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Economic views and news - Friday, 16 December

ANZ Research

Friday 16th December 2011

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CURRENCY: A calmer finish to the week for the NZD may well disguise potential moves next week as market liquidity falls with the approaching Christmas / New Year break. Support levels should be avoided today.

RATES: Little to report from activity in London in so far as what is means for the NZ open. Local yields are expected to open a touch higher.


CURRENCY: Yesterday’s attempts towards the downside found heaving buying interests both locally and offshore. The European session buyers managed to lift the NZD off the canvas but momentum soon waned.

GLOBAL MARKETS: A risk-on season overnight but one that showed signs of fading as the night wore on. The S&P 500 was up 0.7 percent at the time of writing after lifting more than 1 percent earlier in the session. Recall though that it was down 3.5 percent in the preceding three days. The Euro Stoxx 50 lifted 0.9 percent.

US 10 year bonds were choppy through the overnight session with the 10 year yield broadly unchanged at 1.93 percent. Spain saw good demand for medium and long-term government bonds, raising €6 billion against a target of €3.5 billion, paying 2 percent less to issue a 5-year bond than Italy did this week. Gold, oil and other commodities were generally stable after recording their biggest drop in several months on Wednesday.


STAIRS AND ELEVATORS. Equities started the day with a bid tone. Spanish 5 year and 10 year auctions went well. Pressure appeared to be easing in the front end of the euro forwards. Throw in some better looking Eurozone PMI’s (smaller contractions) and a continuing reasonable tone across US data (Empire State Manufacturing jobless claims both beating expectations, industrial production a bit weaker but revisions and a strong Philly Fed) and you have some reasonable ingredients for a temporary bout of risk-on and position squaring, particularly following extended days of losses.

This is precisely what we got, though the spirit was one of a couple of steps up the stairs after a ride down the elevator over days prior with appetites waning as the session wore on. We’re not surprised to see a lack of conviction given the scale of challenges. A better economy (oops I mean maybe a less poor one) is a necessary but not sufficient condition to addressing fundamental solvency issues.

Lagarde, Managing Director from the IMF called for greater cross border unity to avert a potential repeat of the 1930’s. Fine in theory. In practice we know from a seldom mentioned pocket of economics called game theory that self interest tends to dominate group interest. We await the policy roadmap in an environment where politics is fickle.

For now it is simply looking like the market is becoming tired, volumes across the board remain low, positioning is light and people looked to have packed up for Christmas. I’m doing the same. The lakes and central Otago Pinot Noir beckon.

•         IMF’s Lagarde, the world economic outlook is “quite gloomy” and called for international help across all countries. 
•         ECB’s Draghi, emergency program to buy government bonds “neither eternal nor infinite”.
•         SNB holds its cap on franc at 1.20 per euro today, knocking back speculation it would move to weaken the currency further.

NZDUSD: Consolidation…
Today’s trading should be about consolidation as the NZD may well avoid looking at support levels. Buyers should again be present on any move closer to 0.7465 although this is deemed out of reach today. Sellers should await higher levels that are likely towards the close of the calendar year.
Expected range: 0.7485 – 0.7565

NZDAUD: Another day…
This cross is set to remain within recent ranges with little economically to move it. Support around 0.7550 remains in place and positioning may see it shift back into the 0.76AUD region to close out the week.
Expected range: 0.7558 – 0.7608

NZDEUR: Could it be…
Increasing risks for the European markets may well see a lift in this cross moving into next week. Concerns around Europe have not diminished and the possibility of weekend developments increases as the holidays approach.
Expected range: 0.5760 – 0.5810

NZDJPY: Yield hunting…
Further support for the NZD around 58.25 is likely even as yields shrink across the curve. Expect another day in the 58JPY zone although a lift back above 59JPY may take place later today.
Expected range: 58.25 – 59.05

NZDGBP: No difference…
Weaker UK November retail sales released overnight demonstrates that problems in the UK are still evident. This cross subsequently lifted off support but remains today in the 0.48GBP zone.
Expected range: 0.4835 – 0.4895


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