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Economic views and news - Wednesday, 21 December

ANZ Research

Wednesday 21st December 2011

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OUTLOOK

CURRENCY: Expect mild topside investigations today for the NZD going into the important Q3 data round starting with the current account this morning. Support from offshore would be evident on any move to 0.7650.

RATES: A quiet London session overnight, but with spread interest evident. Local rates are expected to open unchanged.

REVIEW

CURRENCY: As expected yesterday the NZD investigated support levels. These held in the mid 0.75USD region before strong offshore demand began. The demand continued throughout the overnight session.

GLOBAL MARKETS: Quiet trading overnight, but with a more risk on feel, which gained momentum. European equities staged their biggest overnight rally this month, with the Euro Stoxx 50 up 2.7%, with US equities up 2.5% at the time of writing. Supporting the climb was resilient German business confidence, confirmation of a recovering US housing market, and a successful Spanish 3 and 6 month bill auction, where €5.64bn was issued (against a target of €4.5bn) at an average yield of 1.754%. Government bond yields in the US, UK and Germany edged higher, whereas yields fell in Italy and Spain. The weaker USD and more bullish sentiment contributed to a 1.7% increase in the CRB index, with crude oil prices up close to 3.5%.

KEY THEMES AND VIEWS

IMF CAUTION OVER IRELAND. While sentiment overnight had more of a festive mood, an IMF warning over Ireland provided a much needed reality check, with the fund advocating a European government backed firewall to protect the ”fragile” Irish economy by providing guarantees for term funding and by taking a temporary ownership stake in Irish banks. With Ireland set to test bond markets next year after a two-year hiatus, more was needed to be done to break the link between the sovereign and the financial system. Fixing liquidity issues are a start, but with gross government debt at close to 120% of GDP, debt payback will be a long road ahead.

US SHOWDOWN OVER PAYROLL TAX CUT EXTENSION LOOMS. The Republicans controlled House of Representatives look set to reject a bipartisan Senate plan to extend the expiring tax cut by 2 months, on the grounds this is only a stopgap measure. How to fund the proposed 12-month long tax cut extension had earlier run into a brick wall, with Democrats supporting a surtax on the higher paid, while Republicans preferred spending cuts. Sounds familiar? Both sides have dug in and if no resolution is found, the tax cuts will expire at the end of this year, leaving 160 million US workers out of pocket.

OTHER EVENTS AND QUOTES:
•         Fitch comments overnight: The EFSF AAA rating will depend on France remaining AAA.
•         Greece sells €1.3bn 91-day bills, at an average yield of 4.68%.
•         Prices ease 1.6% at the GlobalDairyTrade auction. There were offsetting movements, with larger falls for Casein and Skim milk powder, but higher prices for cheddar and AMF. Wholemilk powder prices fell 1.5%.

NZDUSD: Look local…
Local NZ Q3 Current Account data today should not generate too much market reaction. The moves of commodities and equities overnight are likely to have an overriding influence and should see the NZD remain supported.
Expected range: 0.7650 – 0.7725

NZDAUD: Not surprisingly…
This cross remains transfixed within the 0.76AUD range. Support is building under 0.76AUD and a lack of patience may well deliver an attempt to push through into the 0.77AUD territory. Such a move would require support from positive NZ Q3 data during the remainder of this week.
Expected range: 0.7608 – 0.7684

NZDEUR: Positional play…
Offshore participants are looking for further gains on this cross as it continues the trek higher. European sentiment has not changed but successful debt auctions and better German data may have tempered some of the rise.
Expected range: 0.5850 – 0.5900

NZDJPY: Looking up…
Little movement again on the JPY has left the NZD doing all the work on this cross. With mild topside potential for the NZD this cross should test the 60+JPY levels at some point today.
Expected range: 59.55 – 60.25

NZDGBP: Santa’s coming…
Those looking for 0.50GBP+ levels may well be rewarded in the lead up to Christmas. GBP strength should not completely counter that of the NZD and a further extension towards 0.50GBP may continue today.
Expected range: 0.4898 – 0.4948

 



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