Monday 3rd October 2011
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CURRENCY: A Chinese week of holidays should take some liquidity and support from the NZD as it is unlikely to return to the field of play at this point. Selling the spikes higher remains the prevailing trading strategy.
RATES: NZD rates trading was quiet in the London session, and rates are likely to open unchanged.
CURRENCY: The NZD went down hard on Friday, felled by two downgrades, and plumbed new recent lows in the offshore session to close the month more than 10% lower than where it finished August.
GLOBAL MARKETS: A mixed day, but with an overall risk-off tone. European bonds initially sold off on the higher than expected Euro inflation number, but quickly reversed, and continued to rally strongly, driven in part by headlines that Germany won’t increase its contribution to the EFSF. Weakish US data saw fixed income head to its highs for the day, but solid outturns for the Chicago PMI and consumer confidence reversed the move. Treasuries yields ended down a few pips. Equities bounced around but were firmly down for the day. Commodities were also broadly weaker.
KEY THEMES AND VIEWS
MARKETS SHOW NO QUARTER. The third quarter of 2011 drew to a close on Friday, appropriately with a risk-off day that invoked negative returns for most asset classes. Financial market participants will be pleased to see the back of the quarter, while wary of what the final three months of the year may bring.
The MSCI All-Country World Index is down 18 percent for the quarter, and the S&P500 down 13 percent, their worst quarter since the GFC of 2008. That’s a common label. It can also be applied to pretty much all other equity indexes, oil, a broad range of commodities, and the Euro.
Those invested in gold and Treasuries, traditional safe havens, have done well, with US Treasuries having their best quarter since 2008. Gold is more of a mixed bag, up 7.6 percent for the quarter but rapidly losing its shine, down 11.0 percent in the last month.
It is far from a given that policymakers will succeed in turning the tide in markets in the final quarter of the year. Promising signals from European policymakers are yet to be tested by the realities of attempting to implement rapid, contentious change in a bureaucratic system that was designed to encourage closer economic ties while protecting national sovereignty and the right to veto.
JUST WHAT THEY DON’T NEED. Eurozone inflation printed at +3.0 percent y/y, trouncing expectations of a 2.5 percent rise. This is only a flash estimate, and some 0.3 percent can be put down to seasonal factors, but it is unhelpful for those trying to convince the ECB to cut, given their view that “price stability is the only needle in our compass”.
OTHER EVENTS AND QUOTES
• Protesters blocked the Brooklyn Bridge in a continuation of the “Occupy Wall Street” protest in the US. Some 700 were arrested. The sit-in protest looks likely to continue into its third week.
• China’s PMI for September rose 0.3 points to 51.2, just beating market expectations. Export orders rebounded.
• The Austrian parliament approved expanding the EFSF bailout fund.
• Injury ruled Dan Carter out of the remainder of the RWC.
NZDUSD: Leaving the game…
With significant injury concerns the NZD is fit this week only to spend time watching the currency game from the sidelines. Spikes higher are likely to find willing sellers as sentiment remains poor despite marginally positive Chinese data over the weekend.
Expected range: 0.7565 – 0.7665
NZDAUD: Any relief welcome…
This week’s RBA interest rate decision will be one that holds the focus of many. The opportunity to cut interest rates to reflect the global picture may not be missed. While it may provide a spike up in this cross towards the 0.7920 area it may not last given the concerns around the NZD.
Expected range: 0.7845 – 0.7902
NZDEUR: Support still under threat…
Despite a weaker EUR, based largely around the continuing Greece concerns and a better-performing USD, this cross is still under threat of further downside moves. Support at 0.5634 has held at this point but may be tested this week.
Expected range: 0.5640 – 0.5700
NZDJPY: Nudging closer…
More major support in the high 57JPY area is approaching. It may be of concern to Japanese investors if broken given the potential for an extension towards 54.50. For today, however, it should remain within the JPY58 zone.
Expected range: 58.25 – 58.95
NZDGBP: Support breaking…
With support in the low 0.49GBP breaking last week this cross has the potential to revisit 0.4800GBP. Today, however, it will remain closer to 0.49GBP as GBP developments unfold and the BoE interest rate decision later this week is eagerly awaited.
Expected range: 0.4865 – 0.4905
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