Economic views and news - Thu 28 July

Thursday 28th July 2011

OUTLOOK

CURRENCY: RBNZ OCR today will dominate the local headlines. A possible “buy the rumour sell the fact” scenario may well play out providing some relief for exporters who have to date had very little to cheer about.

RATES: Interest picked up in the NZ rates market during the overnight London trading session, ahead of today’s RBNZ decision. The 2-year traded slightly below the NZ closing levels.

REVIEW

CURRENCY: An over heated market, driven by the elevated Australian Q2 CPI release, gave back a lot of those gains overnight. Strategic sellers in the mid 0.87USD area ensured that a solid cap was in place overnight. GLOBAL MARKETS: A bad day in the office for equities overnight, with European bourses down 1.7% and the S&P500 off 1.5% as I write. The reason? Ongoing wrangling over the US debt talk negotiations (if you can call it that) and some disappointing corporate news. Weak US durable goods orders didn’t help things either. But there was to be no safe haven demand for US Treasuries this time. A lacklustre auction of 5-year notes sent yields higher. The USD made a comeback overnight, which weighed on commodities.

KEY THEMES AND VIEWS

THE CLOCK IS TICKING AND STILL NO RESOLUTION. It seems even the Republicans can’t agree amongst themselves on a proposal to deal with the US debt situation. Speaker Boehner had to push back a vote among the caucus by a day due to opposition from the fiscal conservative side of the party. The Democrat’s own plan by Senate Majority Leader Harry Reid also hit a bump when the CBO estimated that the cuts were about US$500bn short of what was initially claimed.

Markets are not taking the gridlock too well. And when you throw in some poor corporate news, weak durable goods orders data and a more downbeat Fed Beige Book, you have all the excuses you need for investors to sell and stay on the sidelines.

The Fed’s Beige Book noted that economic activity continued to grow, but the pace has moderated in many Districts. Of the 12 Districts, 8 experienced a slowing in growth this time, compared to 4 in the previous Beige Book.

Labour market conditions were said to remain soft. And just to make investors even more nervous, some conflicting comments from Eurozone politicians cast some doubt on last week’s deal. Though these comments were minor and were more about politicians playing to their domestic audiences, it was enough to send Italian and Spanish CDS spreads wider.

The global backdrop is looking shaky as the RBNZ prepares to release their OCR decision later this morning. That, and the high flying NZD (though off a bit overnight), will no doubt be mentioned in the RBNZ statement. But based on purely domestic considerations alone, the case for removing the March insurance rate cuts is strong. The RBNZ will have a delicate balancing act today in signalling the removal of the insurance cuts soon (possibly as soon as September) without sending the NZD into another post-float high. Some pointed comments specifically aimed at the currency may have some effect, but it will likely be brief.

OTHER EVENTS AND QUOTES

• ECB President Jean-Claude Trichet: “Such a speculation (betting on Greece defaulting) would be a sure-fire way of losing money given the decisions taken last Thursday”.

NZDUSD: Crunch time…
All the focus will be on the RBNZ OCR this morning at 9am and the all important accompanying statement. Expect an indication around the timing of the removal of the emergency cut to be made clearer with the last paragraph phrasing critical. The NZD should remain capped on the topside in the mid 0.87USD range with a possible correction as low as 0.8620 today.

Expected range: 0.8620 – 0.8749

NZDAUD: Catch up…
Yesterday’s Australian Q2 CPI did weaken the cross as expected. Further weakness today may well deliver a dip towards the next support level of 0.7847 as the AUD remains relatively firm.

Expected range: 0.7847 – 0.7915

NZDEUR: Hold on…
The US debt impasse remains, doubts arise around the EU bailout deal and German inflation advances higher. Throw it all into the mix and you come up with a weaker EUR. However the moves of the NZD should help to lower this cross back towards the 0.6000EUR level.

Expected range: 0.6000 – 0.6060

NZDJPY: Watching…
JPY strength has made it difficult for this cross to advance past resistance currently at 68.20. For today this will hold and a reversal back towards support at 67.40 is likely.

Expected range: 67.40 – 68.20

NZDGBP: Valiant attempts…
Despite attempting to push higher this cross has eased back to yesterday’s levels. Expect a corrective move today towards support currently at 0.5292.

Expected range: 0.5292 – 0.5338

Source: ANZ Research

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