Wednesday 31st August 2011
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CURRENCY: Offshore participants should exercise an element of caution today awaiting the release of the NBNZ August business confidence data. Expect the NZD to push on towards the next target of 0.8644 once 0.8550 is cleared.
RATES: There wasn’t a lot of interest in NZ rates during the overnight London session. We are likely to see swap yields open largely unchanged this morning.
CURRENCY: No hint of consolidation as buyers became impatient yesterday and entered the market. Their over exuberance extended the rally in the NZD close to resistance at 0.8550.
GLOBAL MARKETS: A breather in equities, following the previous session’s strong gains, is to be expected. But the fact that both US and European equities managed to hold on to gains and trade within a relatively small range despite some poor data suggests much bad news has already been discounted and investors now see value.
The weak US data, however, did see US Treasuries gaining in price. Those gains extended following the release of the FOMC minutes. Commodity prices were stronger, helped by higher oil and gold prices. The ECB was active in the Italian bond market following an auction of long-term BTPs which saw weak demand.
KEY THEMES AND VIEWS
FOMC MINUTES SHOW FED DOING THE GROUNDWORK FOR MORE EASING. Fed Chairman Bernanke’s Jackson Hole speech over the weekend did not contain any details for further action. Now we know why, with the release of the FOMC minutes from their August meeting – where they pledged to keep rates low until mid-2013, which drew an unprecedented three dissenters. The FOMC discussed the range of tools available, but looking at what they put on the table (reinforcing forward guidance, which was done in August; more QE; selling short-dated securities to purchase longer-dated ones; and reducing the interest rate paid on excess reserve balances), it is clear that their options are now severely limited and no new groundbreaking option was raised.
The FOMC is also divided on the next course of action, with some participants not convinced that the Fed can do much more. Hence, the decision to extend the September FOMC meeting to two days to discuss “the possible costs and benefits of various potential tools”. The hurdle for another full-blown QE is still high, and those dissenters from the August meeting will not be easily swayed by the doves. But with the US data still on the weak side, as evidenced by the fall in the Conference Board consumer confidence reading to its lowest level since April 2009 and the continuing decline in house prices, markets will hold out the hope of further Fed action. So even if we get a very weak ISM and payrolls print this week, any selloff in risk assets will likely be limited, as markets know the “Bernanke put” is there.
OTHER EVENTS AND QUOTES
• Chicago Fed President Charles Evans (FOMC voter this year) said he was in favour of further strong accommodation at this point, and for such policy to be in place for a “substantial period of time”. Minneapolis Fed President Naryana Kocherlakota, who dissented at the August FOMC meeting, indicated that he won’t be dissenting to the rate commitment in future meetings, but that “the case for any additional easing would have to be made on its own merits.”.
NZDUSD: Enough already…
With a couple of days of solid gains under the belt, the NZD needs a well deserved rest. Local economic activity data and the raft of offshore data should ensure that trading remains elevated but wary of a corrective move. For today any back off from the recent highs would see buying interest emerge around 0.8515. Topside resistance around 0.8585 should hold.
Expected range: 0.8515 – 0.8585
NZDAUD: Back in the groove…
Local building activity indicators assisted in differentiating the two economies yesterday. Attempts though to break through 0.8000AUD were thwarted overnight but could again be on the cards today.
Expected range: 0.7955 – 0.8005
NZDEUR: No resting…
Further gains on this cross should be slightly more difficult to achieve today given the extension into the 0.59EUR territory. Increasing concerns around European bank capitalisation though will not assist the EUR to maintain its current strength against the USD in the medium term.
Expected range: 0.5891 – 0.5935
NZDJPY: Change of guard…
A new Japanese PM is facing similar economic issues to the old one. There are no easy or quick solutions to these issues so relative JPY weakness to the NZD should continue. Having achieved the next technical level, expect some consolidation for this cross today.
Expected range: 64.88 – 65.68
NZDGBP: Pushed the limits…
Having lifted considerably over the past couple of days this cross should find itself struggling to break through 0.5250 today. The relative attractiveness of NZD yields will, however, mean a reversal of the move is limited today.
Expected range: 0.5200 – 0.5250
Source: ANZ Research
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