Friday 2nd December 2011
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CURRENCY: Expect the NZD to end the week contained within recent ranges and capped by interest rate expectations around the RBNZ and RBA announcements next week. Support levels should be further tested.
RATES: The march higher in NZ swap yields look set to continue today. With scant receiving interest in sight, payside will dominate again. Expect yields to open one or two points higher across the curve this morning.
CURRENCY: Attempts to further investigate levels above 0.78USD were thwarted as a weaker set of Chinese PMI releases yesterday ensured that the market tread very carefully.
GLOBAL MARKETS: Equities took a breather following a strong run, despite much stronger US ISM data, though this was countered somewhat by weaker Chinese PMI.
The Euro Stoxx 50 shed 0.7% while the S&P500 is down 0.4% at the time of writing. US 10-year bond yields moved higher once again, at one stage reaching an intraday high of 2.14%.
Eurozone bond yields fell with Italian 10-year down to 6.6% following successful French and Spanish debt auctions.
Commodities traded lower while in the currency space, both the NZD and AUD lagged behind the other major currencies, though this is partly following strong moves by the antipodeans this week.
KEY THEMES AND VIEWS
WAITING ON THE POLITICIANS TO DO THEIR PART. The coordinated central bank action on liquidity swaps has continued to work a treat for markets. Though equities lost some ground, this is to be expected following strong gains in the past few days. The boost to investor sentiment can be seen in the successful French and Spanish auctions which attracted very strong bid-to-cover ratios. European bond yields continue to retreat. And on the data front, the run of better than expected US data continues, with the ISM bucking the worldwide trend to move higher. The confidence boost from central bank action came at a right time, but it won’t last unless there is follow up from the politicians in getting the Eurozone’s fiscal house in order.
ECB President Draghi was clear when speaking to the European Parliament that further fiscal integration is needed. He hinted that the ECB is prepared to do more, but needs to see fiscal commitment before they act. This makes the December 9 EU leaders summit a key focus for markets. Failure there mean yesterday’s coordinated central bank action would only be akin to a sugar pill, and its effects will have worn out by then. The major central banks have shown that they can work quickly and quietly among themselves. We now need European politicians to do the same.
OTHER EVENTS AND QUOTES
• ECB President Mario Draghi: “A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.”
• Bank of England Governor Mervyn King: “But let me stress, this [the coordinated central bank action yesterday] cannot be a solution to the underlying crisis, all this can do, is to help temporarily relieve liquidity problems. But liquidity problems, often, reflect underlying solvency problems and in this case they do.”
NZDUSD: Finding the going tough…
Expect topside levels to sufficiently cap the moves of the NZD today given the approaching RBNZ Monetary Policy Statement and Official Cash Rate review on Thursday next week. While a cut of the cash rate is not expected at this point, the probability has increased given the current global scenario.
Expected range: 0.7705 – 0.7805
NZDAUD: Just waiting…
With the belief that the RBA will cut interest rates next Tuesday this cross is finding a base from which to perhaps look again at levels above 0.7650. Today this is not likely but support should again be evident if the cross moves towards the 0.7565 level.
Expected range: 0.7565 – 0.7625
NZDEUR: Backing up…
Levels above 0.58EUR have not been sustainable despite weaker European PMIs released overnight. Continued difficulty with the level of this cross around 0.58EUR should ensure it remains on the back foot today.
Expected range: 0.5731 – 0.5801
NZDJPY: Enough already…
Topside levels around 60.80 should be again enough to hold this cross. Profit taking from recent positions will ensure a move back closer to 60JPY during today’s trading with the potential to ease towards 59.80.
Expected range: 59.80 – 60.80
NZDGBP: Passing the buck…
The difficulties in Europe without question are weighing on the fortunes of the UK economy. There will be no escaping the blame game and this cross may again test resistance at 0.4979 in the short term but not today.
Expected range: 0.4925 – 0.4979
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