CURRENCY: The questions regarding Europe can only grow this week and the US ISM finally catches up to regional Fed surveys. Relative demand for NZD is set to continue but against the USD the 0.8060 resistance looks set to remain firm. Only a hawkish RBA Statement today could change that.

RATES: Expect pressure to the downside for Kiwi rates on the open today. Global yields have rallied with yields on Aussie futures down 4bps from our close. RBA a focus today but not expected to generate much of a reaction.

REVIEW

CURRENCY: Asian regional PMIs and US ISM give cause for concern. European questions start to be raised with Finland and Norway blocking ESM secondary market purchases, yet AUD & NZD remains in demand.

GLOBAL MARKETS: The overnight session was choppy with the weaker than expected ISM figure knocking some of the wind out of the post-EU Summit positive trading sentiment. US 10-year Treasuries rallied solidly in response, with yields down 7bps to 1.58%. Equities were mixed, with European bourses gaining a further 1% and US indices currently trading flat to negative. Bond markets rallied across the board - the exception being Spain whose 10-year yields rose 5bp to 6.30%. German Bund yields rallied 6bps to 1.51%.

KEY THEMES AND VIEWS

US MANUFACTURING SECTOR HEADING FOR CONTRACTION? The ISM surprised to the downside in June, falling below 50 for the first time since July 2009 (52.0 expected). Heightened European concerns at the end of June may have unduly impacted the headline result. At face value, contraction in global factory output looks to be spreading from across the Atlantic with the final June Eurozone PMI printing at 45.1. Traditionally, the US manufacturing ISM has provided a pretty good steer for GDP growth and this latest figure questions the durability of the US recovery. New orders slumped 12pts to 47.8, export orders fell 6pts to 47.5 and production fell 4.6pts to 51. On a more positive note, it was good to see a further rundown in inventories (down 2pts to 44), and despite the new orders-to-inventories ratio slowing to below its 12-month trend, it did suggest a constructive base may be forming to support a recovery in activity later in the year. The employment subseries fell only 0.3 pts to 56.6 and should bode well for payrolls on Friday.

NO CHANGE VERDICT EXPECTED FROM RBA TODAY. Economists are unanimous in their expectation for no change in the cash rate. Markets are only pricing in 3-4bps of cuts (from 25bps in early June). Minutes highlighted that June's decision to cut was "finely balanced" and influenced by adverse developments in Europe. Our Australian economics team continues to pencil in two 25bp rate cuts for August and November, but now believe an August cut "is 50-50 at best". The biggest risk to Australian (and by association Kiwi) rates markets would be a relatively neutral statement; and/or affirmative wording suggesting the RBA will sit on the sidelines for an extended period.

OTHER EVENTS AND QUOTES

� Finland vowed to block ESM bond buying in secondary markets and the Netherlands Finance Minster said they would decide on purchases on a case-by-case basis, adding the Dutch don't like the buying.

� The Euro area unemployment rate rose to a record high of 11.1% in May. PMIs fell to 41.1 in Spain, 44.6 in Italy and 44.7 in Germany.

NZD/USD: Global growth is not strong?

Asian regional PMIs were weaker than expected as was the US ISM survey. Barring a hawkish RBA sending the AUD higher, which would drag NZD along, the 0.8060 resistance looks set to hold firm.

Expected range: 0.7920- 0.8060

NZD/AUD: RBA day?

Whilst the market doesn't expect a RBA cut today there is still 73bps of cuts priced by year end. Our economists expect only 50bps. So room for excessive cuts to be removed which should benefit AUD over NZD.

Expected range: 0.7780 - 0.7860

NZD/EUR: Here come the questions?

After a weekend of reflection the markets decides to question details of Europe and EUR definitively underperforms. Expect this trend to continue but given global growth concerns to be bumpy.

Expected range: 0.6340 - 0.6440

NZD/JPY: Tankan indicates Japan like NZ is recovering?

The Tankan survey indicates the Japanese economy is recovering quite well potentially heralding a period of settled activity on this cross.

Expected range: 63.2 - 64.20

NZD/GBP: Asset purchase program...

NZD continues to out-perform GBP. UK PMI surprised higher last night giving some comfort to the UK's fundamental position but focus remains on the BOE and its asset purchase program.

Expected range: 0.5090 - 0.5150