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 Corporate FX Update

Jason Wong -
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The year has begun with bearish sentiment overhanging the USD which saw the NZD push up to fresh highs above 0.74. We have recently been fretting about USD weakness and wondering how much longer this would be sustained. But currency markets are now at an interesting crossroads. A chunky increase in US Treasury yields has spooked markets. A much higher VIX index and wider credit spreads has seen our risk appetite index plunge from 85% to 70%, giving a taste of what might be in store for 2018, namely increased market volatility. A question mark hangs over whether the USD will continue to lurch downwards.

Weak USD Threatens Our NZD Call

Jason Wong -
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In our opening currency piece for the year, “NZD Review and Outlook” we touched on a few themes including the weak USD story. We expand on this theme and the implications for the NZD.

NZD Review and Outlook

Jason Wong -
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The NZD underperformed last year, falling by 4.3% on a TWI basis and falling against 12 of the 17 currencies that make up the TWI basket. Of the key majors, the NZD only rose against the USD (+2%), with falls against EUR ( 10%), GBP (-6%), AUD (-5½%), CAD, (-4%), CNY (-4%) and JPY (-1%).

NZD Corporate FX Update

Jason Wong -
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- After being re-rated lower over the past few months, our projections show the NZD spending much of the year ahead flat around USD 0.68-0.70. In practice that means the occasional flourish into the low USD 0.70s, but relatively short-lived, and maybe a look at USD 0.66 sometime through the next year.

NZD/EUR: Downward trend intact

Jason Wong -
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- NZD/EUR has spent much of 2017 on a downward path and is currently down 12% year-to-date. But this move was from a very high level and the cross remains some 6% above our long-term purchasing power parity model estimate.
- The strong economic fundamental forces that have been in play over recent years and supported a rich NZD/EUR cross rate have been gradually unwinding. The ECB’s gradual move away from quantitative easing and expectations of an eventual removal of the negative deposit rate, are likely to drive EUR higher and be the key factors supporting further weakness in the cross.
- The model we introduced earlier this year still shows fair value heading steadily lower to EUR 0.54 when the ECB’s (shadow) policy rate reacheszero. The NZD/EUR downward trend still looks intact until we reach that sort of level. It would be prudent for corporates to take advantage of any short-term rallies to hedge positions in anticipation of further downside potential.

Economy Watch

RBNZ Maintains Tightening Bias

Stephen Toplis -
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We see no need to change our view that the RBNZ starts raising interest rates in February 2019 and then it moves relatively aggressively. However, we equally concede that there are multiple risks around our hypothesis. In addition to economic developments, we will have a new RBNZ Governor for the next Monetary Policy Statement and, potentially, a very different Policy Targets Agreement.

Labour Market Keeps Promise of Stronger Wage Inflation

Craig Ebert -
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While today’s labour market data were not entirely strong, they add to the impression that New Zealand’s labour market is tight and tightening further. But also that, for the meantime, inflation in wage rates remains moderate.

Seeing Through the CPI’s New Clothes

Craig Ebert -
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Sure, the RBNZ, in its November Monetary Policy Statement (MPS), was looking for 1.8%, and, more to the point, a slowdown to just 1.5% for Q1 2018. However, it also forecast annual CPI inflation to pop back up to 2.1% in Q2 2018 (and to stay around the middle of the 1.0 to 3.0% target band over the remainder of the forecast horizon). Today’s CPI outturn undermines this profile, at least for the foreseeable future.

Performance of Services Index - Solid Performer

Craig Ebert -
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New Zealand’s services sector ended the year in solid expansion territory, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

Performance of Manufacturing Index -Summer Slowdown

Summer Slowdown - Craig Ebert -
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New Zealand’s level of manufacturing expansion slowed during December, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

BNZ Economy Watch: QSBO Holds Up Rather Well, Considering

Craig Ebert -
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Sure, this morning’s Quarterly Survey of Business Opinion (QSBO) registered a further fall in net confidence, into negative territory. However, the further we delved into this NZIER report the more resilient it appeared. While firms are publicly expressing unease about the new government, they are privately getting on with business. Indeed, their most pressing issue at the moment would seem to be a lack of resources – both capital and labour – which is starting to impinge on profitability.

