Tuesday 8th November 2011
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CURRENCY: Global outlook remains bleak as Greece moves aside for Italy in the deeply troubled Eurozone.
RATES: NZ rates traded lower in yield during the London session, and we will open this morning with yields down a point or so across the curve with an offer tone.
CURRENCY: Headline watching resumed overnight with no set data to excite the market. A step down from the Greek PM saw a moment of risk sentiment before Italy took the podium.
GLOBAL MARKETS: Equities were weaker as markets fret over the political uncertainty in Italy. Not helping European equities and the euro were weak Eurozone economic data, especially a large fall in German industrial production.
The Euro Stoxx 50 closed 0.7% lower while the S&P500 is off 0.5% at the time of writing. US bonds rallied to send the 10-year yield below 2%. Gold rose over 1.5% on safe haven demand.
KEY THEMES AND VIEWS
FROM GREECE TO ITALY. The positive vibes which emanated from the announcement of the European debt plan a week and a half ago has well and truly disappeared. The euro, having risen past 1.42 against the greenback at once stage, is now back below 1.38. Politics are now keeping markets on edge.
Greek Prime Minister Papandreou is stepping down to allow the formation of a unity government with the opposition to secure the bailout aid the country desperately needs, and also to carry out deeply unpopular austerity measures. As yet, there is no confirmation of who will be the new Greek Prime Minister, with talk that Lucas Papademos, a former deputy head of the ECB, as a potential front-runner doing the rounds.
Then there is Italy, where uncertainty over whether Prime Minister Berlusconi will resign is causing some volatile movements in markets. The fact that Italian equities and bonds got a boost on reports that Berlusconi could step down, only to reverse course when it was denied, just goes to show how the Italian Prime Minister is regarded by markets. The real worry though, is that Italian bond yields continue to rise, with the 10-year reaching 6.65%. This is well above the 6.2% level it reached in August during the height of the Greek debt crisis. Italy may have a primary surplus this year, but that matters nought when debt is at 120% of GDP, your borrowing rates are moving sharply higher, and the economy looks to be heading for recession.
Greece may still be hogging the headlines at present, but we could be moving from a Greek crisis towards an Italian crisis if policymakers do not address the situation soon. The ECB may have doubled its bond buying during the first week of Mario Draghi’s presidency, but the ECB can’t do it alone, and the EFSF is not big enough to handle Italy. European policymakers must have thought they had things under control when they unveiled their plan at the end of October. Once again, they now risk getting behind the curve.
OTHER EVENTS AND QUOTES
• France announced tax hikes and budget cuts amounting to €65bn over five year in a bid to maintain the country’s triple-A rating. Measures include an increase to the lower rate of VAT, a temporary rise in company tax for large firms, a rise in dividend tax, and cutbacks in welfare.
NZDUSD: Tic for tat
NZD initially rallied on the news from Greece that a new government had been formed. This was however short lived and jitters returned to the market with Italy taking centre stage in the politically unstable and debt ridden stakes. Headline watching again today with risk off sentiment set to continue.
Expected range: 0.7890 – 0.8000
NZDAUD: Testing testing
AU trade balance and business confidence today should be followed by eager eyes in today’s local session. NZDAUD tracked back towards the 0.77 cent mark overnight and is where our first line of resistance is today. A firm push though here required to open the topside.
Expected range: 0.7655 – 0.7725
NZDEUR: Tick tock
The Eurozone reinforced its seismic woes yesterday as one issue was placed on hold (Greece) while another stood in the wings to take over the headlines (Italy). NZDEUR rallied on the overtly EUR bearish sentiment. A break needed at the 0.58 short term resistance to see the cross push higher.
Expected range: 0.5760 – 0.5820
NZDJPY: Taking time
A range bound NZDJPY overnight as mixed headlines ruled the roost of the currency markets. Sitting mid range this morning it looks likely that the NZDJPY will remain in recent ranges with little local data and the world looking to the Northern Hemisphere for further tips going forward.
Expected range: 61.80 – 62.40
NZDGBP: Tentatively tracking
The NZDGBP tentatively rallied overnight with mixed emotions around FX markets. Helping the rally was an article which outlined that the UK is in ‘serious risk of contracting’ in the current quarter. There is little reason for large moves in local trade, and ranges should remain intact.
Expected range: 0.4940 – 0.5000
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