NZ FX & Interest Rate Outlooks

Transcription

1 NZ FX & Interest Rate Outlooks 20 April 2015 Imre Speizer Senior Markets Strategist 1 1

2 Contents Summary of forecasts 3 NZD/USD 4-5 NZD/AUD 6 NZD/JPY 7 NZD/EUR 8 NZD/GBP 8 Swap rates 9-10 Swap curve slope 11 Swap spreads 12 Global data calendar

3 NZ FX & Interest Rate Forecasts 3

4 NZD/USD: buoyed by weaker US dollar this week Week ahead: NZD/USD remains dominated by US matters. That much was evident today when NZ CPI for Q1 at -0.3% qoq came in slightly below consensus at -0.2%. NZD/USD shrugged it off and rose, preferring to continue responding to the month-old weakening of the US dollar. There s another important NZ event this week RBNZ Ass. Gov. McDermott s speech on inflation on Thursday, but don t expect any monetary policy signals with an RBNZ OCR Review scheduled for 30 April. The US data calendar is mostly lightweight, and there are no Fed speeches. So NZD/USD will be driven mainly by sentiment, which is currently bullish. We target the area. 3 months ahead: Lower to at At the OCR Review on 30 April, the RBNZ is likely to voice its discomfort with the high trade-weighted NZD (second chart). Also, NZ s economic data pulse should soon start to slip. Q1 GDP (released in June) should be weak (drought effects)., and Q2 CPI is expected to remain near zero. 1 year ahead: Lower to The RBNZ is on hold for the next two years, while the Fed is expected to tighten by September. Also, NZ economic data for Q1 and Q2 will be soft. Stronger US dollar in Q2 should depress NZD/USD NZD/USD eventual reversal 0.71 Oct-14 Dec-14 Feb-15 Apr-15 Elevated NZD TWI of concern to RBNZ NZD/USD USD index NZD/USD (lhs) NZ TWI (rhs) 0.50 Aug-08 Aug-11 Aug (Sources all charts unless stated: Bloomberg, Westpac) 4

5 The US dollar s multi-year uptrend has stalled The US dollar is struggling to resume its multi-year uptrend. Longer term prospects remain solid though. We care about broad US dollar trends because they usually determine the direction of NZD/USD. If the US dollar strengthens, then NZD/USD falls, and vice versa (first chart). During the past month, disappointing US economic data for Q1 plus more uncertainty regarding the start date of the Federal Reserve s looming tightening cycle have caused the US dollar to correct downwards More recently, early data for April is not inspiring much confidence that Q1 s malaise has been shaken (the bounce in retail sales was lacklustre while the Fed s NY Empire survey joined other regional surveys, falling into contractionary territory). US growth momentum will inevitably recover as one-time negatives wash out of the data (ports strike and bad weather) but our best guess is that the snapback may well underwhelm given other negatives holding back activity are more enduring, such as the higher USD and the retrenchment of the energy sector. In short this USD corrective selloff has further to run. Longer term prospects, though, remain solid with the outright direction of Fed policy and growth differentials vs G3 still tilted in the USD s favour and US bonds continuing to attract inflows.. When the broad US dollar rises, NZD/USD falls 0.9 NZD/USD NZD/USD (lhs) index 130 US dollar index (rhs) US dollar responding with lag to weak Q1 US data Index 80 % US data surprises, 8wk m.a. (lhs) USD index, 8wk % change (rhs) 20 Nov-12 Nov-13 Nov

