Economic views and news - Wednesday, 30 November

ANZ Research

Wednesday 30th November 2011

OUTLOOK

CURRENCY: Overnight moves for the Australasian currency bucket should be reversed today as markets get wind of the difficulties facing the European community, which continue to weigh on the global picture.

RATES: NZ swap yields were again marked higher during the overnight London session. We can expect the curve to open this morning around 3bps higher in yield.

REVIEW

CURRENCY: A quiet local session saw the base formed for a leap higher overnight as momentum came by way of a stronger AUD. A Fitch Australian foreign currency IDR upgrade assisted the AUD to move higher.

GLOBAL MARKETS: After the previous session’s stellar gains, European equities managed to post a more modest rise of 0.6%, helped by an Italian bond auction that was considered successful. US equities also posted gains, driven by a rise in consumer confidence. US bond yields rose as safe haven demand was reduced. Oil prices got a boost from the US consumer confidence data and also reports that Iranian protesters have broken into the British Embassy in Tehran. Gold traded sideways while in the currency space, the USD was down against all the other major currencies.

KEY THEMES AND VIEWS

STILL HOPEFUL. As I write, there has been no word out from the Eurozone finance ministers meeting. But markets appear to remain hopeful of some positive news to emerge, with equities managing to add further to the previous session’s stellar gains.

A much larger rebound in US consumer confidence certainly helped sentiment. Markets are still in the mood of entertaining good news and brushing aside those that are not so good – such as the ECB failing to fully sterilise its bond purchases or Eurozone banks’ demand for ECB weekly funding hitting a new two year high of €265.5bn (versus last week’s previous record of €247bn).

Even the Italian bond auction overnight was seen as a success by the market, helping to drive EUR up by a big figure. Sure, the Italians managed to get the bonds away and the bid to cover was decent (but not spectacular). However, Italy had to pay through the nose to sell those bonds, with the 3-year paper going for a record 7.89% yield (up from 4.93% in late October) and 7.56% for 10-year (6.06% the last time). It is unlikely that Italy can continue to pay those kinds of yields, which are well above the levels at which Greece, Ireland and Portugal asked for bailouts.

With most indicators now pointing to an outright recession in the Eurozone, bond yields at unsustainable levels for some countries, funding market still showing signs of stress and the threat of ratings downgrades hanging over the whole region, we shall see how long markets choose to have their blinkers on.

OTHER EVENTS AND QUOTES
• The ECB failed to attract enough deposits from banks to fully sterilise its SMP bond purchases, the first time since May. With the ECB ramping up their SMP purchases at a time when European banks are keen to hang on to liquidity, there could well be further short falls.
• US Federal Reserve Vice Chair Janet Yellen: “… the scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer-term financial assets.”

NZDUSD: Short or not?
The local session yesterday built a solid base on which trading higher could take place overnight. For today staying in the 0.76USD region might be a difficult ask with European headlines unlikely to be positive. Important Chinese November PMI data, still a day away, should return focus to the region’s economic potential performance and make moves higher difficult.
Expected range: 0.7577 – 0.7647

NZDAUD: Keeping up…
This cross remains transfixed around the 0.7600 level. Oscillations are likely to continue with support around the 0.7580 level to continue to hold.
Expected range: 0.7580 – 0.7630

NZDEUR: Relatively speaking…
The lack of anything positive on the European front has left the NZD looking relatively attractive. Further extensions higher will depend largely on the moves of the AUDUSD and as such it may be difficult to sustain a move today above 0.5730.
Expected range: 0.5681 – 0.5731

NZDJPY: Heavy lifting…
Today’s local session should see this cross further capped around 59.64 given the speed and magnitude of the reversal from the recent base at 57.00. Japanese economic data today is hardly likely to impact moves of the JPY.
Expected range: 58.84 – 59.64

NZDGBP: In the hole…
Like it or not the UK is tied to the moves of the EZ and as such further relative weakness to the NZD may come. Difficulties in pushing above 0.4890 may become apparent today.
Expected range: 0.4850 – 0.4890

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