Economic views and news - Wednesday, 2 November

ANZ Research

Wednesday 2nd November 2011

OUTLOOK

CURRENCY: Demand is looking shy for the NZD today, as a Raft of data/news placed the flight less bird on the back foot leading into the offshore session last night.

RATES: Quiet trading in the overnight London session. Local rates are expected to open this morning lower in yield given the rally in other markets.

REVIEW

CURRENCY: A rate cut by the RBA and weak Chinese PMI data began proceedings for the southern drift in the NZD overnight. The theme continued into the European session as Greek Politicians lashed out against the PM’s proposed referendum.

GLOBAL MARKETS: The risk off move largely centred around PM Papandreou calling for a referendum on last week’s debt deal sending shock waves through the market. Equity markets in US were down around 2 to 3%, with the Euro Stoxx 50 down more than 5%. Government bond yields fell in the US and in most of Europe. There were a few exceptions, with Greek 10-year bond yields up 85 points at the time of writing (to 22.23%), with Irish, and Italian yields (to 6.17%), up around 10bps. The CRB commodity price index fell close to 2%, led by falls for energy, previous metals, and industrials. Crude oil prices fell 3%, with larger falls for silver and copper.

KEY THEMES AND VIEWS

GREEK TRAGEDY FAR FROM OVER. Greek PM Papandreou calling for a referendum on last week’s debt deal was the major development overnight. Domestic pressures appear to be the major catalyst behind the move, with the Greek PM facing a key vote of confidence on November 4 and with six senior ministers of the ruling party already calling for the Greek PM’s resignation. Details of the proposed referendum are unclear, but it is likely to be held in January. If the referendum is defeated, what are the consequences? Does this guarantee a Greek debt default? Will Greece be ejected from the euro? What about the financial stability in the euro region, and risks of contagion posed by a disorderly default as warned by the rating agencies? These questions are unanswered at present but will be pertinent going forward. It was not exactly an ideal start to Mario Draghi’s first day as ECB president, and is likely to increase pressure on the ECB to keep purchasing distressed bonds and to cut its policy rate. The Greek move makes it all the more important that Italian and euro-zone policy makers, including those from the ECB, build a reliable firewall around Greece to prevent more serious contagion to Italy. No doubt that Greece will be at the top of the list of discussion points when Merkel and Sarkozy meet in Cannes just before the November 3 G20 summit.

OTHER EVENTS AND QUOTES
• There was little in October’s ISM manufacturing survey to suggest the US economy was moving any closer towards recession. While the overall index did fall, much of this was due to a sharp drop in inventories (t0 46.7 from 52). New orders (to 52.4) rose to a six month high. Lower prices paid (to 41 from 56) suggest US producers are starting to benefit from lower raw material costs.
• Prices eased 1.2% to US $3,511/tonne in the GlobalDairyTrade auction. Prices fell for most components, with whole milk powder prices down 0.8%. Casein managing a chunky 35% increase.

NZDUSD: Surprise.
Our NZD continued on a slippery slope last night, as concerns over Greece’s fiscal future intensified. Dropping over 1½ cents in the off shore session nothing was working in favour of the NZD. Buyers finally slowed the dip at around 0.7920, previous trend line of support.
Expected range: 0.7910 – 0.8010

NZDAUD: They Did
RBA cut rates yesterday afternoon and the AUD bore the brunt of the move. NZDAUD rallied back above 0.77 cents on the decision which closed the yield gap. Once the rate cut has been digested by the market, this cross could approach the lower part of the range.
Expected range: 0.7650 – 0.7720

NZDEUR: Strange but true.
Greece’s shock call to have a referendum on the recent bail out package sent jitters through the market and the NZD was the beneficiary of some aggressive selling, even vis a vis the EUR. NZDEUR tested familiar support around 0.5790 as our local session opened this morning.
Expected range: 0.5770 – 0.5820

NZDJPY: All in vain?
The NZDJPY has given back all the gains made by the intervention attempt on Monday. This cross has slipped back to familiar territory and again without the presence of more intervention, the risk off frame work will keep the pair under pressure, particularly should a break of 61.80 be achieved.
Expected range: 61.80 – 62.70

NZDGBP: And again
Further dips were printed over night as the cross slipped below 0.5000. The local session today should bring some stability as little data is due to affect the NZDGBP. Off shore markets are controlling the helm, so we headline watch for the next action and re action from the troubled North.
Expected range: 0.4955 – 0.5000

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