Economic views and news - Thursday, 25 August

Thursday 25th August 2011

OUTLOOK

CURRENCY: Expect the NZD to consolidate around current levels in the lead up to news from Jackson Hole. While resistance has lowered to 0.8326, support around 0.8250, if seen, should provide an initial base if tested.

RATES: NZ swap rates did trade a touch lower in yield in London, but global yields have since risen, and the local market is likely to open up a tad.

REVIEW

CURRENCY: As expected the NZD tested resistance early yesterday but quickly ran out of puff. It eased off through support levels and then floundered throughout the offshore session in aimless trading.

GLOBAL MARKETS: A quiet (in terms of volume) but choppy day on European markets. Despite the weaker close on Asian bourses, the risk switch was flicked to ‘on’ in early trading, particularly for EUR FX traders and equity markets. While German business sentiment printed below market expectations, the realisation that current confidence levels remain well above their long-run averages provided decent support. Followed up by a lack of interest at the ECB’s 7-day USD lending operation and better US durable goods orders, these moves were extended (although EUR’s move higher was later completely unwound).

A decent sell-off was seen in bond markets, with US Treasury yields rising. Gold traded sharply lower (currently down around 3.5% to USD1780/oz) with some rumour mills suggesting this was driven by selling by the PIIGS, and others saying that a trimming of long positions was taking place ahead of Jackson Hole.

KEY THEMES AND VIEWS

LOOKING FORWARD TO FRIDAY’S FREE LUNCH. Although there has been a bit of movement at times over the past few days, overall market volatility has fallen this week, one gets the distinct feeling that we are treading water ahead of Fed chair Ben Bernanke’s Jackson Hole speech on Friday (2am Saturday NZ time). Call it the Bernanke put, call it free lunch, call it what you will, but the attitude that seems to be prevailing in bond markets seems to be that yields will stay low regardless – either we see QE, which will keep yields low, or we don’t, in which case growth will be low, keeping yields down.

Equity markets have taken a similar (but different) spin – rallying on the idea that more Fed action will help, but if it is not forthcoming, low interest rates will support prices. We will see. One thing that does trouble us somewhat is the lack of follow through buying in our region with bond yields this low. Are Asian buyers backing off because they are not as downbeat on Asia as the state of Australian interest rates implies?

OTHER EVENTS AND QUOTES
• Gold hits the skids. The fall in gold has made it to the top of Bloomberg’s top news list this morning, after spot prices fell to as low as $1750 an ounce overnight, having peaked at $1912 a little less than 48 hours ago – ouchy. Although the fall has doubtless been exaggerated by positioning and general over-excitability, it fits with the overall theme of the last few days, which seems to be a little more upbeat, risk loving, and less stressed.
• France downgrades growth forecasts and raises taxes. The Sarkozy government has lowered its growth forecasts for 2011 and 2012 to 1.75%, down from 2% and 2.25% respectively. The government also announced €12bn of measures aimed at reducing France’s deficit to 4.5% of GDP by 2012 (it was 7% in 2010). They include taxes on capital gains, alcohol and tobacco taxes, and a controversial 3% “exceptional tax” on earnings over €500k that will remain in place till the deficit falls below 3% of GDP.

NZDUSD: Offside…
Despite a quick move over the advantage line yesterday, assisted by the positive trade release, the NZD found itself wanting. With little support from the rest of the team it quickly retreated back through key levels. Today it may find itself in a similar situation with resistance levels lowered from yesterday. Buyers should be patient at this point awaiting low 0.82USD levels.
Expected range: 0.8240 – 0.8310

NZDAUD: Trouble in camp…
The political developments in Australia may serve to dent the fortunes of the AUD as it rests close to support levels of it’s own. The cross may lift marginally however resistance at 0.7933 should hold today.
Expected range: 0.7877 – 0.7933

NZDEUR: Blindsided…
Lower German business climate survey results and lowered French GDP expectations have marginally dented the EUR however the weaker NZD has this cross struggling to remain in touch. Expect a day where the NZD remains below resistance at 0.5764.
Expected range: 0.5718 – 0.5764

NZDJPY: Crash tackled…
The moves of the NZD were enough to reverse a very quick look at 64JPY territory yesterday. The NZD will be unable to play much of today outside the 63JPY zone with support likely on any dip towards 63.25.
Expected range: 63.25 – 63.85

NZDGBP: Waking up…
Markets are waking up to the realisation that the UK economy cannot escape the weakening EU economic picture. This should help keep the GBP weak relative to the NZD today.
Expected range: 0.5030 – 0.5082

Source: ANZ Research

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