6 NZD/AUD: a fresh attempt on is likely in May Week ahead: NZD/AUD has been stuck in a narrow range since the RBA disappointed markets by not easing early this month (first chart). This week s Australian events have plenty pf potential to break that range. RBA governor Stevens speaks in NY Mon (local time). On Tue we ee the minutes from the RBA s Apr meeting which surprised markets with a steady hand. On Wed it s Q1 CPI. CPI has long been seen as no barrier to easing but after the absence of a rate cut in Apr, markets will be anxious to see whether this reading causes any further delay. 3 months ahead: Another stab at is likely if the RBA cuts its cash rate in May and leaves the door open for more. 1 year ahead: We expect the cross to trade close to for the remainder of 2015 and into We have revised our iron ore price forecast lower, now looking for a bottom this year at $45. Note that this cross cycles in a relatively orderly manner over the long run, contained by a slightly ascending channel (second chart). Around the level should represent a major cycle peak. NZD/AUD uptrend has stalled NZD/AUD NZD/AUD Oct-14 Jan-15 Apr-15 NZD/AUD approaching a cycle peak NZDAUD NZD/AUD

7 NZD/JPY: remains in medium term uptrend Week ahead: Near term momentum has turned positive and we target this week. This week has a reasonable amount of Japanese data with department store sales Tuesday, trade data Wednesday, flash PMI Thursday and small business confdence Friday. Trade will be well worth watching given the very poor outcomes seen in China, Korea and Taiwan this last week. 3 months ahead: We expect the medium term uptrend to continue to beyond Money-printing by the BoJ versus an on-hold RBNZ are the main factors. 1 year ahead: We expect BoJ QE to continue to support this cross which should spend most of the next year above (second chart). NZD/JPY poised to break higher NZD/JPY NZD/JPY Oct-14 Dec-14 Mar-15 May-15 Longer term trend is upwards NZD/JPY NZD/JPY 45 Jan-09 Dec-10 Nov-12 Oct

8 NZD/EUR and NZD/GBP strong NZD/EUR This week: We expect a continuation of the uptrend this week, targeting above (post-float high so far). The first of the April surveys ZEW, the Markit PMIs and the German IFO will be the key releases to watch this week. 3 months ahead: The medium term uptrend remains intact (first chart), a fresh post-float high above 0.72 expected during the months ahead. The recent commencement of ECB QE should continue to support this cross in the medium term, something ECB President Draghi affirmed at the meeting last week when he rebutted any suggestions the program may be downsized if the economy continues to improve.. 1 year ahead: We expect the cross to hover around the 0.71 area during the year ahead. NZD/GBP This week: The cross is threatening to break above its multiyear range (second chart). Above has major upside implications. BoE minutes and retail sales are on tap. 3 months ahead: While it s hard to envisage the cross above 0.52 with the BOE expected to start tightening in 2016 but the RBNZ remaining on hold, there is significant event risk for GBP from the general election on 7 May. 1 year ahead : We expect the cross to extend the pattern of , a range with a slight downward drift (second chart). We target 0.48 by mid NZD/EUR trending higher NZD/EUR NZD/EUR Oct-14 Dec-14 Mar-15 May-15 NZD/GBP poised to break higher 0.53 NZD/GBP NZD/GBP Oct-14 Dec-14 Mar-15 May

9 NZ 2yr & 10yr swap remain rangebound This week: The 2yr swap rate last week bounced critical yield support at 3.46% for the second time this year. That level has now been established as a formidable obstacle. Breaking below it will probably require further negative surprises, with falling dairy prices and today s Q1 CPI disappointment unable to do the job so far. We thus expect the 2yr to range between 3.46% and 3.65% during the next few weeks.. The 10yr swap rate also remains locked in a sideways range, between 3.65% and 3.77%, mimicking US yields during the last few weeks. 3 months ahead: We expect the Feb low of 3.46% to be again tested, with a good chance of a downside break. A soft patch for NZ economic data releases is expected from April onwards, and that should keep market doves positioned for rate cuts. The next major downside target following a break is 3.18% (2012 peak). The 10yr swap rate is likely to fare better if the complexion of US economic data improves in Q2. Torn between stronger US data and weaker NZ data, the 10yr should gradually drift higher towards 3.80%. 1 year ahead: If our forecast of an RBNZ hike to 3.75% in September 2016 proves correct, both the 2yr and 10yr swap rates will pre-empt such and be trading above that level by early yr swap ranging 4.0 % % Oct-14 Dec-14 Feb-15 Apr-15 10yr swap ranging 4.6 % % Oct-14 Dec-14 Feb-15 Apr

