Economic views and news - Thursday, 15 December

ANZ Research

Thursday 15th December 2011

OUTLOOK

CURRENCY: Having churned through several support levels in the past 24 trading hours the NZD continues to remain vulnerable to EUR and AUD moves. An extension towards the low 0.74USD may be possible this week.

RATES: Very quiet, with our analyst reporting that it feels like Christmas volumes, even if it’s not exactly festive. The NZ market was quiet but will likely take its tone today from the Aussie market overnight, where futures were bid and the curve flattened as tens led the rally.

REVIEW

CURRENCY: NZD weakness was evident from early in yesterday’s session and with a falling EUR and AUD there was no escape overnight. Very heavy USD buying continued in early morning trading to further weaken the NZD.

GLOBAL MARKETS: A risk-off session overnight, more on the basis of rumour than any particular development – though if one is looking for a scapegoat one could perhaps blame the Fed for not taking any new action. The Euro Stoxx 50 fell 1.0%, while the S&P500 index fell 0.9%. Government bond yields generally fell for the safe havens (US 10y –8bp, Germany –11bp) and rose for the adventure rides (Italy +8bp). Commodities were hard hit by the stronger USD, with the S&P GSCI index down 2.3 percent. The fall was led by silver, though gold also fell sharply (-3.3%). Oil prices were down more than 3%, partly as a result of OPEC action.

KEY THEMES AND VIEWS

FEDERAL RESERVE HOLDS THE LINE. A steady hand on the tiller, as the FOMC did not hint at any future stimulus following their policy meeting yesterday, despite acknowledging that global growth was slowing. They reiterated their intent to keep interest rates near zero until at least mid-2013. Operation Twist will continue, as will the policy of reinvesting portfolio of maturing housing debt into agency mortgage-backed securities. It’s questionable whether Q3 would have much impact on the real economy at this point anyway, with the Fed arguably pushing on a string. For the record, the Fed reported that the US economy continues to expand “moderately”, but there is an “apparent slowing in global growth” and that “strains in global financial markets continue to pose significant downside risks to the economic outlook.” Optimists continue to believe that the Fed is just gathering its strength for a launch of new stimulus measures following their meeting in mid-January. However, it’s probably fair to say that the days of the market believing that the Fed can always save the day are well and truly over.

OTHER EVENTS AND QUOTES:
•     Italy gets its bonds away, at a price. Italy sold €3bn of 5-year bonds at 6.47%, up from 6.29% at the last auction a month ago. There is a lot of talk in markets that success even at this price is primarily due to the ECB. They’ll get another chance tomorrow, at Spain’s debt auction.
•     Norway cuts: Norges Bank cut its cash rate by 50bps to 1.75 percent, a bigger cut than expected.
•     And so it begins. China imposed “anti-dumping” duties on some vehicles imported from the US in retaliation for a US tariff on Chinese tyres.
•     OPEC boosts output ceiling. For the first time in 3 years, OPEC changed its production limit to make room for a recovery in Libyan production.

NZDUSD: Next please…
Technical support levels in the NZD were blown away overnight after the EUR broke 1.30USD. Expect similarly troubled times for the NZD today as markets digest newer levels. More substantial support awaits in the low 0.74USD region which will need further EUR weakness to achieve.
Expected range: 0.7465 – 0.7545

NZDAUD: Battling on…
RBA Deputy Governor Battellino confirmed what everyone thought yesterday: that Australia cannot avoid the drag from the current Eurozone crisis. It did little to help the AUD but assisted in lifting this cross marginally off the lows.
Expected range: 0.7550 – 0.7600

NZDEUR: Holing on…
Relatively speaking the NZD still looks more attractive than the EUR. USD buying continues to be the main theme of markets and this cross should continue to oscillate around the 0.58EUR level.
Expected range: 0.5760 – 0.5810

NZDJPY: Looking vulnerable…
Expect a day for this cross contained within the 58JPY zone. Japanese economic data is currently far from inspiring and moves of the USDJPY are not following the broader moves of the USD to the same degree.
Expected range: 58.25 – 59.05

NZDGBP: Easing lower…
Slight lower than forecast UK unemployment data provided some support to the GBP. However, moves on the NZD dominated the action and may well see lower moves on this cross again today.
Expected range: 0.4835 – 0.4895

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