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Economic news & views - Friday, 5 Aug

Friday 5th August 2011

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OUTLOOK

CURRENCY: A similar outlook continues today for the NZD given the global equity and commodity picture, barring gold, remains in reverse.  Expect support to enter the market should sub 0.84USD levels be seen later today.

RATES: US Treasuries have rallied 16bps since last night’s NZ close, and Aussie 3yr futures have rallied 18bps. Those are big moves. 2yr swap also traded lower in London, so expect a parallel shift lower in the curve on the open.

REVIEW

CURRENCY: A none too subtle intervention by the Bank of Japan in the USDJPY left markets in buy USD mode with the NZD and AUD being caught in the traffic. Equity markets overnight ensured there was no recovery in sight.

GLOBAL MARKETS: A wild night in Northern Hemisphere markets, with ranges being broken all over the place.  While the European session began modestly, the opening of US markets triggered a significant sell off after the lack of a bond buying plan from the ECB (see below). Equities are down over 3%, US 2yr yields fell to a record low, US 10-year bond yields are below 2.50%, and WTI crude is below USD89/bbl.

Safe-haven flows have seen more USD buying, with some of the BOJ’s hard work in pushing up USDJPY being undone (now below 79 after earlier trading above 80) and USDCHF is also over 1% lower. These moves have hit both AUD and NZD hard: AUDUSD has managed to hold up above 1.05 for now, while NZDUSD has plunged below 0.8450 for the first time in two weeks.

The big change overnight was the resumption of US dollar buying – it seems that the NZD may be a safe port in a storm, but not in a hurricane.  Dollars are so popular that one NY Bank is now charging to take deposits.

KEY THEMES AND VIEWS

ECB leaves rates unchanged, fails to meet expectations on bonds. Although the ECB left policy interest rates unchanged as expected, and arguably went well beyond market expectations by announcing an unlimited 6mth liquidity programme (known as the LTRO) to support flagging markets, it was what it didn’t do that got the markets upset. Recall that rumours were circulating yesterday that the ECB was preparing to start buying Italian and Spanish bonds in a bid to prevent 10yr yields rising above 6%, which is widely believed to be where things get unsustainable (I would have thought you’d start thinking about that long before taking debt above 100% of GDP, but still) as a sort of stop-gap before the EFSF gets finalised.

Instead, the ECB announced today that it had decided to recommence sovereign bond purchases in a program that it describes as “ongoing.”  This did nothing to help the market, which was looking for some kind of sea change, aimed at Italy, not word that there had been action in Ireland and Portugal, those “old chestnuts”. There is evidence to suggest that the ECB has been buying Irish and Portuguese bonds in the secondary market today, although the bank has no plans for other sovereign bond purchases yet.

And just to get things fired up another notch, Trichet remains worried about inflation, noting that he “doesn’t exclude further rate hikes amid ample liquidity”.  It seems pretty clear where Trichet himself stands. Indeed, he noted that while the “overwhelming majority” of the Governing Council (which discusses the bond purchase program at every meeting) was in favour of this action (note the Bundesbank was not), the decision was not unanimous. Note that the ECB does not consider these bond purchases to be ‘quantitative easing.’ Trichet continues to differentiate between “standard” and “non-standard” policy measures, and insists that they are “totally independent”.

Source: ANZ Research

 



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