Tuesday 29th November 2011
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CURRENCY: A more difficult job of adding to yesterday’s gains may be in store for the NZD today. Momentum will have to be delivered from offshore as local factors at this point will struggle to extend the gains today.
RATES: NZ swap yields were marked higher overnight during the London session, in line with the rise in global yields. Expect yields to open around 3 to 4bps higher across the curve, but for volumes to remain light.
CURRENCY: As expected market participants scrambled to close short NZD positions yesterday. Key levels were easily eradicated as solid gains were delivered. Overnight a minor extension higher started to find supply.
GLOBAL MARKETS: Equity markets put on solid gains on hopes that policymakers will come out with fresh proposals to deal with the Eurozone crisis, helped by decent bond auctions in Italy and Belgium.
The Euro Stoxx 50 Index surged 5.2%, while the S&P500 is up 2.8% at the time of writing. The gains were broad based, with US retail stocks doing well on reports of record Black Friday sales. US Treasury bond yields rose while oil advanced past US$100/bbl at one stage, boosted by concerns over Iran’s nuclear programme. The antipodean currencies were the top performers in FX.
KEY THEMES AND VIEWS
RISING ON HOPE AGAIN? Walking in and looking at your screens this morning, you would be forgiven for thinking that all is well in the Eurozone, and that there must have been some major positive announcement that came out while you were sleeping. Sadly, this is not the case.
The rally in risk assets seems to be more on the back of hope. To be fair, the market was in part responding to reports of record Thanksgiving weekend sales in the US. And Italy and Belgium’s bond auctions attracted good bid-to-cover, allaying market concerns following Germany’s failed auction last week. But the main driver behind the surge in equities seem to be on hope that Germany and France can speed up plans for fiscal integration in the Eurozone, in what the German Finance Ministry calls “the creation of a Stability Union.”
It was one of those trading days where bad news was brushed aside. An earlier news headline of a €600bn IMF aid package for Italy was denied. Moody’s warned that a rapid escalation of the crisis threatens all of the region’s sovereign ratings. And the OECD’s latest economic forecasts made for sombre reading.
The OECD recommended that the major global central banks keep policy loose, and indeed, loosen policy further in order to support growth. The OECD believes that the ECB should continue to lower policy rates and ensure ample liquidity, recommending that the BoE extend its asset purchase target from £275bn to £400bn, for the Fed to leave rates unchanged until the end of 2013, and for the BoJ to extend its quantitative easing programme.
We have seen markets rally on hope before, only to be brought back down to earth when reality hits. Until policymakers step up to the plate, it will be difficult for the overnight rally to extend.
OTHER EVENTS AND QUOTES
• OECD Economic Outlook: “Concerns about sovereign debt sustainability are becoming increasingly widespread. If not addressed, recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption. Pressures on bank funding and balance sheets increase the risk of a credit crunch.”
NZDUSD: Taking a breather…
Solid gains over the past 24 trading hours should see the NZD comfortably taking a rest break today. Despite technically needing an extension into the 0.76USD territory this is not likely today. Offshore momentum will be required for this to take place and that is not present today.
Expected range: 0.7505 – 0.7595
NZDAUD: Started sharp…
The AUD has surprisingly outpaced the NZD over the past 24 hours despite next week’s looming RBA cash rate decision. In a world where yield matters it should be difficult for the NZD to break higher on this cross until larger Australian cash rate cuts are actually delivered versus priced in.
Expected range: 0.7580 – 0.7630
NZDEUR: Second thoughts…
The expected extension to the 0.5634-0.5665 zone took place a little too quickly and easily for that matter. European issues clearly are a concern but breaking higher from here will require positive news on the local front.
Expected range: 0.5634 – 0.5681
NZDJPY: Starting to struggle…
Having lifted solidly from support around 57JPY this cross may well run into more pronounced NZD selling interests above the 59JPY level. Expect difficulty in getting above 59.13 today.
Expected range: 58.33 – 59.13
The fortunes of the GBP continue to be weakened by the association with the Eurozone. This has ensured a lift in this cross back into the 0.48GBP territory where it will remain today.
Expected range: 0.4835 – 0.4875
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