BNZ Economy Watch - GDP Stirs but may yet be Shaken

Stephen Toplis -
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There was a dump of NZ data this morning, covering the current account deficit for Q3, and merchandise trade, net migration, and tourism in November. It is a lot of information following on from this morning’s dairy auction.
Overall, there was nothing to shake the idea that the economy continues to expand at a reasonable clip. However, there are more signs of dairy prices easing that will be a drag on exports in 2018.

BNZ Economy Watch - NZ Data Galore

Doug Steel -
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There was a dump of NZ data this morning, covering the current account deficit for Q3, and merchandise trade, net migration, and tourism in November. It is a lot of information following on from this morning’s dairy auction.
Overall, there was nothing to shake the idea that the economy continues to expand at a reasonable clip. However, there are more signs of dairy prices easing that will be a drag on exports in 2018.

BNZ Economy Watch - The Problem with Confidence

Craig Ebert -
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After it fell off a cliff in November, the ANZ business survey rebounded a bit in December, for the most part. However, it’s worth pointing out that the recovery in its headline figures was frustrated by a still-weakening view amongst agriculture respondents.

Performance of Manufacturing Index

Doug Steel -
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New Zealand’s level of manufacturing activity during November returned to September’s expansion result, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI). The seasonally adjusted PMI for November was 57.7 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 0.4 points up from the previous month, and returned the sector back to September’s result. It also continues the relatively tight band of expansion seen over the last four months. Overall, the sector has remained in expansion in all months since October 2012. BusinessNZ’s executive director for manufacturing Catherine Beard said that the sector is heading towards a stronger second half of the year. “The sub index value for production (62.1) was at its highest level of expansion since July 2013, while finished stocks (57.5) was the highest recorded since the survey began, just pipping the 57.4 recorded in September 2014. Also, the proportion of positive comments in November (65.1%) increased slightly from October (64.2%). BNZ Senior Economist, Doug Steel, said that “recent surveys have seen business confidence falter during and after the government formation process. In contrast, the PMI, which is a survey of business outcomes rather than sentiment has remained rock solid over recent months”.

HYEFU Holds the Fort for the Budget Bun Fight

Craig Ebert -
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- HYEFU hangs together remarkably well
- With a largely unaltered bond programme
- As Treasury net-increases nominal GDP forecast
- NZGB bond rates fall in relief, NZD steady
- But BPS flags pressures for Budget 2018
- Where spending promises more fully accounted

What will the rating agencies make of today’s HYEFU? We suspect they will be, like us, deferring any judgement on the fiscal accounts until we see next year’s Budget. That’s when everything will be rinsed through and we’ll have a better handle of how Treasury’s economic forecasts are looking as well.

Record Terms

Doug Steel -
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- Merchandise terms of trade hits all time high
- But is expected to ease back from here
- Trade volumes offer Q3 GDP support
- Imported deflation ending?

The terms of trade rose 0.7% in Q3 2017, to be 12.3% higher than a year ago. This was a little softer than market (and our) +1.3% expectations but not a big miss in the scheme of things. In the bigger picture, the merchandise terms of trade has reached a record level in 2017. But we think this is as good as it gets for now.

More Than Political Protest by NZ Firms?

Craig Ebert -
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- ANZ business survey slumps majorly
- As it tends to do with Labour-led governments
- But reasons for genuine caution too
- Jump in survey's inflation gauges also an issue
- As NZD continues to abate

Politics noted, the extent of the drop in the ANZ survey, so soon, means we also need to wonder what might be bugging the business sector from a practical point of view too – whether by way of identifiable policy or anything else.

