external vulnerabilities
- Indicating NZD not overvalued
- We expect current account deficit to shrink further
- Nothing here to change our +0.8% view for tomorrow’s Q2 GDP.

New Zealand’s external accounts are looking more and more benign by the day. Sure, the annual current account balance remains in deficit, as it has since 1973, but at the equivalent of 2.8% of GDP in the year to June 2017 it is smaller than its historical average. This result was a smaller deficit than the market consensus of 3.1% of GDP and even a touch smaller than our 2.9% forecast (helped by some revisions).

Upwards and onwards

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

Producing the goods

BNZ - BusinessNZ -
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New Zealand’s manufacturing sector experienced increased expansion levels
during August, according to the BNZ - BusinessNZ Performance of Manufacturing
Index (PMI).

Good-Looking Goods Trade

Craig Ebert -
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- Q2 merchandise terms of trade lift 1.5% (10% y/y)
- Likely fattening nominal GDP growth to 8% y/y
- Export and import volumes strongly expansive
- Putting upside pressure on our +0.9% pick for Q2 GDP

Compared to a year ago New Zealand’s merchandise terms of trade have lifted 10%. This is fundamental to the 8% annual growth we expect for nominal expenditure GDP growth in Q2, compared to “just” 2.6% on real (production-based) GDP. Consideration of TOT-fuelled nominal GDP growth is also important for thinking, more generally, about (per capita) income, the ability to save (and strengthen balance sheets), equity valuations and tax revenue to boot.

Growth Stronger, Inflation Weaker

Stephen Toplis -
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- NZ activity indicators portend strong growth
- Pushing profits higher
- Encouraging employment and investment
- Chewing into capacity, but not creating inflation
- And aiding the NZD lower

We’ve said it time and time before, and we’re forced to say it yet again. We are in a rather unusual environment where growth continues to escalate, capacity is being fully utilised, businesses are investing and hiring, and yet inflation remains an abstract concept. This, again, was the message from today’s ANZ Survey of Business Opinion.

New Zealand At A Glance

Stephen Toplis -
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New Zealand’s growth cycle looks set to be extended for a further three years (or more). Low interest rates, fiscal stimulus and population growth are the key to this. Growth is, however, being adversely impacted by capacity constraints, particularly in the labour market. Normally, such an environment would portend significant inflationary problems but inflation (at least that measured by the Consumers Price Index) is absent. Accordingly, the Reserve Bank is on hold for some time. Meanwhile, the recently robust NZD looks set for a modest correction against the USD while strengthening against the AUD.

BNZ Economy Watch - No More Money

Stephen Toplis -
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Those looking for Treasury to announce that there was money to burn when it presented today’s Pre Election Fiscal Update will be very disappointed. There were many who had assumed that the recent windfall gains that were flowing into tax revenues would provide the base for a much stronger future revenue track.

Outlook for Borrowers: Post August MPS

Jason Wong -
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In the 10 August Monetary Policy Statement the RBNZ reiterated the policy guidance it has maintained all year, that “monetary policy will remain accommodative for a considerable period”.

RBNZ Aggressively On Hold

Stephen Toplis -
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The RBNZ is stuck in neutral. Any increase in interest rates is seen as simply not plausible given that inflation continues to sit below the RBNZ’s target band mid-point. On the other hand, low (and, indeed, falling) inflation is not seen as sufficient to cut rates as (a) it’s seen as transitory and (b) the economy simply does not need any more stimulus at this juncture.

Working Through The Noise

Doug Steel -
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There seems to remain a lot of noise in the official employment data making quarterly movements difficult to trust as an indicator of trend. We say this as today’s Household Labour Force Survey (HLFS) shows employment eased 0.2% in the second quarter of the year and the participation rate lurched lower from its record high. This saw employment come in well below market (and our) expectations, but the unemployment rate edge lower and match what was anticipated at 4.8%.

NZ Keeps On Keeping On

Stephen Toplis -
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It has now been over six years since New Zealand last experienced a technical recession, and that was largely due to the fall-out from the Darfield earthquake. Before that, you have to go back to the GFC period of 2008/09. This represents a remarkably long period of expansion by historical standards and, importantly, one which looks set to be sustained for some time to come.

Zero Inflation

Jason Wong -
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A soft CPI and a soft under-belly to the result suggest that the RBNZ won’t be in a hurry to join the ranks of other major central banks to remove policy accommodation. It anchors the short end of the rates curve around current levels and at least from a relative monetary policy perspective the Bank’s stance won’t be lending any support to the NZD.

