Monday 1st August 2011
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CURRENCY: Many will have difficulty with the opening level of the NZD this morning and find every reason why it should not be at this elevated level. Advances towards 0.8818 cannot be ruled out.
RATES: NZ rates came offered during the London session, and this will likely be the case today following the big rally in US rates. Swap yields to open unchanged to slightly lower, but expect the curve to push lower as US growth concerns dominate.
CURRENCY: The NZD continued the local session trend initially as US Q2 GDP knocked it to the overnight low. From there it was a one way move as it soared past the previous post float high to finish the week strongly.
GLOBAL MARKETS: No agreement in the US on the debt ceiling and weak US Q2 GDP saw equities down in Europe and the US. US Treasury prices rallied sending 10-year bond yields to their lowest since December last year. Commodity prices were generally lower despite the selloff in the USD, as concerns over demand weighed. Gold bucked the trend, hitting fresh highs.
KEY THEMES AND VIEWS
US ECONOMY AT STALL SPEED. As I write, there is still no deal on the US debt ceiling, though an agreement between Congressional leaders is reportedly “very close”. The President still has the final say, so there is still a lot of drama to play out.
Personally, I much prefer the Greek tragedy than this US thriller. Hopefully the bleak US GDP report will help convince the powers that be to strike a deal and not dither any longer.
Q2 growth came in at +1.3% q/q annualised versus market expectations of a 1.8% rise. Personal consumption was virtually flat at +0.1% q/q annualised (market expectation: +0.8%), and government spending continued to drag (-1.1% q/q annualised).
Even worse however were the revisions to the backdata. Q1 growth was revised down to just +0.4% q/q annualised from +1.9% previously, with a big downward revision to private investment, and a lesser one to net exports. Moreover, with the peak-to-trough fall in GDP during the recession revised to -5.1% from -4.1%, GDP is still below its pre-crisis peak.
However, given that the Fed’s preferred measure of inflation, the core PCE deflator, rose by 2.1% q/q annualised versus +1.6% in Q1, this means that QE3 is still a big ask. Indeed, FOMC member Dennis Lockhart (President of the Atlanta Fed, non-voter this year) reiterated after the data release that the bar to further easing remains high as monetary conditions are already very accommodative. Lockhart believes that growth in H2 will accelerate to 3% or better.
But given that Q3 started off on a weak note with uncertainty around the US debt ceiling, and consumer confidence taking a step lower, it is hard to imagine a second half pick-up that is material. Especially when the US economy faces large government spending cuts that will see public consumption acting as a drag on growth for some time. The sharp move lower in US bond yields will help provide some support, but with the Fed unlikely to be able to lend more of a hand, it looks like the Greenback will need to do more of the work.
OTHER EVENTS AND QUOTES
• St Louis President James Bullard (non-voter this year): “I think the inflation outlook does make it a much tougher decision than it was last summer [to provide more stimulus]… you’ve got rising inflation, and headline inflation is pretty high compared to a year ago. It could even go even higher.”
NZDUSD: To be, or not to be…
A very critical week for global markets. The NZD may well be the fuse that lights the way for explosive action to come. Risk indicators are high but with the NZD being parked in the “safe haven” status (for now) this may in fact assist an extension past last week’s close.
Expected range: 0.8749 – 0.8818
NZDAUD: All the world’s a stage…
Will the RBA upstage all this week and raise the cash rate to a round 5%? Such a move may dent the fortunes of the NZD on this cross as after all no actual move by the RBNZ has been made. Topside action might be sparse in this cross today.
Expected range: 0.7950 – 0.8010
NZDEUR: Is this a dagger I see before me?
Debt, default or downgrade? The daggers are out for the USD and failure to deliver anything will certainly drive it lower. Expect this cross to be capped around recent resistance levels today as a waiting game is played.
Expected range: 0.6065 – 0.6125
NZDJPY: Signifying nothing…
Plenty of vociferous comments from officials around the strength of the JPY and the impact on the local economy. The clear reality is that it is a USD story assisted by inflow to the Japanese economy, not unfamiliar to local players here, that will see more JPY strength to come.
Expected range: 66.90 – 67.90
NZDGBP: Such stuff as dreams are made on…
The UK economy can dream of strength. In reality the connection to the EU and its worsening credit rating picture will not help the GBP relative to the NZD. While a lift towards 0.54GBP cannot be ruled out it should avoid testing this level until later this week.
Expected range: 0.5325 – 0.5375
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