Economic views and news - Tuesday, 30 August

Tuesday 30th August 2011

OUTLOOK

CURRENCY: Having expended considerable energy moving higher yesterday, the NZD will take a rest stop today. Demand remains but is likely to be patient at current levels and await a minor retracement before entering the market.

RATES: London was closed for a public holiday. Given the strong tone of equities and a lift in US bond yields, expect the NZ rates market to open this morning with yields slightly higher and for payside interest to emerge.

REVIEW

CURRENCY: A brief glance at the downside yesterday was quickly reversed as demand ensured the NZD led the way higher. Overnight it attempted to break towards the next level of resistance but failed in holiday thinned trading.

GLOBAL MARKETS: Equities performed strongly on news of some positive developments in Greece and better then expected US consumer spending data. Liquidity was thin with London away for a public holiday and Hurricane Irene causing disruptions in Wall Street. The Euro Stoxx 50 Index rose 2.2% and the S&P500 was up 2.4% at the time of writing. The lift in equities and a weaker USD helped to give a lift to oil prices. Traditional safe haven assets – US Treasuries, gold, Japanese yen and Swiss franc – all fell. The antipodean currencies were the best performers in the G10 overnight.

KEY THEMES AND VIEWS

FINALLY, SOMETHING TO CHEER ABOUT. The economic news over the past month has been pretty dismal, so it was good to get some positive news for a change – especially out from Europe. The news that sparked the risk on rally in markets overnight was the merger of two major banks in Greece: Eurobank and Alpha bank which are the second and third largest banks respectively. Markets are hoping that this merger will spark similar ones to strengthen the European banks.

Of course, mergers alone will not be the panacea. The problems are much more deep rooted and more capital will most definitely be required. In this regard, it was somewhat disappointing that the European Commission has rebuffed IMF head Lagarde’s call for European banks to be force-fed capital. For now though, at least some positive steps are being taken, while European politicians continue to dither. Indeed, following Fed Chairman Bernanke’s Jackson Hole speech, where he took US politicians to task over their fiscal decision-making, ECB President Trichet chimed in when speaking to European parliamentarians, saying that “The fact that markets are dysfunctional is, in our opinion, the responsibility of governments.” Touché.

It wasn’t just news out of Europe that was positive. US data showed consumers spending more than expected in July, helping to ease recession fears. But the data was prior to the plunge in equities over August. The upcoming dataflow this week, including consumer confidence, ISM and payrolls, will be key to watch. With expectations already revised significantly lower, it will require some really poor data prints to spark another wave of aggressive selling.

OTHER EVENTS AND QUOTES
• Japan has a new Prime Minister, the sixth in five years. Finance Minister Yoshihiko Noda will take over from Naoto Kan, who lasted 14 months in the job.
• ECB President Jean-Claude Trichet: “Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September.” This suggests the ECB will be dropping their tightening bias at the September meeting.

NZDUSD: Looking sharp…
Having taken out another level of resistance, the NZD should find itself having a rest day and consolidating within the 0.84USD zone. Buyers are likely to exercise more patience at this point, preferring instead to see if the NZD can retrace back into the 0.83USD zone. Sellers will await a lift closer to 0.85USD.
Expected range: 0.8415 – 0.8485

NZDAUD: Still showing potential…
Expect this cross to continue to hammer on resistance levels. At this point they are unlikely to give way easily as many still believe the interest rate cuts priced into the Australian market are unrealistic.
Expected range: 0.7922 – 0.7971

NZDEUR: Easing up…
Resistance levels on this cross are also being tested to the limit. With questionably brighter news on the European front, it will be difficult to break through them today.
Expected range: 0.5795 – 0.5835

NZDJPY: Still working at the topside…
Having taken out the resistance level of 64.58, this cross is now eyeing up the next level of 65.40. This level should not be under threat today with the cross choosing to remain instead within the recent range.
Expected range: 64.58 – 65.40

NZDGBP: Holidayitis…
With the moves of the NZD, this cross has lifted and tested the resolve of sellers. Further extensions higher are possible but today with the UK market having been on holiday to start the week, expect 0.5165 to cap the topside.
Expected range: 0.5125 – 0.5165

Source: ANZ Research

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