Thursday 8th December 2011
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CURRENCY: RBNZ Monetary Policy Statement and Official Cash Rate review this morning will determine if the NZD can recover from moves lower overnight. Expect support in the low 0.77USD to be avoided at this point.
RATES: Another quiet offshore session for the NZ rates market as participants stayed on the sidelines ahead of the RBNZ. Swap yields were marked 2bps lower from the NZ close.
CURRENCY: Further failed attempts to move high in tandem with the AUD yesterday demonstrated the market’s desire to get the RBNZ’s OCR decision out of the way. A weaker NZD greets markets this morning.
GLOBAL MARKETS: Equities traded lower as optimism over a deal at the EU leaders summit dimmed. But expectations of ECB action helped to limit the downside, with European equities off 0.5% and the S&P500 flat at the time of writing, after being down as much as 1% in early trading.
US 10-year bond yields fell but trading was light and choppy. Oil prices fell following a report showing that crude and fuel inventories rose much more than expected. In the currency market, GBP gained the most against the greenback on likely M&A related flows, while AUD also did well following their strong Q3 GDP result yesterday. NZD was the laggard among the G10 currencies overnight.
KEY THEMES AND VIEWS
COUNTING DOWN. There is much anticipation in markets over tomorrow’s ECB policy meeting and the upcoming EU leaders summit. To date, markets have been giving both events the benefit of the doubt, hoping that policymakers will deliver something to address the current crisis. But market nerves are fragile, as evidenced in the price action overnight, when risk and the EUR were hit by comments from an unnamed senior German official who stated that "we are now more pessimistic than last week over a significant summit deal."
Italian 10-year bond yields rose towards the 6% level. Thankfully, the selling was light, as expectations that the ECB will do their part tomorrow by cutting interest rates, extending two-year loans to banks and widening the range of acceptable collateral to include senior bank bonds provided some support. Other than that, the waiting game continues. One gets the feeling that the market has gotten itself into an uncomfortable place in pinning so much hope on a deal being reached at the EU leaders summit. With liquidity conditions thin as we head into the close of the year, there is the potential for violent moves next week depending on the outcome of the summit. For the RBNZ, there is nothing they can do but wait and see. This morning’s Monetary Policy Statement will see the RBNZ leave the OCR unchanged at 2.5%, and we expect them to flag that any increases will be pushed back. The hurdle to rate cuts is still high, in our view. With the market anticipating a dovish statement, as evidence by the weak NZD, the risk is that the statement is not as downbeat as what the market is expecting.
OTHER EVENTS AND QUOTES
• In the ECB’s first dollar funding operation since the coordinated action last week, Eurozone banks asked for more than US$50bn, far more than expected.
NZDUSD: Sign of relief perhaps?
Many realise that today’s RBNZ Monetary Policy Statement and Official Cash Rate review statement will deliver nothing unexpected as ammunition on the interest rate front needs to be saved. A dovish statement may see the low 0.77USD levels looked at, but only briefly.
Expected range: 0.7705 – 0.7845
NZDAUD: Chipping away…
Support levels continue to be tested after the positive surprise on the Australian economic front. NZ’s Q3 GDP, due for release later this month, is hardly likely to match that result and so expect lower levels on this cross.
Expected range: 0.7545 – 0.7615
NZDEUR: Kicking the can…
Market expectations around the EU summit are too large to be fulfilled. The most that many can hope for is another interim decision that sees the can kicked into Q1 2012. NZD moves however may see a dip on this cross towards support in the short term as it fails to take out key topside levels.
Expected range: 0.5775 – 0.5835
NZDJPY: Looking towards support…
Despite not being able to fully test support around 60JPY yesterday, there is still a chance today that this takes place following the RBNZ statement at 9am today.
Expected range: 60.00 – 60.90
NZDGBP: Defending the top…
Strategic sellers of NZD on this cross at 0.50GBP have managed to win the current battle. Even weaker UK economic data last night failed to inspire a move higher and as such support now around 0.5935
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