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Economic views and news -Wednesday, 7 September

ANZ Research

Wednesday 7th September 2011

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OUTLOOK

CURRENCY: Expect a further easing of the NZD today as Asian markets watch for the reaction to the moves of the Swiss National Bank who have seen red lately and now have placed a minimum level of the EURCHF cross.

RATES: Expect local rates to open with an upside bias following global moves.

REVIEW

CURRENCY: Global attention faded quickly from the RBA’s decision yesterday to miss an opportunity to reflect current market pricing. This saw the NZD fade as well with plenty of holes being found in support levels overnight.

GLOBAL MARKETS: A volatile day in FX after the Swiss announcement (see below). After a brief “risk-on” push, markets turned decidedly dour once the US came online, even after the release of better ISM non-manufacturing data. But if CHF is no longer the safe-haven darling it once was, and markets speculating that the Bank of Japan will be close on the SNB’s heels to push the JPY lower, where can global investors confidently park their money? As it turns out, Scandinavian currencies and gold, and one would think in time, in NZD and AUD (although that has yet to be seen).

US 10yr Treasury bond yields backed off yesterday’s record lows, but didn’t move too far with equities still in the red.

KEY THEMES AND VIEWS

US DATA FAILS TO IGNITE. You would have thought markets might breathe a sigh of relief following the rise in US ISM Non-manufacturing data. Although the detail was mixed, the survey was generally upbeat. However, it seems worries over the European debt crisis continue to be the predominant concern. The question is, what will it take to break the cycle? Would credible US jobs and mortgage reorganisation plans do the trick?

Although there appears to be a growing split between the “bailouters” and the “bailoutees”, with markets priced for Armageddon, the risk is some good news comes along – in the US or Europe.

MORE VOLATILITY ON THE WAY? Keep in mind that there is a lot going on this week, including the German Constitutional Court ruling on Germany’s participation in the Greek bailout and EFSF (Wednesday); BoC and BoJ policy decisions (Wed); RBA’s Stevens speech ahead of Q2 GDP (Wed); Bernanke and Obama speeches (Thursday); BoE and ECB rates decisions (Thursday); G7 meetings (Friday-Saturday), and Chinese monthly data on Friday.

OTHER EVENTS AND QUOTES
•       Swiss National Bank sets a line in the sand. In a statement, the SNB said “The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development”. They went on to say “The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR.CHF exchange rate below the minimum of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities”, adding “even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures”.This really is rolling out the big guns, especially as EURCHF was trading around 8% lower pre-announcement, and with inflation running at 0.2%y/y, they can probably get away with not sterilising some of the intervention.

•       Fed’s Kocherlakota: “The data in August did not justify the additional accommodation provided” (that he voted against) at the last FOMC meeting.

NZDUSD: Further defensive measures required…
Expect a further fall back for the NZD as it faces strong opposition and plenty of activity in offshore markets. Global economic releases are not supportive and a further drop in the overnight Global Dairy Auction will not assist any recovery of sorts today.
Expected range: 0.8180 – 0.8250

NZDAUD: Missed tackles…
Plenty of missed tackles and opportunities for this cross as the RBA decides to sit on the bench and save their reserves for a later date.  Expect support levels to continue to be tested with an extension towards 0.7781 possible.
Expected range: 0.7781 – 0.7850

NZDEUR: Tactical change…
The Swiss National Bank decided to change tactics and confront the opposition head on with their line in the sand. They will be closely watched as markets have a tendency for impatience and willingness to test the resolve of Central Banks. Expect support on this cross around 0.5860 to be further tested.
Expected range: 0.5860 – 0.5905

NZDJPY: Substitute required…
Discussions on whether the BoJ will be next in line to replicate actions of the SNB. At this point the focus for the economy is elsewhere and given the Japanese export business, such a move would be short lived. This cross however remains with the potential of testing support levels further.
Expected range: 63.50 – 64.40

NZDGBP: Fresh legs…
Having tested support at 0.5141 this cross should remain above it today as markets await the Bank of England interest rate announcement tomorrow night. An increase in the asset purchase target to GBP300bio is not out of the question and would weaken the GBP overall.
Expected range: 0.5141 – 0.5178



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