Economic views and news - Friday, 12 August

Friday 12th August 2011

OUTLOOK

CURRENCY: A calmer end to the week for the NZD should not imply that liquidity has improved in markets. Concerns in the European arena will ensure that the weekend rumours fly delivering still further erratic moves for the NZD.

RATES: Local rates will open higher following global moves, with AU 3yr bond futures higher in yield, and US 10yr Treasuries up around 15bps.

REVIEW

CURRENCY: The early dip towards support at 0.8055 found plenty of demand across the board for the NZD yesterday. It then spent the remaining trading day building a base with several revisits of the 0.8110-0.8130 support zone.

GLOBAL MARKETS: European stocks opened up off the prior days low before sinking as financial stocks came under pressure, only to come back on news that German Chancellor Merkel and French President Sarkozy would meet next week to discuss the Eurozone debt crisis. Whether they will come up with a timely and credible plan (which is an absolute must given the virtual leadership vacuum) remains to be seen, but it buoyed markets, as did talk of a short-selling ban in Europe, which helped. US opened higher, spurred on by better than expected jobs data (see below), ad did commodities, although gold declined. For now it seems the bears have retreated, but who knows how long it will continue for.

KEY THEMES AND VIEWS

FRENCH BANKS AND SWISS PEGS. It was another day of volatility on northern hemisphere markets, but the mood had improved markedly by the end of the session. Although improved sentiment is of course welcome, there doesn’t appear to be much substance behind it, and as such it may prove to be short-lived. Nonetheless, French banking stocks were targeted early in the session on rumours an Asian bank had cut its credit lines to major French banks, and that others were considering following suit. Markets remain nervous that some of the larger French banks are dependent on short-term funding. Excessive volatility saw trading in a number of Italian banking stocks suspended at times. Equity markets were extremely whippy; after opening positively, European stocks sold off in line with a fall in S&P futures before a better than expected US initial jobless claims print (see below) turned sentiment around. Big movements were also seen in FX and commodity markets. Speculation was rife about another potential intervention by the Swiss National Bank in the “massively overvalued” CHF. Rumours that the SNB may peg the franc to the euro were sparked off by comments by SNB Vice Chairman Jordan, who said that the bank could consider “a temporary link with the euro, as long as the measure is compatible with price stability over the long term.” However the decline in CHF was pared back upon deeper consideration by analysts about the legal and practical difficulties, and constitution legality of it.

BUT TRADERS ARE STARTING TO PAY ATTENTION TO DATA AGAIN. Yesterday’s soft Australian jobs data caught the market’s eye despite volatility (although to be fair, the local session was fairly subdued yesterday), but it seems the US market is also paying attention, after almost ignoring data all week. This time it was a reasonable fall in jobless claims, which have started trending lower again after spiking higher in April and May. That said, US trade data were poor.

OTHER EVENTS AND QUOTES

US 30yr bond yields rose after a poor $16bn auction, with bid cover of “just” 2.08 times, well down on the 2.64 average over the past ten auctions. This was the first Treasury auction since S&P’s credit rating downgrade, and at yields around 0.75% below those prevailing before the downgrade.

NZDUSD: Base building…
Expect the erratic moves to continue for the NZD today. Equities continue to drive direction for the market although a more solid base is forming below 0.80USD. Those looking for sub 0.80USD dips may come to market next week assisting in lifting the NZD back towards the week’s highs.
Expected range: 0.8170 – 0.8325

NZDAUD: Another attempt…
The lift in the Australian Unemployment rate yesterday delivered some relative AUD weakness back into the 0.80AUD zone. This cross now looks set for another test of resistance at 0.8080 but that should not take place today.
Expected range: 0.7985 – 0.8075

NZDEUR: Show me the money…
Rumours leading into the weekend around France are likely to reach fever pitch tonight. This should deliver further relative EUR weakness and provide an attempt on the topside at the next level of resistance at 0.5825.
Expected range: 0.5770 – 0.5825

NZDJPY: Looking up…
With continued interest on this cross on the dips closer to 62.00JPY yesterday it is likely that this cross lifts further today. While the NZD will perform most of this work some JPY weakness is possible to close out the week.
Expected range: 62.50 – 64.58

NZDGBP: Reality cheque…
A weaker UK growth outlook as expected has help to ensure this cross looks towards resistance levels. Expect attempts to push back into the 0.51GBP zone throughout today’s trading.
Expected range: 0.5060 – 0.5130

Source ANZ Research

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