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Economic views and news - Wednesday, 05 October

ANZ Research

Wednesday 5th October 2011

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CURRENCY: Further consolidation around the 0.75USD level is likely for the NZD today. Offshore markets will digest the Congressional testimony of the US Fed Chairman Bernanke and comments from ECB President Trichet.

RATES:  Expect rates to open up lower again today following offshore events and on the back of the RBA statement. It may be yesterday’s news, but as it happened on the NZ market close, it has yet to be reflected in local rates.


CURRENCY: With the RBA opening the door to an interest rate cut, but not actually walking through it just yet, relative support for the NZD kicked in. The brief visit below 0.75USD found plenty of demand locally to assist the bounce.

GLOBAL MARKETS: Northern hemisphere equity traders spent the day staring into screens swimming in a sea of red ink as concerns grew over further delays in Greek bailout talks (in relation to the next tranche), Dexia’s woes, and Deutsche Bank’s profit warning. Bond yields fell in European time, but have since retreated a tad. Gold and silver fell, as did the CRB Index.


ANOTHER BAD DAY AT THE OFFICE. Dexia’s troubles and the Deutsche Bank profit warning were the big stories in Europe, and saw markets on the back foot from the get-go. The Belgian and French finance ministers vowed to “take all necessary measures” to protect Dexia’s clients, and will guarantee its debt. This may stop the rot initially, but it might also be the tip of the iceberg, and markets tend to smell a rat when governments intervene. Moreover, as we know from our sovereign debt analysis, these countries are in a wee spot of bother of their own – already up to their eyeballs in debt. Belgium’s sovereign debt to GDP was, for example, 97% in 2010 – hardly an enviable position. The way markets are trading, one could be forgiven for thinking we were back in 2008 again.

RBA HINTS AT A RATE CUT NEXT MONTH. As we suspected they might, the RBA has described the conditions it needs to see to cut rates, noting that “the path for inflation may now be more consistent with the 2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme. This assessment will be reviewed on receipt of further data on prices ahead of the Board's next meeting. An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.” That’s a very strong hint indeed. ANZ now expects a cut next month.

•          Fed Chairman Bernanke Ready to do more. In testimony in front of Congress’s Joint Economic Committee today, Bernanke said the Fed “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability”. While similar, this is a more “urgent” comment than the comment made at the September 21st FOMC statement, when the Fed said it “discussed the range of policy tools available” and is “prepared to employ its tools as appropriate”.
•          Deutsche Bank profit warning. German banking giant Deutsche Bank issued a statement overnight saying that its “planned pre-tax [2011 profit] target of EUR 10 billion from its core businesses is no longer achievable”.  It said it still expected “robust” earnings, but that it would be slashing 500 jobs, and would take a EUR 250m impairment charge on its Greek government bond holdings.

NZDUSD: Finding support…
Despite a dip through the support line at 0.7513 the NZD has managed to in the main remain around this level. At this point a considerable amount of recuperation is required in order to build a base from current levels. With markets ignoring current US issues it may be hard to recover until such time as they return to focus.
Expected range: 0.7495 – 0.7595

NZDAUD: Opening the door…
There are significant differences between opening a door and walking through it. At least yesterday the RBA acknowledged that the door is there and may be walked through at some point. This should provide further support to this cross and perhaps a return to 0.80AUD+ levels although not today.
Expected range: 0.7912 – 0.7992

NZDEUR: Remaining in holding pattern…
Support in the mid 0.56EUR area remains in place as the last meeting for ECB President Trichet approaches. Any further acknowledgement of the waning inflation concerns will see more support return for the NZD.
Expected range: 0.5634 – 0.5694

NZDJPY: Deeper moves…
With little by way of action from the BoJ and all the moves in this cross coming from those of the NZD support in the low 57JPY area should increase. Yield demand, once risk aversion levels lower, will assist.
Expected range: 57.55 – 58.35

NZDGBP: Treading water…
Markets await the BoE interest rate decision later this week. Support at 0.4865 has held again and should go untested today with the possibility of a squeeze back towards 0.4925.
Expected range: 0.4875 – 0.4925

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