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Economic views and news - Wednesday, 17 August

Wednesday 17th August 2011

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OUTLOOK

CURRENCY: NZD will find itself tracking offshore equity moves once again, given a lack of major domestic data to focus on.  While likely to see further grinds higher, the strong topside resistance for NZDUSD at 0.8390 is likely to hold.

RATES: NZ rates traded lower in yield during the London session overnight, joining in the move lower in global yields.  As such, we can expect swap yields to open this morning around 3-4bps lower.

REVIEW

CURRENCY: A fairly uninspiring session for the NZD, as it drifted towards the 0.8280 support level, only to bounce off it and move in tandem with US equities once the market opened.

GLOBAL MARKETS: The recent strong rally in equities came to an end, as weaker Q2 GDP growth in Europe, especially Germany, and a proposed financial transaction tax by Germany and France weighed.

The Euro Stoxx 50 Index closed flat, while the S&P500 was down 0.7% as I write, despite some positive US data for a change. Oil prices fell on demand concerns following the Eurozone GDP numbers, while gold continues to attract demand.  US Treasuries found good support sending 10-year bond yields down to as low as 2.2%.

KEY THEMES AND VIEWS

A STEP CLOSER TOWARDS A UNITED STATES OF EUROPE. There has been a clear shift towards stronger fiscal unity in the Eurozone following the much anticipated summit between the German and French leaders in Paris.

Merkel and Sarkozy have proposed common governance for the Eurozone, with the creation of a Eurozone economic council. The leaders propose to elect a president of the council for 2.5 years, with European Commission President Herman Van Rompuy put forth as its first head.

Merkel and Sarkozy would like to see a deficit limit rule put in place in the 17 Eurozone countries’ constitutions by mid 2012, with all countries ideally having a balanced budget rule. Given that the Maastricht Treaty’s 3% deficit and 60% debt-to-GDP rules has failed to be enforced, one wonders why the new stricter rules will be any more successful.

But what really got the market worked up was the proposal for a financial transaction tax (that’s right, a ‘Tobin’ tax), with more detail to be finalised by September. Germany and France clearly do not want to be the two shouldering most of the burden of bailing out the periphery.

A financial transaction tax will likely be an easy political sell. Other proposals include a harmonisation of company tax rates and bases, something which will hurt Ireland’s competitive advantage if it forces them to increase their tax rates towards those of France.

There wasn’t anything more concrete, with an increase to the EFSF ruled out and the issue of Eurobonds a possibility one day, but not now. All up, a move closer towards integration and eventual fiscal union, the only path that can save the Eurozone. We shall see whether what has been proposed will work, and whether policymakers can move fast enough. After earlier efforts which fell short, markets remain unconvinced about the latest one.

OTHER EVENTS AND QUOTES
•       Fitch affirms US credit rating at AAA with a stable outlook, based on its creditworthiness, role in the global financial system and its capacity to absorb and adjust to shocks. However, failure of the joint select committee to reach a deal on deficit reductions or an upward revision to public debt projections would see the outlook revised to negative.
•       The GlobalDairyTrade auction saw the trade weighted prices down 0.9%.  Wholemilk powder fell 2.2% to US$3,385/MT.

NZDUSD: Follow the leader…
The NZD seems happy to just follow equity moves, and understandably so given the lack of any domestic drivers at present.  We can expect more of the same today.  Q2 PPI data today will largely be ignored, and it is all about offshore events.  Recent ranges are expected to hold.
Expected range: 0.8300 – 0.8390

NZDAUD: Rangy…
Yesterday’s RBA minutes failed to change too many minds.  There was something for the hawks and doves.  Besides, much has changed since the early August board meeting, so the market continues to price in around 130bps of cuts over 12 months.  This was enough to see AUD underperform NZD, sending the NZDAUD cross moving towards the key 0.80 level.
Expected range: 0.7940 – 0.8020

NZDEUR: Failure to excite…
The German and French proposals to save the Eurozone didn’t exactly get the EUR too excited, apart from a brief spike towards 1.4470.  Indeed, looking at the price action in the EUR, you wouldn’t have thought any major announcements had been made, as weaker than expected Q2 GDP numbers weighed. NZDEUR looks set to grind higher. 
Expected range: 0.5760 – 0.5840

NZDJPY: Drifting…
This cross once again finds itself crawling sideways with topside resistance level at 64.58 still holding firm.  As with yesterday, support remains in the low 63JPY area with another look at resistance likely.
Expected range: 63.60 – 64.58

NZDGBP: Sideways…
Higher than expected UK CPI was not enough to get this cross to break out of its tight range overnight.  Same old expected today with support in the low 0.50GBP area in the near term.
Expected range: 0.5060 – 0.5100

Source: ANZ Research



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