Wednesday 21st September 2011
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CURRENCY: Offshore markets continue to live in hope that tomorrow’s US FOMC meeting will deliver further “stimulus” and as such the risk on switch will light the way today. Resistance at 0.8281 could be tested in early Asia.
RATES: There was some activity in NZ rates during the London session, but only in small volumes. Swap yields are expected to open slightly higher.
CURRENCY: Extremely erratic headline and flow clearance trading was experienced yesterday and overnight by the NZD. Support at 0.8150 remained unbroken and the recovery was driven by good demand across the board.
GLOBAL MARKETS: Markets brushed off some negative headline news and focused on some positives for a change, sending equities higher. The Euro Stoxx 50 gained 2.1%, while the S&P500 was up 0.5% at the time of writing. Despite the recovery in equities, US bond yields were little changed as the market is pricing in further action by the Fed tomorrow via “Operation Twist”. Gold and oil prices both gained, benefiting from a lower USD.
KEY THEMES AND VIEWS
LIVING ON HOPE. Given the further negative news yesterday, which included the surprise downgrade of Italy by S&P, rumours that Greece could hold a referendum on exiting the euro, a story about a major European corporate pulling money out of European banks and depositing direct with the ECB, and Chinese banks pulling swap lines with several European banks, you would have expected another risk off day in markets. Instead, we actually saw equities gaining, and this was despite the economic data coming in below expectations and the IMF downgrading their growth forecasts. It appears that the catalysts for the overnight market moves are increased expectation that Greece will satisfy the requirements for further bailout funds following “productive” talks with the Troika, Greece fully repaying €769m of bonds that matured yesterday thus avoiding default, and that the FOMC will provide additional stimulus tomorrow. None of these are new or unexpected of course. After all, it is very reasonable to expect the FOMC to engage in “Operation Twist” tomorrow and for Greece to get its second tranche of cash from the Troika. Yet, the fact that markets seem to latch on to them shows that they are trading off hope, or lack any conviction, and most likely both. Hence, brace for more “risk off” moves one day, only to be followed by “risk on” another day, even though there has been little new development. Turning to the IMF’s latest forecasts, global growth is not expected to grow by 4% in 2011 and 2012, down from 4.3% and 4.5% respectively. But the IMF notes that “the global economy is in a dangerous new phase” and that “downside risks are growing”. The IMF projections assume that European policymakers can contain the crisis, and that US policymakers can strike a balance between supporting the economy and undertaking medium-term fiscal consolidation. Now that is really living on hope.
OTHER EVENTS AND QUOTES
• IMF Chief Economist Olivier Blanchard: “There is a wide perception that policymakers are one step behind the action, markets. Europe must get its act together.”
• The overnight GlobalDairyTrade auction saw dairy prices fall 2.1% from the previous event. This is the seventh consecutive decline with the weighted auction price now down over 18% since early June.
NZDUSD: On attack…
With rising expectations of further US measures, expect the NZD to look at resistance today around 0.8281. While any break, similar to the one last week, may not be sustainable in the short-term without positive Q2 local data to assist, the NZD should not back off significantly at this point.
Expected range: 0.8210 – 0.8281
NZDAUD: Lining up…
Yesterday’s moves on this cross saw strong resistance at 0.8085 before the RBA meeting minutes dumbfounded many and delivered a complete reversal of the move higher. Resistance at this point remains in place. Support under 0.80AUD would only be seen today if the NZ economic data disappoints.
Expected range: 0.8005 – 0.8085
The situation in Europe remains troubling for the EUR. This cross is currently knocking on the key resistance level of 0.6038 and may well break through this during Asian trading today. Any run higher will be limited today.
Expected range: 0.6005 – 0.6055
NZDJPY: Play on…
Another dip to the mid 62JPY region overnight and yield support materialises to lift it back into the 63JPY zone. With further comments from Japanese officials around the level of the USDJPY doing nothing to inspire this cross higher, expect another day where dips will be sought by offshore investors.
Expected range: 62.55 – 63.65
With the UK economic picture tied tightly to that of the EZ expect relative weakness for the GBP to continue. Another move higher may see resistance at 0.5275 tested but not today.
Expected range: 0.5225 – 0.5275
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