Wednesday 7th December 2011
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CURRENCY: Another day where the NZD looks to offshore for guidance on moves. Expect a topside cap to be lowered with the potential for further support investigations given the approaching RBNZ MPS/OCR and EU summit.
RATES: Interest in NZ rates was light during the offshore session ahead of the RBNZ tomorrow. The local market will also see light liquidity today, with swap yields expected to open unchanged to slightly lower.
CURRENCY: Attempts to move higher were thwarted easily after warnings came from S&P on the ratings of 15 Eurozone countries and the RBA confirmed expectations with a 0.25% cut to the Australian cash rate.
GLOBAL MARKETS: The S&P announcement weighed on European shares, though the Euro Stoxx 50 index ended up falling by only 0.5%. US equities were unchanged, and US Treasuries traded sideways without much real direction. The oil market continues to keep a nervous eye on developments in Iran, helping to hold prices up. In the currency markets, the Swiss franc suffered the largest decline following data showing the Swiss economy entering deflation.
KEY THEMES AND VIEWS
SHOT ACROSS THE BOW FROM S&P MIGHT DO SOME GOOD. Yesterday’s S&P announcement that it had placed 15 Eurozone countries on credit watch negative saw the expected initial negative reaction in markets. Indeed, with two Eurozone countries (Greece and Cyprus) already on credit watch negative, this means that the whole Eurozone area has been marked for potential mass downgrades. In some respects, this was not a total surprise, and France’s triple-A rating had been looking shaky of late. But the unprecedented move by S&P to put all the countries on notice means that even Germany gets tarred.
What was surprising though, was the overall market reaction. Rather than seeing a big risk of move across markets, the S&P announcement was actually viewed as a positive by forcing politicians to reach agreement at the EU leaders summit. Indeed, German Finance Minister Schaeuble said that the S&P warning was the “best encouragement” to reach a solution. The best indication of this is the continual decline in Italian 10-year bond yields to 5.87% from near 7.4% only a week ago. The pressure is now really on given that markets are pinning a lot of hope and faith in EU politicians. The ECB will likely do their part when they ease rates tonight. Let’s hope the politicians finally get it right this time.
OTHER EVENTS AND QUOTES
• The RBA cut the cash rate by 25bps yesterday to 4.25%. Our Australian colleagues expect another 25bp cut in February next year.
• The Bank of Canada left their policy rate unchanged at 1%. The BoE announced the introduction of a new contingency liquidity facility designed to mitigate risks to financial stability arising from a market-wide shortage of short-term sterling liquidity.
• The overnight GlobalDairyTrade auction saw a 2.6% increase in the trade weighted price from the previous event. Butter milk powder prices recorded the largest increase at 14.4%.
NZDUSD: Watching and waiting…
An RBNZ Monetary Policy Statement and Official Cash Rate review statement tomorrow will acknowledge the current landscape but will not be following in the footsteps of the RBA yesterday is adjusting interest rates. Wider global forces will continue to be more influential.
Expected range: 0.7752 – 0.7812
NZDAUD: Still armed with the axe…
The door remains clearly open for the RBA and they will be following the northern hemisphere developments with interest. A weaker than expected Q3 GDP print from Australia will ensure this cross drifts higher in the lead up to tomorrow’s RBNZ decision.
Expected range: 0.7560 – 0.7635
NZDEUR: Not quite…
Resistance on this cross managed to survive the S&P announcement yesterday but only because it was the shot across the bows versus an actual downgrade. New found momentum on this cross would see a spike higher should 0.5835 resistance break.
Expected range: 0.5775 – 0.5835
NZDJPY: Continued battle…
This cross could attack support around 60JPY today. This level may be defended by yield demand although the attraction on the NZD front has diminished somewhat over recent weeks.
Expected range: 60.00 – 60.90
NZDGBP: Cap remains in place…
Difficulties getting above 0.50GBP are likely to continue in the short term as many establish strategic positions in advance of this level. Despite the association with Europe the GBP has found some strength in local data.
Expected range: 0.4955 – 0.5000
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