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Economic views and news - Thursday, 20 October

ANZ Research

Thursday 20th October 2011

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OUTLOOK

CURRENCY: Increasing questions around this weekend’s EU summit and possible outcomes should have the NZD testing the resolve of buyers today. Expect support in the low 0.79USD region to be enough to hold the downside.

RATES: Expect local rates to open a tad higher following offshore moves.

REVIEW

CURRENCY: FX markets took a while to settle yesterday after headlines flew and Spanish ratings were dropped by Moodys. Overnight attempts to scale the 0.80USD wall were unsuccessful as the NZD eased off it’s highs.

GLOBAL MARKETS: Markets were reasonably unremarkable in comparison to moves seen recently. European equities rose slightly, and interestingly, bond yields rose too. Italian bond yields are 4 points closer to 6% (at 5.89). Commodities fell slightly – but it was neither “risk on” nor “risk off”

KEY THEMES AND VIEWS

DATA AND POLITICS. US CPI data edged higher in September, taking the annual headline rate to 3.9%, the highest since 2008. On the face of it this is an unwelcome development. But the pace of the rise is slowing, and when taken together with a core annual rate of just 2.0%, and a monthly increase that could have just as easily been rounded down to zero had it been a sliver lower (the unrounded rise was 0.0554%) it’s hardly a story of inflation getting out of control as some opponents of QE suggest. That said, the Fed would no doubt prefer not to be doing QE while core inflation was rising and sitting around their 2% target, but even still, we doubt current inflation conditions would prevent more QE if it becomes necessary. But the US is not the immediate problem – Europe is – and headlines overnight were staggeringly confusing, and only cement our long held view that the political process is almost designed to fail. Getting consensus takes time, and Europe doesn’t have time.

Enough of that – let’s look at the headlines. We saw one where Moody’s sees a 60% Greek haircut, another where a German Finance Ministry spokesperson says the EFSF’s upper limit is €440bn and that the leveraged figure Schäuble mentioned earlier in the week was hypothetical, along with others suggesting France may take steps to protect its AAA credit rating. Can everyone get what they want? We’re not so sure. The bigger the Greek haircut, the more losses the banks take. The more losses banks take the more capital they need. But smaller haircuts will just put more pressure on governments and the EFSF. Bottom line – this is a long way from getting sorted. But European equities rallied anyway.

IN THE NEWS. Bloomberg News leads with a story about European banks vowing to trim their balance sheets by €775bn in a bid to assure investors ahead of planned increases in Tier 1 capital ratios, which may lead to forced recapitalisations funded by governments. Whether asset sales can be completed before capital ratios increase remains to be seen – if they are it will take some pressure off the banks. But the real issue is what assets they sell – for this is how the trickle down effect impacts other countries. Will it be Asia? It could be, but we suspect not. European banks lending into Asia has increased by around US$450bn over the past 2 years, but most of this has been by British banks – which may not be downsizing. It seems likely that once again, assets in the European periphery will be on the block.

OTHER EVENTS AND QUOTES
•          Bank of England Minutes showed voting for the £75bn increase in asset purchases was unanimous.

NZDUSD: Crossing the line…
Little chance of the NZD crossing the 0.80USD line overnight and the same scenario is likely today. An investigation of support is more likely as further questions are raised around this weekend’s EU summit.
Expected range: 0.7920 – 0.7980

NZDAUD: Inching closer…
This cross continues to edge towards the 200 day moving average (0.7669) with little technically in the way. Initial support at 0.7722 should give way at some point to assist the move as little by way of economic data is due during the remainder of this week.
Expected range: 0.7722 – 0.7772

NZDEUR: Tighter ranges…
Minor support levels could be tested in the lead up to the EU summit despite an increasing probability of disappointment on the weekend announcements. The topside is capped just below 0.58EUR today.
Expected range: 0.5740 – 0.5790

NZDJPY: Still waiting…
Markets remain in waiting mode for any Japanese official announcement around the strength of the JPY. Any such announcement will lift this cross temporarily but in the meantime familiar ranges will continue.
Expected range: 60.48 – 61.50

NZDGBP: Clear cut…
Last night’s MPC meeting minutes were clear in their decision. Despite the current high CPI the belief remains that it will fall next year. GBP strength helped to lower this cross and that move should continue today towards the 0.5013 support level.
Expected range: 0.5013 – 0.5053

 



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