Economic views and news - Thursday, 8 September

ANZ Research

Thursday 8th September 2011

OUTLOOK

CURRENCY: All eyes remain across the Tasman today with the Australian August employment release this afternoon the main focus. Positive moves overnight on the German constitutional court decision add support to the NZD.

RATES: The 2-year swap traded during the London session at the NZ closing level. As such, expect an unchanged open this morning.

REVIEW

CURRENCY: Yesterday’s strong Australian Q2 GDP was enough to turn around the fortunes of the NZD given support on the NZDAUD cross under 0.78AUD. A return to the 0.83USD territory was assisted by further AUD strength overnight.

GLOBAL MARKETS: Equities recovered the previous day’s mauling, posting strong gains as the German Constitution Court’s decision was welcomed by the market. The Euro Stoxx 50 gained 3.4%, with the S&P500 up 2.7% at the time of writing.

As is usually the case when equities perform well, US Treasuries fell in price, sending the US 10-year bond yield as high as 2.06% at one stage. Oil prices got a boost from concerns over weather disruption on supplies. Gold lost some of its shine, falling below US$1,800/oz at one point.

KEY THEMES AND VIEWS

A BRIEF SIGH OF RELIEF. This week is full of key event risks, which is why markets had been very jumpy. We got one of the event risks out of the way overnight, with the German Constitutional Court rejecting the lawsuits aimed at preventing Germany from participating in the latest Greek bailout and strengthening of the EFSF. However, the Court ruled that approval from parliament’s budget committee must be gained before granting aid, which means the ability of Germany to make quick decisions is curtailed. Nonetheless, the decision, though tight, was cheered by markets. It will not solve the sovereign debt crisis, but at least it is one potential stumbling block that has been removed.

The focus will now turn to the US where President Obama is expected to unveil a US$300bn jobs package tomorrow NZ time. With the unemployment rate at 9.1% and the economy stalling, there is a lot of pressure on US policymakers to act. Fiscal policy is somewhat hamstrung given the need to reduce debt, so it will be interesting to see where the offsets to the jobs package will come from.

Though the recent run of US data has not been disastrous, the last payrolls number will certainly up the ante on the US Federal Reserve to do something. FOMC voter Charles Evans is a known dove, and he is in favour of providing further accommodation. Whether he can convince his other FOMC members is another matter.

This weekend’s G7 finance ministers meeting will be closely watched. Nothing new is expected to come out of it, which is possibly why the Swiss decided to go it alone in their decision to put a floor on EURCHF. Failure by the G7 (or G20) to come up with coordinated action means it will be every policymaker for themselves.

OTHER EVENTS AND QUOTES

• US Federal Reserve Beige Book: “… economic activity continues to expand at a modest pace, though some districts noted mixed or weakening activity… Several districts also indicated that recent stock market volatility and increased economic uncertainty had led many contacts to downgrade or become more cautious about their near-term outlooks.”

• Chicago Fed President Charles Evans (FOMC voter): “Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation”.

NZDUSD: Blitz defence…
Support around 0.8200USD was defended yesterday and ground gained towards the opposition defence overnight. Expect a day of attack for the NZD as it eyes the 0.8326 goal line early today. It may try to attack higher levels. However 0.8360 will be safe from a test today.
Expected range: 0.8285 – 0.8355

NZDAUD: Nemesis…
A stunning Australian Q2 GDP release left the NZD attempting to make up lost ground. It did not test the 0.7781 support line overnight but this level remains within reach. A solid Australian August employment release would be required to reach this level and that is a tall ask.
Expected range: 0.7781 – 0.7850

NZDEUR: Out flanked…
Support remains in place at 0.5860 for this cross. The rejection, albeit just, of German lawsuits aimed at blocking further EZ aid by the Constitutional Court should help calm European nerves. It does not however solve the main issue.
Expected range: 0.5890 – 0.5945

NZDJPY: Lock…
Despite comments from Japanese officials, no intervention as yet has hit the market. Many are wary of this and that alone should keep markets reluctant to push the JPY higher. Expect this cross to test 64.58 during today’s trading.
Expected range: 63.85 – 64.65

NZDGBP: Prop…
Poor UK data means the GBP is in need of being propped up. This cross however is not and should move back towards the mid 0.52GBP area particularly if tonight’s BoE meeting delivers an increase in the asset purchase target to GBP300bio.
Expected range: 0.5195 – 0.5245

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