Monday 14th November 2011
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CURRENCY: Markets will again start the week looking at European weekend developments and assessing their likely impact. Expect NZD moves on the topside to be relatively challenging despite a solid recovery from last week’s lows.
RATES: A very quiet night for the kiwi rates market. With the US Treasury market closed on Friday, the market will likely open somewhat directionless.
CURRENCY: A solid recovery from the lows on Friday as holiday-ridden markets looked to bring risk back to the table and take profits from recently initiated positions.
GLOBAL MARKETS: Markets had a slow day courtesy of the US Veterans’ Day holiday. That said, markets still managed to get up a bit of steam, with a solid risk-on session late in the European session, on optimism that the new political clarity in Greece and Italy will improve things. There was little data. US consumer confidence beat expectations but garnered little market response on release. Nonetheless equities were up on both sides of the Atlantic, and oil and gold had a good day too. The US bond market was closed.
KEY THEMES AND VIEWS
THE FULL MONTI. Another Super Mario at the helm in Europe, as former European Commissioner Mario Monti takes over from Prime Minister Silvio Berlusconi as Italian Prime Minister – albeit temporarily and with a limited mandate.
Mario Draghi took over the ECB and immediately (and unexpectedly) cut rates. Mario Monti will be delighted if he sees rates fall under his watch too, namely Italian bond yields. So far so good – at 6.43 percent they are down about 100bp from Wednesday’s panic peak. But getting yields to stay down at levels that won’t blow up the nation’s finances will be considerably tougher than cutting the ECB’s cash rate.
Monti’s job is to push through austerity measures and structural reforms that will be deeply unpopular – hence the need for an unelected technocrat. But he has to form a government first – in a country that has averaged almost one government a year since World War 2. One suspects the days of Italy’s politics generating market-moving headlines are probably not entirely over, despite the replacement of the great showman with a “highly competent” (Lagarde) technocrat.
Greece has gone the same route, with a coalition led by an unelected experienced official. It’s certainly a step in the right direction for both countries, but the two new leaders have a daunting task in front of them. Meanwhile, European banks and other Italian debt holders continue to race each other out of the door that the ECB is kindly holding open for them through its ongoing purchases. Ironically, the heroic efforts to avoid triggering CDS policies in the Greek write-down has contributed to the selling wave, as banks have lost confidence in these hedging instruments. This means selling, even at a loss, is the only way to reduce exposures.
OTHER EVENTS AND QUOTES
• The preliminary release of the University of Michigan consumer confidence rose for the third consecutive month by 3.3 points to 64.2, beating expectations of a smaller rise to 61.5.
• China’s lending grew more than expected in October, perhaps signalling an easing in credit policy as Europe struggles and China faces increasing evidence of a popping real estate bubble at home.
NZDUSD: Countdown continues…
Offshore markets will continue to drive the moves of the NZD at this point. Locally the impending general election has not seemed to factor quite as much as it should at this point and so the currency impact has been limited to date. Expect more of a focus in the coming week which should help limit topside moves for the NZD.
Expected range: 0.7820 – 0.7894
NZDAUD: Still struggling…
Little chance of a stronger recovery on this cross in the short-term unless tomorrow’s RBA meeting minutes are particularly dovish. Expect the topside to be the most challenging with NZD sellers above 0.77AUD continuing to place a justifiable cap on things at this point.
Expected range: 0.7605 – 0.7675
NZDEUR: Flattening out…
European developments remain at the forefront of directional drivers for this cross. With Italy looking to form a new government the question will be is how stable it will be and whether suggested austerity measures will prove enough. At this point support at 0.5665 could be questioned but not today.
Expected range: 0.5695 – 0.5745
NZDJPY: Support still evident…
Support for this cross remains around 60JPY and this should be in place again today. The raft of Japanese Q3 data due today is unlikely to make any currency impact with only the Bank of Japan lurking in the wings a factor.
Expected range: 60.00 – 61.00
NZDGBP: Support holding…
Support for this cross remains around the 0.4860 level as markets look to any possible UK impact of the current European turmoil. Currently there is an air of separation but the winds could change quickly on this front.
Expected range: 0.4860 – 0.4920
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