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Economic views and news -Tuesday, 27 September

ANZ Research

Tuesday 27th September 2011

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OUTLOOK

CURRENCY: Further volatile trading is likely in the NZD as the market evaluates the relativities without significant additional economic data. Support around 0.7650 may again be tested today although watch for a base to form.

RATES: There was little interest in NZ rates during the London session.  As such, expect an unchanged open this morning, with an offered tone.

REVIEW

CURRENCY: Diametrically opposed trading for the NZD as it was whipped between positive and negative sentiment to start the week. The overnight dip lower found further buying interests which helped provide a short-term base.

GLOBAL MARKETS: Equities started the week on a better footing, helped by speculation that policymakers will come up with a plan to resolve the Greek debt crisis. European equities as measured by the Euro Stoxx 50 index rose 2.8% in whippy trade, while the S&P500 was more guarded with a 0.8% gain at the time of writing. The better tone to equities saw US Treasury prices fall, sending 10-year bond yields higher towards 1.9%. Late last week, US 10-year yields had fallen to as low as 1.67%, so we have had a very large swing in bond yields within a very short space of time. Oil prices gyrated around, settling slightly higher, while gold remains unloved.

KEY THEMES AND VIEWS

BETTER START TO THE WEEK BUT WILL IT LAST? Speculation that policymakers are working on a grand plan to resolve the European sovereign debt crisis helped market sentiment somewhat. European equities roared back to life on the back of this, posting strong gains. But the reaction in other markets was more cautious.

The euro was little changed in whippy trading. In fact, trading across markets generally gyrated around more than usual – a sign of the uncertainty amongst participants over how much credence to place over unconfirmed reports about a plan to allow Greece to default but keep it in the euro, ring-fence Italy and Spain by boosting the EFSF, and recapitalising European banks.

This was certainly not your typical risk on trading session, for while equities were higher and fixed income lower, risk currencies failed to spark into life. You would have thought EUR would be a major beneficiary of any plan to resolve the crisis, but the single currency is failing to take off in tandem with European equities. Perhaps the threat of an ECB rate cut is holding EUR back.

Next week’s ECB policy meeting will garner more attention than usual. After the change in tone at the last meeting, the deteriorating economic outlook in the Eurozone could be enough to convince the ECB to take back those rate hikes they put in this year. All up, best we can say at present is that markets are starting the week on a better albeit cautious tone, but that sentiment remains fragile and we are going to be susceptible to wild reactions to headline news. In other words, more of the same.

OTHER EVENTS AND QUOTES
•       ECB Governing Council member Yves Mersch:  “These wild expectations [or a 50bp cut by the ECB next week] only show that some people have lost the north. We have one needle in our compass.” However, Mersch did admit that “interest rate cuts aren’t completely ruled out.”
•       Newswires report that the ECB is considering restarting their covered-bond purchases along with further measures to ease monetary conditions, including the reintroduction of 12-month loans to banks. The report quoted an unnamed central bank official.

NZDUSD: Second warning…
Further erratic moves by the NZD underscore the illiquid nature of the currency and its dependence on external factors.  Expect similar trading patterns to continue as markets remain glued to headlines and announcements around the developing European situation. Overall support in the low 0.76USD zone may be out of reach today as consolidation takes place.
Expected range: 0.7650 – 0.7814

NZDAUD: Phase…
This cross continues to progress through another phase of play remaining largely within the 0.79AUD zone. A brief dip yesterday under 0.79AUD was unsustainable given the proximity of the RBA October cash rate decision.
Expected range: 0.7885 – 0.7945

NZDEUR: Breaking the line…
Longer term support levels remain attainable in the short-term as the markets look towards European developments. In this move, getting below 0.5659 will take some doing given the ECB has a strong chance of lowering interest rates next month.
Expected range: 0.5695 – 0.5745

NZDJPY: Lining up…
A longer term trend line of support is approaching and buyers may be saving their ammunition for this point. Yield buyers have few choices available in currency markets and may look to enter the market at this level.
Expected range: 58.30 – 59.30

NZDGBP: Winging it…
Having entered the 0.49GBP zone this cross is looking around for support. The approach of the 200 day moving average should provide levels at which some short term sellers of NZD help to provide a base through taking profit.
Expected range: 0.4928 – 0.4978



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