10 Market continues to speculate the RBNZ will ease The short end of the NZ curve remains depressed by market speculation the RBNZ will cut the OCR. Current OIS pricing has the OCR falling to 3.31% by January 2016 (first chart), The RBNZ s latest Monetary Policy Statement (March) forecasts otherwise, expecting the OCR to remain on hold until mid-2016 (second chart). However it does at least admit there is a greater chance of a rate cut than a rate hike during that horizon. It included a discussion section describing one scenario where rate cuts may be warranted, namely inflation expectations continuing to fall. To that end, today s CPI result, while approximately in line with RBNZ s forecasts, may engender a further downward shift in inflation expectations. Inflation expectations surveys will be well worth watching this year. At the next RBNZ meeting, an OCR Review on 30 April, we expect a similar message to March s that it is likely to remain on hold for some time. However, its concerns regarding the high NZD TWI are likely to be intensified, implying the risks to the on-hold stance are in a downward direction. Market still pricing in RBNZ OCR cut % % current OCR = 3.50% 3.31 Implied by OIS (per meeting) 3.0 Apr-15 Jan-16 Oct-16 RBNZ disagrees, saying it will remain on hold % % RBNZ Mar-15 RBNZ Dec-14 Swap market current d interest rates Apr-15 Apr-17 Apr-19 10

11 NZ curve slope flatter near term This week: The US curve has recently adopted a slight flattening bias and this should set the tone for the NZ curve this week (first chart). That said, it s hard to see the NZ 2-10yr swap breaking outside its recent 13bp-25bp range in the near term. 3 months ahead: The NZ curve is likely to steepen during the next few months if the US economic data pulse improves as we expect in Q2/Q3 which should raise long-end US yields. Since the NZ short-end is likely to remain depressed by expectations the RBNZ will ease, a steeper curve should result. Partly offsetting this will be flattening pressure from NZ mortgage fixing activity which we expect to bulge during May and June. Thus, the 2-10yr swap will find it tough to steepen beyond 35bp. Also testifying for the steepening case is our quantitative model of the NZ curve which includes NZ short-end rates, NZ short-end slope and US long end rates as inputs. It shows the curve is currently too flat (second chart). 1 year ahead: If our forecast the RBNZ will hike the OCR from September 2016 proves correct, the curve should flatten. NZ curve following US curve bp NZ 2-10yr swap curve (lhs) US 2-10yr swap curve (rhs) 0 Oct-14 Dec-14 Feb-15 Apr-15 Model says NZ curve too flat % % Deviations from fair value (rhs) NZ 2-10yr actual (lhs) NZ 2-10yr fair value (lhs) bp

12 NZ swap spreads grinding higher The NZ 10yr swap spread (difference between NZGB yield and interpolated swap) has ground steadily higher since late 2014, from around 30bp to 50bp for the 10yr maturity (first chart). We expect this trend to continue. Partly explaining the rise is the global attractiveness of NZ real yields. One easy measure of real yields is via inflationlinked NZGBs. Here, the 2035 maturity, NZ s longest, is a good margin above any other OECD country s real yield (second chart). The US real yield at 0.51% is 130bp below NZ s 1.81%. NZ real yields have attracted offshore investors into kauris, eurokiwis, uridashis, LGFAs and NZGBs (chart below). NZ 10yr swap spread rising steadily bp NZ 10yr swap spread -50 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 bp Offshore investors NZGB ownership rising NZ$bn % NZGB outstanding (lhs) NZGB proportion owned by non-residents (rhs) NZ real yields are well above global peers % NZ 2035 AU 2035 real yield on 2035 (or nearby) government bond US 2040 CA 2036 FR 2040 SW 2028 % UK

