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Economic views and news - Thursday, 22 September

ANZ Research

Thursday 22nd September 2011

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CURRENCY: Another rocky road for the NZD today with the digestion of the US FOMC meeting minutes in Asian time today likely to see further gyrations.  Support at 0.8050 should hold today after the early sell off.

RATES: Interest in NZ rates picked up during the London session, possibly in advance of this morning’s GDP release.  Swap yields are expected to open lower.


CURRENCY: Once NZD buying interests were completed during yesterday’s local session it failed to maintain the 0.82USD handle. Overnight comments from RBNZ Bollard (currently in NY) assisted in testing lower levels.

GLOBAL MARKETS: A choppy session in markets with equities lower ahead of the FOMC on news of US banks getting downgraded, and fluctuating wildly after the Fed announcement as market participants try to digest the implications of the Fed action. Overall, still a down day for equities, with US bond yields falling and the USD rising. Commodities were generally lower.


LET’S DO THE TWIST. As widely expected, the FOMC has engaged in what has been labelled “Operation Twist”, selling US$400bn of shorter-dated securities (3 years or less) to purchase the same amount in longer-dated ones (6 to 30 year sector). As the size of the Fed’s balance sheet is not expanding, this is not a new round of quantitative easing. This move should help flatten the yield curve, and indeed, that is what occurred following the announcement, with US 30-year bond yields falling by more (17bps) than the 10-year (6bps). The FOMC will also reinvest principal payments from its holding of agency debt and agency mortgage-backed securities in agency mortgage-backed securities to support the mortgage markets. The commitment to keep rates low until at least mid-2013 has been retained.

There were three dissenters, the same ones as in the previous meeting (Fisher, Kocherlakota and Plosser). The weak state of the US economy and what the FOMC sees as “significant downside risks to the economy outlook, including strains in global financial markets” have clearly prompted them to deliver more stimulus. But given that the FOMC pretty much delivered what the market was expecting and nothing more, we are unlikely to get a risk-on kick in the near-term. Lower US bond yields are all well and fine, but ultimately, it will only be effective if it flows through into main street. This is where plans to assist borrowers to refinance will prove more beneficial. With the FOMC now out of the way, focus will quickly turn to Europe. That is where the source of real downside risks reside.

•       RBNZ Governor Bollard, speaking at a conference in New York, said that interest rates in NZ need to go up, but the increase could take time. He describes the NZD as overvalued, and said that the strong currency has moderated demand in NZ.
•       BoE minutes from September meeting: “For most members, the decision of whether to embark on further monetary easing at this meeting was finely balanced since the weakness and stresses of the past month had significantly strengthened the case for an immediate resumption of asset purchases. For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting.”

NZDUSD: Mauled…
A rough night for the NZD that delivered a move into the key medium term support zone. Further tests of support are possible this morning as Asia digests the moves by the FOMC earlier. Expect more solid support at 0.8050. Topside moves should be limited to the mid 0.81 area.
Expected range: 0.8050 – 0.8130

NZDAUD: Hospital pass…
An uninspiring release of data on the NZ local front yesterday and overnight comments from RBNZ Governor Bollard helped to drop this cross lower. Having failed yet again to push higher support around 0.7943 could well come into question if the NZ Q2 GDP data disappoints today.
Expected range: 0.7943 – 0.8023

NZDEUR: Tight head…
EUR gained the advantage yesterday as the NZD side of the equation gave way. Formidable defence of the 0.6038 resistance level left it no option but to test support levels. It may well probe deeper levels today.
Expected range: 0.5891 – 0.5957

NZDJPY: Pause…
All NZD moves on this cross as support levels are being thoroughly tested. A possible dip into the mid 61JPY territory may take place today particularly if the BoJ remains silent on USDJPY moves.
Expected range: 61.50 – 62.25

NZDGBP: Engage…
The dovish Bank of England meeting minutes led the GBP lower overnight and help to cushion some of the fall on this cross. Support levels though should be tested further in this current environment.
Expected range: 0.5180 – 0.5225


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