Even Keel

Craig Ebert -
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New Zealand’s services sector stayed at a similar level of healthy expansion for June, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

Steady Pace

Craig Ebert -
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New Zealand's manufacturing sector saw expansion continue to hover around expansion levels experienced over the last three months, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

QSBO Still Pressing On (And Then Some)

Craig Ebert -
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- Q2 QSBO about as robust as it was last quarter
- So firm on growth, capacity constraint and inflation
- No news for the RBNZ as such
- But QSBO misses the fiscal/commodity thrusts
- While resilient to the impending general election

There were some unders and overs in this morning’s NZIER Quarterly Survey of Business Opinion (QSBO). However, overall, it remained consistent with robust growth, capacity constraints, as well as firmness in inflation.

Central Banks Stir as RBNZ Hibernates

Stephen Toplis -
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- RBNZ on hold for “considerable period”
- As BOC, BOE and Fed show signs of aggression
- We formally relinquish our Feb rate hike view
- As short term inflation indicators weaken
- Nonetheless, we remain mindful that capacity pressures continue to build

With some trepidation, we are now formally pushing back our expectation of a first RBNZ rate hike to mid-2018 from Q1 2018. There remains huge uncertainty around the timing of the move and we are certainly not ruling out a February rate hike. However, we now think looking for a May (or August) move is a better reflection of our central view of the RBNZ’s reaction function with equivalent risks of an earlier or later move. Our view remains significantly more aggressive than the central bank’s and modestly more so than market.

NZ Business Reality Trumps (Political) Uncertainty

Craig Ebert -
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- NZ businesses beefing up their optimism
- Despite the election and other supposed uncertainties
- Agriculture very much joining the party
- Capacity constraints are clearly biting
- Pricing gauges sustain 2%-plus inflation pulse

With the word “uncertainty” being bandied around a lot lately, and a local election fast approaching, the reality is that New Zealand’s business sector is full of confidence and expectation.

Financial Markets Wrap

BNZ Financial Markets Wrap

Jason Wong -
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- NZD significantly lower, near 5% on many crosses
- Unwinding strength over recent months
- Speculators wrong-footed

USD (still) under pressure in July

Jason Wong -
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- Risk sentiment positive in July, supporting commodity currencies
- NZD reached a 26-month high, aided by soft USD backdrop
- TWI up a more modest 0.5%, with NZD weaker against AUD and EUR

June a Good Month for Commodity Currencies

Jason Wong -
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- NZD, AUD and CAD all performed well in June
- Signs of coordinated major central bank guidance later in the month…
- …causes a significant sell-off in the rates market

Interest Rate Strategy

RV analysis of the new NZGB Apr-29

Jason Wong -
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The NZ DMO is expected to issue a new NZGB Apr-29 before year-end. Our fair value analysis suggests a current yield of 3.06-3.07% and a spread to Apr-27 of +17-18bp. At this stage, timing of the issue is unknown, but recent cheapening of longer dated NZGBs suggests some speculation the bond is coming soon. If the Apr-29 is issued in the near future, we don’t expect significant further cheapening in NZGBs against swap. Demand for a new Apr-29 is likely to be reasonably solid.

Markets Outlook

Q2 GDP Growth Likely Solid, Weak and Massive

Craig Ebert -
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- We expect Q2 GDP lifted 0.8% (2.5% y/y)
- Per capita growth weak, nominal huge
- PSI/PMI suggest annual GDP growth of 3-4%
- Dairy prices still consolidating recent gains
- Party night Saturday…but which one(s)?

Our Q2 GDP expectation infers next to no growth in per capita terms. This is considering the working-age population expanded 2.4% in the year to Q2 2017 – boosted, as it has been, by record high net inward migration. However, Thursday’s NZ GDP report also needs to be assessed in the context of nominal growth – which we believe will hit a cracking 8% in Q2 – reflecting the terms-of-trade related flush of commodity income starting to course through the economy. So take your pick.

Peeking into Q3 GDP and CPI

Craig Ebert -
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- We estimate Q2 GDP lifted 0.8% (2.5% y/y)
- 0.1 under RBNZ/Treasury expectations
- August ECT leave likelihood of Q3 retail fall
- But as hangover to sports-mad Q2
- Awaiting Sept. consumer conf., August PMI
- While August FPI to fill in on CPI inflation

Broadening attention to the total ECT result, its 0.6% increase simply reversed the percentage fall it registered in July. This makes it even more likely that Q3 retail volumes will ease back (we are picking -0.6%). If all of this sounds disconcerting, it shouldn’t. Importantly, it needs to be viewed in the context of the outsized jump we saw in retail volumes in Q2, of 2.0%, which was no doubt boosted by sports events. It was no surprise, in this vein, that the hospitality component of the monthly ECT continued to abate in August, having spiked 2.1% in June.

Economy Chugging into Political Fog

Craig Ebert -
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Going into this week’s trifecta of Q2 GDP indicators, we estimate a production-based increase of 0.9% (2.6% y/y). As it happens, this is also what the Reserve Bank, in its August Monetary Policy Statement (MPS), expected, as did Treasury in its pre-election Economic and Fiscal Update. That said, we sense Q2 GDP growth could quite conceivably be 1.0% or more (our expenditure-GDP growth estimate for Q2 is presently +1.4%, as a cross-check).

