Wednesday 26th October 2011
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CURRENCY: Expect the NZD to remain on the back foot for the remainder of this week after running into headwinds yesterday that will not be easily countered. Today’s topside cap above 0.80USD should hold any gains.
RATES: Very quiet trading for the kiwi in London overnight. Local rates are expected to open unchanged.
CURRENCY: Attempts at the topside were reversed easily. A weak NZ Q3 CPI release and downward revision to the forecast payout from Fonterra were enough to thwart further advances and push the NZD lower overnight.
GLOBAL MARKETS: Increasing nervousness over tomorrow’s EU summit announcement saw equity markets retrace earlier gains, with US and European bourses down around 1%. Apart from Portugal and Italy, Government bond yields eased, led by falls for Greece and France. The CRB commodity price index was up 0.8%, led by precious metals, industrials and crude oil.
KEY THEMES AND VIEWS
WATCHING THE HEADLINES. Ahead of the EU summit, the market has largely been trading on headlines. With Germany soon to vote on a revamped bailout package, supportive comments by German politicians suggest this vote will narrowly pass through the 620 seat Bundestag, with only a few dissenting votes from Merkel’s 330 seat coalition expected. Merkel has stood firm on her wish that EU governments should not decide for the ECB on its role in tackling the debt crisis. It is widely expected that the enhanced EFSF would take over from the ECB in buying sovereign bonds in the secondary market. This positive sentiment was quickly shattered by the news that the EU Finance Ministers meeting immediately prior to the summit was to be cancelled, which markets initially interpreted as being a sign the whole EU summit was to be called off, and an illustration of how fragile market sentiment is. Also not helping were efforts by EU officials to hose down expectations on the specifics of the package to be announced tomorrow. Details on the exact size of future public sector support for Greece (including debt targets) and leveraging options for the EFSF are likely to be announced. However, the summit may not provide all of the answers needed, including details on the exact size of the new bailout fund (an indicative range may be announced according to officials), and estimates of the total amount needed for European bank recapitalisation.
OTHER EVENTS AND QUOTES
• ECB’s Smaghi says Europe’s rescue fund must be large enough to counter the risk posed by the debt crisis; if the euro area fails to provide a convincing answer, all parts of the union will be severely affected, even those who currently seem safe.
• Bank of Canada leaves policy rate unchanged but cuts 2011 and 2012 growth forecasts. With the economy to remain below trend until the end of 2013, inflation will fall to 1% by mid 2012.
• USDJPY hit a new all-time low overnight of 75.75. It raises the possibility of the BoJ introducing a new round of intervention following Thursday’s policy meeting.
NZDUSD: In trouble again…
Further testing times ahead are expected for the NZD after encountering poor news yesterday. Topside gains would only come reluctantly and off the back of a stronger AUD and EUR. Support in the low 0.79USD area may well be investigated again today.
Expected range: 0.7937 – 0.8007
Today’s Australian Q3 CPI will unlock the potential for an RBA interest rate cut next week. This may do little to rescue the current moves as the 200 day moving average was broken yesterday. Further weakness on this cross towards 0.7583 is possible today.
Expected range: 0.7583 – 0.7669
NZDEUR: Knocked down…
Moves above 0.58EUR were short lived despite further conflicting headlines around the European situation. Having failed to thoroughly test topside resistance this cross will need to await a reality cheque that has been written but not yet cashed by European officials before being able to bounce.
Expected range: 0.5702 – 0.5752
NZDJPY: A regular talkfest…
Warnings around the level of the JPY continue to flow from Japanese officials as the Bank of Japan lowers their growth outlook for the economy. While intervention is not forthcoming this cross will weaken towards the low 60JPY level before finding the next level of support.
Expected range: 60.23 – 60.93
NZDGBP: Easing back…
The inability to break 0.5063 resistance and moves on the NZD front were enough to see this cross dip back below 0.50GBP. Expect further back foot positioning today as it fails to get above 0.50GBP.
Expected range: 0.4968 – 0.4998
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