BNZ pares back its future OCR hike timing projections on the strong dollar and high immigration; still see a 5% peak

by Raiko Shareef

NZ Dollar

The week started with the NZD (and AUD) buoyed by the monthly “flash” update of Chinese Manufacturing PMI courtesy of HSBC.

Yesterday’ afternoon’s release of the June update at 50.9 was a marked improvement.

We always caution about reading too much into very modest changes in this index but the fact of it being back above 50, with increases in the sub-indices for output and new orders is encouraging and helped give a lift to investor sentiment through much of the Asian time zone, even if the Shanghai Composite couldn’t sustain the gains into the close to show a net loss of - 0.1% on the day.

On the home front we saw NZ net migration print +3,980 in May, (+4,100 previous).

Remember that the RBNZ admitted it has been surprised by strong net migration, and this was a key reason why the rate track was unchanged in June (defying some expectations for a lower track).

The RBNZ expects net immigration to peak at 37k annual in mid-2014. This reading takes the annual pace to 48.5k.

Our Research team refreshed their rate forecasts yesterday, removing a hike in October from their expected trajectory. This is largely due to the NZD’s strength as they note the strength of migration & trade balance updates.

They retain their forecasts for July & December hikes (and a peak of 5.0% for the OCR).

Overnight after pushing towards the 0.8750 level the currency has retreated, macro accounts noted as supply in our flows (as they were in the AUD).

We open this morning at 0.8715 and with a light calendar it’s to offshore news and data we may most attention – that and the football of course!

Today, traders will continue to respect the 0.8680 level as first support with resistance still defined by the 0.8750 level on our order book.

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Majors

Whereas China’s PMI was tentatively encouraging; there were significant disappointments in the European numbers.

Both the manufacturing and services numbers in France were well below consensus expectations and last month’s levels. German manufacturing edged up a tenth to 52.4 but there was a sizeable -1.2 point drop in services to 54.8.

The European data were an excuse to push the EUR lower but we are talking about just a 30pt range overnight.

For the US, the big economic event is a toss-up between the Wednesday second revisions to Q1 GDP & the PCE inflation numbers on Friday – probably the latter more important for the future path of monetary policy.

In the interim we saw overnight the Markit Mfg. PMI push to its highest level since May 2010, in sharp contrast with the earlier European releases.

Part of the reason why the PCE reading will be so important is Fed Chair Yellen’s apparent dismissiveness of US inflationary pressures at her press conference last week.

The comments evoked a vocal riposte from commentators wondering whether the Fed is perhaps being too complacent.

We count ourselves among that group, which gels with our positive USD view for 2014/15.

All its research is available here.