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Economic views and news - Tuesday, 18 October

ANZ Research

Tuesday 18th October 2011

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OUTLOOK

CURRENCY: Further consolidation today is expected for the NZD as it awaits a raft of Chinese September data and the RBA meeting minutes. Forays above 0.80USD are not likely today as reality kicks in around the EU situation.

RATES: More interest in the kiwi in the overnight London session, with more receiving interest evident overnight as equity markets sold off. New Zealand interest rates are expected to open a touch lower in yield this morning.

REVIEW

CURRENCY: NZD attempts to push higher were easily thwarted after the German Finance Minister provided a stark reminder that a definitive solution to the EU situation will not be forthcoming on 23rd October.

GLOBAL MARKETS: Risk sentiment took a hit after German Finance Minister Schaeuble threw cold water on a conclusive solution will be reached at this weekend’s EU debt crisis summit. US and European equity indices were down around 2%. US and Germany bond yields fell, although bond yields in the more indebted European economies rose, notably in Greece, Ireland, Belgium, Spain, Portugal, and Italy. Commodity prices fell 0.8%, led by falls for soft commodities and energy. Crude oil and gold prices edged lower.

KEY THEMES AND VIEWS

BACK TO REALITY. After encouraging noises made during the weekend’s G20 meeting, market euphoria that the October 23 EU summit will see the swift resolution to a worsening debt crisis, was dealt a blow by overnight comments.

German Finance Minister Schaeuble noted “the summit will not present [the] final solution for [the] euro zone debt crisis”. These were backed up by comments from German Chancellor Merkel’s chief spokesman Seibert who reiterated that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled”.

The reality was always that European leaders would struggle to deliver the quick ending hoped for and a long and hard road lies ahead. Obstacles to an EU accord include resistance by bankers to a deeper restructuring of Greek debt and discord amongst European leaders over how to multiply the firepower of the EFSF and recapitalize financial institutions.

Illustrating the practical difficulties that lie ahead, Greek finance ministry workers began a 10-day strike, which will further complicate the ability of their government to collect tax revenue. There are also signs that the powerhouse German economy is slowing, and the Bundesbank noted that the outlook for German economic growth has deteriorated as foreign orders fall and business expectations fade. European policymakers are facing increasing calls from the US and other regions to try and stamp out the turmoil that is putting the world economy at risk.

OTHER EVENTS AND QUOTES
•          US vote on China unlikely to pass. US house speaker Boehner ruled out a measure to lift duties on Chinese imports passing through the Republican dominated lower house, after passing through the senate 63-35 last week.
•          ECB’s Trichet: The EU Treaty should be changed to prevent member states from destabilising the bloc; urges stronger euro zone governance.
•          Bank of Finland Deputy head Hakkarainen: The ECB’s won’t allow the interbank market to freeze as they did after the collapse of Lehman’s, with the ECB ready to step up measures to provide liquidity.

NZDUSD: A long wait…
It will be a long week for the NZD as it awaits the outcome on 23rd October of the EU summit. With expectations being managed offshore the NZD should struggle on the day to break higher and remain in a defensive position.
Expected range: 0.7915 – 0.7995

NZDAUD: In two minds…
Support levels should continue to be tested on this cross. The RBA meeting minutes, due this afternoon, may provide some relief however moves above 0.78AUD should be limited to the 0.7825 resistance level currently in place.
Expected range: 0.7765 – 0.7825

NZDEUR: Finding it tough going…
Attempts to push towards resistance at 0.5834 were thwarted as the NZD eased lower. With market expectations of a panacea for European problems being managed out of Germany expect further headlines dampening down a risk on environment. This cross may struggle to reach 0.58EUR+ levels today.
Expected range: 0.5755 – 0.5805

NZDJPY: Topside too tough…
Despite nothing from Japanese officials around the level of the JPY this cross found itself unable to break through resistance at 62.47. The subsequent reversal leaves room for those looking to establish positions under 61JPY. A dip under this level may be seen today.
Expected range: 60.85 – 61.65

NZDGBP: Divergence…
Attempts to break above 0.51GBP were unsuccessful and left this cross with only one course of action.  Stronger UK house price data assisted the move back through support at 0.5063. It should remain in the 0.50GBP zone today.
Expected range: 0.5023 – 0.5063

 



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