Tuesday 6th December 2011
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CURRENCY: NZD moves will continue to be largely as a result of moves in the AUD and EUR today. Expect similarly tight ranges with the topside cap remaining in place around the mid 0.78USD level.
RATES: More payside interest across the curve was evident overnight, but with few trades. Local rates are expected to open a touch higher today.
CURRENCY: Initial moves lower for the NZD yesterday encountered underlying demand around the mid 0.77USD level which ensured a base to start off the week. Overnight attempts to move higher have been muted.
GLOBAL MARKETS: Markets added to earlier gains, buoyed by cabinet approval of the Italian austerity package and the Merkel and Sarkozy agreement to modify the EU Treaty. US and European equities were up 1.2%, and government bond yields in the US, UK, and Germany rose. Government bond yields eased in Italy (to 5.93% for 10-year), France (3.11%) and Spain (5.06%). Prices for industrial commodities rose 2%, with oil up 0.5%. Gold prices fell.
KEY THEMES AND VIEWS
A NEW EUROPE? Overnight Merkel and Sarkozy announced that they had reached a “comprehensive” agreement on treaty and fiscal rule changes required for the euro area (17 states), and “ideally” for the European Union (27 countries). A letter on the proposed changes will be sent to European Council President Van Rompuy on Wednesday, and then on Friday, Merkel and Sarkozy hope the proposals will be accepted by the EU Summit participants.
Among the measures are plans to fast-track the permanent rescue fund to 2012 (previously 2013), and stricter enforcement of the region’s fiscal rules, with stricter penalties for deficit violators and the locking of debt limits into euro states’ constitutions. Not much different from the current arrangements, which have failed miserably, sceptics would argue.
The joint issuance of euro area bonds and full fiscal union looks to be a bridge too far given the loss of nationwide sovereignty, particularly with the interest rate lever already being controlled by unelected technocrats. The hope of the politicians is that the ECB will take the rhetoric at face value and step up its response to the crisis. While the ECB’s independence is sacrosanct, the German government is not adverse to the Bundesbank getting its hands dirty by helping to channel loans to the IMF.
PARLIAMENTARY VOTE ON ITALIAN AUSTERITY PLAN TONIGHT. Overnight the Italian cabinet approved an additional €30bn in austerity measures, which resurrect property taxes, cut pension entitlements and attempts to reduce tax evasion. The cost is almost certainly recession, Italy’s fifth in a decade, but the reality is that there are no quick fixes.
OTHER EVENTS AND QUOTES
• Non-manufacturing ISM dips. Falls in the employment (to 48.9 vs. 53.3) and supplier deliveries indices (50.0) more than offset the rise in the business activity (56.2) and new orders indices (53.0).
• Watching the RBA. Our Australian ANZ colleagues are opting for a 25bp insurance cut, taking the policy rate to 4.25%. Well above our own 2.5%.
NZDUSD: Treading carefully…
Support around 0.7750 USD yesterday was not thoroughly questioned and may remain out of reach today. Focus in the Australasian market will be on the RBA interest rate decision later today. Once out of the way the NZD may find itself tentatively exploring the topside.
Expected range: 0.7780 – 0.7860
NZDAUD: Stay in the present…
After a cut today the market will have a long wait until the next RBA decision in February 2012. If the cut is just 0.25% this cross will continue to struggle, unless the RBA signals that more is to come, especially with the RBNZ on hold.
Expected range: 0.7560 – 0.7635
NZDEUR: Building up…
With market positioning against the EUR increasing it may not take too much positivity to provide a corrective move. This cross should continue to struggle to make topside gains as more substantial news is awaited.
Expected range: 0.5775 – 0.5835
Very little change on this cross as the cross continues to find difficulty holding onto gains above 61JPY. This may remain the case today as Australasian yields are lowered further.
Expected range: 60.20 – 61.10
NZDGBP: Cap in place…
Difficulties getting above 0.50GBP are likely to continue in the short term as many establish strategic positions in advance of this level. Despite the association with Europe the GBP has found some strength in local data.
Expected range: 0.4950 – 0.4995
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