Friday 19th August 2011
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CURRENCY: Having suffered the fallout of a 5% drop in US equities the NZD should show some consolidation today after losing 1.5 cents in the offshore session.
RATES: Quiet trading in the kiwi overnight, although more receiving interest was apparent. Given the rally seen in overseas markets, we expect the 2-year to open about 5 points lower in yield this morning.
CURRENCY: US data and a bearish forecast on global growth has seen the NZD fall 150 points in the last 24 hours.
GLOBAL MARKETS: Mounting concerns on European bank funding, more pessimism over the global economy, and weak US manufacturing data contributed to a risk-off session overnight. Both the S&P500 and the Euro Stoxx 50 slumped 5%, with a sea of red ink for various US and European bourses.
US, UK and German Government bond yields fell 8 to 12 points, with the US 10-year yield at 2.08% at the time of writing, after having troughed at 1.97% overnight. Italian and peripheral European bonds yields edged up.
Commodity prices (CRB measure) fell more than 2%, with WTI crude oil prices down 6% to around US $82/bbl.
KEY THEMES AND VIEWS
AUGUST PHILLY FED RAISES SLOWDOWN FEARS. The sharp drop in the August Philadelphia Fed Manufacturing Survey was considerably weaker than expected. There were significant falls in all of the key components, which are now tracking well below their long-run averages. Current new orders plunged to -26.8 from +0.1 and employment dropped by 14.1 points to -5.2. Future general activity dropped to just +1.4, while new orders sank by 11.5 points to +16.3. This is the kind of result we became accustomed to at the height of the GFC, with the August reading the worst since March 2009. While the recent drawn-out US debt negotiations no doubt played some part in clouding the economic outlook, the result shows just how fragile the US manufacturing sector remains. It certainly backs this month's effective easing in Fed policy. While the Philly Fed survey gave us a 'head fake' back in June, the August fall (combined with the weak Empire Manufacturing survey) is concerning.
There is a decent likelihood that the August manufacturing ISM will see a sub-50 print.
Weak labour market data has also bolstered the case for further QE, although rising core CPI inflation (now running at an annualised rate of 3.1% in the 3-months to July), may well prevent this in the short-term. We need to remember there is still a considerable amount of stimulus in the system: overnight NY Fed President William Dudley spoke in favour of the FOMC’s recent commitment to keep the funds rate close to zero over the next two years, noting that lower market interest rates “should help provide some additional support for economic activity and jobs.”
OTHER EVENTS AND QUOTES
• Debt contagion fears. There are increasing concerns that Europe's debt crisis may spill over into the US Banking System. NY Fed officials have been stepping up their monitoring of large European banks operating in the US, holding extensive meetings in an attempt to gauge their vulnerability to financial pressures.
• UK retail sales volumes remain subdued, despite much stronger food sales. This was consistent with the more downbeat outlook presented by the BoE in the August MPC minutes.
NZD fell off the radar overnight with US stocks leading the way on renewed concerns about US and the global economy. Kiwi fell away to find support at 0.8190. Expect sentiment to slow today however be cautious of a break through this level.
Expected range: 0.8180 – 0.8240
NZDAUD: Well out of range
NZD fell away faster than the AUD as the global economy jitters were renewed on the back of the poor US data. The cross should show some support today at 0.7900 any break here should see the pair under further selling pressure.
Expected range: 0.7880 – 0.7940
Risk aversion was the name of the game overnight with the NZD underperforming all majors. NZDEUR fell off 150 points on the day and is showing first support at 0.5709. Again a break at this level is likely to open up the downside.
Expected range: 0.5709 – 0.5749
NZDJPY: Less carry
NZDJPY also felt the burn as risk aversion trading saw the carry trade pair fall into the 62 JPY levels. Support in our session should hold at 62.50 as consolidation trading should commence.
Expected range: 62.50 – 62.90
NZDGBP: Less than half.
NZDGBP pushed straight through the 0.50p mark overnight with little attempts by buyers to stop it. A fallout in global risk appetite taking its first breather after an impressive dip at support 0.4960 the NZDGBP should look supported around this level. Any break of this could see the pair testing 0.49p.
Expected range: 0.5060 – 0.5100
Source: ANZ Research
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