Economic views and news - Monday, 19 December

ANZ Research

Monday 19th December 2011

OUTLOOK

CURRENCY: A marginally positive start to the week is expected for the NZD as markets look towards growth numbers due later this week. Resistance levels should be investigated early as the holiday season approaches.

RATES: Two and 3-year swap rates both traded down 1bp overnight, in a very quiet session.

REVIEW

CURRENCY: The consolidation of the NZD turned into a positive finish for the week as overnight markets took a risk-on approach. This was in spite of several further setbacks on the European front.

GLOBAL MARKETS: A quieter session for markets Friday night NZ time, with light volumes traded, and a mild risk-on tone, at least initially. Equities half-heartedly continued their rally from Thursday, but ran out of steam on more poor headlines from Europe. Treasuries rallied. Crude oil futures fell, for their largest weekly decline since September. Hard commodities showed some signs of life, with many metals rising. Gold rose, but not enough to save it from its biggest weekly drop in three months.

KEY THEMES AND VIEWS

NO LET UP FROM NEGATIVE HEADLINES. That’s the trouble with having three ratings agencies. Fitch put France on negative outlook and warned they may cut credit ratings of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus. Fitch didn’t pull their punches, commenting that a “comprehensive” solution to Europe’s crisis was “technically and politically beyond reach,” and “of particular concern is the absence of a credible financial backstop.” Meanwhile Moody’s cut Belgium by two notches on Friday (and maintained a negative outlook to boot), noting particularly the contingent liabilities from the Dexia bailout. Despite these headlines, Spain and Italy bond yields fell overnight, with ten year yields down 20 and 15bp respectively. Many are putting this impressive fall down to banks buying the bonds as eligible collateral for when the ECB starts offering 3-year loans next week (a galloping stampede for these by cash-starved banks is likely). There’s a pretty fat margin to be made doing that particular trade. Quantitative easing by stealth? The game of monetary musical chairs continues, but one suspects the chairs are about to be repossessed.

OTHER EVENTS AND QUOTES:
•         The US completed its withdrawal from Iraq, almost nine years after the invasion.
•         Protests in Egypt have gone into their third day. The Egyptian army has been cracking down on the pro-democracy action.
•         Unnamed senior Troika official casts doubt on whether the Greek debt swap will go through: “Our objective is still to have a voluntary operation. If you ask me: is there a guarantee that there will be a voluntary operation? Of course there can never be a guarantee.”
•         A cyclone in the Philippines killed 650+ over the weekend.
•         US politicians allowed their government to limp on, by agreeing to extend payroll tax cuts by two months and passing a spending bill to avert a government shutdown.

NZDUSD: Positive finish…
While a lift going into the close of the year is not expected to take the NZD back above 0.80USD it may well spend this week edging up towards the 0.78USD zone. Initially it will have to take out the 200 hour moving average at 0.7661 and a stronger EUR will be needed to accompany such a move.
Expected range: 0.7595 – 0.7660

NZDAUD: Hard to stay down…
Markets have been frustrated by the inability of this cross to fall through key support levels. As such, positional squaring and further underlying demand meant a lift towards the end of the week. Finishing this week above 0.7684 (200 day moving average) would be significant.
Expected range: 0.7608 – 0.7684

NZDEUR: May the time has arrived…
Some decoupling action may be the order of this week as the NZD finished the week above a major trend down channel. An extension back into the 0.59EUR zone cannot be ruled out this week.
Expected range: 0.5810 – 0.5870

NZDJPY: Doing the hard yards…
Given the NZD has been left to determine the moves on this cross, expect an extension towards the 200 hour moving average at 59.78 later this week.
Expected range: 59.05 – 59.78

NZDGBP: Waiting game…
A stronger GBP failed to eliminate all the NZD strength on this cross. A move back above the 200 day moving average (0.4978) is possible this week providing the NZD remains on course to move higher.
Expected range: 0.4895 – 0.4935

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