Economic views and news - Friday, 11 November

ANZ Research

Friday 11th November 2011

OUTLOOK

CURRENCY: Uncertainty is rife in markets and will likely remain that way for a while yet. With a lack of domestic data today, we will again look to offshore as the EU attempts to pull themselves together.

RATES: Another quiet day for NZ rates in the overnight session. We can expect swap yields to open a point or so higher this morning.

REVIEW

CURRENCY: Choppy night for currencies as uncertainty reins. Some positive US data may have helped dampen risk aversion initially. However a sharp pull back late in the European session sees lows again being tested.

GLOBAL MARKETS: Equities had a better day at the office, though European bourses were mixed with the Euro Stoxx 50 up slightly, giving up most of earlier gains on worries over rising yields for France. US equities performed better, helped by some better than expected economic data. US Treasury prices almost unwound most of the previous session’s gains while gold prices fell. Oil prices posted gains in choppy trading.

KEY THEMES AND VIEWS

A BIT OF A RESPITE. Markets were generally calmer overnight, as we get better clarity over the political situation in Greece and Italy, and the ECB’s bond purchases managed to send Italian 10-year bond yields back below 7%. A successful Italian 12-month bill auction also helped calm market nerves. While the yield was 6.087% (up from 3.57% at the last auction in October), the bid-to-cover ratio was a reasonable 1.99.

In Greece, Papademos was named to lead Greece, ending days of uncertainty, while in Italy, the talk is that another technocrat – former European Commissioner Mario Monti – could be replacing outgoing Prime Minister Silvio Berlusconi. The new leaders will have their work cut out in driving through painful reforms.

The fact that both Greece and Italy have opted for a coalition will at least ensure that reforms are not as likely to be held up by politicking. And having technocrats to take the helm may help, as they are unlikely to worry too much about political opinion polls, knowing that their job is only a temporary – but vital – one.

The latest forecasts from the European Commission, which downgraded the Eurozone’s growth forecast for next year to 0.5% (from 1.8% previously), was generally ignored by the market. But we are not out of the woods just yet. There was some worry overnight about France being put on negative watch, sending their bond yields higher. S&P later confirmed that France’s ratings remain at AAA with a stable outlook, but the fact that the market can get so easily spooked tells us that we are still set for some volatility ahead.

OTHER EVENTS AND QUOTES
•          Lucas Papademos will lead an interim unity government in Greece, ending days of speculation and uncertainty.
•          The Bank of England left its policy rate unchanged at 0.5%, and also left its target for asset purchases unchanged at £275bn.
•          ECB governing council member Klaas Knot: “We have gone pretty far in what we can do but there is not much more that can be expected from us. It is now up to the governments… to make sure the doubts about sustainability, about repayment of individual government debt are removed as quickly as possible.”

NZDUSD: Certain Uncertainty.
NZD pushed straight through support at 0.78 cents yesterday and spent the majority of the overnight session below that level. Uncertainty reared its head as the NZD bounced early in EU trade only to give it all back and again test the low as their market winds down for the day. Another bounce as I write sees the kiwi mid overnight range with a wild look in its eye.
Expected range: 0.7720 – 0.7820

NZDAUD: Easy does it.
Stronger than expected employment numbers from Australia did little for the AUD initially, but may have been the source of its slight outperformance of the NZD overnight. Moving lower to the bottom side of the ranges, the NZDAUD may be tempted to break further today.
Expected range: 0.7625 – 0.7695

NZDEUR: South it is.
NZDEUR found south on the compass overnight and preceded that way in no uncertain terms. EUR found benefit from a new interim PM for Greece and Italy doing a 180 on the previous election call. NZDEUR is likely to remain on the back foot today as uncertainty remains strong.
Expected range: 0.5735 – 0.5795

NZDJPY: Figure Support.
A choppy session for the NZDJPY, as the forces from the EU again ran the show. NZDJPY bounced off 60.05 twice in the offshore session. This should remain our first line of support today.
Expected range: 60.00 – 60.80

NZDGBP: Precarious situation.
The NZDGBP was no exception to the choppy NZD cross trading overnight. This cross is also looking vulnerable as the NZD tests major support lines which are the lowest levels seen in the last 6 months. Downside moves on any push through 0.4860 needs to be given close consideration.

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