Economic views and news - Thursday, 1 September

Thursday 1st September 2011

OUTLOOK

CURRENCY: A new month for the NZD where it should find itself onside with global investors. Local data is unlikely to upset the fortunes of the NZD as it looks to move into a new phase. Resistance at 0.8585 may be tested today.

RATES: There wasn’t a lot of interest in NZ rates during the overnight London session. Local swap yields are likely to open largely unchanged.

REVIEW

CURRENCY: Despite some foul play yesterday and overnight the NZD was well supported across the board and moved past the advantage line easily. No element of caution was shown by buyers who expected higher levels.

GLOBAL MARKETS: Improving risk appetite, helped by less “bad” data and hopes of new policy measures by policymakers, provided a better tone to markets overnight. Government bond yields rose, with US 10 year yields at 2.23% at the time of writing. Commodity prices (CRB measure) edged up 0.5%, led by gains to industrials and energy. Gold and crude oil prices fell slightly.

KEY THEMES AND VIEWS

BACK TO THE DATA. Despite the FOMC minutes showing divisions over the next course of action, markets remain hopeful that policymakers will do more despite quickly running out of options. The key issue for the FOMC will be to gauge whether the collapse in confidence seen in recent months is fleeting, the extent to which it is already impacting the real data and the extent that the decline in real data could intensify.

Regional manufacturing gauges overnight were not too bad, with Chicago PMI matching earlier rumours of a 56.5 print, while the NAPM-Milwaukee PMI actually rose 0.7 points to 58.3 (52.7 expected). They raise the likelihood that tomorrow’s ISM print will not be as dire as flagged by the earlier Philly Fed survey, and even the possibility of an above consensus pick (48.5), but this is unlikely to be enough to hide the fact that manufacturing activity has lost momentum over the last few months. Moreover, the ADP employment report, showed no sign of the US labour market collapsing, although the real issue is whether the current loss of momentum intensifies from here.

GERMANY TO GIVE WAY? German Ministers are reported to have backed a reworked European Financial Stability Facility, including sovereign bond-buying powers, and raising Germany’s share of EFSF loan guarantees to 211 billion euros from 123 billion euros. Senior members of the German Christian Democrats are confident they can secure a coalition majority to get the proposed changes through the September 29 parliamentary vote. With concern too much taxpayer money is on the line there remains considerable resistance, and state elections this month are expected to show voter displeasure. With coalition members faced with the choice of having to go to the polls if the vote does not go ahead and the coalition breaks down, this pressure may be enough to clear this immediate hurdle. However, there are plenty more ahead.

OTHER EVENTS AND QUOTES
• Atlanta Fed President Lockhart sees slow growth, and fiscal challenges for the world economy. The Fed should be ready to consider more monetary easing.
• The Swiss franc is still “massively overvalued”, according to the Swiss Government, with purchasing power parity between CHF 1.35 to 1.40 to the euro. The Government is set to invest in a stimulus package, with the focus of preserving jobs in the export sector.

NZDUSD: Bonus points…
The NZD remains in a ruck with a multitude of players scrapping over supply. Expect dips closer to 0.8500USD to remain supported as topside levels look to be investigated. The NZD has not really cleared the 0.8550 hurdle despite huddling close to it for the past couple of days.
Expected range: 0.8515 – 0.8585

NZDAUD: Dummy pass…
Another brief flirt at 0.8000AUD failed overnight. Expect further tests of this level in the lead up to next week’s RBA cash rate review. While no cut of the cash rate is expected some pressure may come on the RBA if today’s Australian Q2 private capital expenditure release is soft.
Expected range: 0.7955 – 0.8005

NZDEUR: Turnover…
The fortunes of the EUR remain in question as mixed US economic data has helped to counter that of the EZ. It is still a tough ride higher for this cross with the next level of resistance at 0.5957 likely to prove easier to defend.
Expected range: 0.5907 – 0.5957

NZDJPY: On the full…
Dips on this cross were caught by many offshore investors who were part of the wider ruck for the NZD. Support should remain on a yield basis alone although new momentum is needed to break higher which may not be around in today’s trading.
Expected range: 64.88 – 65.68

NZDGBP: Offside…
Month end flows for the GBP and a generally weak economic performance ensured this cross advanced further. Pushing higher from here will require all the weight to fall on the shoulders of the NZD, thus making the job more onerous. Expect difficulty in getting closer to 0.53GBP today.
Expected range: 0.5215 – 0.5265

Source: ANZ Research

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