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Economic views and news - Wednesday, 3 August

Wednesday 3rd August 2011

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OUTLOOK

CURRENCY: A continuation of the correction for the NZD should be the theme of today.  Offshore developments will clearly be a guide for the moves of the NZD which will remain capped with a lower topside throughout today.

RATES: NZ rates rallied strongly overnight given concerns over the global economy, with the two year swap trading at 3.60 % in London overnight after closing yesterday at 3.67%. Local rates are expected to open lower today

REVIEW

CURRENCY: An attempt by the NZD to move in the opposite direction to the falling AUD late yesterday was quickly rationalised by the markets.  Overnight the move lower continued to probe support levels and remain weak.

GLOBAL MARKETS: A nervous market saw equities sell off, with US and core European bourses down 1 to 3%. UK, German and US bond bonds yields eased, with the 10 year US yield at 2.63% at the time of writing, their lowest level since last November.  Commodity prices on the CRB measure were broadly unchanged. Gold prices hit a new high, and grain prices strengthened, but these were offset by falls for industrials and energy. Oil prices fell 1 percent.

KEY THEMES AND VIEWS

WEAK US DATAFLOW CONTINUES. As if weak Q2 GDP and July manufacturing were enough, weaker income and spending numbers for June had only a limited impact on an already heavy market. Personal income rose by just 0.1% m/m, while personal spending fell 0.2% m/m, which were weaker than expected. Consumer price measures either came in line with, or slightly below, expectations. US households remain nervous, and who can blame them given the deteriorating state of the economy. The household saving rate rose to 5.4% in June, up from the March low of 4.7%.  With President Obama having just signed the debt compromise after the measure passed through the Senate (76-26) and House (269-161) the focus is now returning to the US economy. Markets are becoming increasingly sceptical that the new package will be a panacea for the economy, and are starting to look towards the Fed meetings at Jackson Hole at the end of the month (little new is expected out of next week’s FOMC meeting) as the next opportunity for renewed direction. Judging by the direction of bond yields, markets are starting to bet increasingly on QE3.

EUROPEAN DEBT CRISIS SIMMERS AWAY. Overnight the European Commission announced that if borrowing costs for a lender were to be higher than 3.5% there was a mechanism to compensate the lender for it. There were a lot of rumours circulating on Italy overnight, with some market commentators speculating the Italian government would run of cash in the next few months, with next Thursday’s bond auction due to be cancelled. Italian and Spanish government bond yields increased (6.11% for Italy and 6.25% for Spanish 10-year yields) and spreads with German bunds have continued to widen. Italy and Spain are a different proposition to Greece, Ireland and Portugal, and with Italian Gross debt set to hit 120% of GDP this year, the numbers are very large indeed. Testing times lie ahead.

OTHER EVENTS AND QUOTES
•       Dairy prices down 1.3 percent. The average winning price at the GlobalDairyTrade auction fell 1.3 percent to US $3,716/tonne. Prices for whole milk powder eased 0.3 percent, with offsetting moves for other dairy products.

NZDUSD: Rationalisation…
Further assessment of the outlook for the local economy with the currency so strong is delivering an air of caution to many.  The marginally weaker Global Dairy Trade auction overnight suggests that commodity prices in this arena are not keeping pace with the moves of the currency.  Expect the topside to be further capped in today’s trading.
Expected range: 0.8644 – 0.8720

NZDAUD: Not quite there yet…
The decision to remain on hold by the RBA yesterday did lift this cross. It has not yet reached the technical objective and will require further AUD weakness for this to be achieved.  It is not likely to stretch to 0.8080 on the day although it will remain supported.
Expected range: 0.8010 – 0.8080

NZDEUR: Elevated…but justifiably so for now…
Concerns around the EU countries continue to ensure the EUR remains weak. This cross is elevated and should correct from these levels but it will be something that takes time and renewed confidence in EU management of the crisis.  At this point moves above 0.62EUR will be difficult to sustain.
Expected range: 0.6082 – 0.6150

NZDJPY: Talkfest…
Further talk around the possibility of BoJ intervention at this point has amounted to nothing.  The end result is a weaker cross which will further probe support levels in the low 66JPY area.
Expected range: 66.44 – 67.36

NZDGBP: Valiant attempts…
A marginally stronger UK July construction PMI helped to lift the GBP off the mat.  The moves of the NZD have helped a correction of this cross and a deeper move is likely towards support at 0.5325.
Expected range: 0.5305 – 0.5355

ANZ Research



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