Economic views and news - Monday, 10 October

ANZ Research

Monday 10th October 2011

OUTLOOK

CURRENCY: Markets this morning will digest early morning headlines from the Merkel / Sarkozy meeting that may help to start the week on a more positive note. Resistance levels remain difficult to break, however.

RATES: Although NZ rates did not trade in the London session overnight, expect local interest rates to open a touch higher in yield following offshore moves.

REVIEW

CURRENCY: Friday’s offshore session did see the NZD attempt break higher levels. The failure to do so was largely around downgrades of Italy and Spain by Fitch and the possible Moody’s downgrade of Belgium.

GLOBAL MARKETS: Markets gave the better than expected US payrolls data a big tick, but the Fitch downgrades of Italy and Spain tempered the mood. European equities ended slightly in the black but US equities ended down 0.8%, led down by financials. US bond yields rose. CRB commodity prices, gold and oil were all fairly flat. Markets are likely to respond somewhat positively today to the Merkel/Sarkozy press conference, which set a firm deadline for a plan. Not quite the same thing as a plan, admittedly.

KEY THEMES AND VIEWS

SO, WE MEET AGAIN. German Chancellor Angela Merkel and French President Nicolas Sarkozy concluded their weekend meeting declaring they would do “everything necessary” to ensure banks have sufficient capital. A deadline of November 3 was set to deliver a response to both the immediate crisis and “structural defects” in the Euro system. “By the end of the month, we will have responded to the crisis issue and to the vision issue,” Sarkozy said. We’ll see whether markets view this as sufficiently decisive. Even if it’s more can-kicking, then it’s certainly clear the available road is getting shorter, as November 3 is not far away. The leaders reiterated their intention to keep Greece in the Euro. Another week of headline watching coming up.

PAYROLLS BETTER THAN EXPECTED. The closely watched US non-farm payrolls data beat expectations on Friday, rising by 103,000 in September, with private payrolls rising 137,000. This puts it in the “not bad” category in terms of levels. There were also sizeable upward revisions to July and August. Some optimists are hailing an end to the risk of recession for the US, but given this data is volatile and prone to large revisions, we’ll not make any significant judgements from one outturn. What is true is that the US data is not rolling over in the same way it did in 2008. Details in the household labour data were mixed: the unemployment rate was unchanged at 9.1 percent, but the number of “discouraged” workers rose, as did long-term unemployed.

OTHER EVENTS AND QUOTES
•          Fitch downgrades Italy and Spain. Spain was cut from AA+ to AA-, while Italy was cut from A+ to AA-, with both on negative outlook.
•          Belgian/French bank Dexia became the first victim of the European sovereign debt crisis, with a rescue plan agreed over the weekend. Dexia is about as big as the entire Greek banking system. Not surprisingly, Moody’s has placed Belgium’s credit rating on review.
•          “No I’m fine, really.” French banks Société Générale and BNP Paribus denied reports they may need to raise billions to shore up their capital.

NZDUSD: Mauled…
A late session mauling of the NZD, and risk in general, on Friday ensured that it backed off the overnight highs. The US and Japanese holidays today may well detract from liquidity and keep the NZD from attaining a more positive start to the week. Support levels are close at hand and despite potentially positive European news the NZD may well slide further.
Expected range: 0.7629 – 0.7729

NZDAUD: Looking ominous…
A showdown of epic proportions may be on the cards in the coming week. On the currency front, however, things will be more subdued to start the week. A test of support at 0.7842 may well come early as this cross languishes further.
Expected range: 0.7842 – 0.7902

NZDEUR: All aboard…
The Merkel/Sarkozy weekend meeting has delivered screens full of headlines with potentially wider ramifications once details are hammered out. Expect the EUR to marginally gain against the NZD to start the week.
Expected range: 0.5720 – 0.5786

NZDJPY: Holiday mode…
With the Japanese on holiday the focus will be on wider Asian markets as the Chinese return to the market. Expect some yield support to be countered by those happy to sell NZDs closer to 60JPY.
Expected range: 58.55 – 59.45

NZDGBP: Packing up…
The recent GBP relative weakness has been largely reversed as the NZD suffers from further selling interests. Expect moves back into the 0.48GBP zone but not today.
Expected range: 0.4922 – 0.4972

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