Economic views and news - Friday, 28 October

ANZ Research

Friday 28th October 2011

OUTLOOK

CURRENCY: Overnight momentum may well flow through to the local Asian market today and further lift Australasian currencies. Topside gains from the opening may be difficult to sustain given the tough local picture.

RATES: Local rates will open higher, with a bias to steepen the curve.

REVIEW

CURRENCY: Yesterday’s RBNZ OCR ignited the NZD rocket which blasted off after the EU rescue package details were announced. From there the moves were one way without any relief through to the opening of the market today.

GLOBAL MARKETS: European equity markets surged following yesterday’s announced grand plan, and on much better than expected US GDP data. AUD and NZD have surged too, as have US bond yields, but Italian and Spanish bond yields rallied, proving just how poor a judge the market can be. Commodities surged, led by copper. Energy prices also rose, led by crude.

KEY THEMES AND VIEWS

EUROPEAN MARKETS REBOUND ON GRAND PLAN, DESPITE LACK OF DETAIL. Although at this stage there is a lack of detail, the very fact that there now is a plan has been viewed as enormously positive by markets.

Anyway, with regard to the plan, the key elements are as follows: (1) Banks will be required to hold at least 9% core tier 1 capital by mid 2012. Stress tests using September 30th data suggest this means an additional €106bn capital; (2) The EFSF will be leveraged to around €1trn, but we do not know which method (SPV or insurance) will be used; (3) 50% “voluntary haircuts on Greek debt”, which have been proposed to avoid triggering a credit event, and (4) treaty change options “to be explored” which include new rules, closer monitoring, and greater enforcement.

All in all, the plan is pretty well what we outlined in yesterday’s Morning Brief – and it is well short of what most analysts would consider a lasting solution, so why the “Europhoria”? We suspect it is simply a case of markets being enamoured by headlines, rather than details.

What remains to be seen is how well markets will cope when fuller details emerge, and when it comes to putting the plan in action. In that regard, we have some concerns. How the plan gets executed is still up in the air. It won’t be easy. For example, how will so-called “voluntary” haircuts be managed?

As we noted yesterday, this is going to be tricky to execute – turkeys don’t vote for an early Christmas, so why would a bank CEO with his or her back to the wall accept such a deal? Also, how will markets cope when they realise that even after all this, Greece’s debt to GDP will still be 120% by 2020!

The plan also hangs on Italy and Spain honouring their pledges with regard to fiscal reform. We have also heard that Germany is opposed to the ECB continuing to buy Italian and Spanish bonds. Still, for now markets are optimistic, and even though it feels like we have euro-fatigue here in NZ, at the end of the day, this is what has been driving markets so we have to keep on top of it.

OTHER EVENTS AND QUOTES
• From the ISDA website in relation to Greek CDS. Although a final determination has yet to be made (and can’t until more information is available), ISDA say that “based on what we know it appears from preliminary news reports that the bond restructuring is voluntary and not binding on all bondholders. As such, it does not appear to be likely that the restructuring will trigger payments under existing CDS contracts request to determine whether a credit event has occurred.”

NZDUSD: Trigger happy…
It appears the RBNZ still have their finger on the trigger ready to pull it should the need arise. The mere mention of further OCR increases was enough to lift the NZD. Having extended further through key levels look for 0.8183 to provide interim support and the Asian market to extend the rally.
Expected range: 0.8183 – 0.8253

NZDAUD: Building a base…
Markets are likely to remember that the RBA next week is in a position to cut interest rates and this should ensure that the base at 0.7613 is not broken at this point. Today a move back towards 0.77AUD is possible.
Expected range: 0.7640 – 0.7695

NZDEUR: 50/50…
Markets may take some time to realise the actions being taken in Europe are not being taken because they want to. EUR strength is based around lower risk levels versus stronger underlying fundamentals. This cross should remain troubled above 0.58EUR.
Expected range: 0.5755 – 0.5805

NZDJPY: Action delivered…
But the action came from the NZD leg of the cross. With little more than further words around the JPY side of the cross. A test of technical resistance at 62.47 may take place in Asian time today.
Expected range: 61.75 – 62.47

NZDGBP: Back in action…
Comments from BoE’s Fisher that there is a strong chance of another UK recession were enough to ensure the GBP lagged moves overnight. Further topside moves are possible here with resistance at 0.5113 to be tested.
Expected range: 0.5080 – 0.5113

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