Drying Out

Doug Steel -
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- NZ soils drying out rapidly
- An economic risk worth monitoring
- As 2008 NZ recession attests

The risk of drought in New Zealand is rising. That might seem like a strange thing to say when right through winter and early spring there was far too much rain. Back then grass growth was restricted by saturated soils. But conditions have been changing over recent weeks. It has been drying out – rapidly. It has got to the point now that many parts of the country have bigger soil moisture deficits compared to what is normal for this time of year according to NIWA. At this point, we have not adjusted our economic forecasts on account of the spreading dry. But it is a risk worth highlighting, especially with near term weather forecasts showing little rain on the horizon.

When the Little Things Mean So Much

Craig Ebert -
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- 0.2% gain in Q3 retail effectively huge
- As it builds on Q2's sporting fillips
- But be careful in interpreting the regional data
- Retail inflation shaking its negativity
- Fiscal injection to households still to come

Statistics NZ this morning reported a 0.2% increase in September quarter retail trade volumes. At first blush this does not sound impressive, one little bit. But really it was, considering it followed a 1.8% jump in June quarter spending that was demonstrably boosted by New Zealand’s hosting of some major sporting events.

Financial Markets Wrap

Bearish USD Sentiment Drives NZD Higher

Jason Wong -
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The key theme that pervaded markets in January was a very weak USD, following up on its poor performance through 2017. Key USD indices were down in the order of 3%, and breaking down through key technical levels in the process, opening up the risk of further deep losses

Interest Rate Strategy

Outlook for Borrowers: Post Februarry MPS

Nick Smyth -
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At the February Monetary Policy Statement (MPS), the RBNZ kept the OCR on hold at 1.75%, as universally expected by economists. Interim Governor Grant Spencer said the next move in the OCR could be either up or down, but the Bank’s main scenario is that the next move is a tightening. Consistent with this, the Bank retained the same OCR projection as it had in November, which shows the first full rate rise in early 2020.

A Framework for Thinking About NZ-US Spreads

Nick Smyth -
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The spread between NZ and US rates has compressed to the tightest levels since the 1990s. The spread between 2 year NZ swaps and those in the US is now negative while the 10 year spread is around 50bps, some 60bps lower than the start of last year.

Interest Rate Strategy - Taking Stock After NZ CPI

Nick Smyth -
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New Zealand rates have moved higher over the past few months, mainly driven by rising global rates. Before the CPI release, the 5 year swap rate had moved to 2.78% and at the front end, the 2 year rate had reached a 3 month high of 2.27%. While NZ rates have been dragged higher by global forces, they still significantly outperformed the US.

Interest Rate Strategy: NZGB Yields To Go Higher This Year – Lighten Up On Duration

Nick Smyth -
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We expect NZGB yields to be pushed higher by USTs
New Zealand yields fell over the course of 2017 as the RBNZ kept the OCR at a record low of 1.75% and the initial sell-off after the US Presidential election in November 2016 unwound. NZ yields remain well off the levels seen in mid-2016 in the aftermath of Brexit, but are still reasonably near to their range lows. We expect NZGB yields to move higher, mainly driven by moves offshore in the first half of the year.

Markets Outlook

Slump or Hiccup?

BNZ Research -
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We have been expressing for some time now our concern that just about every asset looks overpriced and that a correction was long overdue. Is this that correction? Maybe. Whether it is or not, it is a timely reminder that asset prices of all descriptions have been running strong for a very long time now and, accompanying that strength, volatility has been very low.

RBNZ to Hold the Line

BNZ Research -
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If it boiled down to just the local information over the recent months, the RBNZ could well perceive reason to signal a softer OCR track. However, such things are balanced by 1) the sense there is already a strong precautionary element to the record-low OCR setting of 1.75%, 2) the Bank’s recent emphasis on the flexibility it has in guiding inflation to the mid-point of its target band (akin to the current RBA approach of late) and 3) the fact there are a number of identifiable inflation impulses on the not-too-distant horizon, including now from global sources.

