Tuesday 25th October 2011
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CURRENCY: A positive start to the week for the NZD offshore as perceived progress is being made on the European front. Local NZ Q3 CPI data due this morning may assist further extensions higher.
RATES: With New Zealand on holiday, there were no trades in London overnight. Local rates are expected to open broadly unchanged ahead of today’s CPI release and PREFU.
CURRENCY: The depth of support for the NZD was clearly evident as it moved directionally one way. Despite being a struggle at times it broke through determined resistance and prevailed in the end.
GLOBAL MARKETS: The waiting game continues in Europe, with markets awaiting the October 26 announcement on the EFSF. Equity indices were up around 1% in the major US and European bourses. US government bond yields were broadly unchanged, while small rises were evident in German and UK yields. Italian and French bond yields rose 6-7bp (to 5.93% and 3.3% respectively, with Greek yields up 27bp (to 22.49%). The CRB commodity price index was up 2.2%, led by copper, nickel and crude oil.
KEY THEMES AND VIEWS
AWAITING THE OCTOBER 26 PLAN. The major focus for markets is the size and shape of the October 26 package. The market appears to be expecting a bank recapitalisation requirement of at least €100-110bn, Greek debt haircut of around 50%, and boost to the EFSF to an effective size of around €1tr. There were rumours of a larger package (€1.4tr) floating around. The weekend saw Germany shoot down the French proposal that the EFSF should get a banking license, which would have enabled it to borrow from the ECB. Before the October 26 package is ratified Merkel must seek German parliamentary backing for boosting the EFSF, given the obvious fiscal implications. “This is new territory” according to Merkel’s chief spokesman, with the German parliament to discuss two models for leveraging the EFSF. The weekend also provided a timely reminder of the vulnerability of highly indebted economies to lower economic growth and higher interest rates, with S&P warning of rating downgrades (one to two levels for Spain, Portugal, Italy and Ireland and one level for France) in a stressed economic scenario. Greek public finances are also looking increasing precarious.
OTHER EVENTS AND QUOTES
• ECB comments. Noyer: the ECB has pushed its mandate to the limit by intervening in bond markets, though it will continue to meet its responsibilities. Mersh: in order to eliminate any doubts on the sufficient fire power of the EFSF, Government’s of the euro-area should provide appropriate leveraging of the fund.
• Fed’s Fisher comments. “I believe that the actions we have taken recently will be helpful in supporting growth and jobs. However, I do not think that monetary policy is all-powerful. To get the strongest possible recovery we need reinforcing action in areas such as housing and fiscal policy.”
• US Government announce mortgage relief programme, allowing homeowners to refinance their properties irrespective of the magnitude of house price falls.
NZDUSD: Depth of support…
While initially nudging support on Friday night the “progress” on the European front has assisted in lifting the NZD. Expect it to track within the 0.7981 – 0.8183 zone looking towards the topside on any elevated release of today’s Q3 CPI data.
Expected range: 0.8058 – 0.8105
NZDAUD: On track…
Little to change the direction of this cross except getting the RBA interest rate decision next week out of the way. Even with a token cut this cross is unlikely to substantially reverse current trends until the 200 day moving average at 0.7669 is tested.
Expected range: 0.7705 – 0.7755
NZDEUR: Looking sharp…
European officials have escaped the weekend without a penalty. At this point the argument revolves around the level of haircut and bank recapitalisations. Expect this cross to continue to push the topside boundaries with some difficulty in getting through resistance at 0.5834.
Expected range: 0.5778 – 0.5828
NZDJPY: Warning, warning…
Continued warnings of intervention by Japanese officials on the JPY side of this cross appear to go unnoticed by the markets. An extension towards the topside and the mid 62JPY area is likely when such intervention takes place.
Expected range: 61.16 – 62.47
NZDGBP: Very trying…
The dip to 0.5000GBP on Friday was brief and unsustainable as the NZD rose alongside the EUR. This cross finds itself up against the familiar 0.5063 resistance level (1.9750 on the GBPNZD) and should struggle from here.
Expected range: 0.5033 – 0.5063
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