Economic views and news - Friday, 25 November

ANZ Research

Friday 25th November 2011

OUTLOOK

CURRENCY: The NZD is likely to remain caught in the election headlights and reluctant to move much today. Expect any dip closer to 0.7375 to find support from those scaling back previously established short NZD positions.

RATES: Will be higher after trading higher in London. Otherwise expect the market to be in a holding pattern ahead of tomorrow’s General Election.

REVIEW
CURRENCY: A day of relative rest for the NZD as the US Thanksgiving holiday meant markets found no direction from many participants. Demand under 0.74USD was evident and assisted in keeping the NZD supported.

GLOBAL MARKETS: A pretty quiet day on European markets with the US out for Thanksgiving. The market opened on a positive note, but it wasn’t long before the usual stresses crept back in. European equities drifted lower, and Italian bond yields are back above 7% again.

KEY THEMES AND VIEWS

RISK APPETITE WANES AGAIN. Risk appetite picked up early in the session, boosted by German IFO data. The market was then left watching headlines, with a focus on the Sarkozy/Merkel/Monti meeting, which apparently ended with Merkel reiterating her opposition to both the ECB being directed to fight the debt crisis and jointly issued Eurobonds, claiming that “conditions aren’t right”.

Things weren’t helped when Portugal’s credit rating got cut too. However, encouragingly, Merkel said she does believe the euro zone should take steps toward fiscal union, and we understand that Germany and France will also make joint proposals to modify current EU treaties in the days ahead. The trio also agreed to abstain from making demands on the ECB.

This latter development is encouraging – while it is highly likely that the ECB conclude that they have no real option other than QE, the ECB needs to arrive at that decision on its own, on the basis of the economic outlook. Political interference isn’t helpful, and in fact, the need to be seen to be independent even has the potential to block progress.

OTHER EVENTS AND QUOTES
•          Portugal downgraded from BBB- to B+ (i.e. junk status) by Fitch: “the country’s large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign’s credit profile is no longer consistent with an investment-grade rating”.
•          No clues from RBA Governor. Governor Glenn Stevens gave a speech overnight in London on “The Use of Forecasts” for policy purposes at the Australian Business Economists Annual Dinner. Stevens highlighted the current heightened state of uncertainty, but virtually no mention was made of the current monetary policy stance and outlook, and he explicitly said in the Q&A session that he would not comment on the outlook for interest rates, nor the trade off between monetary and fiscal policy.
•          China has announced that it will launch AUD/CNY and CAD/CNY trading on Monday 28 November, although this is largely to give member banks more convenience to settle trades directly (currently, two trades are needed to be conducted, eg. AUDUSD and USDCNY).
•          Standard & Poor's has hinted that it may downgrade Japan's sovereign credit rating, currently at AA-, given the government's failure to make any progress in reducing the level of outstanding public debt.

NZDUSD: Waiting mode…
All the work has been done and the wait now begins to see what will result after the NZ general election this weekend. Expect a nervous start to trading next week if the result is not clear enough for offshore participants to return to fundamental analysis. Support around the 0.7375 area initially should form the base for today’s trading if the NZD dips that deep.
Expected range: 0.7385 – 0.7445

NZDAUD: Struggling…
Attempts to the topside continue for this cross. To move back towards the 0.77AUD area it will need to move past this weekend. Falling yields in both countries are decreasing returns for investors and making the Australasian currency bucket a less attractive one.
Expected range: 0.7605 – 0.7645

NZDEUR: Further lift to come…
Key support at 0.5510 remains in play and should not be threatened ahead of the weekend. Expect an extension towards the higher 0.55EUR level as the continued European crisis plays out.
Expected range: 0.5540 – 0.5590

NZDJPY: Still probing support…
Tests of support in the low 57JPY area should continue today. It may be difficult to get closer to more major support at 56.80 as some concerns around the Japanese credit rating remain.
Expected range: 56.80 – 57.80

NZDGBP: Catching a cold…
BoE member Miles has mentioned that the EZ crisis is having a substantial impact on the UK and such thoughts have helped to weaken the GBP. This may well deliver a spike into the 0.48GBP territory towards the close.
Expected range: 0.4766 – 0.4806

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