Economic views and news - Thursday 4 August

Thursday 4th August 2011

OUTLOOK

CURRENCY: While global equity markets continue their move in recognition of reality the NZD should remain under pressure. Topside cap will again be lower today but may be tested after the NZ Q2 unemployment release.

RATES: Some receiving interest was still evident given global developments, but the kiwi traded in a narrow range. With the market looking to morning’s HLFS for direction, local rates are expected to open broadly unchanged.

REVIEW

CURRENCY: No surprises yesterday to see a further melting of the NZD as equity market moves led the way. Overnight however the NZD found initially support above the 400 hour moving average to deliver a minor bounce.

GLOBAL MARKETS: Concerns over the global economy saw European equity indices fall up to 3%, with US bourses retracing earlier losses at the time of writing. German, UK and US bond yields eased, with the 10 year US yield currently at 2.59%, having fallen earlier to 2.55%. Italian and Spanish bond yields fell (to 6.21% and 6.07% respectively for the 10 year maturity). Despite the weaker USD, commodity prices fell on the CRB measure, with oil prices down nearly 2%. Gold prices rose further to a new high.

KEY THEMES AND VIEWS

CONCERNS REMAIN OVER US ECONOMY. Moody’s and Fitch leaving their AAA credit ratings intact (for now), but have warned of downgrades if lawmakers fail to enact debt reduction measures and the economy weakens. Dagong (the Chinese rating agency) have already cut their US credit rating from A+ to A with a negative outlook. The dataflow overnight has not assuaged fears. When the downward revisions to June are taken into account, the ADP private sector employment report was in line with market expectations. The ISM non-manufacturing report was weaker, with the employment component falling to 52.5. With the employment component of the ISM manufacturing slumping to 53.5, the outlook is for another sub +200k non-farm payrolls report later this week. With core inflation showing little signs of falling, QE3 does not appear under consideration by the Fed yet, but watch this space if the dataflow continues to weaken.

EUROPE. Better than expected data across the Atlantic and a decline in Spanish and Italian bond yields have done little to assuage fears over the economic health of the region. S&P are worried about the euro zone growth outlook, with concerns the recent soft patch in the data may extend into the second half of the year. The picture for growth is "worrisome", particularly considering the fiscal challenges facing the region. The test will come next month when around €70bn of Italian government debt is due to be refinanced. October is looming as a crucial month for Spain, when nearly €30bn of debt rolls over.

OTHER EVENTS AND QUOTES
• Swiss ease policy. Describing the currency as “grossly overvalued,” the SNB is now targeting three-month LIBOR ‘as close to zero as possible,’ with a target range of 0-0.25% (versus 0-0.75% prior). The Bank will also act to boost liquidity in the CHF money market over the next few days. With China looking to diversify its US $3+ trillion in foreign reserves, and with safe-haven flows predominating, the currency impact is also causing angst for the BOJ.
• HLFS today. We are counting on lower numbers of registered unemployed to push down the Q2 unemployment rate to 6.4%.

NZDUSD: Joining the dots…
Today’s trading may be dominated locally by the NZ Q2 unemployment release. This is an erratic release so any positive surprise will see the NZD spike but this should be met with appropriate levels of selling. Equity markets still hold the key and have further downside potential.
Expected range: 0.8582 – 0.8662

NZDAUD: Tick the box…
Having gotten within selling distance of the 0.8080 resistance level after yesterday’s Australian June retail sales release this cross will keep many in suspense. Remember the move here has been on the assumption that the RBNZ will remove the 0.50% cut as early as September. We all know that assuming something can be very dangerous.
Expected range: 0.8010 – 0.8080

NZDEUR: Still further to go…
The correction continues alongside the NZD moves. This should not indicate to anyone that the EU troubles are over but the NZD needs a rationalisation and is receiving it currently.
Expected range: 0.5975 – 0.6055

NZDJPY: Waiting…
With nothing likely at this point from the BoJ until the USD moves below 75JPY expect the NZD to do the walking here. Support levels will continue to be tested with 65.69 the next in line.
Expected range: 65.69 – 66.44

NZDGBP: Flip, flop…
Another marginally stronger UK July services PMI release further assisted, alongside NZD weakness, the move lower. Just one more level in this run to test (0.5224) but that may be out of reach today.
Expected range: 0.5224 – 0.5274

ANZ Research

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