Economic views and news - Friday, 20 January

ANZ Research

Friday 20th January 2012

OUTLOOK

CURRENCY: With much of the fire from recent moves extinguished expect the NZD to finish the week subdued. A long weekend and the Chinese New Year celebrations should see lower support levels tested.

RATES: NZ rates were quiet overnight as the market digested a tame local CPI versus a slight drift up in global yields. The latter will set the scene for today.

REVIEW

CURRENCY: Very weak releases all round helped to ensure the NZD gave back some of the recent gains yesterday. That trading theme was muted overnight enabling the NZD to remain within the 0.80USD territory.

GLOBAL MARKETS: Risk on bias overnight. EU bourses assisted by reasonable Spanish and French bond auctions (good volume and average prices through the market). The US data dump had semblances of goldilocks (low inflation but better volumes) but it’s a stretch to say she will be sleeping in our bed. Risk bias and a lift in US equities accentuated by better than expected US earnings and US 10 year Treasury yields up 9 points amidst some talk of portfolio reallocation. Cooper up on signs China could relax credit controls. A whip around and we see not a lot of conviction. The NZD hollowed out a narrow 0.8002-0.8029 range. Little follow through for the AUD. Oil, gold and silver down. US 10 year TIP’s at a negative yield.

KEY THEMES AND VIEWS

THE BULLS HAVE THE UPPER HOOF? As I sit down at my desk the immediate question is what to write about. Yes, activity overnight contained semblances of risk-on courtesy of earnings, decent US data (though not across the board with the key Philly Fed undershooting expectations) and better than expected European bond auction results. Stepping back we see equities have hit 2½ month highs, which on the face of it suggests the battle royal between liquidity and fundamentals looks to be gravitating towards the former. Of course the snags are endless. There is Greece’s private sector deal, Italy’s surge in redemptions in February and Europe’s sovereign problems have not disappeared on either side of the equation (poor balance sheets and limited economic flexibility) needing to be addressed. But for now we’ll take any signs of stability (or market fatigue) as welcome. Next week will likely prove a different story with narrow ranges in risk measures like the NZD portending of breakouts.

SECOND TIER COMMENTS. We were drawn to comments by Luxembourg Prime Minister Juncker overnight, who noted that the euro area must find ways to boost economic growth while tightening government budgets because the region risks economic stagnation. There is a palliative to debt woes; it’s called growth. Austerity alone is a necessary but not sufficient condition to averting woes. Solutions must be multi-pronged.

OTHER EVENTS AND QUOTES
• IMF forecasts a “slight” recession (-0.5%) in the euro region this year even as the economies of Germany and France continue to grow.
• ECB head Draghi. “We see a softening business cycle in Europe with significant downside risk……..some tentative signs of stabilisation of economic activity at low levels….. All this is subject to downside risks, in other words it can get worse”.

NZDUSD: Taking a break…
Having extended as sharply as it has many will be looking for the NZD to reverse a large part of the gains. While some correction is likely, and could be as deep at 0.7960 today, underlying support remains for the NZD at this point. The approaching long weekend and Chinese New Year celebrations should ensure demand wanes on the day and recent positions are squared.
Expected range: 0.7960 – 0.8050

NZDAUD: Showing the strain…
This cross continued to confound yesterday after Australasian data delivered surprises. Having been unable to hold support levels this cross could well be destined to ease marginally today.
Expected range: 0.7665 – 0.7705

NZDEUR: On the bench…
Further corrective moves on this cross are likely today. A deeper dip towards 0.6185 is possible but may take tonight’s session to achieve and a more sustained move higher in the EUR.
Expected range: 0.6185 – 0.6225

NZDJPY: Handing over…
It has been the JPY doing most of the work here overnight. JPY weakness helped to counter much of the recent NZD move but this cross should remain in corrective mode today.
Expected range: 61.45 – 62.05

NZDGBP: Deeper dip…
Further corrective moves are likely here as well towards the 0.5150 support level as the NZD eases.
Expected range: 0.5150 – 0.5200

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