Tuesday 1st November 2011
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CURRENCY: The driving news in our local session today will be the RBA announcement this afternoon. We can expect a little downside pressure leading into the release.
RATES: Local rates will probably open a tad lower in yield. Despite dramatic falls in yield in markets like the US, the NZ market barely reacted during the London session, which is indicative of how bearish the local market is. We will probably tread water ahead of the 4.30pm RBA meeting – will they cut?
CURRENCY: Intervention by the Bank of Japan spurred a dive in the JPY across the board. The impact continued into the European session, with losses in hard hit currencies like the NZD being consolidated. As we write the NZD is about a cent lower than where it was this time yesterday. Risk appetite has waned as cracks start to emerge around the EU Plan.
GLOBAL MARKETS: Markets elected to react to data overnight, and it looks like the “Europhoria” is fading somewhat judging by market moves. German retail sales disappointed in September, but worse still, Eurozone unemployment rate rose a pip to 10.2% – hardly the sort of work rate you want from your population as you look to pay down debt as well as grow. Just to make things trickier for the ECB, the Eurozone flash CPI estimate for October came in at 3.0%y/y, begging the question – can the ECB cut rates, or will it stand alone guarding against inflation as politicians scramble to tackle the debt crisis? Equity markets were hit hard, with the FTSE, CAC and DAX all down about 3%. Core country bond yields fell, but Italian and Spanish bond yields rose, with the former reaching euro era high of 6.16% at one point. This is simply not sustainable, and could be the undoing of the grand plan. It’s hard to deliver on fiscal reform when financing costs spiral out of control.
KEY THEMES AND VIEWS
CENTRAL BANKS BACK IN THE SPOTLIGHT. Europe remains in the news, and we note that cracks are starting to appear. Indeed, Italian bond yields have surged higher, threatening to undermine last week’s grand plan (details of which are still forthcoming). But markets seem to be getting euro-fatigue and as we head into today’s RBA meeting and Thursday’s FOMC meeting, expect the focus to shift to policy actions and words. We think the RBA will cut, but forecasters are split. With so much priced in, no change would cause a bigger stir.
In the US, several Fed governors have also hinted at easing further. When we consider what an epic failure “operation twist” has been, we are inclined to think they might take further action, which should support bonds. But others including PIMCO’s Gross think that such steps will ultimately add to inflation, and are a good reason to sell bonds. The bottom line – brace for volatility.
OTHER EVENTS AND QUOTES
• MF Global Holdings bankruptcy. Bloomberg reports that the holding company for the broker-dealer of the same name has filed for bankruptcy and is understood to have exposure to European sovereign debt.
• The OECD cuts US and euro area forecasts, lifts China forecasts. They say the euro area will grow by just 1.6 in 2011 and 0.3% in 2012, down from 2% apiece in May. It also cut its US forecasts for from 2.6% to 1.7% for 2011, and from 3.1% to 1.8% for 2012. However, it raised its China forecasts for 2011 from 9.0% to 9.3%, but cut its 2012 forecast from 9.2% to 8.6%.
NZDUSD: Fall from grace
The US Dollar took out the best onion competition in the off shore session. The NZD was held lower though out the session. BOJ intervention boosted the USD initially, and it hung on to gains as equity markets drifted back. Expect the NZD to remain under pressure today on the “risk off” endures.
Expected range: 0.8160 – 0.8250
NZDAUD: Will they?
A tight range traded for the Antipodean cross over night as the NZD and AUD proceed in near tandem. The RBA rate announcement this afternoon will be the focus of the cross today. With expectation building around a 25 Bp cut the risk in the NZDAUD lie to the downside.
Expected range: 0.7640 – 0.7684
NZDEUR: It begins
The NZD fought back against the EUR over night with concerns over the EU plan growing as the US futures Broker MF Global file for chapter 11, following the haircuts on European debt. NZDEUR rallied through out the session and pushed squarely back into the 0.5800 region. A push through 0.5830 will be telling to the upside however this should be capped today.
Expected range: 0.5780 – 0.5835
NZDJPY: The war begins
The Bank of Japan intervened late in our trading day yesterday, which saw the NZDJPY jump a quick two big figures. With the Japanese finance minister pledging to pursue intervention until satisfied with the result I tentatively draw my ranges based on recent movements.
Expected range: 62.90 – 63.80
NZDGBP: Quiet performer
The GBP quietly out performed the NZD over night as risk sentiment helped to keep our Kiwi subdued. The GBP stayed on the front foot helped by David Cameron, calling Britons for greater optimism as there is much to be inspired by. Support around the 0.5020 region should hold in the local session today.
Expected range: 0.5010 – 0.5080
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