BNZ Markets Outlook

BNZ Research -
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A strong support to the NZ economy over recent years has been a high terms of trade. That is, the ratio of export prices to import prices. The terms of trade ultimately determine how many imports can be bought for a given amount of exports; an increase represents a lift in purchasing power. The terms of trade have been trending higher over recent years boosting national income in the process and supporting all manner of things like saving, demand, growth and the external and fiscal accounts.

BNZ Markets Outlook

Craig Ebert -
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Generally speaking, this Wednesday’s PREFU will be a platform for the government to reiterate its Budget initiatives – including the significant Family Incomes Package planned to start 1 April 2018 – but also an opportunity for opposition parties to say how they will manage the surpluses differently. With respect to outcome of next month’s election, while the polls have been lurching around – with a noticeable resurgence in support for the Labour Party – the central message, for the most part, remains the same. Neither National nor Labour are looking likely to command a majority in the House. New Zealand First, meanwhile, is increasingly laying claim to the balance of power and the pundits are increasingly split as to which way it will go.

BNZ Markets Outlook

BNZ Research -
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This morning’s Q2 retail sales were very strong and well ahead of market (and our) expectations. The massive 2.0% quarterly lift in seasonally adjusted sales volumes were clearly boosted by sports events like the British and Irish Lions’ rugby tour (mainly in June) and NZ hosting the World Masters Games (in April). But there was a bit more to it than that.

BNZ Markets Outlook - RBNZ To Hold

BNZ Research -
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Thursday’s RBNZ Monetary Policy Statement (MPS) sits head and shoulders above anything else on the local calendar in the coming week. We expect no change in the OCR, but there is a lot to consider.

Could The RBNZ Ease?

BNZ Research -
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A purely mechanistic approach to monetary policy would now argue for a cut in New Zealand’s cash rate. At the time of the May Monetary Policy Statement, RBNZ spokespeople were clear in their message that there was an equal chance of a rate cut as a rate hike. Since that time the balance of economic data that we have received suggests that the RBNZ should be lowering its CPI inflation forecasts to levels that are not only well below the mid-point of the RBNZ’s target band but staying there for some time.

BNZ Markets Outlook

BNZ Research -
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Even with signs that the NZ economy continues to perform relatively well, the prospect of slowing CPI inflation, aided and abetted by a cooling in the housing market, will only feed the reserved stance that the Reserve Bank reiterated last month. This is something for international punters to take most note of, even though the broader argument for rate hikes remains valid in our view.

Those Annoying Headline Grabbers

Craig Ebert -
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- Q2 CPI likely to “disappoint” with 0.1% (1.8% y/y)
- As the May MPS expected 0.3%, 2.1% annual
- But core inflation probably firming like the economy
- June PSI (58.6) strong like the PMI (56.2)
- Migration, tourism, dairy price info later this week
- Bascand’s talk; more financial than monetary policy?

Locally this week the focus turns to tomorrow’s Q2 CPI outturn. We expect a soft result of 0.1% q/q and 1.8% y/y (below the RBNZ’s pick back in May of 2.1% y/y, which didn’t have the benefit of knowing the recent tumble in oil prices). A soft result would support our view that the RBNZ isn’t likely to do an about-turn like the Bank of Canada recently did. We see the data reinforcing the RBNZ’s decisively neutral policy stance for some time. If anything, inflation is tracking below its projections, given the combination of a stronger NZD and lower oil prices.

Inflation Moderates Again

Craig Ebert -
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- Construction constraints will adversely impact manufacturers
- Tourism constraints to intensify
- Consumer confidence buoyant
- House price inflation to moderate further
- Food price jump offset by petrol price fall

We are forecasting next week’s Consumers Price Index to rise just 0.1% over the June quarter which will result in annual inflation nudging below the magical 2.0% mark to just 1.8%. This is lower than the 0.3%/2.1% combo that the Reserve Bank had in its May Monetary Policy Statement (MPS), largely due to the recent slump in petrol prices.

Leading From the Front

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- BCA reckons RBNZ in the group to hike next
- Which tomorrow's QSBO is likely to reinforce
- Especially with its messages of capacity constraint
- But the RBNZ looks set to keep OCR at record low
- Credit, QVNZ, commodity prices, Crown accounts due
- But also watch for Barfoot's June housing results

As much as the RBNZ looks set in a holding pattern, we have the likes of heavyweight research house, BCA, putting the NZ central bank in the group most likely to hike next. While this doesn’t infer any immediate move, it is a collective that includes the Bank of Canada, which is now (rather suddenly) expected by the market to hike later this month. While we have a lot of sympathy with the BCA view – and representative, as it is, of some global views currently affecting NZ markets – we just as surely point out that the RBNZ would appear unconvinced.

