Friday 4th November 2011
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CURRENCY: The RBA Statement of Monetary Policy will be the focus in our local session. Offshore markets bring day two of the G20, the Greek vote of Confidence and US Non Farm Payrolls.
RATES: Very quiet overnight trading in the kiwi overnight, and while payside interest was apparent, there were no trades. Local rates are expected to open a touch higher in yield.
CURRENCY: Markets have added risk back to the portfolio with the ECB adding stimulus to the EU economy and the Greek debt referendum looks increasingly unlikely.
GLOBAL MARKETS: Market movements were largely dominated by the headlines. Risk rallied with the ECB interest rate cut and with the scrapping of the Greek referendum on the EU bailout. US and European equities rose. US and European bond yields also rose, although Italian bond yields eased to 6.17%. Commodity prices lifted more than 1%, with crude oil and gold up 2%.
KEY THEMES AND VIEWS
ECB TO THE RESCUE. Overnight a unanimous vote by the ECB to lower the benchmark interest rate by 25bps surprised the market. No announcements were made regarding the ECB’s ‘non-standard’ policy measures aimed at boosting liquidity in the euro area, with September’s additional measures yet to largely take effect.
During the Q&A session, the ECB President reminded his audience that the SMP is temporary, limited in amount, and justified by monetary policy considerations. Draghi also noted that any decisions regarding interest rates and bond purchases were separate. Draghi framed the interest rate cut around a forecast sharp decline in inflation to below 2% in 2012, with “inflation to remain in line with price stability over the policy-relevant horizon.”
He acknowledged the impact of “intensified” negative risks to the euro area economy and the fact that some of these risks had already materialised, with the ECB now forecasting a mild Eurozone recession from the end of 2011. Draghi continued Trichet’s urging of significant structural economic reforms and fiscal consolidation in the euro zone, and for the full implementation of the commitments made in last week’s Euro Summit Statement. He also reiterated that the ECB’s remit “enshrined in the treaty” is to maintain price stability over the medium term, and not to be the lender of last resort to governments.
OTHER EVENTS AND QUOTES
• G20 discuss bigger role for the IMF. The IMF is reported to be under pressure to repeat a 2009 move to expand global foreign-exchange reserves, with G20 leaders (who dominate the IMF voting board) alleged to have agreed to an allocation of $250 billion in Special Drawing Rights.
• Greek PM Papandreou clings to power after abandoning the referendum on the Greek bailout. With the referendum triggering a suspension of European aid and with France and Germany treating the Greek referendum as a vote on euro membership, a back down was inevitable.
• RBA statement released at 1.30pm. The key focus for markets will be any further clarification on how close the current stance of monetary policy is to ‘neutral’ following the 25bp cut this week.
NZDUSD: Some sense
The Greek PM back pedalled on the likelihood of the bailout referendum. The markets breathed a sigh of relief, the NZD was no exception pushing briefly but significantly back above 0.7900. Topside moves are likely today. However the US non-farm payroll number tonight is a known boat rocker.
Expected range: 0.7810 – 0.7985
NZDAUD: Local influence
Having created a line of support at 0.7595, the NZDAUD should remain supported here today. RBA SMP should drive the market this afternoon following on from the 25bp cut we saw on Tuesday. Any mention of further cuts should see the cross in demand.
Expected range: 0.7600 – 0.7670
NZDEUR: Getting out of a pickle?
The ECB cut rates to help alleviate ‘mild recession’ risk and Greek PM re-thinks his referendum proposal. NZDEUR was placed on the front foot and erratically but surely stayed that way. NZDEUR will remain supported should the G20 meeting continue to surface positive EU outcomes.
Expected range: 0.5710 – 0.5790
NZDJPY: Tug of war
A change in risk sentiment saw the NZD pull back some gains after a frightful local session yesterday saw the NZDJPY back to printing a big figure of 60 momentarily. This change in sentiment should continue to see the cross continue to prosper in our local session.
Expected range: 61.20 – 62.10
NZDGBP: Slowly slowly
Support today is likely to remain around 0.4920 today as the NZDGBP was supported as the BOE released a dovish statement indicating that growth in Britain is likely to remain weak throughout 2012. Risk lies on the top side today in the lead up to Greek vote of confidence and day two of the G20.
Expected range: 0.4910 – 0.4980
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