Taxing Times

BNZ Research -
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Before the next MPS, the only NZ data which could potentially cause a stir are those regarding the December quarter labour market. These are due 7 February. New Zealand’s labour market is certainly steaming – if one consults the latest tax data.

An Inflationary Basis

BNZ Research -
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Providing the NZ CPI doesn’t shock for Q4, the debate will turn to how it will go in the early stages of 2018. In particular, that there is a good chance its annual rate of inflation will slow in Q1 – simply because a stocky quarterly result from Q1 last year will be dropping out of the calculations. Increased subsidies for tertiary fees will also be a drag on the CPI in Q1 2018. We expect annual inflation to dip to 1.5% in this quarter, and stay there in Q2. It will belie much of the capacity pressure in the economy, but could yet engender more delay with respect to OCR normalisation.

2018: The More Things Change…

Craig Ebert -
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In spite of all that has changed, and is changing, we haven’t really altered our forecasts of the NZ economy, from a broad perspective. As such, they remain relatively upbeat. So we still envisage pressure will come on the RBNZ to start lifting its policy rate later on this year.

HYEFU/BPS to Shine a Light on Fiscal Path

Craig Ebert -
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- Robertson's speech contained nothing new
- HYEFU/BPS to illuminate fiscal policy/costing
- ECT/Paymark show spending spark in Nov/Dec
- Also due this week: Nov food prices and PMI
- Our Q3 GDP pick settled at 0.7% (2.5% y/y)

For fuller detail, and costing, on the new government’s new plans it is eyes down for Thursday’s Half-Year Economic and Fiscal Update (HYEFU). And it’s not just the HYEFU. There will be the accompanying Budget Policy Statement – for the government’s medium-term intentions, including on spending and debt – to scan, while the government is also supposed to be providing an update of its 100-day plan. With all of this we will, hopefully be better able to assess New Zealand’s fiscal (stimulus) outlook and its implication for the wider economy and financial markets.

New Zealand in Hot Water

Craig Ebert -
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- NZ sea temperatures unusually high
- Spencer’s talk on low inflation a scene setter
- Partials to test our 0.7% view on Q3 GDP
- Data to show housing stabilising?
- Commodity price updates also due this week

Grant Spencer’s speech tomorrow, entitled “Low inflation and its implications for monetary policy”, promises to be important, one way or another. In particular, it lends itself to an issue we’ve long been mulling. That is, there is reason to believe global inflation is being suppressed by structural, as distinct from cyclical, factors, which central banks have little to no influence over. Accepting this, is it prudent for central banks to keep aiming for the same old CPI inflation targets?

The Good (Old) Days

Craig Ebert -
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- Business/consumer confidence diverging
- Political poll largely unchanged
- Q3 terms of trade to surpass peak of 1973
- NZ GDP history revised up 2.2%
- RBNZ FSR to simply outline criteria for LVR exit
- And…it's dry before summer even begins

What we’re starting to notice is a divergence in business and consumer confidence, with the former sagging and the latter proving robust. This is probably no great surprise. Some of the policies being proposed by the new government will be a direct impost on the business sector for the sake of benefitting employees. Labour market policies are integral to this.

Markets Today

BNZ Markets Today

Jason Wong -
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A soft USD theme continues to prevail although after
falling through much of yesterday it’s trying to recover.
The US 10-year Treasury yield pushed on up to a fresh
high, but has peeled off 5bps since, while US equities
continue to recover.

BNZ Markets Today

Jason Wong -
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US CPI data were stronger than expected, however the positive impact on the USD quickly faded. US Treasury yields are higher, but that hasn’t stopped US equities recovering further.

BNZ Markets today

Jason Wong -
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USD weakness has returned, showing a broadly based
reduction, as investors seek out safe havens like JPY and
CHF. Equity markets are in the red while US 10-year
Treasuries are relatively steady.