Capacity, Commodities and Construction

Doug Steel -
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- Businesses still upbeat?
- As capacity issues press
- Oil to dent near term inflation
- And add to already strong terms of trade
- May exports expected higher
- Building consents to bounce in May?

Data releases in New Zealand are relatively sparse this week. But what is on offer will provide more fodder to contemplate the growth and inflation implications of three important current themes namely capacity constraints, commodity price movements and construction activity.

Markets Today

BNZ Markets Today

Jason Wong -
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The market has settled down after the FOMC’s policy update yesterday. The AUD and NZD are weaker, while UST yields have traded in a tight range.

BNZ Markets Today

Jason Wong -
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The USD has strengthened and UST yields have risen after the Fed’s latest policy statement. Against that backdrop the NZD and AUD have performed much better than other majors.

BNZ Markets Today

Jason Wong -
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Markets have been uneventful overnight, with only second-tier data releases and traders sitting on their hands, waiting for the Fed’s latest policy Statement in just under 24 hours. The NZD and AUD have been well bid for no obvious reason, while UST yields have drifted up a touch.

BNZ Markets Today

Jason Wong -
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The USD and rates are higher as the market positions itself for the FOMC meeting later in the week. Trading conditions are fairly quiet and that may remain the case until Thursday morning’s important update from the Fed. The consensus expects the Fed to announce the beginning of “quantitative tightening” (QT), with its balance sheet expected to begin shrinking from next month, initially at a pace of $10bn, and the Fed to keep its options open for another possible rate hike in December.

BNZ Markets Today

Jason Wong -
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In currency markets on Friday, GBP remained in the spotlight making further strong gains, while the NZD also closed the week on a strong note. The S&P500 closed at a record high, breaching the 2,500 mark while the VIX index closed the week near a highly risk-loving level of 10. Global bond yields tracked higher.

BNZ Markets Today

Jason Wong -
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GBP has surged after a more hawkish than expected BoE announcement, while moves in the USD and rates have been contained despite a positive inflation report.

BNZ Markets Today

Jason Wong -
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The key theme overnight is the USD recovery continuing, helped by some momentum on tax reform while UST yields have nudged higher.

BNZ Markets Today

Jason Wong -
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Yesterday’s risk-on move has been extended, with the S&P500 up to another record high and higher global rates across the board. GBP is the best performer after stronger inflation data, while the NZD has been supported by a shock political poll.

BNZ Markets Today

Jason Wong -
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Risk sentiment has bounced higher, leading to a shift out of safe-havens, while the USD has shown signs of recovery. US and European equity markets are up around 1%, the former flirting with another record high, the VIX has fallen to a 10-handle, gold prices are down over 1%, JPY and CHF have slumped more than 1% and global bond yields are higher across the board, a classic risk-on move.

BNZ Markets Today

Jason Wong -
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During Friday’s session, the USD reached its lowest level since the beginning of 2015, while US 10-year rates fell almost to the 2% mark, before closing slightly higher.

BNZ Markets Today

Jason Wong -
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The USD remains under pressure for various reasons, while the EUR has performed well despite the ECB’s warnings. A lack of detail on ECB policy sees lower German yields, helping to drive down US Treasury rates to new lows.

BNZ Markets Today

Jason Wong -
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Risk sentiment has improved with US equities modestly higher, the VIX index down to 11.5, global rates up a bit and a softer Yen. The NZD is weaker for no apparent reason, after its top-performing move in the previous session, while the CAD has surged ahead after a surprise rate hike.

BNZ Markets Today

Jason Wong -
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For a change, the NZD is the top performer for the day, while the USD remains out of favour as US Treasury yields hit a fresh low for the year.

BNZ Markets Today

Jason Wong -
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With the US on holiday, trading activity has been quiet. With little economic data to trade on, the focus has been on North Korea’s provocations, which have seen a modest shift into safe-haven assets.

Markets Today

Jason Wong -
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After a quiet day during local hours, markets were choppy during the Friday night trading session. The net result was strength in the CAD and AUD, with the NZD underperforming its commodity peers. Risk appetite ended the week on a positive note, with equity markets modestly higher, the VIX back down to around 10 and global rates higher.

BNZ Markets Today

Jason Wong -
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There has been a truckload of data to digest and a number of news stories over the past 24 hours. The NZD has been a net loser, finding itself at the bottom of the leaderboard yet again, rounding off a poor month, and going against the grain of better risk sentiment and outperformance of the other commodity currencies.

BNZ Markets Today

Doug Steel -
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Positive economic news overnight saw equity markets rise, yields edge up and the USD dollar lurch higher. Making a change from recent sessions, economic news had some influence on markets overnight. ADP employment showed the US added 237k jobs in August, beating expectations of 185k. It offers encouragement for official payrolls data on Friday and is likely to keep the USD on the front foot for now. The positive vibe was enhanced shortly after when upward revisions to US Q2 GDP growth were bigger than anticipated. Growth was revised to an annualised pace of 3.0%, its fastest pace in two years.

