Economic views and news - Friday, 18 November

ANZ Research

Friday 18th November 2011

OUTLOOK

CURRENCY: The ability of the NZD to hold a key longer term support level should be questioned early this morning. A move lower is likely in the absence of any positive news offshore given the impending NZ election.

RATES: More receiving interest was apparent in the overnight London session. We expect local rates to open a touch lower in yield this morning.

REVIEW

CURRENCY: Any chance of picking itself off the floor yesterday ended when FITCH associated potential US bank credit ratings to the current European crisis. From there the path lower was laid.

GLOBAL MARKETS: The downbeat sentiment continued for much of the overnight European session. A poor Spanish bond auction did not help matters, nor did the downgrade of 10 German banks by Moody’s and warnings by Fitch over Italy. US and European equities fell 1% to 2%. US Treasury yields eased on safe haven demand, with German, Spanish and UK yields rising. Italian and French government 10-year bond yields eased, to 3.61% and 6.79% respectively. The CRB commodity price index fell 2%, with larger falls for crude oil, grains and precious metals.

KEY THEMES AND VIEWS

MONTI: “THE FUTURE OF THE EURO ALSO DEPENDS ON WHAT ITALY DOES”. His new government will first focus on implementing austerity measures passed by the previous administration that aimed to balance the budget in 2013. Additional steps, that may include reinstating property taxes, overhauling the tax system, changing pension rules, trimming the size of the government and modifying labour laws, will be then be introduced. This will not please the voters but with the underground economy potentially 20% of GDP, there is a large potential tax base to tap into. The stakes are high, with the Italian Government recently announcing the 2012 bond auction schedule of EUR440bn, around 25% of total outstanding issuance, which has not been warmly greeted by investors, although bond purchases by the ECB have helped to keep the 10-year yield below 7%. Fitch Ratings said overnight that Italy’s credit rating could be cut to a low investment grade if the nation loses market access. Still, its opinion is that the new government “will prove itself to be credible in pursuing fiscal and structural economic reform”.

OTHER EVENTS AND QUOTES
•          Merkel rejects using ECB as a crisis backstop. “I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis”. French Finance Minister Baroin had earlier called for an enhanced role for the ECB.
•          Philly Fed takes a breather. New orders and shipments both fell (to +1.3 and +7.3 respectively), but remain well above the deep negative readings seen a few months ago. Given the general improvement in the tone of the incoming economic data, including unexpected strength in housing starts and the further decline in initial jobless claims, the tone of US data remains on the improve.
•          The PBOC said that China can’t loosen control over prices. China still faces “extremely loose” global monetary conditions, with the PBOC to continue with exchange rate reform.

NZDUSD: Support tests likely…
Support in the low 0.76USD zone may not be enough to hold things today. Resting on a key support line early in the morning the NZD is likely to test this and move lower towards the next level of support. Topside moves are still being capped by those looking towards next week’s NZ election.
Expected range: 0.7575 – 0.7650

NZDAUD: Still under the pump…
Attempts to move back into the 0.76AUD zone were not sustained as this cross remains close to the key monthly level 0.7583. Expect further potential moves lower once support around 0.7550 is taken out.
Expected range: 0.7545 – 0.7605

NZDEUR: Base jumping…
This cross dropped through support at 0.5665 overnight and now rests on an even more important support level. Expect this level to under a severe test today with the potential to extend lower if broken.
Expected range: 0.5620 – 0.5660

NZDJPY: Also resting on key support levels…
No action yet from the Bank of Japan as the USDJPY side of this equation does little of the heavy lifting required to get it out of trouble. It too is resting on a key support level on the daily charts and a break lower looks likely in the coming sessions.
Expected range: 58.30 – 59.10

NZDGBP: Following the pattern… Some positive UK October retail sales data has enable this cross to move lower as well. Falls on the NZD side should help it get close to the 0.47GBP region in the coming session. Expected range: 0.4805 – 0.4855

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