Economic views and news - Monday 15 August

Monday 15th August 2011

OUTLOOK

CURRENCY: The fortunes of the NZD will again be largely dependent on moves in equity markets. Expect further tentative topside tests as some level of calm returns to the market.

RATES: Despite a quiet London session, there will likely be downward pressure on NZ long rates following global moves Friday.

REVIEW

CURRENCY: Markets had exhausted their energies after a massive week. Support tests for the NZD found appropriate buyers as it continued to play out classic retracement potential.

GLOBAL MARKETS: Friday was another risk-on day on the whole, despite some pretty lacklustre data. Equities rose, perhaps assisted by widening bans on short-selling of financial stocks, while gold fell on reduced safe-haven demand. The US sharemarket had its largest swings ever last week – and one suspects there’s more to come. Treasuries gained, with the 10-year yield down 9 points. Oil futures fell slightly on the back of the US consumer confidence shocker, but the data only temporarily dented the equities rally. Other commodities held up.

KEY THEMES AND VIEWS

POOR DATA BUT NOT ONE-WAY TRAFFIC. In the US, University of Michigan Consumer Confidence plunged from 63.7 to 54.9, to just below its 2008 lows, taking economists by surprise with the rapidity of its fall (a much milder drop to around 62 had been anticipated, and lowest pick of almost 70 economists was 59). Retail sales for July were more positive, but are a backward-looking indicator, whereas confidence gives an – albeit imperfect – guide to coming months. Sales growth was the strongest in four months, and the previous month was also revised up slightly. It’s not likely enough to convince anyone that the US consumer is currently in a good space. But to provide some balance, jobless claims (released last Thursday night NZ time) have been trending down in recent months, providing some hope.

Meanwhile in Europe, French GDP growth for Q2 came out at a big fat zero, not what you want when the market is starting to look sideways at both your sovereign debt and your banks. To top it off, EU-wide industrial production plunged 0.7 percent in July, whereas it had been expected that it had held steady. All-up, not a data round-up to sooth the nerves of jittery markets.

ITALY PASSES AUSTERITY BUDGET. It might not be quite as vicious as the Greek version, but it’s still going to hurt. The Italian Cabinet yesterday approved 45.5 billion euros in deficit cuts to balance the budget, as demanded by the ECB in exchange for its bond-buying. Measures included a higher capital gains tax, higher taxes for the rich, and cuts in government spending, including lower transfers to the regions. PM Silvio Berlusconi was apologetic to his tax-paying voters: “Our heart is bleeding as we have always maintained that we wouldn’t put our hands in the pockets of Italians, but the international scenario has deeply changed.”

OTHER EVENTS AND QUOTES
• Australia can “ride out” the storm, claimed Treasurer Wayne Swan in the weekend, citing low public debt, low unemployment, a massive pipeline of investment and a projected government surplus next year. Time will tell, but for NZ exporters’ sake let hope he’s right.
• Calls for Eurozone fiscal union. Calls for joint Eurobonds came from unsurprising quarters over the weekend: Italy, Greece, and non-member the UK (whose taxpayers would not be on the hook).

NZDUSD: Looking offshore…
Despite support for the NZD, currently under 0.82USD, directional moves should be guided by offshore markets. Resistance levels will be tested but will take time to be investigated as markets look for a lowering of risk concerns.
Expected range: 0.8280 – 0.8356

NZDAUD: Waiting on RBA minutes…
Expect a patient wait for this cross today and more trading within recent ranges. Tomorrow’s RBA August meeting minutes release should help add clarity and topside moves to this cross with resistance around 0.8080AUD remaining the main obstacle.
Expected range: 0.7985 – 0.8075

NZDEUR: EU arena heating up…
The Italian job on austerity might be enough in the short term until the general strikes begin. The Swiss appear to be getting more serious about the strength of the CHF with possible announcements later in the week likely to further unsettle markets. This cross continues also to retrace recent falls with the next level of resistance at 0.5866 the target this week.
Expected range: 0.5816 – 0.5866

NZDJPY: Familiar official rhetoric…
A similar picture in regards to officialdom concern on the strength of the JPY. Any short-term success by BoJ intervention would send this cross back above resistance at 64.58.
Expected range: 62.90 – 64.58

NZDGBP: Knocked up…
Resistance levels should be tested on this cross despite a slightly stronger UK Q2 construction output released on Friday. Expect the 200 hour moving average to be taken out early in the week.
Expected range: 0.5080 – 0.5130

Source: ANZ Research

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