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Economic views and news - Fri 29 July

Friday 29th July 2011

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OUTLOOK

CURRENCY: Continued resistance around the key 0.8749 technical level remains in place.  Today, hope for a US debt deal.  Concerns around the EU should see the NZD ease back below 0.87USD.

RATES: After the big moves yesterday following the RBNZ statement, there was no follow through during the overnight London session.  Expect swap yields to open unchanged to 1pt lower across the curve.

REVIEW

CURRENCY: No change to the RBNZ OCR and an accompanying statement that was short but hardly sweet. The much desired dip was practically nonexistent and the NZD consolidated throughout the day and night in the 0.87USD zone.

GLOBAL MARKETS: After the previous session’s losses, US equities were higher initially, helped by better economic data and hope that a deal on the US debt limit can be reached. But those gains unwound. European equities were weighed by weak data and ongoing concerns over sovereign debt in that region, this time over Italy, which provided safe haven demand for US Treasuries. Commodity prices moved lower, partly on a slight recovery in the USD.

KEY THEMES AND VIEWS

AS IF THERE ISN’T ENOUGH TO WORRY ABOUT ALREADY. The US debt drama carries on. Republicans will be voting on Speaker Boehner’s plan this morning NZ time but even if passed, the Senate has already said that it will be defeated. The Senate will likely pass another plan by Leader Reid, which will probably be defeated by Congress.

The two sides will then likely try and reconcile both plans to come up with something that can pass both Congress and the Senate.But even if both sides come to an agreement, the President could still veto it.

Confused? Why do you think markets are so unnerved? Thankfully, there was some better US economic data out with jobless claims falling below 400k for the first time since March. Pending home sales were also better than expected.

But the data out of Europe was poor, apart from German data showing a larger fall in unemployment numbers there than expected (though the unemployment rate was unchanged at 7%).

The decline in Eurozone confidence suggest a slowing in growth, but for the ECB, tonight’s early CPI estimate will probably be more important in deciding whether another hike is warranted before the end of the year.

However, the more worrisome aspect overnight was the big jump in yields at the Italian bond auction. It could be that speculation around Italy’s economy minister Tremonti resigning (over tax avoidance allegations) were partly behind the poor auction. But it could also signal rising concerns over Italy’s fiscal situation where debt to GDP stands at 120%, second only to Greece.

Should debt woes spread to Italy, it will be back to the drawing board once again for European policymakers, for the agreement reached at last week’s summit will not be able to accommodate Italy.

So even if the US debt limit gets resolved, attention will quickly focus back on Europe, with Italy centre stage this time.

OTHER EVENTS AND QUOTES

•       Italian bond auction for 10-year notes was priced to yield at 5.77% compared to 4.94% at the previous auction last month.  The bid-to-cover ratio was 1.38, lower than the average of the last six auctions.
•       Richmond Fed President Jeffrey Lacker (non-voter this year):  “Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur growth.” 
 
NZDUSD: Holding out…
Market’s eager anticipation of the RBA meeting next Tuesday should ensure the NZD also remains supported on dips.  Familiar resistance levels remain in place (0.8749) and any positive news on the US debt front, despite delivering a stronger USD, may also support the NZD.
Expected range: 0.8670 – 0.8749

NZDAUD: Next week…
The frenetic calls for the RBA to hike interest rates next week should ensure this cross remains close to the 0.7900AUD handle.  Dips under this level will draw forth further NZD buying as they are viewed as dips only at this stage.
Expected range: 0.78780 – 0.7930

NZDEUR: Troubles returning…
The EUR was dented by the Italian debt auction overnight as yields lifted.  Some hope on the US debt front also enable the EUR to test support levels while the NZD remained supported.  The cross broke through resistance levels and got within a whisker of the 2006 highs.  Expect this level to hold today.
Expected range: 0.6065 – 0.6125

NZDJPY: Sleepy…
Players in this cross continue to find difficulty in lifting it sustainably above the resistance at 68.20.  This remains the case today with support levels also out of reach.
Expected range: 67.40 – 68.20

NZDGBP: Sky is the limit…
Further topside attempts after poor UK data may be stretching the boundaries for now.  While the UK picture is poor a lot has been priced into this cross at this point.
Expected range: 0.5305 – 0.5355

ANZ Research



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