Economic views and news - Tuesday, 24 January

ANZ Research

Tuesday 24th January 2012

OUTLOOK

CURRENCY: Expect continued support for the NZD today off the back of AUD and EUR strength. Buyers would support any dip closer to 0.8080 while sellers will await levels closer to 0.8183 that may be out of reach today.

RATES: A quiet day for NZ rates in the London time-zone and we expect the NZ market to open unchanged to up a point today.

REVIEW

CURRENCY: The quiet start to the week disguised moves overnight as topside resistance was broken through and supply in the NZD dried up. Sellers emerged ahead of minor resistance around 0.8150.

GLOBAL MARKETS: Risk on or risk off overnight? More former than the latter, but with no real conviction. European equities rallied, but the S&P 500 was off 0.2 percent at the time of writing. EUR strengthened and the NZD surged to as high as 0.8140. Oil was up on news the EU had agreed to ban imports of Iranian crude from July. Gold rallied as the dollar weakened.

KEY THEMES AND VIEWS

IN A NUTSHELL. If you are after a summary of recent market movements, this little gem from one commentator (Barton Biggs) sums it up: “I’m terrified I’m not long enough…. and terrified I’m too long if the apocalypse is coming in Europe”. Sifting between the tea leaves we can see semblances of position squaring and short squeezes, most notably in the EUR following the build up of record shorts. But the real underlying story remains of tension between the bazooka style response (with noises of the EFSF and ESM potentially running in parallel and continued moves lower in Euribor adding to conviction) versus the poor underlying fundamentals. Talk of 65-70% haircuts to private sector Greek bondholders are necessary but this still leaves the debt burden around 120 percent of GDP, and in a country that is moving backwards in the growth stakes. It’s like moving from outright bankruptcy back to insolvency, and every one knows that the latter leads the former which suggests a groundhog day of repeating nightmares. Stepping back we note a 50 plus percent decline in the VIX since US equities hit their lows in early October last year. This portends of more market comfort towards the so called endgame – which is not to be confused with markets thinking all is well. The problem with this is that the tail-risks are now skewed massively in either direction, and there is no stepping away from the political element in the middle. At times like this, when guidance from the data is absent, it is useful to step back and ask what has changed. Nothing. Fickle markets movements across asset classes really continue to bear this out. Threats by an Iranian politician to blockade the Strait of Hormuz (and another to cuts of shipments to the EU completely) are a reminder that there are also multi-pronged risks.

OTHER EVENTS AND QUOTES
• IMF’s Lagarde urges European leaders to increase the size of it multi-billion euro bailout fund and use common euro bonds as a tool to prevent the debt crisis from turning into a 1930s style depression.
• German Chancellor Merkel says Germany and Belgium agree on the need to bring ahead implementation of the permanent European rescue fund; doesn’t see any need for a bridging loan for Greece.

NZDUSD: Full of energy…
Marginal corrective moves towards the end of last week appear to have avoided any real dip at this stage. The energy with which the NZD started this week should continue particularly if a Greek debt deal can be sealed.
Expected range: 0.8080 – 0.8150

NZDAUD: Finding it tough…
The troubles of the NZD against it’s trans Tasman counterpart are set to continue although close attention this week will be on the mid week release of the Australian Q4 CPI. Any further evidence that the RBA has room to cut interest rates should support his cross in the mid 0.76AUD zone.
Expected range: 0.7665 – 0.7705

NZDEUR: Pressing on…
While not making new ground on the topside to close out the week this cross recovered some of its recent losses and held support at 0.6185. Expect further support today to ensure it remains in the 0.62EUR zone.
Expected range: 0.6202 – 0.6242

NZDJPY: Hard road ahead…
As the 200 day moving average approaching (63.01 currently) the road on the topside will get more difficult. Today’s moves should be relatively subdued given Chinese New Year celebrations continue.
Expected range: 62.05 – 62.75

NZDGBP: Support holding…
Technical support around 0.5165 held overnight and delivered another bounce on this cross. Markets await more substantial UK economic news in the form of UK Q4 GDP and the BoE meeting minutes later this week.
Expected range: 0.5185 – 0.5215

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