Tuesday 9th August 2011
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CURRENCY: Turbulent times continue for global financial markets. Today’s direction may well be guided by the raft of Chinese July economic data that is out this afternoon. Support for the NZD is now in the high 0.81USD zone.
RATES: NZ rates will open lower here after trading lower in London, and as Australian 3yr bond yields and US 10yr bond yields plumb new lows.
CURRENCY: The NZD could not escape the moves of equity and commodity markets yesterday. It plumbed further recent lows as equity markets continued to be crushed.
GLOBAL MARKETS: Another massive day, starting with the ECB actually implementing earlier rumoured plans to buy Italian and Spanish bonds. The impact was eye-watering: 10yr Italian and Spanish bond yields fell 82bps and 92bps respectively. One would have thought it would have instilled some confidence, but judging by core country bond yields, it has not. Indeed, US Treasury yields are down over 20bps, and are trading at 2.35% at the time of writing. Stock markets continue to evaporate, with losses across Europe, and the Dow down over 4% at the time of writing. Gold rallied to new highs.
KEY THEMES AND VIEWS
SCREEN WATCHING. What can you say on a day like this – you can try and make head or tail of it, or you can stand back and watch in awe (or shock?) as markets break new ground and hit new extremes. After what turned out to be a fairly calm day yesterday, markets got into a tailspin during the Northern Hemisphere session, which kicked off with the ECB buying Italian and Spanish bonds. As one would expect, bond yields in those markets fell, and one would expect yields in the core markets to rise. But they didn’t, and in fact, US Treasuries never budged an inch, grinding progressively lower as the day wore on. So what’s going on? Is this the market telling us that they don’t believe the ECB plan will make a difference, and this is just another stop gap solution? It looks like it, and it’s not hard to see why. For one, EU officials still seem to be in denial. Recall last week, Trichet was still talking about rate hikes. Now he is actively engaged in QE. And today, the EU has said that Spain and Italy don’t need aid, and that declarations by the ECB, G7 and G20 will bring back confidence. Say what! Given the scale of the problem (PIIGS government debt alone stands at around €3.4 trillion, and without exchange rate flexibility or confidence that concrete steps will be taken to get debt down, who wants to touch it. Perhaps worse still, if steps are taken and they involve acute spending cuts (which is pretty well what the only thing that will appease the bond vigilantes), what chance does growth have – particularly if there is no scope for exchange rate adjustment.
What does it all mean for NZ? More caution on the part of the RBNZ, lower interest rates all around, and volatility for the NZD. Indeed, it is not clear that this is NZD positive (on the back of safe-haven buying) or NZD negative (on global recession fears).
OTHER EVENTS AND QUOTES
• S&P cuts credit ratings of Fannie Mae and Freddie Mac. Government Sponsored Agency and mortgage giants had their ratings cut to AA+ today.
• Moody’s affirms US’ Aaa credit rating. In contrast to S&P, Moody’s today affirmed the United States’ Aaa credit rating, noting that it expects the US to take further fiscal measures, and that the US can run higher debt than others.
NZDUSD: Speaking frankly…
Officials have moved to calm markets with talk and in some cases action. A close focus on the Chinese July data today may well quell some fears but the fragility of current conditions will not escape many. Downside support may again be tested as rebalancing takes place.
Expected range: 0.8180 – 0.8310
NZDAUD: Locked and loaded…
Markets have finally moved back close to pricing inactivity by the RBNZ in September. This cross ventured sub 0.80AUD briefly overnight only to run into support. Topside resistance at 0.8080 looks ready for a thorough test.
Expected range: 0.8020 – 0.8080
The ECB has been active in buying Italian and Spanish bonds overnight. While this has lowered their yields the underlying safety of them has not altered at all. Expect support for this cross as the realisation remains that the EU and US situations are dire.
Expected range: 0.5785 – 0.5850
NZDJPY: Early warnings…
Moodys comments around Japanese intervention in currency markets and the likely impact on ratings should deliver a sobering message. Support around the 200 day moving average looks to be tested today.
Expected range: 63.50 – 64.95
NZDGBP: Follower the leader…
Expect further concerns to arise around the state of the UK economy as riots appear to be spreading. Uncertainty should always weaken currencies and this may provide a not inconsequential bounce for this cross having completed a test of a key technical level overnight.
Expected range: 0.5025 – 0.5095
Source: ANZ Research
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