Economic views and news -Tuesday, 6 September

ANZ Research

Tuesday 6th September 2011

OUTLOOK

CURRENCY: An extremely tentative start to the day is likely for the NZD as it awaits the reopening of US markets after their long weekend. Support may not kick in until the mid 0.82USD area in the current environment.

RATES: Although London trade was quiet, expect to open lower with US yields.

REVIEW

CURRENCY: The NZD was unable to fly overnight as it faced a wave of negative global economic data that saw safe haven flows to the USD. It suffered injury concerns that sent it to the sidelines in need of medical attention.

GLOBAL MARKETS: Equity markets were hammered in Europe, with key exchanges like the DAX and CAC down 5.3% and 4.7% respectively. What was to blame this time? More concerns about the sovereign debt crisis, lingering concern about the US lawsuit against banks, talk by a Bundesbank board member that even systemically important banks should be allowed to fail, and general euro malaise.

Although US markets were closed, Dow futures are down over 200 points at the time of writing. FX markets were heavy, with the USD grinding higher against most currencies.

Crude oil and base metal prices were weaker, while gold remained capped below US$1900/oz. Flight to safety buying helped gilts and bunds (where 10yr yields are down around 16bps apiece). By contrast, Italian and Spanish 10yr bonds were up 29 and 12bps respectively.

KEY THEMES AND VIEWS

ALL QUIET ON THE WESTERN FRONT. It was a quiet day in Europe and US markets were closed for the Labor Day holiday. Markets remain nervous ahead of a big week of events, with a number of major central bank policy decisions, speeches from key policy makers (Bernanke, Obama, Trichet, Stevens), and a ruling by the German Constitutional Court over the legality of the latest euro zone bailouts. This drove another risk-off session, with eyes again fixed on sharp falls on equity markets.

It was also a quite day for releases, with only the final reads of the euro zone PMI services survey. Downward revisions to the initial August estimate for Germany weighed on EUR. The UK’s survey also printed sharply lower than expectations (but in line with market rumours), falling to 51.1 from 55.4 in July. This represented the sharpest decline in the series in over a decade. It is clear that economic momentum remains weak.

WHAT’S NEXT FOR THE US? Although some are holding out for QE3, there seems to be a growing chorus of commentators who think this (and other alternatives including operation twist, or cutting interest on excess reserves etc) is not the answer. Roubini is calling for “credit easing”, where the Fed would buy private sector assets in a bid to narrow spreads, as opposed to lower already low Treasury yields.

But there are other options – and there has been more chatter lately about a plan to kick-start the housing market and consumption by re-organising sub-prime debt. This is where some of the big negative equity positions lie, and this group of borrowers are yet to benefit from any government policy. The value of their houses has collapsed and they can’t refinance at the new low interest rates. The originating banks can’t cut them any slack as they have on-sold their mortgages to a MBS pool. Although the collective value of their mortgages (in the pool) has been written down, homeowners haven’t had a write down. The solution – a government agency buys the debt well below par, writes down the principal, erasing some or all of the negative equity, and refinances the homeowner. A large and complex job for sure, but one that would pay dividends. And at $1.3 trillion it could be do-able too.

NZDUSD: Fall back…
The call came out early yesterday as the NZD found itself on the goal line attempting to repel attacks from weaker global economic data. Support levels were tested early and failed as overnight moves saw it driven back. Initial support just under 0.8300USD held but the bounce has been limited.
Expected range: 0.8278 – 0.8348

NZDAUD: Blindsided…
Expectations have built that the RBA will not wish to rock the boat today have seen this cross move lower. It extended the fall once support at 0.7902 gave way but has failed to reach the next level of support around 0.7850.
Expected range: 0.7850 – 0.7900

NZDEUR: 99…
It appears the legendary call went out overnight and an all in brawl around European debt issues mean the USD was the clear winner. Interest rate markets are telling the FX market with significantly lower yields that a slowdown in Europe of potentially monumental proportions is on the way.
Expected range: 0.5868 – 0.5925

NZDJPY: Hand-off…
The inability of the NZD to remain above support levels should mean further dips on this cross towards the low 63JPY area. Today it will require work on the NZD side of the cross to achieve.
Expected range: 63.25 – 64.18

NZDGBP: Mauled…
This cross also suffered from a mauling overnight despite a weaker UK August services PMI. Support at 0.5141 is approaching and may be seen today.
Expected range: 0.5141 – 0.5178

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