Economic views and news

Tuesday 26th July 2011 1 Comment

OUTLOOK

CURRENCY: The freeze continues today as the NZD remains locked in the 0.86USD zone and US politicians locked in heated discussions. Attempts to the topside may well be tempered by the NZ June trade release later today.

RATES: Another quiet session for NZ rates during the London session. There does not seem to be much interest ahead of the RBNZ OCR decision on Thursday. Expect an unchanged open this morning.

REVIEW

CURRENCY: Despite some mild weakness yesterday and overnight the NZD remained a currency in vogue. Demand throughout the European session ensured that it again pushed recent boundaries.

GLOBAL MARKETS: The US debt limit stalemate and Moody’s downgrading Greece further weighed on equities overnight. European stocks fell 1.1% while the S&P500 fell a more modest 0.5% after being down as much as 1% early on in the open. US bond yields were whippy with no real direction. Gold hit a new high but oil was down slightly. In the currency space, the USD was the clear loser, with the Swiss Franc the standout performer, reaching another new high against the greenback.

KEY THEMES AND VIEWS

STILL NO DEAL ON US DEBT LIMIT. The impasse continues, and as the August 2 deadline looms ever closer, the prospect of an agreement being reached between the White House and the Republican-controlled Congress grows ever bleaker. House Speaker Boehner is due to hold a press conference later this morning, but he is unlikely to announce any agreement. Instead, we are likely to get a game of political chicken throughout this week, where the Republicans will put up their own proposals and daring the President to veto it. While most agree that a US default will be avoided, there is a real prospect of the US losing its triple-A rating. Amidst all the political theatrics, global markets were by-and-large fairly well behaved – considering the circumstances. Equities were rattled more by another downgrade of Greece, with Moody’s now certain that a default is unavoidable. Safe haven demand was again evident, with investors flocking to gold and the Swiss Franc, sending both to record highs. The USD is lacking any friends, and we can expect further downside for the greenback to come.

IMF ARTICLE IV ON THE US. The IMF forecast growth of 2.5% in 2011 and 2.7% in 2012. Private investment is expected to be the major driver of activity, with fiscal consolidation resulting in public consumption spending falling by 1.7% in 2011 and 1% in 2012. The unemployment rate is forecast to fall only slowly to 8.4% by 2012 while inflation is expected to soften from 2.8% in 2011 to 1.6% in 2012. Significant excess capacity and contained inflation in turn suggest that accommodative monetary policy will remain appropriate for some time. Risks to the outlook are elevated and skewed to the downside. In stating the obvious, the IMF “highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation plan.”

Other events and quotes

Moody’s downgrades Greece further into junk territory to Ca, just one notch above default. Moody’s notes that “the announced EU programme along with the Institute of International Finance’s statement implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 percent”.

NZDUSD: Frozen…
Perhaps the NZ June trade data may thaw the NZD. A strong surplus would surprise many given the level of the currency is impacting on the underlying results. Today expect another day trading in the 0.86USD range.

Expected range: 0.8620 – 0.8690

NZDAUD: One down…
A mild Australian Q2 PPI release did nothing to dent the fortunes of the AUD. This cross again flirted with the 0.80AUD level but was unable to break through given the lack of outstanding factors on the NZD side of the equation. Similar trading is likely today although RBA Governor Stevens’ speech in Sydney this afternoon may help to solidify resistance levels.

Expected range: 0.7945 – 0.8005

NZDEUR: Up in the air…
This cross remains contained on the topside by resistance at 0.6050. Discussions around the US debt ceiling continue as politicians bandy about numbers. The patience of markets thins and as a result a strengthening EUR will help to further temper gains on this cross.

Expected range: 0.5985 – 0.6045

NZDJPY: Watching closely…
Nothing new in comments from Japanese officials that they are closely monitoring the movements of the JPY as it approaches the 78JPYUSD level. Moves back into the 68JPY territory are not likely to be easy to come by but while this cross continues to consolidate above 67.40 it remains on track to move towards 69.97JPY at some point.

Expected range: 67.40 – 68.20

NZDGBP: Likely lift…
Tonight’s UK Q2 advance GDP release may be the tonic this cross needs to break new ground. Do not expect the advances to be large at this point with the next resistance level at 0.5350 close at hand.

Expected range: 0.5288 – 0.5338288 – 0.5338

Source: ANZ Research

Comments from our readers

On 26 July 2011 at 10:24 am Tony said:

Well done ANZ Research.Love the way you have presented your commentary today,very user friendly,strait to the point,everthing itemised and easy to read.