Economic views and news - Wednesday, 24 August

Wednesday 24th August 2011

OUTLOOK

CURRENCY: Local NZ July trade data should help to further the topside exploration for the NZD as it looks towards the next level of resistance. Offshore equity market performance will assist the move higher.

RATES: No kiwi trades were again reported in the overnight London session, although some payside interest was evident. Local rates are expected to open this morning broadly unchanged.

REVIEW

CURRENCY: A quiet local session disguised a solid overnight move for the NZD. With strong Asian demand helping to drive it through the 200 hour moving average and place a solid base under any potential corrective move.

GLOBAL MARKETS: Another relatively quiet session in markets overnight. Risk traded well helped by a smaller than expected US government list of “problem” banks, some stronger than expected Chinese and European PMI data and the expectation that weak US data would raise the prospect of QE3. US and European equities rose, and while European government bond yields edged up, US yields eased, with the 10-year yield at 2.09% at the time of writing. Commodity prices edged up, led by gas, grains and oil. Gold prices eased.

KEY THEMES AND VIEWS

COUNTING ON THE BENANKE PUT. Going by recent market moves markets are clearly looking towards this week’s Jackson Hole meeting, with investors waiting for clear statements from policymakers about what they can do about fiscal troubles in Europe and growing economic headwinds in the US. The main focus will be the assessment of the US economy by Bernanke on Friday (US time), with some analysts expecting the Fed to take further action to depress longer-term interest rates. Weaker than expected US data overnight only seemed to add to this confidence. The housing sector clearly remains in a deep slump, with new home sales in 2011 set to be the worst year on record. The Richmond Fed manufacturing survey also fell by more than expected and while it suggests next week’s key manufacturing ISM is unlikely to be as weak as the disastrous Philly Fed result, the likelihood is that a sub-50 print will be delivered. Whether or not the Fed will soon deliver on QE3 remains to be seen, and while markets are counting on a magic bullet the Fed’s arsenal is quickly running out.

MIXED MESSAGES FROM EUROPE. Following on from the better than expected Chinese HSBC PMI, August PMI’s across the Eurozone held out the hope of mild expansion. Offsetting movements were noted for German and French manufacturing and services gauges. While the market took some heart from this and brushed of the weaker than expected German ZEW survey, the challenges remain formidable. Comments overnight by Alan Greenspan that “the euro is breaking down” were noted by markets, with Greenspan’s primary area of global concern the health of the European banking system rather than the US economy.

OTHER EVENTS AND QUOTES
• The German ZEW survey was considerably weaker than expected, with the current situation, and economic outlook gauges plunging. Comments in the ZEW survey noted that scepticism on future growth has increased "dramatically". Domestic and external events are both weighing on sentiment, with the weaker Q2 German numbers, US debt downgrade and recession fears, and concerns in Europe the major catalysts.
• Magnitude 5.9 quake hits Virginia. No major damage reported.

NZDUSD: Full credit…
A solid performance for the NZD overnight. Demand, primarily out of Asia, should continue throughout today and assist with an extension towards the next level of resistance on the topside. Buyers awaiting a move into the 0.82USD area may have to sit on the sidelines today.
Expected range: 0.8300 – 0.8380

NZDAUD: Made the team…
RBA Battelino’s speech yesterday highlighted just how difficult policy setting will be over the coming months. Subtle attempts to steer the market away from pricing in aggressive Australian interest rate cuts should temper topside moves on this cross today.
Expected range: 0.7905 – 0.7965

NZDEUR: First pick…
Elevated expectations of the US Federal Reserve Chairman Bernanke and ECB President Trichet may see markets unfold later in the week. However at this point the NZD is putting in the hard yards with an extension towards 0.5825 possible in the coming days.
Expected range: 0.5750 – 0.5805

NZDJPY: Warming up…
Another move towards the topside is possible today however completion of the technical picture would require 64.58 to be reached and this is not likely. Expect support around the mid 63JPY to hold today.
Expected range: 63.55 – 64.15

NZDGBP: Lining up…
Another leap perhaps for this cross today. Resistance however at 0.5082 should hold the topside as markets await the release later this week of the UK Q2 provisional GDP data.
Expected range: 0.5030 – 0.5082

Source: ANZ Research

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