Economic views and news - Friday, 30 September

ANZ Research

Friday 30th September 2011

OUTLOOK

CURRENCY: Downside pressure is likely to mount for the NZD as the early morning announcement from Fitch credit ratings of a downgrade to NZ’s credit rating takes hold. Support levels should be tested initially.

RATES: NZD rates trading was quiet in the London session, but we’d expect the Fitch downgrade to see some steepening of the curve, and swap spreads narrowing as long bonds under-perform.

REVIEW

CURRENCY: A technical bounce from yesterday’s low was assisted by the overnight passage of support through the German parliament. Positive sentiment was easily sapped from the market and the bounce was reversed.

GLOBAL MARKETS: Another relatively quiet day data, event and flow-wise. Germany’s Bundestag (parliament’s lower house) passed the July 21 changes to the EFSF with a solid majority as expected. Stocks pushed higher, with European equities closing up 1.6%, but US stocks are trading up just 0.3% at the time of writing. An early sell-off in US bonds was later unwound, while the reverse move was seen in European ‘safe-haven’ fixed income.

There was only limited reaction to stronger than expected US data, although potential seasonal adjustment difficulties with the jobless claims figures could have left some sceptical of the significant weekly improvement.

KEY THEMES AND VIEWS

FITCH DOWNGRADES NZ’S SOVEREIGN CREDIT RATING FROM AA+ TO AA... Fitch Ratings has downgraded NZ’s credit rating by a notch to AA, citing high levels of external debt as a “key vulnerability”. The agency also cited high household indebtedness and eroding public finance as contributing factors.

On our external debt, the agency notes that in level terms it has always been much worse than our peers, but the real issue is that it will not improve if we continue to run current account deficits. Although the agency acknowledges that we are not alone with regards to household debt – with other AAA rated countries like the US, UK and Australia in a similar position – it notes that unlike the US and UK, we have not made progress.

The agency also acknowledges that while NZ’s public finances are in better shape than other similarly rated peers, our fiscal position has deteriorated rapidly (in large part due to earthquakes – but nonetheless it has happened), and that we are very reliant on offshore participation in bond tenders. This latter characteristic makes us vulnerable to shifting market conditions.

So what does it all mean? To start with, it has been widely talked about, and made it to Bloomberg’s top worldwide news stories within the hour. What is interesting is that we now have 3 different credit ratings, for we are AAA with Moody’s, AA+ with S&P and AA with Fitch.

Still, the downgrade was not a huge surprise – we have been on negative outlook since July 2009, so in a sense this removes that “threat” that had been hanging over us (noting that the outlook is now stable). But what we are really talking about here are degrees of excellence – recall that Uncle Sam has also just been downgraded too. It will of course increase speculation in markets that S&P might follow suit – they too have us on negative outlook.

We’ll be watching bond yields and tender results closely over next few weeks, but our sense is that many had been expecting this development, and in a low and falling yield environment, the impact is likely to be less than it might otherwise be. But it’ll probably keep the NZD on the skids for a few more days.

NZDUSD: More medical attention required…
Overnight the NZD struggled to make it back on the field but it was quickly sent off for medical attention after the announcement of a downgrade to the credit rating by Fitch. A minor bounce from the lows will not save it from a further extension lower which eyes up the last week’s recent low.
Expected range: 0.7650 – 0.7740

NZDAUD: Limbering up?
One wonders how much next week’s RBA cash rate decision has been factored into this cross. It appears to be limited at this stage but any attempts to spike towards the 0.7980 level will find sellers of NZD for now easily capping the top.
Expected range: 0.7845 – 0.7902

NZDEUR: In the bin…
Expect some weakness on this cross as the EUR maintains support from the vote overnight in Germany. There are many more hurdles to jump but those of the NZD appear to be more difficult at this point.
Expected range: 0.5640 – 0.5700

NZDJPY: Needing support…
With another failure on topside moves the next move appears to be lower with the potential to extend towards 57.60 a major support level. The absence of the Japanese market may make attaining a dip below 59JPY easier.
Expected range: 58.75 – 59.50<

NZDGBP: A bet each way…
This cross failed to remain above 0.50GBP and should ease slightly today. The fortunes of the GBP are not clear but moves in the NZD may allow a test of the low 0.49GBP level later tonight.
Expected range: 0.4900 – 0.4950

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