Markets Today

Doug Steel -
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Shortly after we pushed the send button yesterday, news broke that North Korea had fired a missile toward Japan. Any prior thoughts of a quiet session disappeared as risk sentiment soured. This saw equities drop, safe havens like the JPY, CHF, and gold higher, while commodity currencies like the AUD and NZD were sold.

Markets Today

Doug Steel -
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The USD remains under downward pressure during still thin trading in the Northern Hemisphere summer. Gold prices lift, while oil slips. Equities and bond yields are marginally lower.

BNZ Markets Today

Jason Wong -
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The Jackson Hole speech duo of Yellen and Draghi drove a weaker USD, with EUR leading the charge, while the NZD was a bystander. US 10-year Treasury yields closed the week near its lows.

BNZ Markets Today

Jason Wong -
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Another quiet summer holiday trading session sees little change in asset prices. The NZD continues to underperform, albeit changes are fairly microscopic

BNZ Markets Today

Jason Wong -
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In what is now a common occurrence, Trump opens his mouth and causes risk sentiment to deteriorate – equities fall, the VIX rises, UST yields fall and the USD weakens.

BNZ Markets Today

Jason Wong -
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Amidst light trading volumes, risk sentiment has improved, seeing stronger equity markets, higher global bond yields and the USD reversing previous losses.

BNZ Markets Today

Jason Wong -
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As the skies darkened over the US during a rare total solar eclipse, a pall of gloom overhung the US dollar, which showed a broadly based fall. Markets started the week on a very quiet note, with no data and light trading conditions.

BNZ Markets Today

Jason Wong -
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Commodity currencies ended the week on a healthy note and the ousting of Trump’s chief strategist Bannon was seen as a positive sign by the market.

BNZ Markets Today

Jason Wong -
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There have been a number of market drivers overnight that add up to a risk-off tone, seeing the yen and Swiss franc the best performing currencies, and equities and rates lower.

BNZ Markets Today

Jason Wong -
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The recent recovery in the USD abruptly ended, with Trump back in the headlines and the market interpreting the FOMC minutes to the dovish side. These factors have also helped drive UST yields lower.

BNZ Markets Today

Jason Wong -
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The USD remains in the box seat, extending yesterday’s gains, as geopolitical concerns ease and with strong data providing a supporting role. The NZD, GBP and JPY have underperformed, while global bond yields are higher as safe haven flows reverse.

BNZ Markets Today

Jason Wong -
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A quiet start to the week, with the USD reversing Friday’s declines and risk sentiment improving after last week’s sell-off.

BNZ Markets Today

Jason Wong -
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Underwhelming US CPI data triggered a weaker USD and kept downward pressure on bond yields, alongside ongoing US-North Korea political tensions.

BNZ Markets Today

Jason Wong -
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Geo-political tensions focused on North Korea remain forefront of mind, leading to a stronger yen, weaker equity markets and supporting lower global rates. The NZD is at the bottom of the leaderboard after yesterday’s MPS.

BNZ Markets Today

Jason Wong -
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Today marks the 10-year anniversary of the beginning of the GFC, when BNP Paribus froze funds exposed to US sub-prime mortgages as they became impossible to value. Financial markets today couldn’t be further from the GFC period, with most assets richly priced and incredibly low market volatility. Even the threat of a major military catastrophe on the Korean peninsula barely gets the market’s attention these days.

BNZ Markets Today

Jason Wong -
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It was another typical sleepy northern hemisphere summer trading session overnight, but we did see a little price action after a strong US labour market report, while the NZD and NZ rates faced downward pressure ahead of Thursday’s MPS.

BNZ Markets Today

Jason Wong -
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It has been a quiet start to the week with mostly microscopic price changes across bonds, equities and currencies. However, most notably, the NZD has started the week on the back foot as focus turns to Thursday’s Monetary Policy Statement.

BNZ Markets Today

Jason Wong -
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The USD and UST yields rose after another robust US employment report. Non-farm payrolls rose by slightly more than expected, a second consecutive month of showing a gain of more than 200k, with the tick down in the unemployment rate and tick up in average hourly earnings in line. It was effectively another goldilocks report with strong employment not leading to significant wage inflation – the 2.5% annual gain in wages was close to its average over the past couple of years.

BNZ Markets Today

Jason Wong -
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A less hawkish than expected Bank of England has put GBP under downward pressure and driven global bond rates lower, otherwise market movements have been modest ahead of tonight’s US employment report.

BNZ Markets Today

Jason Wong -
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In currency markets the NZD has underperformed following yesterday’s labour market data, while EUR has taken out another milestone, breaking through 1.19. Bond markets remain tightly bound.

