Economic views and news - Friday, 21 October

ANZ Research

Friday 21st October 2011

OUTLOOK

CURRENCY: The NZD may well receive a further mauling at the hands of poor European news as the long weekend approaches. Next week’s opening will be of significance if nothing substantial is delivered from the EU Summit.

RATES: Trading in NZD rates was quiet in London, and with markets still whippy we will probably open unchanged, or perhaps a tad lower as a circumspect tone descends on the market.

REVIEW

CURRENCY: Attempts overnight to break higher were quickly extinguished as the NZD ends up lower this morning. The lowering of German growth forecasts will not help an already in trouble European market.

GLOBAL MARKETS: Our London office describes the overnight session as “frustrating”, with markets getting whipped around by often conflicting headlines – the most significant being that “the plan” for Europe will be delayed again – as detailed below. Although the data didn’t feature much, some of it was pretty upbeat – including the US Philly Fed index, which surged from -17.5 to +8.7, and UK retail sales which jumped by 0.6%. Equities took a hammering, and Italian 10 year bond yields are right on 6%, having, having risen while German yields fell. US stocks have been more volatile, having lost ground before recovering on talk of combining the EFSF with the ESM. Meanwhile, the Greek parliament has just started to vote on the austerity package as rioting continues on the streets.

KEY THEMES AND VIEWS

EUROPEAN PLAN DELAYED. Germany and France have called for a second summit to be held by October 26th to agree on the debt package to be presented (presumably not publically) this weekend. In other words, the plan this weekend is to have a plan. This means we will not get concrete news over the weekend as we had hoped, and instead have to wait till Wednesday (unless that meeting is also deadlocked or delayed). Is this the European political process showing its true colours again? It would seem so.

There is stiff German opposition to the French call to give the EFSF a banking license, which would allow it to leverage up using ECB funds. Reuters leaked a draft statement from the summit, but it was missing the gutsy bits yet to be agreed – like how the EFSF will be leveraged, plans for bank recapitalisation and the size of the Greek haircut.

Later in the European session there was news the negotiations have apparently started in relation to combining the EFSF (which is supposed to be temporary) with the European Stability Mechanism (or ESM – which is supposed to be permanent), which would see the capacity increase (without leverage) to €940bn. Is this all getting too confusing? Yes, it is, and the overwhelming sense you get from the headlines is that we are miles away from consensus, let alone resolution.

Considering where market pricing lies (look at the rallies in equities, the NZD, and the rise in bond yields), the hurdle for the European “plan” is high indeed, and it’s going to need to be succinct as well. Overtones won’t do it – we need to see commitments, dates and numbers.

OTHER EVENTS AND QUOTES
• Colonel Gaddafi is dead. The media is reporting that he was captured by rebels but succumbed to wounds suffered in the attack, near Sirte.
• The German government has revised down its 2012 growth forecasts from 1.8% to 1.0%. Hardly welcome news from Europe’s powerhouse.

NZDUSD: Use it or lose it…
The NZD will remain on the back foot for the remainder of this week. Tests of support in anticipation of a poor weekend outcome for the EU summit should see lower levels throughout today. Spikes higher, similar to yesterday, will find willing sellers.
Expected range: 0.7889 – 0.7959

NZDAUD: Knock-on…
At this point the cross has managed to consolidate above initial support at 0.7722. That level may well remain in play today but if broken an extension into the 0.76AUD zone is likely.
Expected range: 0.7722 – 0.7772

NZDEUR: Red card…
Expect European officials to be given a red card by markets to begin next week. Efforts to stitch together a credible package that crosses sovereign lines is a tough ask. As such this cross should remain supported off the back of a weaker EUR.
Expected range: 0.5740 – 0.5790

NZDJPY: Dummy pass…
Support tests are likely for this cross as it has spent another day within familiar ranges. Expect a move closer to the 60JPY level as the NZD suffers from the malaise of the EUR.
Expected range: 60.48 – 61.50

NZDGBP: Caution…
Moves below the 0.5000GBP level are possible to finish off this week as the moves of the NZD lead the way. An extension towards 0.4987 is expected to close out this week.
Expected range: 0.5013 – 0.5063

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