Economic views and news - Thursday, 3 November

ANZ Research

Thursday 3rd November 2011

OUTLOOK

CURRENCY: Unemployment data should bring some colour to the market with expectations of a mild improvement. NZD to remain under pressure in the big picture as external forces continue to knock the kiwi about.

RATES: The US bond markets have not reacted to the FOMC meeting, but yields are higher in most markets, and that will be reflected on the open here. But the main event will be HLFS jobs data at 10:45am.

REVIEW

CURRENCY: Greece remains defiant, standing by the call for a referendum on the bailout package. The FOMC statement saw a late USD rally.

GLOBAL MARKETS: European markets opened with a mild spring in their step, with equities (and bond yields) higher on talk that the Greek referendum (if it goes ahead) might be held sooner (in early December) and on rumours (unsubstantiated) that China would invest $700bn in the EFSF. But this was tempered by weak European data (mostly PMIs – the Italian one fell from 48 to 43), and the cancellation of an €3bn EFSF bond auction. However, US data was better, with ADP data surprising on the strong side, and the FOMC a little more upbeat (see below).

Commodities recovered, led by a precious metals rebound.

KEY THEMES AND VIEWS

FOMC STATEMENT MORE UPBEAT, BUT WILLING TO PROMOTE RECOVERY. Broadly speaking, the tone of the US Federal Reserve’s FOMC statement was a little more upbeat in its characterisation of the economy. Noting that “growth strengthened somewhat” and that household spending had increased. Although the more optimistic tone was probably somewhat surprising, they did acknowledge that some of the strength was simply the reversal of the temporary slowdown earlier in the year. However, it's also worth noting that there was only one dissenter – Chicago's Evans. The minutes of the Sep meeting showed that "two members said that current conditions and the outlook could justify stronger policy action". So we have a more upbeat tone and less dissent. Remember too that 3 members voted against “operation twist” last time. As this was not "voted" on this time, it will not show up as dissent, but it may well come out in the minutes. Generally speaking, we remain in a benign policy environment – remember “operation twist” is ongoing. We also note the tweak in the final paragraph of the FOMC statement, which was changed from September’s "employ its tools as appropriate" to "employ its tools to promote a stronger economic recovery in a context of price stability". Is this a signal that it is prepared to do more (i.e. do we focus on "promote a stronger recovery") or a reminder that their hands are tied (i.e. focus on "in the context of price stability") given that core inflation is about on, rather than below target? We suspect more of the former – forget inflation for now – it might even help on the debt side, the key issue is the Fed’s other target – full employment. Note that Fed chair Ben Bernanke will give a press conference at 7.15am NZT, i.e. around the time this note is published.

OTHER EVENTS AND QUOTES
• Der Spiegel: “Greek Exit From Euro Zone Just a 'Matter of Time'”. The article starts with “Last week, it looked as though the euro had been saved. Now, in the wake of Greek Prime Minister Papandreou's announcement of a national referendum on the bailout package for his country, the common currency is even closer to the abyss. Still, say German commentators, it may have been the right move”.

NZDUSD: Tentative
We open today testing bottom side support as risk aversion lingers. Uncertainty has left the Kiwi bound to a range in past 24 hours. With the fate of Greece and its PM in the balance, we wait for the emergency meeting with Germany and France and vote of confidence this week. These should seal his and the rescue packages fate. Downside risks are on the cards for the day.
Expected range: 0.7850 – 0.7930

NZDAUD: Local influence
The reaction of a rate cut from the RBA is but a distant memory for the antipodean cross as it slipped back overnight toward the low 76 region.
Unemployment numbers from NZ and retail sales from AU should steer the market in the local session.
Expected range: 0.7625 – 0.7680

NZDEUR: The head scratcher
A bounce in the EUR has seen the NZDEUR head lower again over night which leaves scratch marks on many a head. However risk aversion is currently running the show and risk adverse investors are Kiwi adverse. Resistance at 0.5790 should see top side moves capped today.
Expected range: 0.5700 – 0.5790

NZDJPY: Back to it
This morning as the NZDJPY breaks through previous support at 61.80, you can’t help but feel that another intervention attempt has not been sustained.
However, it does leave a lingering back of your mind thought of - is there more to come? Watch for further downside moves. Worldwide jitters should keep this cross under pressure in the near term.
Expected range: 61.35 – 62.10

NZDGBP: Heading further south
The NZDGBP has taken a further fall over night and it looks likely for the mood to continue. Support today should stay firm at 0.4920 if not we could be back to printing 48p prices.
Expected range: 0.4918 – 0.4957

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