Wednesday 28th September 2011
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CURRENCY: Directional guidance for the NZD will continue to come from offshore given the lack of local economic data releases. Expect further support for the NZD to come should it dip under 0.79USD today.
RATES: The sell-off in global rates on the back of improved sentiment is likely to flow through into the NZ rates market today. Expect swap yields to open around 5bps higher across the curve, and for payside bias to dominate.
CURRENCY: One way directional bias was experienced by the Australasian currency pack yesterday, led by heavy demand for the NZD. This continued throughout the European and North American session to lift the NZD.
GLOBAL MARKETS: Global markets got a shot of “risk on” overnight, as investors grow more confident that policymakers will finally sufficiently address the sovereign debt crisis.
European equities surged 5.3%, with the S&P500 gaining 2.7%. The selloff in US Treasuries continued, sending 10-year bond yields past 2%. Commodities too benefited from a return of risk appetite, with the CRB Index up 2.5%, led by precious metals. In the currency space, the antipodean currencies outperformed, as you would expect in a risk on session.
KEY THEMES AND VIEWS
DELAYED REACTION. Looking at the price action in global markets overnight, you would have thought the world was all of a sudden a better place. But care should be taken in reading too much into the positive tone in markets overnight.
The risk rally is welcome, and perhaps overdue to some extent given the savageness of the selloff last week. But there was no new development that emerged to really explain why risk took off.
Reading the various reports, it seems that markets are rallying on hope that European policymakers will do enough to contain the sovereign debt crisis. But why the market reaction now, and not earlier in the week, when there were already news about a grand plan being put together?
Fundamentally, nothing has changed and we are really none the wiser over what the next act will be in this long running Greek tragedy. The Greek parliament passing the property tax is a positive, but they really had no choice.
The economic data was sparse and not exactly inspiring. So what we have is more likely market repositioning, with the looming month-end and quarter-end rebalancing leading to big reallocations across asset classes, given the big swings that we have seen over the past month.
Headlines will still drive markets for some time, so how the various EU governments vote on the EFSF extensions (which were agreed to in July) will be crucial, especially Germany at the end of the week. Beyond that, focus turns to the much speculated grand plan being worked on by policymakers, which involves leveraging up the EFSF.
Comments out from Germany suggest they are not enthused about expanding the EFSF further (since they will have to cough up the most), so today’s risk on move could easily give way to risk off at some point. Brace for more rocky ride ahead.
OTHER EVENTS AND QUOTES
• Greek Prime Minister George Papandreou: “I promise you we Greeks will soon fight our way back to growth and prosperity after this period of pain… The euro zone must now take bold steps towards fiscal integration to stabilise the monetary union. Let’s not allow those who are betting against the euro to succeed.”
NZDUSD: Dummy pass…
A strong reversal for the NZD will have many scratching their heads this morning. Any positive European news may further accentuate the overnight move of the NZD although there are tough technical levels to take out on the topside to call a return to the 0.80s.
Expected range: 0.7910 – 0.7980
NZDAUD: Second phase…
Anticipation of the RBA’s October cash rate review is starting to play out on this cross. Higher levels are likely although today the NZD has a tough job of it’s own to make higher ground. Expect sellers closer to 0.8000AUD to curb the enthusiasm today.
Expected range: 0.7945 – 0.7995
NZDEUR: Back on attack…
The realisation that yield has its advantages has helped to lift this cross back into the 0.58EUR territory where it should spend the remainder of the local session. European bailout news will be keenly watched to determine what action the ECB is likely to take at next month’s interest rate review.
Expected range: 0.5805 – 0.5885
NZDJPY: Drawn out…
Reasonable demand for the NZD can be expected should this cross dip closer to 60.30 today. Heavy demand from those happy to maintain investments providing a solid yield should ensure further support for the NZD.
Expected range: 60.30 – 61.30
NZDGBP: Late tackle…
Buyers were prevalent on this cross yesterday above the 200 day moving average helping the general cause of the NZD. This helped to lift the cross and ensure a return to the 0.50GBP level. Expect a more confined trading day for this cross today.
Expected range: 0.5045 – 0.5095
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