Economic views and news - Thursday, 11 August

Thursday 11th August 2011

OUTLOOK

CURRENCY: The rollercoaster ride for the NZD continues today. Expect the topside to provide the most difficulty closer to 0.82USD given the potential for Australasian data and European concerns to dominate headlines.

RATES: Swap rates traded lower in London, and Aussie 3yr futures have rallied about 14bps, so expect rates to open lower here, at least initially!

REVIEW

CURRENCY: Yesterday’s local session was quiet in comparison to the overnight activity. Heightened concerns around Europe saw the NZD lead the way to reversing all of yesterday’s gains as it opens up today frazzled.

GLOBAL MARKETS: European bank shares got hammered after markets went after the French banks, with Societe Generale’s share price down over 22% at one point before it came back to close down about 15%. The issue: French bank exposures to sovereign bonds. Decisive intervention on a massive scale (be it QE or government support) is now needed, but has not been forthcoming. Equity market nervousness increased after the NYSE decided to “suspend the requirement to disseminate price indications [i.e. futures prices] at the open”.

Equities are weaker across the board, erasing yesterday’s gains.

Bond yields rallied hard, taking US 10yr bonds back to 2.13%. Gold rallied.

KEY THEMES AND VIEWS

A RACE TO THE BOTTOM? Money has started to flow now the Fed has defined exactly what “extended period” means, and guaranteed the market that cheap funding is here to stay for 2 years. The market is also gunning for QE3 after the Fed’s Jackson Hole symposium. Market thus far have been schizophrenic, equities up, then down, bonds down, then up. But one seeming constant has been the attractiveness of safe havens like the JPY and CHF. This may, in turn lead Japan to the conclusion that the only way it can prevent the yen from appreciating is to conduct its own QE on a massive scale.

Europe (and England for that matter) is unlikely to be a destination of choice for hot money. With sovereign bond markets there still flagging, and with the EUR still pretty lofty (in the context of 0.84/1.59 range over the past decade) they may be forced into QE too (and in fact arguably are conducting it now as the ECB buys Italian and Spanish bonds). Although all 3 central banks will may embark on QE for different reasons (US to boost growth, Europe to monetise debt, and Japan to weaken the yen), this potential flood of liquidity could have an enormous impact on “textbook” countries like New Zealand, who have a relatively sound fiscal position, floating exchange rate, “clean” bank balance sheets, and best in class institutional institutions such as the RBNZ and Treasury. Something to ponder?

OTHER EVENTS AND QUOTES
•      Bank of England Inflation Report sees inflation lower, concedes that there is “no meaningful way” to quantify risks around Europe, only that they are “unimaginable or unmentionable” They see growth as being lower, and inflation still in check (with balanced risks) despite the massive move lower in market interest rates. King reiterated that he still has policy options.
•      S&P and Moody’s affirm France’s AAA credit rating. Both agencies affirmed their ratings after rumours of a downgrade started circulating.
•      Swiss National Bank describes CHF as being massively overvalued, tripling liquidity in the CHF market in response, and pledging to “take further measures” if necessary. Who might they blame? Maybe the Fed?<

NZDUSD: Share a thought…
Continued currency volatility is likely throughout the remainder of this week. Downside bias should remain given the reflection in the equity markets of increasing economic risks in the near term. Selling interests above 0.82USD may be out of reach on the day.
Expected range: 0.8055 – 0.8225

NZDAUD: Eaten away…
An attempt to push past topside resistance on this cross failed again overnight leading many to test the downside support. Downside levels we eradicated with ease on the clean out and this cross should now spend some time in the 0.79AUD zone today.
Expected range: 0.7915 – 0.7985

NZDEUR: The emperor has no clothes…
European concerns stemmed the complete rout on this cross as it backed off 0.58EUR+ levels easily. Increasing concerns around EU financial equities should see this cross remain in the 0.57EUR territory today.
Expected range: 0.5705 – 0.5785

NZDJPY: Yield maters…sometimes…
When funds are desired closer to home yield can only cushion the blow. Further tests of support are possible in this current environment.
Expected range: 61.60 – 63.00

NZDGBP: Cut away…
The BoE’s overnight cuts to growth and inflation forecasts helped to slow the rout on this cross. For today more flirting with 0.5000GBP is possible but will require some stability of the GBP to achieve.
Expected range: 0.5000 – 0.5080

Source: ANZ Research

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