Economic views and news - Thursday, 8 March '12

ANZ Research

Thursday 8th March 2012

OUTLOOK

CURRENCY: Having avoided a test of key support yesterday the NZD will find itself at the mercy of today’s RBNZ Monetary Policy Statement. Expect any dips to the low 0.81USD area to uncover further demand.

RATES: There was a bit more life in the NZ rates market overnight, in anticipation of the RBNZ, but yields didn’t move far.

REVIEW

CURRENCY: Yesterday’s turnaround in the NZD was the result of switching out of AUD for many as a disappointing Australian Q4 GDP release opened the RBA’s door wider. Overnight further support for the NZD emerged.

GLOBAL MARKETS: Risk was back on the table overnight as a result of some decent US data and more signing up to the Greek debt restructure. Equities were up in both the US and Europe, while safe-haven bond yields rose slightly. European peripheral sovereign bond yields were down. Commodity prices generally joined the risk-on party, with the CRB index up slightly, and WTI and Brent crude were both up. Gold was also stronger, rebounding from a five-week low.

KEY THEMES AND VIEWS

RISK ON AGAIN. Risk appetite improved overnight, largely due to a solid ADP payrolls figure, albeit one close to expectations. This data is very noisy and has a mixed record as a predictor of the official BLS non-farm payrolls data, but markets latched onto it nonetheless. Perhaps no news is good news, when it comes to the US recovery. Sentiment was also assisted by the fact that investors with 58 percent of the Greek bonds eligible for the debt swap have now signed up for the ‘voluntary’ restructuring. The offer ends at 10pm Athens time tomorrow. It appears likely that the thresholds will be met, and collective action clauses instigated. This will have two side-effects: it will likely trigger credit default swaps, and it may also scare private investors away from other peripheral debt – though a disorderly default would too!

SPAIN IN PAIN. Once the Greek deal is finally over the line, buying Greece around a year of grace, attention is likely to turn to Spain. Their benchmark borrowing costs have risen back above Italy’s for the first time in almost eight months. In early December, Italian 10-year bond yields were 80bp above Spain’s, but Italy have done better at curtailing deficits. That’s not to say that Spain’s bond market has not benefited from the ECB’s largesse. Since the LTROs, which accepted Spanish debt as collateral, amongst other things, Spanish bonds have rewarded investors with a 7.7 percent return. However, with falling GDP, the debt maths is going against them rapidly. With the LTROs having accelerated “bringing home the debt” to their own banks, Spain may find itself up the creek without a paddle. After all, much of wider Europe’s early generosity to Greece stemmed from their own banks’ exposures to Greek debt (now much reduced). But it’s Italy who has the much larger rollover needs this year. The ugly contest is heating up.

OTHER EVENTS AND QUOTES
• German factory orders unexpectedly fell in January, down 2.7 percent sa versus expectations of a 0.6 percent rise. Domestic orders increased 0.9 percent, but export orders from both within the Euro area and further afield fell. Optimists point out the fall was driven by a few big-ticket items rather than generalised weakness.

NZDUSD: No change likely…
Markets should not expect any significant change to the themes of the last Official Cash Rate review on 26th January. Slight improvements locally more than matched by a fragile global economy will see them remain on hold. The bias for the next move will remain a hike and Q4 2012 remains our target for any such action on the OCR.
Expected range: 0.8160 – 0.8230

NZDAUD: Growth is still growth…
Weaker than expected Australian economic growth stymied attempts by this cross to move lower. Today the RBNZ MPS is likely to again ensure moves lower will take further time with realisation that carry costs are not worth it.
Expected range: 0.7720 – 0.7790

NZDEUR: Back it up…
Increasing participation in the Greek bond swap is failing to overcome doubts around the EUR. These have been enough to lift this cross clear of support at 0.6177 and it should avoid a real test of it today.
Expected range: 0.6202 – 0.6252

NZDJPY: Not quite…
Thwarted attempts to move lower should see a higher base for the NZDJPY in the near term. Expect support to kick in around 65.80 if any doubts are cast around the RBNZ MPS meaning.
Expected range: 65.80 – 66.80

NZDGBP: Solid bounce…
The bounce back up towards 0.5220 has not yet been completed but has every chance of taking place during today’s trading. Resistance at this level (from previous support) should be enough to hold the top today.
Expected range: 0.5180 – 0.5220

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