BNZ Markets Today

Jason Wong -
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It’s been a slow start to the week, with little news to digest. A positive mood hangs over equity markets and the US 10-year Treasury rate tested a fresh high, while currency movements have been modest.

BNZ Markets today

Jason Wong -
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Friday was another choppy day for equity markets,
although the S&P500 managed to end on a positive note.
US Treasury yields nudged higher, while the NZD pushed
higher.

BNZ Markets Today

Nick Smyth -
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Stock markets are lower overnight and US Treasury yields
higher, and markets remain reasonably volatile. The Bank
of England surprised markets by saying it expected to
raise interest rates earlier and faster than previously
thought. The USD continued its recent mini resurgence
and is up against most of the major currencies (the GBP
being one exception).

BNZ Markets Outlook

Jason Wong -
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Calm has returned to markets the past 24 hours, with stock markets recovering from the big losses earlier this week and bond yields moving higher as well. The VIX is back down to almost 25. The USD is stronger across the board, with the NZD back a little below 0.73. The RBNZ will be the focus today.

BNZ Markets Today

Nick Smyth -
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There were wild market moves on Monday night and
Tuesday with US stocks down sharply and erasing the
gains for 2018. At one point yesterday, S&P500 futures
were down more than 8% from where they closed last
week, although they have bounced back somewhat over
the past few hours and are starting to show some signs of
stabilising (for now at least). The VIX rose to 50. Bond
yields have fallen sharply in response to the stock market
meltdown but FX has been surprisingly stable. The NZD is
close to 0.73, similar to where it closed last week.

BNZ Markets Today

Nick Smyth -
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US bond yields rose further on Friday night after the US non-farm payrolls report showed faster than expected wage growth. The growing prospect of higher US inflation and faster Fed tightening spilled over into other markets, with US stock markets slumping around 2%, the USD strengthening and the VIX rising to its highest level since the US Presidential election.

BNZ Markets Today

Jason Wong -
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The start of the new month sees more of the same, with broadly-based USD weakness, albeit modest, upward pressure on global bond rates and US equities up.

BNZ Markets Today

Jason Wong -
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US 10-year Treasury yields nudged up to a fresh high but US equities are unperturbed today, following the nearly 2% loss in the S&P500 seen over the previous couple of sessions. Currencies haven’t changed much since the local close, but for the day as a whole, the NZD has performed well amidst a mildly softer USD backdrop.

BNZ Markets Today

Jason Wong -
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Markets are trading a different pattern today than we’ve been used to, with the USD stronger, weaker equity markets and higher global bond rates, led by the long end.

BNZ Markets Today

Jason Wong -
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The USD ended the week on a soft note helping to propel US equities to another record high, while global bond rates drifted higher. For the week, the NZD was 1% higher against the USD but down slightly on all the other major crosses.

BNZ Markets Today

Nick Smyth -
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The dollar is weaker again overnight, although that’s as much a reflection of EUR strength, after ECB President Draghi didn’t push back against the recent rise in the euro. In Davos, US Treasury Secretary Mnuchin said there were benefits and costs to the USD’s current value, which didn’t do much to change the market’s perception that the US administration wants a weaker dollar. US stocks and bond yields were largely unchanged. The NZD has recovered a bit of ground against the USD since the weaker-than-expected CPI release yesterday.

BNZ Markets Today

Nick Smyth -
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The USD is weaker across the board overnight after US Treasury Secretary Mnuchin said a weak dollar was good for US trade and they weren’t concerned about short-term movements. The NZD is above 0.74 as we write. The GBP has also been boosted a stronger than expected employment report and more encouraging comments on Brexit. The S&P500 is broadly unchanged, while 10 year Treasury yields have risen back to recent highs.

BNZ Markets Today

Nick Smyth -
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It was more of the same again overnight, with US stocks pushing higher and the USD weaker. The US administration announced it was increasing tariffs on imported solar panels and washing machines, although this hasn’t really dented sentiment. The NZD continued to rise and is now around 0.735.