BNZ Markets Today

Doug Steel -
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A new month saw some relief for the beleaguered USD. But not much. After a five month losing streak, its longest since 2011, the USD was up smalls overnight. Equities may gains on both sides of the Atlantic, as oil prices and yields eased.

BNZ Markets Today

Doug Steel -
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There has been bucket loads of data out of the past 24 hours, but not a whole lot of news. USD weakness remains the main theme in markets, while US equities and oil are marginally higher. US yields are unchanged.

BNZ Markets Today

Doug Steel -
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A USD downtrend remained intact last week with US data and politics on Friday doing little to arrest the bias for a softer USD near term. On Friday, US equities were mixed, while yields declined despite another rise in oil prices.

BNZ Markets Today

Doug Steel -
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A note of caution kept back into markets overnight. Equities wavered and volatility lifted off extreme lows. The S&P500 is currently down 0.2% after paring earlier losses and the VIX fear index showed a pulse for the first time in a couple of weeks. US yields are higher, as oil prices extend their march north.

BNZ Markets Today

Doug Steel -
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It was all about the Fed overnight with markets relatively subdued ahead of the 6am decision. In the wash up we see the US yields and US dollar lower. Equities are a touch higher and oil prices have extended gains.

BNZ Markets Today

Doug Steel -
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It was a bit of a snooze fest in markets overnight, with generally little movement and tight ranges across currencies. US yields and the US dollar are marginally higher, halting their recent declines. Equities are little changed, while oil prices bounced.

BNZ Markets Today

Doug Steel -
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It was more of the same for currencies and bonds on Friday, the US dollar continuing to push lower alongside US Treasury yields. Equities were mixed, while oil prices fell.

BNZ Markets Today

Brendan Marsh -
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We open this morning to a dominant theme of further extensions to USD weakness for most currency pairs and relatively limited change to most bond and equity markets though the path has been strewn with wet rocks and tree roots - tipping my hat to the weather outside in our verdant city. The NZD continues to defy any suggestion that the market is overly long, rising to challenge resistance just above 0.7400 overnight in step with most of its peers.

BNZ Markets Today

Brendan Marsh -
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After our tumultuous Tuesday session markets appear to have hit the pause button, seemingly moving sideways over the past 18-24 hours. A closer look though does reveal for the most part an ongoing decline for the USD on most pairings, still hurting from the implosion of US health care reform. There is in most instance further favour shown for equity indices and commodity prices.

BNZ Markets Today

Jason Wong -
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There have been some significant swings in currency markets, with most of that occurring during the local trading session, with overnight trading more settled. Global rates are lower.

BNZ Markets Today

Jason Wong -
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It has been a quiet start to the week, with low volumes and no significant market movements, although commodity currencies are on the soft side. Locally, attention will turn to today’s CPI data, while globally the key release is Thursday night’s ECB meeting.

BNZ Markets Today

Jason Wong -
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The focus for the market on Friday was the much-anticipated US CPI release. Core CPI inflation surprised to the downside for the fourth consecutive month, with the annual increase of 1.7% remaining at a 2-year low. There was a trifecta of soft economic releases, with retail sales and consumer sentiment also underwhelming, the latter falling to a 9-month low.

BNZ Markets Today

Jason Wong -
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The NZD and AUD have outperformed for the second day running on a day where risk sentiment is slightly improved, with the VIX index back down to 10 and bond yields are higher.

BNZ Markets Today

Jason Wong -
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Equity and bond markets alongside the NZD and AUD have been well supported after Fed Chair Yellen’s testimony, while the CAD has surged after the Bank of Canada kicked off a tightening cycle.

BNZ Markets Today

Jason Wong -
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The USD is under pressure this morning following some damning headlines for Trump’s team, and that has reduced the damage to the NZD seen over the past 24 hours. EUR has been the key beneficiary.

BNZ Markets Today

Jason Wong -
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It has been a very quiet start to the week. The holiday season and a lack of news have meant little movement in markets, especially currencies.

BNZ Markets Today

Jason Wong -
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Friday’s focus was the US employment report but other factors stole the limelight, with CAD, GBP and JPY the biggest movers on the day. The global bond market sell-off continued, but this didn’t perturb US equities, with the strong payrolls report signalling robust economic growth.

BNZ Markets Today

Jason Wong -
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After pausing for breath over the past few days, the major bond-market sell-off that was kicked off last week has returned, driving equities lower and creating headwinds for the NZD and AUD.

BNZ Markets Today

Doug Steel -
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Generally quiet trading conditions prevailed overnight with data ahead of the FOMC minutes that were released at 6am this morning. Not much changed post the minutes. Equities are little changed on the day, US bond yields are marginally lower and the US dollar is marginally higher.

