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Economic views and news - Wed 27 July

Wednesday 27th July 2011

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OUTLOOK

CURRENCY:  Topside resistance around the mid 0.87USD zone is likely to present an impossible ask today.  Dips back towards 0.8680 should find initial support as the market remains on US political watch.

RATES:  A largely unchanged open expected this morning, after NZ rates traded near closing levels during the overnight London session.  Key focus for the rates market today will be on the AU Q2 CPI release and the NBNZ Business Outlook survey.  The former will be key for near-term RBA policy.

REVIEW

CURRENCY:  Yesterday’s weaker NZ June trade release did dent the NZD.  However another bout of USD selling that saw the AUD and EUR lead the way was enough for the NZD to explore further post float highs overnight.

GLOBAL MARKETS:  Equities were generally lower as the US debt limit impasse and disappointing earnings or outlook from major companies weighed.  Despite debt concerns, US Treasuries managed to post gains on the back of safe haven demand.  The USD remains a pariah in currency markets, losing ground against all the major currencies with new lows reached against the NZ dollar and Swiss franc.  A weaker USD helped push commodity prices higher.

KEY THEMES AND VIEWS

AND SO WE WAIT… AGAIN.  Any hopes of a resolution to the US debt limit situation would have been dashed following President Obama and House Speaker Boehner’s speeches yesterday.  It is one thing to disagree during negotiations behind closed doors.  But to come out during prime time TV in the US and basically point the finger at the other side is not a good look. 

Perhaps this is all part of the political gamesmanship that they play in Washington.  The August 2 deadline is still next week, a long time in politics.  And it seems the US Treasury may be able to stretch out the deadline for another week or so. 

Still, the lack of a deal is starting to unnerve markets.  No doubt the debt limit will be extended in the last minute and a default averted.  Markets seem pretty sure of this.  After all, in April an eleventh hour deal was reached to prevent a government shutdown. 

And US Treasuries continue to attract safe haven demand.  The USD is the clear loser amongst all these, and it is hard to see what could revive the greenback’s fortunes in the near-term. 

Greater fiscal consolidation mean the Fed will be on hold for a long time, turning the USD from reserve currency to funding currency status. 

Other countries may not like their currencies going up against the US.  Japanese finance minister Noda said he is closely watching market moves, and RBNZ Governor Bollard will no doubt say something about the high flying NZD at tomorrow’s OCR decision.  But when the trend is clearly against the USD, there is not much you can do except follow it.

OTHER EVENTS AND QUOTES

•       BoE MPC member Martin Weale:  “A hike of one quarter percentage point would have very little impact on demand over a period of six months but it would have been a signal that we are as concerned about inflation as we are about growth prospects”.

•       ECB council member Christian Noyer:  “The ECB Council remains in a position of very strong vigilance, without us deciding in advance what we will do.”  Noyer later clarified that the word he used in French “grande vigilance” should have been translated as “strong alertness” rather than “strong vigilance”, as the former is the ECB’s code word for an imminent rate hike.

NZDUSD: Deep thinking…
Yet another post float high for the NZD as the USD remains out of favour with investors.  The current US political indecision demonstrates just how dangerous things can be when there is nothing to analyse.  Nothing to stop the NZD pushing higher although the cracks appearing around the edges mean corrective moves could be quite messy.
Expected range: 0.8680 – 0.8749

NZDAUD: Caution ahead…
Yesterday’s RBA Governor speech entitled “The Cautious Consumer” did nothing to stop the upward advance of the AUD.  Today’s Australian Q2 CPI is likely to add further strength to the AUD and ensure this cross weakens.
Expected range: 0.7915 – 0.7985

NZDEUR: Still undecided…
This cross remains contained on the topside by resistance at 0.6050.  The O.K. Corral is becoming a crowded place and it is unlikely that everyone escapes unscathed.  The USD remains in the firing line and the battle for supremacy over the NZD continues.
Expected range: 0.5985 – 0.6045

NZDJPY: Upward path…
The inexorable move higher continues for this cross even in the face of a strengthening JPY.  With the potential for BoJ intervention increasing this cross remains on target towards 69.97.
Expected range: 67.40 – 68.20

NZDGBP: Small benchmarks…
A further look at the topside for this cross was thwarted by the UK Q2 advance GDP release.  Amazingly small hurdles appear easy to step over.
Expected range: 0.5288 – 0.5338

Source: ANZ Research



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