ANZ Research
Thursday 10th November 2011 |
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OUTLOOK
CURRENCY: All is not well in the currency markets this morning as the EU continues to wane. Today expect continued risk off trading in light of an unstable Italian political outlook and rising fear over its debt levels and yields.
RATES: NZ rates are not on anyone’s radar in the Northern Hemisphere trading session, for obvious reasons. Given the rally in US and German bonds, we can expect our curve to open lower in yield this morning by around 5-7bps.
REVIEW
CURRENCY: More woes from the crumbling EU have seen currencies sell off across the board overnight. A rush out of EUR and ‘risk’ has delivered large drops in the Antipodean pairs.
GLOBAL MARKETS: A definite risk off session overnight, with rising Italian bond yields sparking fears that the European debt crisis has reached the third largest bond market in the world. European equities fell 2.3% while US equities were off by a similar amount as I write.
Safe haven demand was apparent, with US bond yields falling around 10bps and German bunds also in demand. Surprisingly, gold failed to capitalise, lifting only marginally in sideways trade. Oil prices were initially hit, but rallied back on concerns over Iranian nuclear capability and an unexpected fall in weekly US inventories.
In the currency space, the big dollar was the clear winner, with the Scandinavians getting hit the hardest, followed by the Aussie, euro and Kiwi.
KEY THEMES AND VIEWS
SOARING ITALIAN BOND YIELDS SPARK SELLOFF. We have seen this European horror movie before: markets become concerned about debt sustainability, pushes bond yields sharply higher beyond breaking point, country unable to roll debt, seeks assistance, exits the primary market, is forced to implement tough austerity measures, growth gets crunched, and viewers are left in suspense as to the ending. The only difference this time is that this scene appears to be playing out in Italy, the world’s third largest bond market (after the US and Japan).
Italian 10-year BTP yields rose as high as 7.48% after margin requirements were raised, sparking a rush for the exit door. ECB buying in the secondary market pushed yields back a bit, but they are going against a very strong current. There were rumours of an emergency ECB meeting, but regardless of whether it was true or not, policymakers should be very concerned.
Greece was something that could be managed. Italy is a whole different ballgame. Given how long it took for European politicians to cobble together a decent plan for Greece, don’t expect a quick plan for Italy. Which means it is all up to the ECB to try and minimise the damage.
Further bond purchases in the secondary market via their Securities Markets Programme simply will not do. The ECB needs to make a hard decision over whether they push the nuclear button, and engage in full blown quantitative easing. We know the Germans are dead against it. But we know what happens when policymakers keep kicking the can down the road. Watch this space.
OTHER EVENTS AND QUOTES
• Head of the International Monetary Fund Christine Lagarde: “Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand… we could run the risk of what some commentators are already calling the lost decade.”
NZDUSD: Product of the environment.
The NZD remains a product of its environment and last night fell over a cent in the wake of rising EU woes (again), which see Italy reaching ‘breaking point’. With world markets still under pressure we can expect further risks to the downside today with support likely to kick in at 0.7800.
Expected range: 0.7805 – 0.7895
NZDAUD: Déjà vu
NZDAUD stuck with the programme overnight as each pair moved almost in tandem vis-à-vis the USD. Looking back towards the top of our range, we again watch for a break of these levels today. However range trading remains likely as external forces lead the way.
Expected range: 0.7655 – 0.7725
NZDEUR: Bring change
As the structural integrity of the EU continues to expose larger and larger cracks, the NZDEUR slowly tracked higher as the single currency bore the brunt of the Italian based panic. Our ranges are still intact so expect support again today at 0.5735 and topside moves capped at 0.5795.
Expected range: 0.5735 – 0.5795
NZDJPY: Pushed through
Breaking current ranges as the EU turmoil intensifies. The NZDJPY has dropped to test existing support at 60.85. A break of this level this morning will likely see continued downside pressure on the cross with risk aversion likely to continue.
Expected range: 60.30 – 61.20
NZDGBP: Continued comeback
NZDGBP also broke bottom side support overnight and was drawn to the next support level of around 0.4915. Showing signs of slowing downside potential, the level needs to be watched very carefully today as a significant break opens potential bottom side moves to 0.4860.
Expected range: 0.4940 – 0.4980
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