BNZ Markets Today

Nick Smyth -
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Around an hour ago, US Senate leaders announced that they had agreed a deal to end the US government shutdown. Markets hadn’t been particularly phased in any event.

BNZ Markets Today

Jason Wong -
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Focus is currently on Washington where a US government shutdown deadline looms this weekend unless a stopgap funding bill is agreed. The USD remains under pressure as a result, while the US 10-year rate pushed through 2.60% for the first time since March.

BNZ Markets Today

Jason Wong -
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The NZD has recovered overnight after slipping through the local trading session on little news. Bitcoin continued to plunge, falling as low as $9185 this morning, which still seems about $9000 too high.

BNZ Markets Today

Jason Wong -
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US markets are open after their long weekend but market movements have been fairly restrained, with little news.

BNZ Markets Today

Jason Wong -
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Markets are quiet with the US on holiday, but that hasn’t prevented another lurch down in the USD, while the NZD makes further gains for the year.

BNZ Markets Today

Jason Wong -
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On Friday, political developments saw a surge in EUR and GBP, while the USD and the NZD underperformed. Stronger US inflation and retail sales data saw only a temporary move up in US 10-year Treasury yields.

BNZ Markets Today

Nick Smyth -
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US Treasury yields steadied overnight after China dismissed reports yesterday that it was considering reducing its UST purchases as “fake news”. Stocks and commodities moved higher amid continued global growth optimism, with Brent crude oil reaching a 3 year high. The minutes to the last ECB meeting were seen as hawkish, with the central bank noting it may change its guidance on monetary policy early this year. The EUR rose sharply, and this has dragged the NZD up to a 3 month high.

BNZ Markets Today

Nick Smyth -
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US rates rose again overnight, after (unverified) reports that China was considering slowing or stopping US Treasury purchases. US stocks and the USD fell in response to the story, although the initial moves have mostly unwound. The NZD broke through 0.72 overnight but has since has come back.

BNZ Markets Today

Nick Smyth -
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The US 10 year Treasury yield broke above 2.50% overnight, its highest level since March, after the BoJ made small changes to their QE purchase amounts. Risk sentiment remains positive with US stocks rising again and US high yield spreads hitting their tightest since 2007. The NZD was relatively strong again overnight.

BNZ Markets Today

Nick Smyth -
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Markets were subdued overnight, with only small moves seen across asset classes. US stocks consolidated near record levels amid continued low volatility while the USD increased a little overnight. The NZD outperformed.

BNZ Markets Today

Nick Smyth -
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2018 has started as 2017 left off with growing global economic optimism, new record highs in stock indices and further strength in commodity prices. Commodity currencies, including the NZD, have risen so far this year. Friday’s release of US non-farm payrolls was a bit weaker than expected but this didn’t dent the positive sentiment. US stocks and yields ended higher on Friday and the NZD reached its highest level since October.

BNZ Markets Today

Nick Smyth -
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US stocks are unchanged overnight after the House and Senate both approved the US tax bill, as widely expected. The bill will be sent back to the House today for a few small (uncontentious) amendments and then signed into law by Trump at some point this week. Global bond yields pushed higher again overnight, with the 10 year US Treasury yield almost reaching 2.50%, its highest level in 9 months. The NZD remains a little below 0.70.

BNZ Markets Today

Nick Smyth -
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US stocks have drifted back from their record highs
overnight as the market awaits the House vote on the US
tax bill later today ahead of the Senate vote tomorrow.
Global bond yields moved higher after some hawkish
comments from ECB members and better than expected
US housing data. But low liquidity probably exacerbated
the moves.

BNZ Markets Today

Nick Smyth -
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US stock indices rose to new record highs on Friday and
the USD strengthened across the board as House and
Senate Republicans agreed on a final version of the tax bill
for vote this week. Republican senators Bob Corker and
Marco Rubio both indicated they would vote for the bill
this week, giving the market greater comfort that it would
pass the Senate vote and ultimately be enacted. The NZD
has stabilised around 0.70 as we await a raft of domestic
data this week.

