Economic views and news - Friday, 14 October

ANZ Research

Friday 14th October 2011

OUTLOOK

CURRENCY: Selling interests stacked up at 0.8000USD have been, and are likely to be, enough to cap proceedings today. Chinese inflation data due this afternoon will be the focus of international markets.

RATES: A reasonably quiet night’s trade in NZD rates in London, but with global yields lower, NZ rates will open unchanged/slightly lower this morning.

REVIEW

CURRENCY: Early morning attempts to crack the 0.80USD barrier were easily thwarted. Offshore and local selling interests dominated activity in the NZD as overnight the EUR handed back some of it’s recent gains.

GLOBAL MARKETS: A pretty tame overnight session, with mixed price action today as the so-called “risk-on” rally of the last week took a breather and most markets chopped around. Our London desk reports that there were no dramatic headlines overnight, although there were a few unaccredited headlines about the negative effect on the banking sector of the private sector involvement in Greek debt write-downs. Among them were rumours that a large German bank might need €9bn of new capital to achieve a 9% core tier 1 ratio. Into the London afternoon stocks drifted lower and bond yields fell. US data did not have any impact, but sentiment got a wee bounce when it became official that Slovakia had approved the EFSF expansion (see below).

KEY THEMES AND VIEWS

SETTING UP FOR A FALL? With little in the way of headlines, and no fresh positive news out overnight, the improvement in sentiment took a breather. The Slovak EFSF vote did pass overnight, clearing the way for the facility’s expansion, but it was widely expected that the vote would ultimately succeed and thus market reaction was minimal. The 64 million dollar question is; what’s next? We’ve certainly been surprised by the magnitude of moves over the past week, and we are now somewhat fearful that the hurdle has been raised so high that we’re going to need to see some real progress at next week’s EU debt summit to satisfy the markets. Closer to home, yesterday’s better than expected Australian employment data, has seen the market price out rate cuts, again potentially leaving the market vulnerable to downside surprises. But the only thing that matters here this weekend is the rugby!

OTHER EVENTS AND QUOTES
•          German banks plan Greek haircut of up to 60%. Bloomberg news reports that German banks “are preparing for losses of as much as 60 percent on their Greek government debt”, citing connected sources. The article also says that Deutsche Bank CEO Ackerman (who led talks that led to the 21% haircut already agreed) will go to the Brussels debt crisis summit next week seeking a larger reduction. Whatever is agreed does of course go hand in hand with the need for bank recapitalisations.
•          Outgoing ECB President Trichet urges politicians to get it sorted. In an interview today, Trichet said “it’s our duty to tell governments and other institutions what we see, but up to them to take the appropriate decisions”. Staunch to the end, he said the ECB’s role “is to deliver price stability”, adding that he’d have preferred to leave at a “quieter” time.
•          The 3rd quarter US bank reporting season is underway, with JP Morgan Chase reporting a 30% fall in profits. It said its investment bank had shed 1100 staff, and that there may be more layoffs yet.

NZDUSD: Ante up…
Further corrective moves are likely for the NZD as it fails to break the 0.8000USD at the first recent attempt. Expect overnight lows to be revisited during the local trading session.
Expected range: 0.7890 – 0.7950

NZDAUD: Short changed…
Support at 0.7781 has held on this cross despite a solid Australian employment release yesterday. This cross is likely to find further exporter support ahead of this key level with importers choosing at this point to wait and see whether a slowing Chinese economy will have a more detrimental effect on the AUD.
Expected range: 0.7781 – 0.7828

NZDEUR: Locked up…
The tandem moves of this cross are likely to continue today. If markets lose some of their hope and optimism around the EZ changes that are yet to be detailed then another attempt to break resistance at 0.5786 is possible. It will not be easy to get through this level.
Expected range: 0.5740 – 0.5780

NZDJPY: Too tough…
Despite the obvious yield benefits and discussion around a Japanese currency transaction tax this cross has failed to push higher. The reversal, if technically based, may well dip towards 60.13 to cover recent moves.
Expected range: 60.48 – 61.20

NZDGBP: Struggling…
Attempts to break technical resistance at 0.5063 were limited and short lived. Today expect this cross to spend further time below this level.

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