Economic views and news -Tuesday, 13 September

ANZ Research

Tuesday 13th September 2011

OUTLOOK

CURRENCY: More volatility in markets is likely as the NZD continues to jump around erratically. With equity markets solidly in the red topside moves will continue to be limited despite a minor correlation breakdown overnight.

RATES: The kiwi rates market was fairly quiet overnight, with some receiving interest evident. NZ rates are likely to open today a touch lower on the back of overseas moves.

REVIEW

CURRENCY: The move lower started early yesterday once minor buying demand was filled. Overnight however a substantial reversal of NZDAUD positioning meant the NZD managed to pick itself off the lows.

GLOBAL MARKETS: Another risk off session overnight. Equities fell in the US and Europe, with heavier falls in France, and the peripheral Eurozone economies. French bank shares in particular were squarely in the firing line. Ten year US Treasury yields troughed at 1.88% before firming, and are 1.93% at the timing of writing. German and UK yields eased, but yields for France, Italy and the Eurozone periphery rose. CRB commodity prices were broadly unchanged. Oil prices firmed slightly, but gold prices eased towards US $1,800/oz.

KEY THEMES AND VIEWS

NOT A GREAT START TO THE WEEK. With no major data to chew over (not that it would have helped much in the current mood), the focus continues to be the risk of contagion from a looming European sovereign debt crisis.

Overnight Greek Prime Minister George Papandreou approved new measures to help plug a budget gap, and vowed to avoid a default and stay in the euro. But with public opinion elsewhere becoming increasingly hostile to having to bail out fiscal transgressors, markets are increasingly counting on the possibility of a debt default, despite reassurances to the contrary by a chorus of European officials.

German government officials have maintained their opposition to joint debt issuance by Eurozone governments, but they are starting to run out of options. It is not just in the Eurozone periphery where the concerns lie. Italian Prime Minister Berlusconi, typically not one for understatement, avowed that he could achieve miracles by presenting new austerity packages. Low demand and the surge in yields from the Italian Treasury one year bill auction overnight (to 4.15% versus 2.96% on the August 10 auction) suggests markets increasingly think otherwise.

Given its exposure to Greek debt, the banking system in France is also looking increasingly shaky, with rumours that 3 main French banks may be downgraded next week by Moody's. Not so according to Bank of France Governor Noyer, who noted, “Whatever the Greek scenario, and whatever provisions have to be made, French banks have the means to face it”.

OTHER EVENTS AND QUOTES

•       Trichet comments on the newswires: The global economy is slowing and downside risks to global growth have increased. The ECB will preserve its credibility in all circumstances.
•       Bank of America Corporation (the biggest U.S. lender by assets), announced that it would cut 30,000 jobs in the next few years. The job cuts were announced just after President Obama began delivering remarks about his efforts to increase employment. Hardly great timing.
•       India’s industrial production growth slowed sharply in July to 3.3% y/y, the slowest pace of expansion in two years. Manufacturing growth led the decline, slowing to 2.3% y/y.

NZDUSD: Redder than Rudolph…
Global equities market moves are redder than Rudolph’s nose this morning adding to the downside pressures for the NZD. The only saving grace is an expected upbeat assessment on the economy by the RBNZ Governor when he releases his OCR/MPS later this week. At this point topside is still limited at 0.8250 although support appears more solidly around the low 0.81USD area.
Expected range: 0.8155 – 0.8250

NZDAUD: Sidestep…
A change in market positioning as the RBNZ MPS approaches left this market scrambling to cover short NZD positions. Today it should extend towards the topside further but moves back into the 0.80AUD territory cannot be ruled out if the picture painted later this week is one of growing strength.
Expected range: 0.7922 – 0.7982

NZDEUR: Talk about trouble…
Continued concerns over Greece and a strengthening USD have been enough to dent the fortunes of the EUR. This cross is threatening to take out resistance at 0.6038 and move higher but will need a better NZ picture to be confirmed by the RBNZ on Thursday to achieve a move back to the 0.61EUR.
Expected range: 0.5988 – 0.6038

NZDJPY: Blink twice…
An overnight dip into the low 62JPY zone satisfied several buyers looking to position themselves for a strong RBNZ statement. Further dips can be achieved although they will require some assistance on the JPY side.
Expected range: 62.80 – 63.75

NZDGBP: Spot of bother…
This cross tested both sides of the ranges overnight. It should find more difficulty on the topside given the GBP’s relative strength against the EUR.
Expected range: 0.5141 – 0.5200

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