Tuesday 15th November 2011
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CURRENCY: Expect further failed attempts to the topside for the NZD today as Europhoria wanes further.
RATES: Expect swap rates to open a touch lower after being marked lower in London trade, and bonds to be well supported as the NZGS 11/11 matures.
CURRENCY: Failed topside attempts off the back of rather questionable positive local data were the order of the local session yesterday. Overnight increasing European concerns ensured the fate of the NZD was sealed.
GLOBAL MARKETS: It was a much calmer and quieter start to the week in Northern hemisphere markets overnight, and quite surprisingly, the wave of market optimism that followed former Italian PM Berlusconi’s resignation was short-lived. There was no US data, so markets had to contend with a poor Italian 5 year bond auction, UniCredit’s posting of a record loss, and talk by Angela Merkel of tighter budget rules, closer political union, and opposition to jointly issued Eurobonds. So, there you have it – the optimism lasted barely a day, and we’re back to watching Italian and Spanish bond yields rise as German bunds rally. Not surprisingly, equities were heavy for most of the London session, closed down in Europe, and are down in the US at the moment.
KEY THEMES AND VIEWS
OPTIMISM FADES. Europe is again in the headlines, and although it is getting somewhat tiresome, and we suspect it will only be a matter of time before the market starts to focus on the US, and the improving data there. This could be the week – especially as we have a heavy data schedule, with PPI, retail sales, CPI, housing data and a few manufacturing surveys all out in the next few days. But for now, the focus is back on Italy following a poor auction result, as noted earlier. At issue was the fact that the 5 year auction cleared at a yield of 6.29%, 0.97% higher than last month’s auction, and a euro-era high for an auction clearance yield. By all accounts, the Italian public has become obsessed with what they call “lo spread” – the spread between Italian and German bunds, with heavy coverage in the press. No doubt today’s 37bp widening will make headlines tomorrow. For us “downunder”, it’s just more uncertainty. Second guessing how the market will react to events seems futile – and we have virtually resigned ourselves to monitoring Italian 10yr bond yields - which we regard as the key bellwether. While we won't be taking a purely binary approach, broadly speaking we view anything above 6% as grounds for caution, and anything below 6% (provided not overwhelmingly caused by ECB intervention) as a sign that the market is taking a more constructive view of Italian austerity. On that score, last night rates as a fizzer.
LOCAL HIGHLIGHTS. The two key events today are the RBA minutes and the maturity of the NZGS 11/11 bond. We’ll be watching the tone of RBA comments closely, viewing them as a sort of proxy for China growth risks. And of course, with the duration of the ANZ Govt Bond Index set to jump by around 0.75 years tonight, bonds should be extremely well supported, flattening the curve.
OTHER EVENTS AND QUOTES
• Italy’s biggest bank posts record loss. UniCredit posted a record loss of €10.6bn in Q3. The loss was over €3bn more than analysts expected, sparking a slide in banking stocks across Europe.
NZDUSD: Behind the façade…
Looking deeper into local data yesterday did nothing to alleviate the reality that the local economy continues to face strong headwinds. These headwinds will ensure that the NZD struggles in the short-term to make any real ground, particularly against the USD. Support in the mid 0.77USD area may be tested today.
Expected range: 0.7750 – 0.7805
NZDAUD: Tightening up…
The release this afternoon of the RBA November Board meeting minutes may help to keep this cross away from support levels. The possibility of further Australian interest rate cuts will help to keep a base just above 0.76AUD in place for the short-term.
Expected range: 0.7605 – 0.7675
NZDEUR: Talkfest continues…
Headlines continue to dominate EUR moves as optimism quickly fades. The task at hand is one of monumental proportions, and solutions, let alone the implementation of them, will not happen overnight. Further EUR weakness may counter moves of the NZD leaving this cross unable to test key support at 0.5665 currently.
Expected range: 0.5695 – 0.5745
NZDJPY: Probing support…
Limited topside for this cross again as it looks to probe support under 60JPY. It should move close to the next level of demand around 59.80 but may take a further day to do so.
Expected range: 59.80 – 60.80
NZDGBP: Changing winds…
This cross continues to also remain above key support assisted by developing expectations of a weaker UK economic outlook. At this point this cross should avoid a deeper dip and remain confined within a tight range today.
Expected range: 0.4870 – 0.4920
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