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Economic news & views - Friday, 23 September

ANZ Research

Friday 23rd September 2011

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OUTLOOK

CURRENCY: The flight to safety in global markets may pause today as many take stock of the recent moves.  Any reversal of topside attempts for the NZD will be tentative at best, as support around 0.7770 remains close.

RATES: There was decent interest in NZ rates during the London session, following yesterday’s weaker than expected Q2 GDP data. Given the rally in global rates overnight, NZ swap yields should open around 4bps lower across the curve with the bias towards the receive side.

REVIEW

CURRENCY: Equities eradicated, commodities crushed, currencies crumbled and bonds bought sums up the carnage on markets over the past trading day. The NZD was easily driven through the 200 day moving average yesterday.

GLOBAL MARKETS: Heavy risk off day with equities getting hit very hard (Euro Stoxx 50 down 4.9%, S&P500 down 4.2% as I write), commodities sold off aggressively (CRB index down 4.5%, oil off 7%), and commodity currencies faring the worst among the G10. Safe haven demand was strong, and in the current environment, US Treasuries and USD are all that investors want.  US 10-year bond yields fell below 1.7% at one point, with 30-year yields falling below 2.8%.

KEY THEMES AND VIEWS

SMASHED. Risk was off in a big way in global markets overnight, as investors pushed the sell button on equities, commodities and all currencies bar the USD. The fact that the selloff occurred just a day after the FOMC gave “Operation Twist” the green light is somewhat disconcerting. It suggests that markets are not convinced that what the Fed has done will be all that effective in stimulating growth. Instead, the market has latched on to the downbeat tone in the FOMC statement. 

A decline in the Chinese flash PMI data and weaker than expected Eurozone PMI readings only added to market concerns over the global outlook. Better US data was completely ignored. Such a sour mood in markets certainly puts the acid on policymakers to act.

There is no doubt that the global economy is slowing, but a recession is not the central case at this stage. However, continued inaction by policymakers increases the risk of one eventuating. The situation is now more than just a European issue. It has implications for the global economy, and as such, other countries will need to get involved.

It is clear that Germany cannot (or is not willing to) save the euro by itself. In that regard, it is timely that finance ministers and central bankers from around the world are gathered in Washington for the annual meetings of the World Bank and IMF. There needs to be coordinated action, and quickly. And policymakers need to get ahead of the curve. If all we get is another vague communiqué in the weekend, then brace for another rout in markets.

OTHER EVENTS AND QUOTES

·       Japan Finance Minister Jun Azumi:  “We will take decisive steps against excessive yen rises that are far from fundamentals, as well as speculative moves.”
·       The leaders of Australia, Canada, Indonesia, Britain, Mexico, South Africa and South Korea wrote an open letter to France, the chair of the G20 this year:  “Euro zone governments and institutions must act swiftly to resolve the euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy.”

NZDUSD: It’s a rough dance…
Capitulation of all markets saw the NZD driven lower overnight only to marginally bounce off the second retracement level.  Given the 200 day moving average was broken overnight there is potential for a bounce but it would be limited in the current environment.
Expected range: 0.7779 – 0.7869

NZDAUD: Holding up…
A little surprising that this cross is currently as resilient as it is given the very poor NZ Q2 GDP release yesterday. At this point moves above 0.80AUD may seem like good value in the medium-term but these should not occur today.
Expected range: 0.7943 – 0.8013

NZDEUR: Lookout for longer term levels…
This cross is resting on an uptrend line from earlier in the year. Any break of this could well see further moves closer to the 200 day moving average so it should be closely watched.
Expected range: 0.5758 – 0.5825

NZDJPY: Doing all the work…
Again all the moves in this cross are the sole responsibility of the NZD as the JPY cannot even weaken in an environment where the USD is keenly sought.  Expect some support for this cross to emerge closer to 58.80.
Expected range: 58.80 – 59.80

NZDGBP: Not alone…
No chance of this cross remaining out of the limelight when all the activity is happening on the NZD front.  Short-term support levels have been broken with deeper moves possible.
Expected range: 0.5040 – 0.5100



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