BNZ Markets Today

Jason Wong -
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The USD is weaker against most currencies over the past 24 hours as the market interpreted the FOMC as more dovish than expected. The ECB raised its growth forecasts but more importantly cut its core inflation forecast for the end of 2018 and that has seen the EUR struggle too. The AUD was the best performing currency after a stellar employment report. The NZD has lagged overnight, with NZD/AUD down almost a cent to 0.91.

BNZ Markets Today

Jason Wong -
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The USD is weaker across the board and yields lower overnight after US core CPI surprised to the downside. The NZD is the top performer. US stocks are also a bit higher, with the current low inflation backdrop seen as supportive of risk assets. Attention now turns to the FOMC December meeting at 8am with the market’s focus firmly on how many hikes the Fed projects for 2018.

Markets Today

Jason Wong -
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Most market moves were again reasonably modest overnight, US stocks inching ahead to new highs once more, as markets await the Fed meeting tomorrow morning and US CPI. The NZD has risen a little further against most major currencies again overnight, but on no discernible news. The AUD has been supported by news of M&A activity.

BNZ Markets Today

Jason Wong -
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The NZD is up against all the major currencies over the past 24 hours after news that Adrian Orr had been confirmed as the new RBNZ Governor. There hasn’t been too much movement elsewhere, as markets tread water ahead of key events later this week FOMC, ECB and BoE meetings, US CPI).

BNZ Markets Today

Jason Wong -
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Currency movements were modest at the end of last week, with GBP the only notable mover Friday night despite signs that Brexit talks can move to the next phase. There was a slight steepening of the curve after the US employment report.

BNZ Markets Today

Jason Wong -
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Trading conditions have been quiet, as they typically are, ahead of the US employment report, due tonight. Currency movements have been modest, with commodity currencies like the NZD underperforming a little. Bitcoin is higher (goes without saying). Global rates are down slightly.

BNZ Markets Today

Jason Wong -
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A modest risk-off feel has pervaded markets this week, with US markets down slightly after three down days in a row and much weaker Asia equity markets yesterday. This sees US 10-year yields continuing to drift lower. On the back of this mood, JPY is the top performer since yesterday morning, while the NZD is holding its ground, further signs that a decent support base has been found.

BNZ Markets Today

Jason Wong -
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There’s been plenty of economic newsflow to digest but not a lot of price action, with traders reporting subdued flows. The NZD is up on all the crosses for the day, despite slipping slightly overnight. US 10-year yields are down slightly.

BNZ Markets Today

Jason Wong -
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The week has begun with a reversal of Friday’s price action, with the USD recovering losses, the NZD lower, higher global bond rates and higher equity markets.

Markets Today

Jason Wong -
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It was a volatile Friday night trading session with the net result being slightly weaker US equities, lower global bond rates and a weaker USD. The NZD made up some lost ground.

BNZ Markets Today

Jason Wong -
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Overnight, the NZD has sustained the fall seen after yesterday’s ANZ business outlook survey. Some monthend buying pressure sees EUR and GBP higher. US 10-year yields have nudged up through the 2.40% resistance level.

BNZ Markets Today

Jason Wong -
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GBP has made further gains on optimism around Brexit talks, while global rates are a lot higher overnight.

BNZ Markets Today

Jason Wong -
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The NZD holds the top performing spot for the second consecutive day, although no more progress has been made overnight, as the USD has recovered a little. UST yields are slightly lower.

BNZ Markets Today

Jason Wong -
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Amidst a day lacking in newsflow, the NZD and JPY have outperformed, while the US yield continues to flatten.

BNZ Markets Today

Jason Wong -
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Friday trading was subdued, as expected, with the US still in holiday mode. The USD continued to drift lower, with EUR the key beneficiary.

