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New Zealand Markets 27 August 2001

NZD: The Desk View

- NZD has broken higher on USD weakness over the last week. We expect this to continue as both NZD and AUD rally.

- Our thoughts are that the dollar will continue to struggle as the week goes on but the market will watch the ECB on 30 August for a lead for the EUR.

- The US market will digest the implications of the expected downward revision to US Q2 growth (taking the outcome into negative territory in our view), two measures of consumer confidence and the Chicago PMI later in the week.

- The NZD enjoys important support at 0.4360 and then at 0.4290. Resistance is now up around 0.4450 with major resistance at 0.4513.

One week range: 0.4360/0.4513

One month range: 0.4250/0.4650

New Zealand Exchange Rate Forecasts

27 Aug 3M 6M 12M

NZD/USD 0.4417 0.44 0.46 0.48

Source: Deutsche Bank

NZD/USD and NZD/AUD - Last 2 Weeks

Source: DB Global Markets Research

Fixed Interest

- NZ markets continue to maintain the working assumption that the RBNZ’s easing cycle ended back in May and that some tightening of policy settings is likely early next year. This accords with our own central view.

- However, we continue to believe that the near-term risks favour a further cut in the RBNZ’s OCR rather than an early tightening. Concerns regarding the global growth outlook and the improved performance of the NZD suggest that a rate hike this side of Xmas is quite unlikely in our view.

- Over the past two weeks, NZ 10Y bond yields have drifted up a little, mainly on the back of weakness in US Treasuries. We think that NZ 10Y yields will trend around the 6.50-6.75 region over the next 3-6 months.

- A busy week of US data lies ahead which should shed further light on both the extent of recent economic weakness and prospects for recovery. Greenspan also speaks on Friday.

New Zealand Interest Rate Forecasts

27 Aug 3M 6M 12M

Official Cash Rate 5.75 5.75 5.75 6.25

10 Y Bond Yield (11/11) 6.61 6.50 6.75 7.25

Source: Deutsche Bank

90 Day Bills and 10Y Bond Rate - Last 2 Weeks

Source: DB Global Markets Research

Dollar Bloc Economic Diary

Mon 27 August US Existing Home Sales (Jul) [DB 5.25mn; market 5.3mn; previous 5.33mn]

NZ Overseas Merchandise Trade - Provisional (Jul) [DB: -$25m mth/$78m ann;

market: $26m mth; previous $139m mth/-$22m ann]

Tue 28 August US CB Consumer Confidence (Aug) [DB 118.0; market 117.5; previous 116.5]

Can BoC monetary policy meeting (09:00 ET) [DB expects a 25bp cut]

Wed 29 August US Q2 GDP (prelim) [DB -0.3% saar; market 0.0% saar; advance estimate 0.7% saar]

Aus Balance of Payments (Q2) [Current A/C Deficit DB $3.2bn (1.9% of GDP); previous $4.7bn (2.8% of GDP)]

Thu 30 August US Personal Income (Jul) [DB 0.3% mom; market 0.3% mom; previous 0.3% mom]

US Personal Consumption (Jul) [DB 0.3% mom; market 0.1% mom; previous 0.4% mom]

Aus International Trade in Goods and Services (Jul) [DB -$A975m; previous -$A537m]

Aus Building Approvals (Jul) [DB 8% mom; previous 3.0% mom]

NZ Producers Price Index (Q2):

Inputs [DB 1.8% qoq/ 8.5% yoy; market 1.2% qoq; previous -0.9% qoq/7.8% yoy]

Outputs [DB 1.0% qoq/5.8% yoy; market 1.2% qoq; previous -0.2% qoq/5.7% yoy]

Fri 31 August US U of M Consumer Sentiment (Aug - final) [DB 93.5; market 93.5; previous 92.4]

US Chicago PMI (Aug) [DB 43.0; market 39.6; previous 38.0]

US Factory Orders (Aug) [DB -1.5% mom; previous -2.4% mom]

Aus Retail Trade (Jul) [DB -1.0% mom; previous 1.1% mom]

Aus Motor Vehicle Registrations (Jul) [DB 7.0% mom; previous -4.8% mom]

Aus Financial Aggregates (Jul) [Previous 0.7% mom]

NZ NBNZ Business Survey [Confidence: DB 19, previous 16.9;

Trading Prospects: DB 37, previous 36]

NZ Wholesale Trade Survey (Q2) [previous -6.1%qoq/2.2% yoy]

NZ Value of Building Work put in Place (Q2) [DB 6.0% qoq/ -4.0% yoy;

previous -6.8%qoq/26.9% yoy]

Local data releases:

The week begins with the first release of merchandise trade data for July. With the commodity export season winding down and non-commodity exports constrained by the global slowdown, we expect this month to mark the beginning of the usual run of monthly deficits. We look for a deficit of NZD25m. However, on a merchandise trade basis (exports measured in FOB terms and imports measured in CIF terms), this outcome would lead to the first annual trade surplus since April 1995.

