RBNZ warns of unjustified and unsustainably high NZD levels

• New sanctions to target funding avenues of Russian banks

• European PMIs set to show minimal growth, price pressures watched

• MPC dissent fails to materialise, sterling slips ahead of retail sales

• RBNZ warns of unjustified and unsustainably high NZD levels

The possibility of fresh sanctions on Russia have increased this morning following the publication of a document by the European Commission directly calling for new measures to shackle the country's banking sector. The proposals focus on not allowing European banks, funds or investors the ability to buy debt or equity in Russian banks while simultaneously barring those same Russian banks from listing shares on European stock markets in order to tempt investment from elsewhere.

These are the kind of sanctions that we want to see but more can obviously be done. A similar ban on Europeans purchasing the sovereign debt of Russia would send a very strong signal but seems to have passed over in fear of retaliatory action.

It is doubtful however that these measures will go to a vote. The vote to impose such tariffs on the Russian banking sector would need to be unanimous and we would have doubts that every member of the EU would fall in line.

The euro has remained under pressure over the course of the Asian session with expectations of further losses only increasing. Today's run of preliminary services and manufacturing PMIs could easily be the ticket. As we have done previously, in preparation for next week's provisional CPI reading from the Eurozone, we will be looking at the price components of the individual measures to see whether businesses are starting to see any form of inflationary pull. Without that, we have our doubts over sustained euro strength.

China’s preliminary manufacturing PMI ran to the highest levels in 18 months overnight rising to 52.0 against 51.0 expected. This may be the first release to definitively show the positive effect of the “mini-stimulus” that Beijing put into effect at the beginning of Q2 alongside a decision to pause its plans to rebalance its economy away from credit driven manufacturing growth. The recovery of the Chinese domestic and external sectors seem to be accelerating into the 2nd half of 2014.

Sterling strength slipped away yesterday as a vote of dissent against the Bank of England’s current policy stance remained elusive. The latest Bank of England minutes continued last month’s feelings that the Monetary Policy Committee is becoming increasingly split as we head into the 2nd half of the year. While one side is happy that risks of a rate rise to the recovery have receded, others believe that a “premature tightening in monetary policy might leave the economy vulnerable to shocks.”

Uncertainty over weak wage growth and slack in the UK economy has been enough to keep interest rates as low as they are now for this long and we believe that comments around a lower growth profile in the UK through the 2nd half of the year will be enough to see rates remain where they are into 2015. It will be wages and only wages that will shift our mind and the MPC’s collective mind on this.

GBPEUR had a run at 1.27 rebuffed only just and we maintain our thoughts that the pair should continue higher through the year. Today’s retail sales announcement at 09.30 could easily be the catalyst. The market is looking for a rebound from May’s disappointing 0.5% contraction.

A currency that has spent the best part of the past year rallying higher was knocked on its back overnight following comments from its central bank that the currency’s rise had been “unjustified”. New Zealand dollar is down around 1.2% on the session so far against its G10 peers. “The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall,” Governor Graham Wheeler said last night following the RBNZ’s decision to hike rates once again to 3.50%.

The Reserve Bank of New Zealand has now signalled that it will pause its rate hike series and further rises “will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures.” We think that the pace of rate rises in the second run will slow to a rise every 2 months from every month and that they will resume in December of this year.

Have a great day.