Economic views and news -Tuesday, 04 October

ANZ Research

Tuesday 4th October 2011

OUTLOOK

CURRENCY: Momentum for the USD may remain in place today as funds flow from equities into US treasuries. The fortunes of the Australasian currencies will rest on the decision of the RBA later this afternoon.

RATES: NZ 2yr swaps were marked slightly lower in London, but nothing traded. With global yields down, we expect local rates to open up lower, and the swap curve to flatten. The bond curve may be more hesitant to flatten in wake of last week’s rating downgrades, leaving swap spreads biased to widen. Of course, the big event of the day is at 4.30pm when we get the RBA decision.

REVIEW

CURRENCY: Another recent low established in early morning trading has the NZD on the back foot as it approaches significant support levels. A lot will rest with developments today.

GLOBAL MARKETS: Sentiment took another turn for the worse overnight. Equity markets were heavy from the open, weighed down by news that Greece would miss its deficit targets in 2011 and 2012 (despite the fact that the latest budget cuts had been approved over the weekend).

European equities traded about 2% lower, the USD strengthened, while the bellwether US 10yr Treasury bond yield rallied over 10bps to 1.80%.

Better than expected European PMIs both sides of the Atlantic failed to excite, with the weight of the euro area debt crisis remaining a millstone around the market’s neck.

The NZD did ok for most of the overnight session, but started getting hit hard as US equities peeled off after about 5am NZ time. EURJPY hit a new 10-year low. Gold and sliver rallied hard, but energy and industrial commodities were generally down.

KEY THEMES AND VIEWS

VOLATILITY AND BEARISHNESS TAKES OVER. If one just focussed on the data overnight, one would be forgiven for being slightly optimistic, with better than expected data across the board, including the key US ISM manufacturing index. If we were to be blunt, we’d say it was the same story, different day. Indeed, apart from the data, there wasn’t really any other new news overnight. The fact that Greece is struggling is certainly old hat. But markets were having none of it, and bearish sentiment has taken over. This on-again-off-again attitude to risk and investing is symptomatic of the degree of caution, misinformation and uncertainty out there, but we better get used to it, as it doesn’t look like it’s going away any time soon. Sadly, the longer it lasts, the more New Zealand will get dragged into the fray. We will be keeping an eye on funding markets, for this is a key vulnerability.

OTHER EVENTS AND QUOTES
• Federal Reserve Bank of Dallas President Fisher (FOMC voter and recent dissenter) was a tad upbeat on the economy: On a radio interview, Fisher said “there is some minor momentum in the economy”, adding that business leaders he knows say “that they are barely moving forward, but they’re not moving backward”. He also pointed the finger at politicians, noting that “our job is to refuel the tanks, we’ve done that” and now “it’s up to the fiscal authorities”. He also said he didn’t think the benefits of operation twist outweighed the costs.
• PIMCO’s Bill Gross quipped that “sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack”. He also said that the global economy is at risk of lapsing into recession, with growth falling even below the slow “new normal” level.

NZDUSD: Still recuperating…
Time is still needed for the NZD to further consolidate around current levels. Markets will have enough to focus on locally and offshore to guide the moves of the NZD as technical levels still remain closely watched. Dips towards the low 0.75USD territory should find further buyers today.
Expected range: 0.7513 – 0.7605

NZDAUD: Knock, knock…
Today the focus is squarely on the RBA and their interest rate decision. Markets are expecting no change however the possibility of a cut is holding the AUD back. Once confirmation is delivered of no change the AUD should strengthen taking the NZD reluctantly with it. This cross should remain capped in the low 0.79AUD area.
Expected range: 0.7860 – 0.7935

NZDEUR: Holding for now…
Having again avoided thoroughly testing key support at 0.5634 this cross looks to strength marginally from here. The first obstacle is 0.5758 but if the RBA leaves interest rates on hold today this should be looked at closely.
Expected range: 0.5675 – 0.5758

NZDJPY: Holding the line…
Support on this cross continues to be closely examined and this should be the theme for today. Buyers are likely to enter the market towards the mid 57JPY area.
Expected range: 57.65 – 58.25

NZDGBP: Time to retrace…
Support at 0.4865 may well be tested again today as the effects of a more positive UK September PMI release overnight remain.
Expected range: 0.4865 – 0.4905

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