Economic views and news - Tuesday, 20 December

ANZ Research

Tuesday 20th December 2011

OUTLOOK

CURRENCY: Failure to push higher and some concerns around the leadership transition in North Korea should continue to cap topside attempts for the NZD. Support levels may be investigated today.

RATES: A quiet London session overnight with only one trade, but interest from both sides evident. Local rates are expected to open unchanged.

REVIEW

CURRENCY: The initial marginally positive start for the NZD failed as Australian equities stumbled on their open. Locally confidence data assisted the fall to ensure no new gains were possible against the USD.

GLOBAL MARKETS: Quiet start to a quiet week, although risk took a knock with news of Kim Jong-il’s passing and a relatively downbeat assessment from ECB president Draghi. Small falls were experienced for US and European equities. US 10-year government bond yields fell (to 1.83% at the time of writing), German, French and UK yields edged up, but yields in Italy (6.75%) and Spain eased. Higher prices for industrials and grain commodities were offset by lower prices for precious metals. Oil prices were unchanged.

KEY THEMES AND VIEWS

DRAGHI DAMPENS BOND PURCHASE SPECULATION. As evidenced by the recent actions of the rating agencies there is deep scepticism that the newly agreed fiscal compact will hold under the pressure exerted by a weak fiscal starting point and weak economic outlook. Euro area finance ministers are reported to be holding a conference to discuss the €200bn in additional funding through the IMF and the precise mechanics of the fiscal compact. With not many sleeps until Christmas, the politicians are running out of time to get everything sorted by then. While European officials have claimed the self imposed deadline is not a legal one, and the Bundesbank saw no “urgent need” to reach a decision, with credibility of European fiscal policymakers under the spotlight, this is not a good look. The ECB is keeping a respectable distance with President Draghi reiterating that the ECB’s founding treaty prevents the central bank from increasing government-bond purchases to fight the region’s debt crisis. Maintaining credibility was also cited as a key reason for the ECB’s reticence, something that the politicians should take heed of. While the ECB has tried to present a united front, there has been dissention within the ranks, with departing ECB Executive Board Member Juergen Stark highly critical that the ECB had got its hands dirty in the first place.

OTHER EVENTS AND QUOTES:
• ECB steps up bond purchases. The central bank said it has settled €3.36bn of bond purchases in the week through Dec. 16, up from €635m the previous week.
• Kim Jong-il died on December 17 from a heart attack bought on by mental and physical strain according to the official Korean News Centre. His son Kim Jong-un is tipped to take over, and confirmed reports of missile test firings in North Korea do not suggest the olive branch will soon be extended southwards.

NZDUSD: Headline driven…
Expect the NZD to remain at the whims of global headlines. The European crisis and the leadership transition in North Korea will weigh. The 200 hour moving average, having fallen to 0.7640, should provide an adequate cap today with support at 0.7560 possibly coming into question later today.
Expected range: 0.7560 – 0.7635

NZDAUD: Minute that…
The RBA meeting minutes are due for release later today. Markets will be looking to assess the probability of a February cut by the RBA. Expect limited reaction to these and the cross to remain in 0.76AUD territory today.
Expected range: 0.7608 – 0.7684

NZDEUR: Trying hard…
A topside breakout for this cross will not be easy as sellers of NZD are comfortable to establish longer term strategic positions at these elevated levels. Expect today’s topside cap to hold.
Expected range: 0.5800 – 0.5850

NZDJPY: Waiting in the wings…
JPY moves off the back of the north Asian changing political landscape may well be limited in the near term. This should enable a slight retracement on this cross back into the 58JPY zone today.
Expected range: 58.85 – 59.55

NZDGBP: Back on struggle street…
Further difficulties on the NZD front have delivered a move lower here. Consumer confidence data in the UK should not assist relative strength and should stabilise this cross today.
Expected range: 0.4865 – 0.4905

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