Thursday 1st December 2011
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CURRENCY: Additional liquidity for offshore markets has lowered risk concerns overnight. However some of the gains made should be handed back as markets realise these actions are undertaken as of need rather than want.
RATES: The ongoing selloff in global rates will see payside interest dominate the NZ market today. Expect swap yields to open around 4bps higher.
CURRENCY: Despite initially handing back some gains yesterday the Australasian currency bucket led the way higher overnight. Central bank actions and actions by Italy in their liquidity management lit the fuse.
GLOBAL MARKETS: A large risk on session right across global markets overnight, as policy action taken by major central banks alongside positive US data provided a boost to investor sentiment. European equities rose 4.3% while the S&P500 was up near 3.5%. For the week so far, the Euro Stoxx 50 is up 10.4%. US Treasuries fell in price, with the 10-year bond yield rising to 2.05%. Commodities also got a boost with oil and copper hitting two week highs. Risk currencies gained the most, with the antipodeans leading the way.
KEY THEMES AND VIEWS
RISK ON SPURRED BY COORDINATED ACTION. We had been waiting for politicians to serve up something to ease the escalating European debt crisis. What we got overnight instead, was a coordinated effort among the major global central banks to ease strains in financial markets. The cut to the cost of dollar swaps was a surprise (and welcome) move and coming on top of the PBOC’s cut to their RRR (whether this was also coordinated or not we won’t know), was the spark for a big rally in risk assets. And it wasn’t just central bank action that provided the good news.
The economic dataflow out overnight from the US, Germany and Canada were all positive as well. There was certainly lots for the market to cheer about. Yet, central bank actions overnight tell us three things. First, the European crisis is getting worse and policymakers are getting increasingly worried about the possibility of a credit crunch in Europe (note that the Fed said that US financial institutions do not face difficulty obtaining liquidity in short-term funding markets). Second, central banks are able to coordinate among themselves and reach agreement much faster than politicians – which means the burden still falls on the ECB to do its part rather than wait for politicians to sort things out in the Eurozone. Third, the PBOC move suggests activity in China is slowing more rapidly, and we are likely to get a very weak PMI reading today. The steps taken overnight will certainly help ease some of the pain, but we are still waiting for the longer-term solutions to emerge.
OTHER EVENTS AND QUOTES
• The US Federal Reserve, along with the ECB, BoE, BoJ, BoC and SNB, announced coordinated actions to support liquidity especially to European Banks by lowering the cost of dollar swaps by 50bps (to OIS plus 50bps). The swap arrangements have also been extended to 1 February 2013.
• The People’s Bank of China cut the reserve requirement ratio (RRR) for all depository financial institutions by 50bps effective 5 December 2011. Our China economists see a further RRR cut as possible in December, followed by three more RRR cuts in H1 2012.
NZDUSD: Coming to terms…
An explosive rally overnight may give way to the realisation that actions by offshore central banks are being taken because they have to…not because they want to. Expect the NZD to continue trading erratically as liquidity remains an issue. Support around the low 0.77USD area should provide an initial base with a topside cap around 0.7834 currently.
Expected range: 0.7734 – 0.7834
NZDAUD: Falling behind…
Stellar Australian data yesterday (Q3 Capital Expenditure) ensured that the NZD was going to be a bit player in any currency move overnight. Expect this cross to remain on the back foot with a move to the low 0.75AUD levels possible during the remainder of this week.
Expected range: 0.7535 – 0.7605
NZDEUR: Spot the difference…
There is trouble in Europe and as some solutions are being implemented others are being dreamed up. Reality remains any permanent solution will require significant pain and time and as such the relative attractiveness of the NZD cannot be ignored.
Expected range: 0.5731 – 0.5811
NZDJPY: Continuing the work…
The NZD side of this cross continues to be doing the heavy lifting ensuring a move back above 60JPY. Expect difficulties remaining this elevated given the speed of the move.
Expected range: 59.80 – 60.80
NZDGBP: Day and night…
Difficulties of yesterday’s session for this cross were eliminated in one foul swoop overnight when major central banks took liquidity action. Expect trading to remain in the 0.49GBP range today.
Expected range: 0.4925 – 0.4975
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