13 Major data this week Day Country Release Previous value Market median Westpac estimate Comments Mon 20 NZ Q1 CPI 0.2% 0.2% 0.3% Sharp fall in fuel prices; underlying inflation positive but subdued. Mar Performance of Services Index 55.6 Business confidence surveys suggest ongoing strength in services. Eur Feb construction output 1.90% 1.6% Favourable weather impact in Jan lifted annual growth to 3.0% yr. Ger Mar PPI %yr 2.1% Deflating at fastest pace in 5 years. US Mar Chicago Fed national activity index 0.11 Based on 80 or so data inputs, not a business survey. Tue 21 Aus RBA, Minutes of April Board meeting Looking for any additional hints around likelihood of a May cut. RBA Governor Stevens speaking Topic TBA, to Aus-US association lunch in New York 2.30 am AEST. Chn Apr MNI business indicator First read on Q2 momentum - Q1 best forgotten on most counts. Ger Apr ZEW analysts' expectations Have risen every month since November. Can Feb wholesale sales 3.1% Jan plunge reflected plummeting auto sales 2015 Budget Presented by Fin Min Oliver. Wed 22 Aus Mar Westpac MI Leading Index 0.49% Feb was first positive read in a year but Mar data mostly weaker. Q1 CPI 0.20% 0.10% 0.1 A late surge in petrol prices only reduced, not reversed, the drag on CPI. Q1 avg. RBA core CPI 0.70% 0.55% 0.40% Ex housing 0.1%qtr, seasonally adjusted 0.2%qtr, trimmed mean 0.5%qtr. Eur Apr consumer confidence advance Confidence at multi-year highs since Feb. UK BoE MPC minutes April minutes usually defer to May when forecasts redone. US Feb house prices 0.30% 0.60% FHFA index. Mar existing home sales 1.20% 2.70% 4.50% Pending sales point to closings rising further in spring. (continued overleaf) 13

14 Major data this week (continued) Day Country Release Previous value Market median Westpac estimate Comments Thu 23 NZ Mar net immigration 4,820 4,800 Monthly migration flows hovering at high levels. Aus Q1 NAB business survey Includes information around capex expectations. Chn Apr HSBC manufacturing PMI - flash Residual seasonality hit Mar - consensus may have the direction wrong. Eur Apr PMI factory adv March saw Germany improve on both PMIs, France stalled/slipping. Apr PMI services adv Composite PMI fact/ser was 54.0 in Mar. UK Mar PSNCR bn 0 Public sector net credit requirement. PSNB ex intv'ns 6.9bn in Feb. Mar retail sales incl autos 0.70% 0.60% 1.0% Almost stalled in early 2015; March to benefit from earlier Easter. US Initial jobless claims w/e 19/4 294k 286k Approaching lows for the century so far. Mar new home sales 7.80% 5.7% 4.0% Can recent sales surge be maintained? Apr Kansas City Fed factory index 4 2 At a 2 year low in March. For of the 5 regional Fed surveys are sub zero. Apr Markit PMI factory prelim Unhelpfully tells different story to ISM surveying same industries. Fri 24 Chn Mar industrial profits %yr Weak nominal GDP a heavy downward weight on profits. Eur Eurozone summit, Riga Finance ministers and central bankers to discuss Greek bailout. Ger Apr Ifo business climate index Expectations rising faster than current conditions lately. US Mar durable goods orders 1.4% 0.60% 0.00% Aircraft to weigh on headline; core capital goods orders to extend Mar capital goods orders ex def/air 1.1% 0.30% 0.5% 6 month decline to Feb. 14

