Thursday 12th January 2012
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CURRENCY: Given the slowing German growth, and the broad correlation between NZD and EUR, NZD appreciation may be limited by resistance. Ability to back off substantially remains difficult as buyers fight over supply.
RATES: NZ 2yr swap rates traded a tad higher in London, but US Treasury bond yields have subsequently rallied, so we’ll probably open unchanged.
CURRENCY: The inability of the NZD to make new highs against the USD can be attributed to the weakness of the EUR which continues to be a drag on the performance of the NZD. However, it remained contained overnight.
GLOBAL MARKETS: After a quiet London morning the tempo picked up in the afternoon on Fitch comments that the ECB must do more to prevent a “cataclysmic” euro collapse, and recurring rumours of an imminent French sovereign downgrade (quickly denied by French Treasury officials). Although some support was provided by comments from German leader Angela Merkel that Germany would be prepared to pay more capital into the ESM at the beginning in order to send a message to markets, the damage was done. EURUSD fell to a new low, with negative sentiment compounding talk that Greece may require an additional €15bn even after a haircut on its bonds.
KEY THEMES AND VIEWS
WHAT NOW FOR THE FED. Opinion on what the Fed’s next move will be remains divided. “Fedspeak” overnight was generally neutral to dovish, with Atlanta Fed President Lockhart (a voter in 2012) saying that he doesn’t want to “lock into a rigid position” on any further easing. Assuming the economy develops as he expects (with benign growth and inflation), Lockhart is “reluctant to change, or support change, in either direction, the FOMC’s accommodative policy”. However, Chicago Fed’s, Evans (who dissented in November, voting for additional accommodation, but is not voting this year), said that the Fed “might have to do more” to stimulate the economy, with any new QE required potentially totalling $600bn. Whatever Fed officials are saying, it is clear Bernanke is frustrated by the lack of a recovery in the housing market, which is critical for consumers, and until it recovers, talk of QE3 will probably continue to hang over the market. Markets are also gearing up for tonight’s Bank of England and ECB meetings (and there is a minority that expect the ECB to cut).
CHINA DATA IN FOCUS. Chinese Inflation data will be the main focus today, and if they are softer, as our China economists expect, it may add weight to calls for more easing. Our economists expect CPI inflation to fall to 3.9% y/y in December, compared with November’s 4.2% reading and last year’s peak level of 5.5%, suggesting that inflation pressures have more or less subsided.
OTHER EVENTS AND QUOTES:
• Another nuclear Iranian scientist has been assassinated. The attack comes amid heightened tensions in the region, and Iran claims that “this terrorist action was undertaken by elements of the Zionist regime and those who claim to fight against terrorism”.
• The Fed’s Beige Book is due for release at 8am NZ time. The report summarises the Fed’s view on how the US economy is faring.
Another confined day for the NZD is possible as markets await today’s Chinese December inflation data and tonight’s interest rate decisions by the ECB and BoE. Expect demand, if tested, to demonstrate the underlying interest in the NZD.
Expected range: 0.7915 – 0.7975
Having lifted itself off the mat this cross may pick up towards the mid/high 0.77AUD zone during the remainder of this week. While nothing new economically is on the horizon, expectations of Australian interest rate cuts and the performance of the EUR are weighing on the fortunes of the AUD.
Expected range: 0.7695 – 0.7745
NZDEUR: Still moving…
Comments around EZ countries and the weaker 2011 German GDP growth release have assisted this cross to move higher. While it has created another record high many will look to take advantage of the move looking for a short-term correction back towards the 0.61 level.
Expected range: 0.6225 – 0.6275
NZDJPY: Pulled over…
Again virtually no moves on the JPY side of this cross and with the NZD remaining contained it has gone nowhere overnight. Expect another day of being stuck in familiar tight ranges.
Expected range: 60.75 – 61.40
NZDGBP: Rear ended…
Weaker UK data overnight has added further momentum on the topside for this cross. It may continue today as the cross approaches 0.52GBP.
Expected range: 0.5150 – 0.5190
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