Economic views and news - Monday, 17 October

ANZ Research

Monday 17th October 2011

OUTLOOK

CURRENCY: The NZD finds itself back in the zone to start off an interesting week. Extensions higher are on the cards providing the optimism around an EU solution is maintained. Resistance around 0.8080 may be tough to break.

RATES: NZD rates in London had a quiet night, but higher global long yields should set the tone this morning.

REVIEW

CURRENCY: Nothing but need for risk as the Australasian currency bucket outperformed even the strong EUR to close the week on a high. Demand from most quarters ensured that it was a one way street.

GLOBAL MARKETS: Despite a bad news day on the whole, markets had a good day. US equities were up around 1.7 percent, completing their best week since mid-2009, led by some solid Nasdaq company results. Europe shares also ended in the black. US Treasury yields rose. Oil lifted to a three week high, and a broad range of commodities has also had a stellar week.

KEY THEMES AND VIEWS

PLAN TO HAVE A PLAN GETS THE BIG TICK. The weekend G20 meeting made further progress towards a plan to deal with Europe’s woes, with the next step being emergency talks in a week’s time. US Treasury Secretary Tim Geithner announced that “The plan has the right elements… I am encouraged by the speed and direction in which they are moving." The plan’s details have not been announced but are believed to include Greek write-downs of up to 50 percent, recapitalising and backing banks to the hilt, and boosting the firepower of the EFSF, probably via partial bond insurance. But the pressure is on.

Following Fitch’s lead a week ago, S&P downgraded Spain by one level to AA- on Friday. This is their third downgrade in three years, and their outlook remains negative. Bonds fell in Spain, Italy and Greece on the news. At 5.21 percent, Spain’s 10 year bond yield is well shy of the 7 percent considered to be the end of the road, but is more than twice that of Germany. Italian 10-year bond rates are again nearing the levels that saw the ECB step into the market in July, and French bond yields are up 37bp for the week. Yet broader markets have had an optimistic fortnight. As George Osborne, UK Chancellor of the Exchequer summed it up, “people are expecting something quite impressive” next weekend. The odds the markets will be underwhelmed seem rather higher than the chance they’ll be pleasantly surprised.

US CONSUMERS KEEP THEM GUESSING. US retail sales for September had their best result in seven months, growing 1.1 percent and beating expectations. US hard data refuses to roll over. However, the consumer confidence release unexpectedly dropped, and the gauge of consumer expectations for six months from now dropped to its lowest level in 30 years.

OTHER EVENTS AND QUOTES
• “The first priority here is for Europeans to put their own house in order.” Australian Finance Minister Wayne Swan and others pour cold water on calls by emerging countries to beef up the IMF’s coffers.
• “We urge the Financial Stability Board to define the modalities to extend expeditiously the framework to all SIFIs.” The G20 communiqué sets new standards for obfuscation in backing a mandatory capital surcharge on big lenders. JPMorgan Chase called the surcharge “anti-American”.

NZDUSD: Back in the black…
Having reached the 0.7981 – 0.8183 zone the NZD may find itself trading within it throughout this week. Further moves higher are very much the domain of developments on the European front as optimism is maintained.
Expected range: 0.8010 – 0.8090

NZDAUD: Second place…
The field of dreams for importers on this cross could well be tested as this cross continues to lurk around the key support level at 0.7781. Australian data may well bring some relief this week if the RBA meeting minutes hint at a cut to the cash rate in the short term.
Expected range: 0.7765 – 0.7805

NZDEUR: Making inroads…
Moves higher on this cross should take some time this week. The road past 0.5834 is not likely to be an easy one with today seeing this cross struggle.
Expected range: 0.5770 – 0.5815

NZDJPY: Watching brief…
Some comments from Japanese officials that new steps against a strong JPY may be forthcoming this week should put local exporters on alert. Any weakening of the JPY would accentuate the already strong cross, sending it back towards 63.70.
Expected range: 61.48 – 62.47

NZDGBP: Taking it on…
The move through resistance at 0.5063 was largely NZD-driven and this level will now remain good support today. An extension into the 0.51GBP zone is likely later this week.
Expected range: 0.5063 – 0.5113

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