Economic views and news - Wednesday, 19 October

ANZ Research

Wednesday 19th October 2011

OUTLOOK

CURRENCY: Contracted ranges are again likely today as the NZD looks to push the technical boundaries. It should not deliver any surprises while waiting on offshore momentum to break free.

RATES: A quiet overnight London session with few kiwi trades. Given overseas moves, local yields will open a touch lower in yield today.

REVIEW

CURRENCY: The defensive moves of the NZD ensured a deeper dip overnight that extended to the 200 hour moving average. The subsequent bounce assisted in part by a stronger global dairy auction has been limited.

GLOBAL MARKETS: The unwinding in risk sentiment in Europe continued today, sparked by Moody’s comments on France. US equities rose, supported by banking stocks. The Euro Stoxx 50 fell 0.4%, with French equities down about 0.8%. US and German bond yields fell, while French, Italian and peripheral European bond yields rose. French 10-year yield spreads to German bunds widened to a euro era high. CRB commodity prices tracked sideways. Oil prices rose nearly 2%, whereas gold prices fell.

KEY THEMES AND VIEWS

DIVISIONS MAY HOLD BACK PROGRESS ON EU SUMMIT. Reported differences between Germany and France may delay the rescue plan for Greece being sealed this weekend. Germany is pushing for banks to accept cuts of 50%to 60% on their Greek bond holdings, while France (whose banks are amongst the largest holders of Greek government debt) is insisting leaders should only make technical revisions to the 21% cut agreed in July. With Chancellor Merkel noting the weekend summit will be an “important step” that will make a “clear commitment” to defending the euro, “further steps will still follow”. While European officials recognize their responsibility to stop the crisis, “this will require tough, long-term work.”

FRANCE IN THE SPOTLIGHT. Moody's in its annual credit note on France noted that "the government's financial strength has weakened, as it has for other euro area sovereigns, because the global financial and economic crisis has led to a deterioration in French government debt metrics - which are now among the weakest of France's Aaa peers". It warned it might start a review of France’s creditworthiness in the next three months, due to France’s worsened economic outlook and a growing EFSF bill. The Moody’s warning came as the official growth forecast for 2012 (1.5%) was deemed “probably too high” by French Finance Minister Baroin.

OTHER EVENTS AND QUOTES
•          Dairy prices rose 1.7% in the GlobalDairyTrade auction. Wholemilk powder prices rose 5.7%, while skim milk powder prices rose 3%. Price falls were observed for the other components.
•          Federal Reserve Chairman Bernanke said the Fed is likely to rely more on public communications as a policy tool to provide clarity about the likely future path of interest rates. The FOMC has established a working group to study transparency initiatives.
•          US Bank shares rebound. Improving credit quality and favourable one-off adjustments ($4.5bn) contributed to a $6.23bn Q3 profit for the Bank of America. Despite Goldman Sachs reporting a $393m loss, its 2nd quarterly loss in 12 years, bargain hunters drove the stock higher.

NZDUSD: Waiting mode…
Further moves within a contracted technical range are likely for the NZD today. Having tested support overnight it may well lift marginally towards the 55 hour moving average currently at 0.7974 but again extensions back into the 0.80USD territory are not likely today.
Expected range: 0.7900 – 0.7975

NZDAUD: Ready…steady…
The RBA October board meeting minutes confirmed the overall belief that the ability to lower the Australian cash rate is almost matched by the desire. This provided no support for a lacklustre cross as hope diminished and it moved lower. More of the same is likely today.
Expected range: 0.7728 – 0.7798

NZDEUR: Remaining calm…
With mixed messages and further waiting time likely before details are unveiled of the EU package expect this cross to remain capped around the 0.5800EUR level.
Expected range: 0.5755 – 0.5805

NZDJPY: By the book…
A contracted range is also likely for this cross today. Markets will need further detail to the announcement that the Japanese Government and the Bank of Japan will form a special team to monitor initiatives designed to address the strong JPY before reacting.
Expected range: 60.48 – 61.50

NZDGBP: Pushing higher…
A test of support was delivered before a GBP turnaround. Higher UK September CPI ensured concerns emerged lifting this cross. It should not make the 0.51GBP zone today as NZD sellers emerge closer to this level.
Expected range: 0.5033 – 0.5073

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