Lower petrol prices and a higher NZD led to a reduction in producer prices in Q1. However, these factors have reversed in Q2 and their influence is likely to have been reinforced by improved prices for New Zealand’s export commodities, as demonstrated by the ANZ Commodity Price Index. As a result, we expect the Producers Price Index to record a further substantial increase in both input and output prices in Q2. However, declining commodity prices and a stronger NZD should see these pressures relieved somewhat over H2 2001.

Consumer confidence fell a little this month, probably dented by ongoing concerns about the drought-induced power crisis (in particular the foreshadowed increase in power prices and the risk of power black outs). Similar concerns are likely to have weighed on business confidence this month - perhaps more so as businesses are likely to have been affected more significantly by the rise in wholesale power prices. As a result, we would not be surprised if the August instalment of the NBNZ Business Survey showed a decline in general business confidence and, to a lesser extent, firms’ own trading prospects, when measured in seasonally adjusted terms. However, given the usual seasonal variation, the unadjusted headline indicators may still show optimism holding firm, if not rising marginally. The market will also pay attention to the various pricing indicators for information on how inflation pressures are evolving.

The week concludes with two partial indicators of Q2 GDP. Building consents data suggests that construction activity is likely to have rebounded somewhat in Q2 - we look for a 6% qoq rise in real building work put in place. Given a general bounce-back in the economy - our preliminary Q2 GDP pick is 1.0% qoq - the wholesale trade survey should also record a decent rise in wholesale sales.

International Themes

United States: The Fed cut rates by 25bp and retained its easing bias. We believe that the seeds of a gradual economic pickup have been planted and that, barring a further collapse in stock prices or an unexpected twist in the economic data, the Fed’s easing campaign is over.

Euroland: HICP inflation has fallen for two consecutive months since peaking in May and further falls are likely in the months ahead. Core inflation, as measured by our proprietary DBCI indicator, continued to edge up in July. The good news for the ECB is that we have observed the first decline in core goods prices, no doubt linked to the weakness of economic activity, suggesting that the peak in overall core inflation is not far away. Because of the ongoing distortions, there is confusion as to how M3 growth figures should be interpreted. That said, the ECB we think has opened the door to a rate cut despite M3. We conclude that the ECB is in a position to cut rates at one of its two upcoming meetings. The latest survey shows that 41 of 55 analysts expect a rate cut this week.

Canada: The key event in the peripheral dollar bloc this week is likely to be the BoC’s policy meeting, where we expect a 25bp cut in rates. However, the jury is still out on whether the expected cut will mark the trough in rates in Canada.

Commentary: Migration flows turning back in New Zealand’s favour

Over the past four years, New Zealand has exported a net 31,000 people - around 0.8% of its population - to the rest of the world. This outflow has revived the “brain drain’ debate that was a feature of the 1980s, when significant net outflows were also recorded. However, more recent data suggests that migrant flows may now have begun to turn in New Zealand’s favour. A net 1140 people moved “permanently’ to New Zealand in July - the strongest inflow recorded since February 1997. Given widespread skill shortages, at first glance a rise in skilled migrants might seem positive for an easing of pressures on labour costs and inflation. However, while we agree that skilled migrants have a positive impact on overall economic performance over the medium term, in the near term, we think that migrants are likely to contribute much more to aggregate demand in the economy than to aggregate supply, thus contributing to, rather than alleviating, pressures on inflation.

Current net inflows remain modest by the standards of the mid 1990s. However, the turnaround in migration trends is still in its infancy, and it remains to be seen where the trend will settle over coming months. Although migration data usually attracts little if any market attention, we think it is worth keeping an eye on migration trends over the period ahead - we are sure the RBNZ will be doing so. If recent inflows are sustained over coming months, or accelerate further, in our view this will provide another reason for the RBNZ to leave the OCR on hold over the remainder of this year, with the prospect of a first tightening in Q1 2002. Interestingly, migrant flows have shown a reasonable correlation with the NZD over the past decade. While there are reasons to expect some causality (due both to the impact of migration on the RBNZ’s policy stance and, to a lesser extent, the financial assets that migrants bring with them), the relationship also reflects the broader correlation that both migration patterns and the NZD exhibit with, for example, the relative performance of the New Zealand and global economies.

Population Growth and Building Approvals Net Migration and the NZD

Source: DB Global Markets Research, Statistics NZ Source: DB Global Markets Research, Statistics NZ

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