15 Disclaimer Things you should know: : If you are located in Australia, this material and access to this website is provided to you solely for your own use and in your capacity as a wholesale client of Westpac Institutional Bank being a division of Westpac Banking Corporation ABN AFSL ( Westpac ). If you are located outside of Australia, this material and access to this website is provided to you as outlined below. This material and this website contain general commentary only and do not constitute investment advice. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This information has been prepared without taking account of your objectives, financial situation or needs. This material and this website may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure the information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of the information, or otherwise endorses it in any way. Except where contrary to law, none of Westpac or its related entities intends by this notice to exclude liability for the information. The information is subject to change without notice and none of Westpac or its related entities is under any obligation to update the information or correct any inaccuracy which may become apparent at a later date. The information contained in this material and this website does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter a legally binding contract. Past performance is not a reliable indicator of future performance. The forecasts given in this material and this website are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Transactions involving carbon give rise to substantial risk (including regulatory risk) and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This information has been prepared without taking account of your objectives, financial situation or needs. Statements setting out a concise description of the characteristics of carbon units, Australian carbon credit units and eligible international emissions units (respectively) are available at as mentioned in section 202 of the Clean Energy Act 2011, section 162 of the Carbon Credits (Carbon Farming Initiative) Act 2011 and section 61 of the Australian National Registry of Emissions Units Act You should consider each such statement in deciding whether to acquire, or to continue to hold, any carbon unit, Australian carbon credit unit or eligible international emissions unit. Additional information if you are located outside of Australia New Zealand: The current disclosure statement for the New Zealand division of Westpac Banking Corporation ABN or Westpac New Zealand Limited can be obtained at the internet address Westpac Institutional Bank products and services are provided by either Westpac Banking Corporation ABN incorporated in Australia (New Zealand division) or Westpac New Zealand Limited. For further information please refer to the Product Disclosure Statement (available from your Relationship Manager) for any product for which a Product Disclosure Statement is required, or applicable customer agreement. Download the Westpac NZ QFE Group Financial Advisers Act 2008 Disclosure Statement at

16 Disclaimer continued China, Hong Kong, Singapore and India: Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore. Westpac Hong Kong Branch holds a banking license and is subject to supervision by the Hong Kong Monetary Authority. Westpac Hong Kong branch also holds a license issued by the Hong Kong Securities and Futures Commission (SFC) for Type 1 and Type 4 regulated activity. Westpac Shanghai and Beijing Branches hold banking licenses and are subject to supervision by the China Banking Regulatory Commission (CBRC). Westpac Mumbai Branch holds a banking license from Reserve Bank of India (RBI) and subject to regulation and supervision by the RBI. U.K.: Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number ) and is authorised and regulated by The Financial Services Authority. This material and this website and any information contained therein is directed at a) persons who have professional experience in matters relating to investments falling within Article 19(1) of the Financial Services Act 2000 (Financial Promotion) Order 2005 or (b) high net worth entities, and other persons to whom it may otherwise be lawfully communicated, falling within Article 49(1) of the Order (all such persons together being referred to as "relevant persons"). The investments to which this material and this website relates are only available to and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely upon this material and this website or any of its contents. In the same way, the information contained in this material and this website is intended for "eligible counterparties" and "professional clients" as defined by the rules of the Financial Services Authority and is not intended for retail clients. With this in mind, Westpac expressly prohibits you from passing on the information on this material and this website to any third party. In particular this material and this website, website content and, in each case, any copies thereof may not be taken, transmitted or distributed, directly or indirectly into any restricted jurisdiction. U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission ( CFTC ) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. Westpac Capital Markets, LLC ( WCM ), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 ( the Exchange Act ) and member of the Financial Industry Regulatory Authority ( FINRA ). This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on All disclaimers set out with respect to Westpac apply equally to WCM. Investing in any non-u.s. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-u.s. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-u.s. securities or related financial instruments may be limited. Non-U.S. companies may not subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments. The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates. For the purposes of Regulation AC only: Each analyst whose name appears in this report certifies that (1) the views expressed in this report accurately reflect the personal views of the analyst about any and all of the subject companies and their securities and (2) no part of the compensation of the analyst was, is, or will be, directly or indirectly related to the specific views or recommendations in this report.