Economic views and news - Monday, 12 December

ANZ Research

Monday 12th December 2011 1 Comment

OUTLOOK

CURRENCY: Having completed a good technical cleanout last week the NZD should start this week on a more positive note. Expect support to be evident on moves under 0.77USD while sellers will await 0.78USD+ levels today.

RATES: Expect a slight risk-on bias across global markets to lift NZ yields.

REVIEW

CURRENCY: The expected move into the 0.76USD territory briefly took place on Friday evening. EU summit news and positive equity moves assisted in lifting it back to close the week within familiar ranges.

GLOBAL MARKETS: The markets took the EU summit as stabilising on Friday night with European Equities higher lead by Eurostoxx50 up 2.4% Banks and Financial services leading the way in both the European and US markets. S&P closed up 1.7%. Global yields agreed with the equity markets higher in yield overnight with US 10’s 9bps higher in yield at 2.06%. Bunds follow 12bps higher at 2.14%. European money markets don’t buy into the stabilisation with Euro 1yr basis swap widening from -70 to -86 and 3m FRA/OIS spread a measure of funding costs widens to a new high at 96bps from 82bps. Italian 10yr yields ease 9bps at 6.36%, 421 to bunds.

KEY THEMES AND VIEWS

A SKELETON. We got semblances of an agreement out of the EU summit. In terms of what was needed, the hooks and what we got we saw:
•       A new fiscal rule to enforce fiscal discipline, including that annual structural deficits should not excess 0.5 percent of GDP. The hooks: this is not enough to stablise net debt as a share of GDP in nations such as Italy. Legal and ratification hurdles remain. Treaty changes were rejected at the EU level though “principles” endorsed. It is not completely clear how the new treaty / rule will be policed and recall the flagrant disregard of so-called fiscal rules some countries had entering in the euro.
•       Theoretical assistance of another €200m from the EU to the IMF to help reforming nations. This helps but pales in comparison with the financing needs of Italy and the IMF cash appears to go counter to what Draghi said on Thursday about it being illegal under the Lisbon Treaty for a central bank-IMF-Eurozone government action. The ESM looks like being fastracked to June though everyone is silent where the €500m is coming from. Ex-post Finland threw a hand grenade announcing it could withdraw if the condtion of unanimous decision making is ignored.
•       No word on additional ECB support (which is hardly surprising given Draghi ruled it out at the end of last week).
So right here an now we are left with more questions than answers. Yes, we acknowledge the progress but getting consensus from 27 countries was never going to happen overnight. Outcomes lack two decisive components: more resources and a showstopper to stabilise the poor economic environment,. It doesn’t look a durable turning signal for risk.

OTHER EVENTS AND QUOTES:
• Slowing export growth in China (13.8%y/y) but still above expectations 10.9%). China to create $300bn FX investment vehicle one for USD and one for Euro. US University of Michigan Consumer Confidence lifts to 67.7, helping equities and extending trend of better data from Uncle Sam.

NZDUSD: Shifting focus…
Expect the NZD to tread familiar ranges to start off the week with a slight positive bias. Asian markets may well turn their attention briefly towards the local environment and the downside risks facing China rather than those facing Europe. This may well cap moves of the NZD initially.
Expected range: 0.7705 – 0.7795

NZDAUD: Three legged race…
This cross continues to provide little to inspire traders offshore as interbank trading begins to slow in advance of the Christmas / New Year break. Support around 0.7546 should not be investigated today while longer term resistance at 0.7679 looks out of reach this week.
Expected range: 0.7565 – 0.7615

NZDEUR: Questions remain…
Questions may be been dispelled around the immediate breakup of the Euro Zone however they remain about economic performance. Weaker prospects in this area should ensure that falls on this cross are cushioned but not eliminated in the short-term.
Expected range: 0.5750 – 0.5800

NZDJPY: Brief relief…
The dip into the low 59JPY area did reveal buying interests. While not completely satisfied they may have to be patient this week as the JPY remains stationary leaving the NZD to do all the work.
Expected range: 59.70 – 60.80

NZDGBP: No man is an island…
But apparently a country is. UK’s insistence to remain on the outer at the recent EU Summit may well see the GBP under more scrutiny in the future. Short-term this may deliver enough weakness to see 0.4979 tested.
Expected range: 0.4935 – 0.4979

Comments from our readers

On 13 December 2011 at 7:39 am Siena said:

Kiaora. "Europe will be forged in crises and it will be the sum of the solutions adopted for those crises" Jean Monnet, Memoirs, 1976 The European Union is in profound crisis – a financial crisis, an economic crisis, a sovereign debt crisis, a social crisis with almost 23 million unemployed, but also a fundamental crisis of European integration itself. In order to resolve this crisis, avert prolonged recession and create the conditions for growth and employment, more Europe is necessary, not less: more Europe to ensure fiscal responsibility and integration, more Europe for the mutualisation of sovereign risk, the restoration of long-term solvency and the leveraging of EU-wide investment in growth, competitiveness and jobs. All this requires strong leadership from the European Commission and the reassertion of the Community method. The Commission must exercise its right of initiative and make proposals commensurate with the dimension that the crisis has taken, in place of failed ad-hoc intergovernmental palliatives. More Europe, a new Europe will require a fundamental pooling of resources and sharing of responsibilities. It is preferable to a situation in which individual national governments are no longer able to survive the pressures of their creditors and private rating agencies. A quantum leap in European integration is necessary, not only to create debt instruments and a growth model that investors can believe in, but also -and essentially - in order to reassert democratic governance. The institutional framework for this new Europe must therefore ensure proper representative and participatory forms of accountability towards the citizen. The European Economic and Social Committee has an active role to play in this framework, both as a bridge to civil society and as a proponent of innovation and change. The way I see it at the moment is that Europe needs to step up economic governance to guarantee fiscal discipline in each Member State, especially in the Euro area. The agreed reform package, the so-called six-pack, together with new regulatory proposals and the accompanying the European semester for better coordination of economic and national budget policies and for closer EU surveillance, must be implemented swiftly and correctly.