Wednesday 10th August 2011
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CURRENCY: Economic reality will kick in for markets today as the US FOMC announcement earlier this morning demonstrated actions and comments made are warranted. Equities markets should weaken further today.
RATES: Interest rates will clearly open lower on the back of the FOMC statement, particularly at the long end of the curve.
CURRENCY: An extremely erratic day for the NZD yesterday following the path of equities and the AUD. This erratic trading continued around the US FOMC statement with a brief rally quickly extinguished.
GLOBAL MARKETS: US 10yr bonds have rallied hard and fast, trading at all-time low of 2.035% a few minutes ago. The FOMC statement hasn’t engendered a “risk on” move, but it has given carry the green light. Equities are up slightly; after initially being lower after the FOMC. Gold is much higher.
KEY THEMES AND VIEWS
Fed defines “extended period”. All eyes were on the US Federal Reserve this morning, and it would be fair to say that markets were pricing in some kind of action, with stock markets and bond yields all up off yesterday’s lows.
In the event the Fed did take an unusual step, defining the true meaning of “extended period” to be “at least through mid 2013”. This is one option Bernanke had proposed in earlier speeches, so it’s not a surprise that he has taken this approach. But there were 3 dissenters on the panel, and that possibly explains why more or other options were not employed, including QE3, or cutting interest payable on excess reserves.
In terms of where the markets were at, they were expecting the Fed to start cranking rates up from early 2013, so in that sense the Fed have “eased”. As an example, before the announcement, the market was pricing the Fed Funds to be at 0.26% by March 2013 and then 0.38% by June 2013. But remember, the Fed’s target range for cash is actually 0 to 0.25%, and with the exception of recent spikes higher, cash has been trading at around 0.1%. With mid 2013 futures trading at around 0.38%, by announcing that the Fed Funds rate will stay on hold through till then, they have effectively delivered a “future cut” of around 0.25bps. The question is, will it be effective? This is the 64 thousand dollar question. By guaranteeing low funding costs for the next 2 years, the Fed has given the market a green light to swing the bat, and start buying assets.
Short end bond yields had to go lower and they have – the US 2yr bond is now at a record low of 0.18%, and will probably start to gravitate on 0.1% if liquidity fears subside. 5 and 10 yr bond yields also needed to fall - after all, 2 years of guaranteed cheap funding is nothing to baulk at. Call it QE by stealth, call it state-sponsored private QE. If the tea party won’t let you do it, get the market to do it for you. Indeed, by guaranteeing a low rate, the Fed is encouraging the market to buy bonds to keep interest rates down.So what does it all mean for NZ?
In the meantime, markets are worried about liquidity, and traders are exiting profitable carry trades to get their hands on USD and EUR, which they are hoarding at the Fed and ECB. Once this dies down, the Fed’s guarantee of low rates is a massive green light for carry trades, and this has to be positive for the NZD and NZGS bonds. When might that be? As soon as markets settle down, which we suspect won’t be too far away. If they continue to burn, authorities will step in, as they did in 2008. That said, it is not clear that Europe have fully acknowledged that they even have a problem.
NZDUSD: Technical tick off…
Having achieved a short-term target yesterday the NZD recovered initially. Equities moves will continue to drive shorter term directional moves until offshore markets take into account the relatively more attractive local economic picture.
Expected range: 0.8055 – 0.8250
NZDAUD: Remain calm…
This cross has tested both sides of the boundaries of recent ranges and continues to flirt with a break on the topside. At this point the NZD does not have the momentum for such a move and once markets realise the RBA will not be cutting to the degree priced in the topside resistance levels will become more difficult to break.
Expected range: 0.8020 – 0.8080
NZDEUR: No better…
Nothing really improved on the European front overnight and markets digested the statement from the US FOMC and thought global economic prospects might be a little weaker. As such this cross has eased but should remain supported in the high 0.56EUR area.
Expected range: 0.5680 – 0.5750
The path of the JPY appears to be similar to that of the CHF. At this point the Bank of Japan will be looking at recent intervention and asking itself what really needs to change. As nothing can be done at this stage for a permanent fix this cross will ease lower and find buyers around 61.50JPY.
Expected range: 61.60 – 63.00
UK rioting is helping to provide uncertainty around the currency and coupled with weaker economic data has helped to find a base for this cross. Expect today’s range to be more subdued.
Expected range: 0.4960 – 0.5040
Source; ANZ Research
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