Friday 7th October 2011
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CURRENCY: A retest of the overnight highs for the NZD is possible today although expect little further extension until the overnight session. US September employment data and European concerns remain in focus.
RATES: Quiet overnight trading, although NZ swap yields moved higher. Local rates are expected to open a touch firmer this morning.
CURRENCY: The expected gains in the NZD over the past 24 hours were duly delivered off the back of global relativities. Flows continued in favour of the Australasian currency team as they start today on a firmer footing.
GLOBAL MARKETS: Another positive session overnight, with market sentiment buoyed by the promise of more QE by the Bank of England. US equities were up 1%, with European equities up 3%. Government bond yields rose, with 10 year US yields at 1.98% at the time of writing. Commodity prices (CRB index) were up nearly 2%, led by gains to copper and silver. Crude oil prices rose nearly 3%.
KEY THEMES AND VIEWS
ECB AND BOE ATTEMPT TO CALM FINANCIAL MARKETS. Both the ECB and BOE left policy rates unchanged at 1.5% and 0.5% respectively. However, the real interest is what they did to tools they have previously used to calm financial markets, with the intent of shoring up liquidity for European banks. The ECB pledged to offer banks additional longer-term liquidity and restart bond purchases. It will spend €40bn on covered bonds starting next month and will offer banks two additional unlimited loans of 12 and 13-month durations in November and December respectively.
Trichet noted “intensified downside risks” to the outlook, and “ongoing tensions in financial markets and unfavourable effects on financial conditions are likely to dampen the pace of economic growth in the second half of this year”.
The lack of a cut surprised some in the market, but with inflation at 3% it may have been a bridge too far. Not cutting rates may also help keep the pressure on fiscal policymakers in the region to get their act together, but whether this will achieve the desired result remains to be seen.
The BOE raised the ceiling for expanding its bond purchases to ₤275bn from ₤200bn, the biggest expansion since the first round of stimulus in March 2009 and the first since November 2009. Concerns over the European situation were paramount, with the MPS noting the UK recovery was threatened by strains in bank funding due to “vulnerabilities associated with the indebtedness of some euro area sovereigns”.
OTHER EVENTS AND QUOTES
• European Commission joins the chorus. Following earlier calls by Chancellor Merkel and Trichet, the European Commission is calling for co-ordinated calls for a capital injection for banks.
• US Bank shares buoyed by Geithner comments. “The direct exposure of the US financial system to the countries under the most pressure in Europe is very modest”. US financial firms have strengthened, with “absolutely” no chance of a Lehman style collapse.
• US mortgage rates fall to lowest on record. The average rate for a 30-year fixed loan dropped to 3.94%, the lowest since records began in 1971 according to Freddie Mac.
NZDUSD: Firmer footing…
A more solid base is developing for the NZD as some begin to question the ability to extend back towards the high 0.77USD area. For today expect limited moves with support likely to emerge should the NZD find itself below 0.7650. Further gains however are favoured in tonight’s session as the USD gives back some of the recently gained ground.
Expected range: 0.7655 – 0.7730
Another day with tight ranges expected on this cross. Any dip towards support at 0.7902 should find NZD buyers as markets look elsewhere for currency volatility that is lacking on this cross.
Expected range: 0.7902 – 0.7962
ECB President Trichet’s last meeting delivered no change to the interest rate but extended a program of covered bond buying and unlimited loans. NZD gains however are likely to be limited at this stage as the move sinks in.
Expected range: 0.5700 – 0.5758
Further moves above 59JPY are likely to be seen again in the near term. For today things will remain rather subdued as another long weekend for the Japanese approaches.
Expected range: 58.55 – 59.45
No change in the interest rate from last night BoE meeting however the sting in the tail came when the QE amount was raised by GBP75bn to GBP275bn. A weaker GBP resulted and it is yet to fully recover from this blow helping to keep this cross elevated.
Expected range: 0.4970 – 0.5030
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