Economic views and news - Friday, 9 December

ANZ Research

Friday 9th December 2011

OUTLOOK

CURRENCY: Expect a weak finish to the trading week and support levels to be investigated as details of the ECB actions leave the market wanting more and waiting on any announcement from the European Summit.

RATES: With the RBNZ out of the way, we’re back in global watch mode. The news here is hardly encouraging so expect NZ rates market price action to remain consistent with the OCR on hold for an extended period.

REVIEW

CURRENCY: Yesterday’s RBNZ MPS/OCR did little to alter the landscape for the NZD market. Overnight the spike higher on misplaced optimism was soon eliminated as the Australasian currencies were dragged lower.

GLOBAL MARKETS: All about the ECB overnight and while risk appetites were initially buoyed by the implementation of multiple policy measures, sentiment rapidly turned sour ex post with EURUSD down 1 percent, same for other FX majors and European bourses closing down over 2 percent. The DJIA was down 1.2 percent at the time of writing.

Italian 10 year yields were close to 50 basis points higher and spread to bunds over 440 basis points. The French German spread widened to 130 basis points.

KEY THEMES AND VIEWS

ONE STEP FORWARD, TWO STEPS BACK. First up the good news. The ECB cut rates by 25 basis points as expected. They also offered 3 year financing to banks and eased rules on the collateral required from banks to access ECB funds. Not a bad combination first up and the initial market reaction was positive with EURUSD spiking above 1.3450.

Now the bad news. The decision was not unanimous, a 50 basis point move was not discussed and some members would have prefered to wait a little longer. With a recession beginning in Europe one wonders what new information would have been relevant. Despite more liquidity support, funding pressures in the eurozone increased. The market was looking for guidance on the inevitable bazooka in the form of QE which was hosed down.

In regard to the idea of eurozone central banks lending to the IMF, we got the following little gem from Draghi: “It is legally complex… If the IMF were to use this money exclusively to buy bonds in the euro area, we think it is not compataible with the treaty.” Ouch. So for now the ECB is not coming to the rescue, limiting their involvement to parts of the crisis impacting them – liquidity. It’s not their job to bail out fiscal profligacy.

This turns attention back on the politicians to take the lead with Draghi emphasising that the new fiscal compact being discussed at tomorrow’s EU summit is the most important precondition to restoring confidence in the euro area. With Merkel and the Polish PM talking down tomorrow’s summit overnight, another outome of the can being kicked down the road beckons. Not good and risk and markets responded appropriately with risk sentiment down across the board.

OTHER EVENTS AND QUOTES
• The Bank of England announced the results of its monthly monetary policy deliberations, with no changes to interest rates (0.50%) nor the asset purchase target (at £275bn) as widely expected.
• The European Banking Authority said the region’s lenders will need to raise €114.7bn (US$152.7bn) in fresh capital.

NZDUSD: No look pass…
Having cleaned things out on the topside, support levels are now in for an investigation. Last night’s price action should leave the markets with no doubt that current measures being undertaken are not sufficient to quell risk concerns.
Expected range: 0.7680 – 0.7765

NZDAUD: Lockstep…
Little to differentiate these currencies in the offshore market and as such moves in tandem are likely to continue with a bias towards the downside albeit a mild one on the day.
Expected range: 0.7565 – 0.7615

NZDEUR: Lock, stock…
Actions by the ECB overnight provided initial impetus for this cross to spike higher. The reversal was achieved reasonably easily. Today’s trading should see support levels mildly tested given the weakness of the EUR will flow through to the Asian session.
Expected range: 0.5775 – 0.5835

NZDJPY: Testing support…
This cross looks set for a deeper dip below 60JPY. Expect an investigation of the strength of buying interests around the 59.70 area once initial buyers around 60.00 are satisfied.
Expected range: 59.70 – 60.80

NZDGBP: Further defence…
Another attempt to break the 0.50GBP level was again thwarted by strategic sellers of NZD. They will look towards the support level at 0.4935 to cushion moves lower on this cross.
Expected range: 0.4935 – 0.4985

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