BNZ Markets Today

Doug Steel -
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Markets were relatively quiet overnight, as the US observed its Independence Day holiday. There was a hint of risk off following yesterday’s North Korean missile test (its 11th of the year, but its first inter-continental). Asian equity markets dipped. Euro Stoxx 50 closed down 0.35% overnight. JPY initially strengthened before settling back. USD/JPY opens this morning down 0.1%, around 113.20.

BNZ Markets Today

Jason Wong -
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Markets have begun the second half of the year on a positive note, supported by positive economic indicators. The Euro Stoxx 600 was up 1.1% while the S&P 500 index closed a shortened session before the Independence Day holiday up 0.2%. Global bond rates continued to nudge higher, while the USD was stronger across the board.

BNZ Markets Today

Jason Wong -
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It was a fairly uneventful end to an eventful week on Friday. There were plenty of data releases to chew over, but there was little market reaction to them, with end of month and quarter rebalancing dominating any flows.

BNZ Markets Today

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The coordinated, less dovish, tone of major central banks remains at the forefront of mind for investors, driving a good old-fashioned sell-off in the bond market and equities. In the risk-off environment, the NZD is the worst performing currency, alongside a still-soft USD.

BNZ Markets Today

Jason Wong -
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In a week with little top-tier data so far, central bankers remain in the driving seat for markets. They are outlining a more positive tone about the outlook and signalling removal of monetary accommodation, supporting the CAD, EUR and GBP.

BNZ Markets Today

Jason Wong -
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A day that looked quiet on paper has turned out to be newsworthy. In currency markets, European currencies have surged, led by EUR on hawkish comments by ECB President Draghi, while the NZD has underperformed. Bond yields are higher across the board, driven by Draghi’s comments and this has helped drag down equity markets.

BNZ Markets Today

Jason Wong -
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After a quiet week last week we’re on track for another one and it’s a struggle to write anything meaningful today. There have been only a few bits and bobs to report and that is reflected in modest market movements. Currency movements against the USD have generally been within 0.2%, with a notable exception being a soft yen. UST yields have nudged lower after some soft data.

BNZ Markets Today

Jason Wong -
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The low vol environment continued on Friday, with only modest changes in bonds, equities and currencies. The USD ended the week on a soft note for no particular reason. Strong new home sales data were ignored. Trump returned to the spotlight with his admission that he never taped his conversations with former FBI Director Comey. This was widely seen as another blow to his credibility as investigators continue with their probe into allegations of his obstruction of justice and associations with Russia.

Rural Wrap

BNZ Rural Wrap

Doug Steel -
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International dairy prices rose strongly in 2016, from low levels. Prices have largely held these gains in 2017. While some easing is still expected over the coming year, we expect prices to be sufficient to underpin a $6.75 milk price in 2017/18. We see this as close to the mid-point of a still wide range of possible outcomes.

Strategist

BNZ Strategist

Craig Ebert -
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Economic Outlook

There might yet be some important implications for New Zealand’s economic outlook from Saturday’s election. But with that race still looking so tight, and coalition permutations reasonably many, it seems pointless to conjecture about how our economic views might need to change. With today’s Q2 GDP report coming in as expected (0.8% for the quarter and 2.5% y/y) attention turns to “what next?” Recent economic surveys still signal a solid growth path underfoot, in spite of the election coming into sharp focus. Consumer sentiment is robust. And we will get further insight into the minds of business with the 26 September ANZ survey. Then there’s the 3 October NZIER Quarterly Survey of Business Opinion to check out – which respondents will have also have filled out pre-election. The more interesting surveys will be those reflecting post-election sentiment and activity, including for the housing market.

Interest Rate Outlook and Strategy

We still see NZ short end yields range bound, anchored by an on hold RBNZ. Economic developments have not been sufficiently different to August MPS projections to warrant any change of cash rate (1.75%), or rhetoric, from the Bank at its meeting next week, especially amid likely post-election noise and it being the first OCR review from the Acting Governor, Grant Spencer. Meanwhile, we remain of the view that long end yields will track higher driven by expected increases offshore including in Australia and the US. The latter reflects our expectations for more Fed funds tightening than implied by current front end pricing and a higher term premium as the Fed balance sheet reduction proceeds and the ECB and other central banks slowly unwind accommodative policy.

Currency Outlook

Central bank statements and expectations can kick around currencies over the very short term but we think other drivers are more important over the medium term. Relationships between NZ-global rate spreads and the NZD have weakened over recent years. Risk appetite and commodity price trends are more important drivers of the NZD than interest rate differentials. Our monetary policy expectations don’t have a significant bearing on our outlook for the NZD over the next year or two. High risk appetite – its highest level this year – supports the current level of the NZD. Our (unchanged) projections for a weaker NZD into year end and early next year assumes that risk appetite peels back from its current giddy heights. A weaker commodity price dynamic is expected to give further weight to that view.

