Economic views and news - Monday, 16 January

ANZ Research

Monday 16th January 2012

OUTLOOK

CURRENCY: The grounding down of European credit ratings could well see relative support for the NZD continue. However, resistance around 0.7980 remains in place and would be difficult to break during today’s trading.

RATES: There was downward pressure on NZD rates in the London session and they are likely to open slightly lower.

REVIEW

CURRENCY: Initial moves lower for the NZD briefly tested the 200 hour moving average but support was enough to put it quickly back on track. The S&P downgrades were announced shortly before the FX market closed.

GLOBAL MARKETS: The day started with a mild selloff, which turned into a rout as the rumours grew ever more persistent that S&P downgrades were imminent. The actual downgrades came after market close, so there may be more impact seen tonight, though much is priced in already as the action was well signalled. Equities fell, US bond yields fell, and peripheral Eurozone sovereign bond yields rose, though not much in the context of the previous day’s falls. Commodities were generally weaker. Oil fell to a three week low.

KEY THEMES AND VIEWS

DOWNGRADES GALORE. Standard & Poor’s hit Europe with downgrades on Friday, sparing few. “In our view, the policy initiatives taken… in recent weeks may be insufficient to fully address ongoing system stresses.” Finland, the Netherlands and Luxembourg kept their AAA ratings but were put on negative watch. France and Austria were cut from AAA to AA+ and remain on negative watch. Malta, Slovakia and Slovenia were cut one notch, Spain, Italy and Cyprus two notches, and Portugal by two notches to junk. The downgrades add new interest to a French bill auction this week. Germany is now the only Eurozone country with a stable AAA rating. A downgrade of the European Financial Stability Fund’s AAA rating is likely to be imminent, given that in December S&P noted that “based on EFSF's current structure, were we to lower one or more of the current 'AAA' ratings on EFSF's guarantor members, all else being equal, we would lower the issuer and issue ratings on EFSF to the lowest sovereign rating on members currently rated 'AAA'.” Fairly clear cut.

GREECE RESTRUCTURING TALKS STALL. As if that weren’t enough, talks between the Greek Government and its private sector creditors have been “paused for reflection on the benefits of a voluntary approach,” polite-speak for “close to collapse”. It is fair to say that negotiating with private sector creditors has not been a huge success. The intention was to reduce moral hazard by ensuring the private sector takes some pain, while keeping it “voluntary” to reduce contagion risk, and avoid triggering default insurance and spreading losses further through the financial system. Private creditors have an incentive to be involved in that they may be able to negotiate a better deal than is likely under a disorderly default – or at least open a small window out of which to throw some of their money. But talks are breaking down on the question of the interest rate to be paid on the replacement bonds. A headline 50 percent write-down will in practice be far greater if this rate is as low as authorities want. Rumour has it Greece will introduce a collective action clause, meaning only a 75 percent sign-up is required for it to apply to all. Seldom has the adjective “voluntary” been so stretched. All up, the odds of a disorderly default are increasing.

NZDUSD: Growing support…
Initially the NZD may weaken off the back of the Asian market’s digestion of Friday’s S&P European downgrades. Support around the 200 hour moving average (now 0.7889) should cushion falls if tested today. Resistance at 0.7980 will be out of reach for markets today.
Expected range: 0.7895 – 0.7980

NZDAUD: Found wanting…
Expect more directionless trading to continue on this cross as it oscillates around the 0.77AUD level. Moves higher are difficult even if the approaching NZ Q4 CPI release due this week is above market expectations.
Expected range: 0.7665 – 0.7705

NZDEUR: Chaos on credit rating reef…
What better day to deliver bad news to Europe than Black Friday. The late S&P delivery of a raft of credit rating downgrades saw only Germany survive the chaos. With the EUR having already returned to its weakening path before the announcement, expect further weakness today.
Expected range: 0.6230 – 0.6290

NZDJPY: Holding up…
Support at 60.50 held to close off last week and would do so again today. Initial NZD weakness may assist another look at this level early this week.
Expected range: 60.65 – 61.35

NZDGBP: Tracking trouble…
This cross should have difficulty in getting above 0.52GBP today. NZD initial weakness may see Friday’s lows revisited but remember the troubles of the GBP have not diminished as the market focuses on the EUR.
Expected range: 0.5155 – 0.5195

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