BNZ Markets Today

Jason Wong -
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The USD has sustained the fall seen post the FOMC minutes yesterday. Overnight moves have been small, with US markets closed for the Thanksgiving holiday.

BNZ Markets Today

Jason Wong -
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In light trading ahead of the US Thanksgiving holiday, the USD has struggled and is the biggest loser. US equities are flat around record highs while UST yields are down slightly.

BNZ Markets Today

Doug Steel -
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Yesterday’s risk on tone extended overnight, as equities push onwards and upwards and the VIX fear index fell to a risk-loving level sub-10. The S&P500 poked just above
2,600 at one point for the first time and currently sits up around 0.7% on the day. European equities were up too, with the Euro Stoxx 50 closing up 0.5%. The DAX
outperformed rising 0.8%, a sign markets are shrugging off the current German political impasse.

BNZ Markets Today

Jason Wong -
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Risk sentiment saw some improvement overnight with US equities showing modest gains and US yields a touch higher. The VIX fear index has pulled back under 11 for the first time in over a week. Currency movements have been generally subdued, with limited data on offer.

Rural Wrap

Drying Out

Doug Steel -
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- NZ soils drying out rapidly
- An economic risk worth monitoring
- As 2008 NZ recession attests

The risk of drought in New Zealand is rising. That might seem like a strange thing to say when right through winter and early spring there was far too much rain. Back then grass growth was restricted by saturated soils. But conditions have been changing over recent weeks. It has been drying out – rapidly. It has got to the point now that many parts of the country have bigger soil moisture deficits compared to what is normal for this time of year according to NIWA. At this point, we have not adjusted our economic forecasts on account of the spreading dry. But it is a risk worth highlighting, especially with near term weather forecasts showing little rain on the horizon.

Strategist

BNZ Strategist

Craig Ebert -
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Economic Outlook
Political protest noted, the extent of the drop in today’s ANZ business survey, so soon, means we also need to wonder what might be bugging NZ firms from a practical point of view. To be clear, we are not about to slash our economic growth forecasts on the basis of today’s survey. However, it surely makes us comfortable keeping our GDP forecasts on the conservative side for the near term (as does the suddenly dry weather). As such, there seems further reason to question the strength of the Reserve Bank’s latest GDP forecasts, as well as Treasury’s (with an eye on its Economic and Fiscal Update, expected ahead of Xmas). Today’s news is certainly no reason to back off our story of inflation picking up – something that the inflation gauges in today’s ANZ survey gave more life to, in fact. This is consistent with the business costs portended by the new government’s policy manifesto, reinforced by the still-abating currency. While we watch for the possibility of the HYEFU over the coming fortnight, there are no significant NZ data over the period otherwise.

Interest Rate Outlook and Strategy
The global economic backdrop remains conducive to higher interest rates but a lack of measured inflation to date is keeping global bond yields in check. This dynamic continues to weigh on NZ yields. But as global economic expansion continues at pace, the odds gradually increase for an uplift in inflation pressure and global bond yields. That’s our 2018 view. Higher German rates next year could play a key role in driving US (and NZ) rates higher. Our view of higher US yields points to an eventual steepening in the NZ 2s10s swap curve and ultimately wider NZ-US 10-year government bond spreads as NZ government bond issuance is expected to step up next year.

Currency Outlook
The NZD has pushed lower over recent months. There has been some fundamental basis for the weakness with some wobbles in global risk appetite, weaker international dairy prices, a narrowing in the gap between NZ and US short term interest rates (as the Fed is expected to hike interest rates again in December), and the uncertainty raised by the change in NZ government. But we feel a lot of this news is now priced in by the market. Regards NZD/EUR, the cross has spent much of 2017 on a downward path, to be down 12% year-to-date. But this move was from a very high level and the cross remains some 6% above our long-term purchasing power parity estimate. The ECB’s gradual move away from quantitative easing and expectations of an eventual removal of the negative deposit rate, are likely to drive EUR higher and be the key factors supporting further weakness in the NZD/EUR cross.