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Economic views and news - Friday, 16 September

ANZ Research

Friday 16th September 2011

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OUTLOOK

CURRENCY: Equity markets are back in the black and should assist a test of higher levels for the NZD today.  Resistance around 0.8280 remains in place but could be tested early as markets look at all the positives today.

RATES: Expect local interest rates to open higher in yield today.  This is less of a reaction to yesterday’s MPS – which seems to have been well received in that the market – and more a reaction to global moves.

REVIEW

CURRENCY: Yesterday’s RBNZ MPS was slightly more dovish than market positioning could cope with and hence the dip in the NZD.  Overnight however global central bank funding cooperation ensured risk was switched on.

GLOBAL MARKETS: Another classic “risk on” move, with a solid rebound in equities. Bond yields have also moved higher, with US 10 year bonds leading the way, up around 10bps overnight. Spanish bond yields rose too, but to a lesser extent following reasonably successful bond auctions overnight.  A Standard & Poor’s spokesperson said that the US still faces a one in three chance of another credit ratings downgrade, but this got lost in the wash. The SNB reiterated its commitment to keeping EURCHF above 1.20. Although the UBS trading loss story (see below) was all over the headlines, and has created a stir, it has not impacted sentiment broadly.

KEY THEMES AND VIEWS

“RISK ON”, TO COIN A PHRASE. Market sentiment turned decidedly upbeat overnight, boosted by generally better US data, the joint central bank liquidity plan (see below) and a strong feeling in the market that policy makers are working on something big for Europe, possibly to be released at tomorrow’s EU’s Economic and Financial Affairs Council meeting. As we noted yesterday, US Treasury Secretary Geithner will be in attendance, and his very presence has got tongues wagging. Indeed, citing unnamed EU officials, Reuters reported that Geithner will ‘float an idea to the Europeans of leveraging the EFSF along the lines of the US TALF programme’. Recall that among other things, this plan saw the Fed match private investors who bought “toxic” debt dollar for dollar. If we do see such a plan, market reaction is likely to be very constructive, especially if markets take a shine to Obama’s jobs package (details to be announced Monday) and the Fed takes further steps at next week’s FOMC meeting. Next week is shaping up to be interesting.

OTHER EVENTS AND QUOTES
•       Liquidity initiatives in Europe. The ECB, BoE, SNB and BoJ have, in cooperation with the Fed, announced enhanced measures to boost liquidity following fears that European banks were struggling to get funds over the year-end “turn”. Three USD tenders will be held in October, November and December (in addition to ongoing weekly 7-day tenders of USD funding that have been held since May 2010). Each fixed-rate tender will be at a term of around three months with full allotment. The IMF’s Lagarde has welcomed the action, saying it is “exactly what is needed”.
•       Rogue trader at UBS AG. The media is reporting that UBS, Switzerland’s largest bank has succumbed to a $2bn trading loss from unauthorised trading.  London police have arrested a 31 year old man in connection with the incident, and UBS warn that it could wipe out Q3 profits.

NZDUSD: Back in black…
Positive equity markets and apparent global cooperation around USD funding should see the NZD supported today. Expect similar difficulties getting past 0.8280 today however there is a better chance of a more solid test of this level going into the close of trading this week.
Expected range: 0.8205 – 0.8280

NZDAUD: Brief retreat…
Yesterday’s RBNZ MPS announcement dented this cross. Positioning however did not prevent yet another spike overnight past 0.80AUD before settling. Expect further topside attempts as the Australian market looks to early October for the RBA to cut interest rates.
Expected range: 0.7950 – 0.8050

NZDEUR: Funding…
Overnight announcements that major global central bank cooperation on USD funding helped the EUR strengthen further and ensured this cross remained weak. Moves back above 0.60EUR cannot be ruled out as European problems require plenty of time to correct. Today however this cross will remain in the 0.59EUR zone.
Expected range: 0.5918 – 0.5988

NZDJPY: Hospital pass…
The overnight dip to the low 62JPY region was keenly sought by offshore interests. The quick rebound may continue to gather momentum today as yield differentials persist.
Expected range: 62.90 – 63.85

NZDGBP: Not selling…
Weak UK August retail sales ensured that the GBP fell against the NZD overnight lifting this cross back towards resistance. Further attempts should be made today to break higher towards the mid 0.52GBP zone.
Expected range: 0.5190 – 0.5230



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