Thursday 6th October 2011
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CURRENCY: The gains of yesterday may well be built on during the coming 24 hours as interest rate decisions and developments in Europe take the stage. Support for the NZD builds as technically it gains topside momentum.
RATES: A bit more interest in kiwi trades in the overnight London session. We expect local rates to open a touch higher this morning on the back of overseas moves.
CURRENCY: The gains of yesterday were solidified overnight as the NZD was unable to establish new recent lows. Calm trading on the equity and commodity front meant familiar ranges for the NZD were easily delivered.
GLOBAL MARKETS: Overnight the market was in a relatively quieter frame of mood compared to the last few days. A rally in US equities set the scene in Europe, where hoped of co-ordinated recapitalisation underpinned European bank shares, helping a 3-4% gain in European equities. US and European government bond yields rose, with gains to Italian yields milder than those for the US, Germany and UK, despite yesterday’s three-level ratings downgrade by Moody’s. Commodity prices (CRB index) were up nearly 2%, with crude oil up nearly 5%.
KEY THEMES AND VIEWS
MERKEL ‘PUT’ HELPS EUROPEAN BANKS. Overnight Merkel signalled Germany’s readiness to join efforts to recapitalise European banks, provided “if there is a joint assessment that the banks aren’t adequately capitalized” and finance officials develop “uniform criteria.” This looks to be a key focus at this month’s EU summit, with EU officials working on plans to boost bank capital, according to the IMF, who have also called for the ECB to step up its response to prevent further destabilisation in financial markets. It signals a shift in direction, with Merkel signalling there may be an increase in investors’ share of a €159bn second aid package for Greece.
The upshot is likely to be more public sector capital being poured into the European banking sector, with increasing urgency for larger solvency buffers needing to be built to recession proof banks. European banks reportedly need more than €140bn of capital, but the figure could be much higher once the state of exposure is known.
Officials in France and Belgium are preparing a bailout for Dexia that will pool its troubled assets into a “bad bank” with Belgian and French government guarantees to protect depositors. With the promise of public funds being thrown at them, European banking shares rallied but are still down by about a third since the start of the year.
OTHER EVENTS AND QUOTES
• IMF comments on the Eurozone: The ECB should lower its policy rate if downside risks persist, and may need to make explicit commitments to buy government bonds for as long as necessary. Tonight’s ECB meeting is the last for outgoing ECB President Trichet, with a 25 point cut a 50-50 call.
• US data holds up. While the data is of secondary importance at present it still has relevance. The non-manufacturing ISM, is still consistent with modest growth, with the strengthening new orders to a four-month high (56.5), a clear positive. The employment picture remains mixed, with the ISM (48.7) contrasting with solid ADP data.
NZDUSD: Run aground…
It may take further time to establish if a medium term base has been set for the NZD. Exporters may find themselves frustrated today with limited dips and a lack of local data to move the NZD. Importers may be more patient awaiting to see if the NZD can extend towards the next technical level at 0.7704USD.
Expected range: 0.7585 – 0.7685
NZDAUD: Knocked back…
This cross was again frustrated ahead of the 0.80AUD level overnight. NZD selling interests appear more prevalent around 0.7980 and should ensure a cap remains in place there in the short-term.
Expected range: 0.7902 – 0.7962
NZDEUR: Who is next?
The downgrading of Italian sovereign debt yesterday ensured that the attention of markets remained firmly on the EUR. The relative attractiveness of the NZD did not escape many and given an ECB meeting tonight this cross will remain supported with the potential to test 0.5758.
Expected range: 0.5700 – 0.5758
NZDJPY: Back on track…
The reversal from the low 57JPY level yesterday should ensure that today’s target is on the topside for this cross. Yield support will help to drive things towards the 59.05 level.
Expected range: 58.05 – 59.05
Tonight’s BoE interest rate decision should see things remain on hold. A slightly positive UK September Services PMI release was not enough to prevent the squeeze higher. Getting above 0.4952 may not be easy today.
Expected range: 0.4912 – 0.4952
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