Thoughts on Q2 GDP

Craig Ebert -
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Dependent only on tomorrow’s manufacturing figures, our growth estimate for June quarter GDP remains at 0.9% (2.6% y/y). That is, based on the production-based measure. In terms of expenditure GDP we figure on a quarterly gain of 1.2% (2.4% y/y).

BNZ Strategist

Stephen Toplis -
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New Zealand’s growth cycle looks set to be extended for a further three years (or more). Low interest rates, fiscal stimulus and population growth are the key to this. Growth is, however, being adversely impacted by capacity constraints, particularly in the labour market. Normally, such an environment would portend significant inflationary problems but inflation (at least that measured by the Consumers Price Index) is absent. Accordingly, the Reserve Bank is on hold for some time. Meanwhile, the recently robust NZD looks set for a modest correction against the USD while strengthening against the AUD.

BNZ Strategist

BNZ Research -
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Economic Outlook
We continue to forecast a solid ongoing economic expansion. Economic growth is expected to average just under 3% over the next three years. But we remain toward the pessimistic end of the spectrum largely as we see little spare capacity to grow. Another tick lower in the unemployment rate adds to the case. The RBNZ, as per today’s Monetary Policy Statement, remains relatively upbeat on the economy’s growth prospects seeing growth exceeding 3% for much of the three years ahead. This includes stronger growth in domestic demand than we see. This is an area to watch ahead as competing forces such as an anticipated record terms of trade and a cooling housing market do battle. Business and consumer confidence have remained robust as we head into the 23 September General Election. Next week’s Q2 retail sales will be the latest gauge on how domestic demand has been travelling; probably a bit slower than in Q1.

Interest Rate Outlook and Strategy
Today’s RBNZ Monetary Policy Statement held no surprises. The OCR was held at 1.75% and is projected to stay there for some time. We formally push out our forecast for the first RBNZ rate hike May to August 2018 – still well ahead of the RBNZ’s expectation but not substantively different to market. NZ short end rates will likely be anchored by an on hold and neutral RBNZ. We expect NZ 2 year swap to (mostly) trade a tight 2.15% to 2.25% range. Global forces represent the key upside risk to NZ rates. If we are right and the Fed remains on track for further rate increases and other major central banks join in, then pressure will be for NZ curve steepening and lower NZ-global spreads.

Currency Outlook
We are struggling to see much upward force for the NZD from here and plenty of downward forces. Technicals and positioning both signal headwinds ahead; the positive terms of trade story is well priced; risk appetite must surely fall from its current elevated levels; election risk overhangs the NZD over the next couple of months; NZ monetary policy won’t be a supporting factor; and the USD looks heavily oversold. Certainly our year-end target for the NZD to go sub USD 0.70 looks a stretch at this juncture, but we remain comfortable in our call for a softer NZD towards year-end, against the trend of the past few months. We expect the US Fed and BoC to continue along the path of higher rates, and the ECB to signal and then begin tapering its asset purchase programme soon. BoE tightening is more likely early next year than this, while the RBA is expected to remain neutral. These forces support downward bias to the NZD on many of the crosses.

BNZ Strategists

BNZ Research -
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Could it be that the jinx of being in government in a year ending in 8 is about to end?

Strategist

Craig Ebert -
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In an otherwise robust-looking NZ economy, we continue to wonder about where the housing and construction markets are going to end up, given their extremely stretched starting points. That’s not to say we are forecasting a big dip, although the risks of such are there. In respect to monitoring trends in the housing market, we welcome the Real Estate Institute’s new SPAR house price indices. These look to give the best signal-to-noise ratio of the many house price measures out there. Their June outcomes, published this morning, proved about as soft/flat as we expected regards Auckland, and for the rest of the country perhaps not as robust as we figured on. The more immediate issue for inflation, however, is next Tuesday’s Q2 CPI report. With the recent drop in fuel prices, we now expect this to increase just 0.1%. This would drag its annual inflation down to 1.8%, from 2.2% in Q1. While this might be viewed as a disappointment by some, just don’t forget to check the various core inflation measures too, as these have been firming up more recently.

BNZ Strategist

Stephen Toplis -
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With the word “uncertainty” being bandied around a lot lately, and a local election fast approaching, New Zealand’s business sector is in fact full of confidence and expectation. Today’s ANZ business survey provided the latest proof. Far from doing a nervous Nelly, its net confidence index strengthened to +25 in June, from +15 in May. Own-activity expectations burgeoned to +43, from +38. These results are consistent with annual real GDP growth in the order of 4%. Not that the economy will be able to achieve such a strong degree of expansion as that, with capacity constraints already biting on most fronts. This is starting to seriously limit the wherewithal to grow, even though the demand side indicators are pushing hard for it. In this we continue to ask questions of those who judge that the economy is not only devoid of resource pressures but is still running some spare capacity. We believe next Tuesday’s NZIER Quarterly Survey of Business Survey will very much support our view.