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Economic views and news - Tuesday, 2 August

Tuesday 2nd August 2011

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OUTLOOK

CURRENCY: Clearly markets have understood recent releases and the implication of these for the NZD. Yesterday’s euphoria should provide a top for the NZD from which corrective moves are likely to unfold.

RATES: NZ rates were off the radar in the overnight London session as global moves dominated. Local rates are expected to open a point lower given continuing concerns over the US outlook.

REVIEW

CURRENCY: Overnight markets took on a more reserved approach to recent developments.  The NZD was initially knocked lower in the European session and this weakness flowed through to the North American session.

GLOBAL MARKETS: Although the market was more confident that a US debt deal will be reached, weak US manufacturing data contributed to a fall in US and European equities. US and core European government bond yields fell, with the 10-year US yield at 2.74 percent at the time of writing.  Commodity prices were choppy. Higher prices for grains and cotton were offset by a fall for gold prices, with oil prices down nearly 1 percent.

KEY THEMES AND VIEWS

OPTIMISM ON COMPROMISE DEBT PACKAGE. With time running out there is optimism Congress will pass a compromise package today that no side is happy with, but would be prepared to accept. The package would cut US $917 billion in spending over a decade, raise the US $14.3 trillion debt limit initially by US $900 billion and assign a special congressional committee to find another US $1.5 trillion in deficit savings by late November, to be enacted by Christmas. If these targets are met the debt limit would be raised by an additional US $1.5 trillion through till 2013. If not, the debt ceiling will be extended by a US $1.2 trillion, with automatic spending cuts in government spending to start in 2013. Will this be enough to appease the ratings agencies? Headlines today suggest Moody’s is likely to affirm the US’s AAA credit rating if the debt ceiling is raised, although it may maintain its negative outlook depending on the final details.  Suggestions are that S&P is also softening its stance.

US MANUFACTURING ISM A SHOCKER. Following on from the soft Q2 GDP report, the much weaker than expected manufacturing ISM suggests the US economy remained on a weak footing heading into Q3.  The weakness was across the board, with the five component indices all falling.  Most eye-catching, however, was the drop in the new orders index to 49.2 (from 51.6), the first sub-50 reading since the recession ended. Employment also slumped 6 points to 53.5.  While upstream pricing pressures are abating (the prices paid measure fell 9 points to 59), this report was not the news the US economy needs. Although the impasse over the debt ceiling negotiations was offered as a reason for the slump, the tailing off in manufacturing sentiment was evident well before then. Softer manufacturing sentiment for the UK (the weakest reading since June 2009) was also driven by weakness in new orders and employment.

OTHER EVENTS AND QUOTES
•       RBA decision time today. While the market consensus is for the RBA to hold fire, our Australian colleagues believe that with inflation starting to point uncomfortably high, a 25 basis point hike now could prevent bigger moves in 2012.

NZDUSD: Enough already…
Expect a period of consolidation/weakness for the NZD in the short-term.  Today’s NZ Q2 employment data starts with the LCI and QES releases but markets will await the unemployment release on Thursday.  Reflection time spent on the overnight offshore releases will have many looking for further downside in the NZD.
Expected range: 0.8685 – 0.8768

NZDAUD: Hold your breath…
This afternoon’s RBA interest rate decision will hold markets in limbo.  No change is likely to lift this cross quickly towards 0.8080 however this level will represent a good NZD selling area for local importers.
Expected range: 0.7950 – 0.8080

NZDEUR: Taking stock…
Another overextended cross which should give up some ground in the near term.  EUR difficulties are not without consequence however the NZD cannot live at these levels without some form of correction.
Expected range: 0.6085 – 0.6155

NZDJPY: Intervention…
Markets are beginning to exercise extreme caution on this cross as the JPY strengthens against the USD to the level where the BoJ intervened heavily in March.  Extremely heavy volume on this cross yesterday may well have put paid to an extension towards the 70JPY level for now.
Expected range: 66.90 – 67.90

NZDGBP: Might still have further room…
Of all the NZD crosses this one might have a modicum of further strength possible as last night UK July PMI fell below the expansion/contraction 50 level.  Today however any move above 0.54GBP would be a surprise.
Expected range: 0.5345 – 0.5395

ANZ Research



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