Economic views and news - Tuesday, 17 January

ANZ Research

Tuesday 17th January 2012

OUTLOOK

CURRENCY: A US holiday thinned market should see moves of the NZD again tempered. Resistance at 0.7980 remains in place today but may be tested if local data releases deliver positive news.

RATES: A very quiet overnight London session, with no kiwi trades. Kiwi rates are expected to open today’s session broadly unchanged.

REVIEW

CURRENCY: Extremely narrow trading ranges have kicked off this week as the EUR survived an early test of support yesterday. The NZD oscillated in both directions with support remaining in place at 0.7910.

GLOBAL MARKETS: With the US market closed for Martin Luther King Day, trading was quiet, with the focus on the subsequent market reaction to the credit downgrades in Europe. European equity markets rallied, with the Euro Stoxx 50 up 1%, with the FTSE gaining 0.4%. Government bond yields fell in the US, Italy and France and most peripheral Eurozone economies, supported by strong buying by the SMP. Commodity prices on the CRB measure were broadly unchanged, with offsetting movements. Crude oil and gold prices firmed, but were offset by lower prices for natural gas.

KEY THEMES AND VIEWS

MUTED IMMEDIATE MARKET REACTION TO S&P DOWNGRADES. For the moment the relief rally we have seen since the S&P downgrades suggests it did not provide any new news to the market; if anything the market had been braced for a worse outcome, and we are still talking margins of excellence for most of the Eurozone sovereign ratings. Strong buying by the ECB of Spanish and Italian government debt also helped. The successful French debt auction overnight provided some cause for cheer, but it is a long road ahead, with the next test being a Spanish bill auction tonight.

Typically market reaction has tended to be muted following such rating actions, but looking at the big picture, historically low Government bond yields in the US, Germany and UK, are hardly a ringing endorsement for the state of the global economy. While German bond yields did not fall following the S&P announcement, they are low enough already, particularly the two-year yield, which has benefited from safe-haven demand. More important have been frantic efforts to prevent a Greek debt default, with authorities scrambling to find a magic formula to toughen budget laws and make Greek debt more attractive to investors. A deal must be struck well before March 20, when Greece has to make a €14.5bn bond payment.

OTHER EVENTS AND QUOTES

European Financial Stability Facility Cut to AA+ from AAA by S&P.

France sold €1.895bn of one-year notes at a yield of 0.406% as compared to 0.454% on a January 9 sale.

Greek officials will reconvene with creditors on January 18 after discussions stalled last week. European governments are preparing for a January 30 summit as the ECB warns against “watering down” a revamp of budget laws.

NZDUSD: Rise and shine…
Support for the NZD continues to ensure that it remains well sought after in the offshore market. Positive moves against most currencies should continue to be assisted by economic releases today with a possible test of resistance at 0.7980 later this afternoon.
Expected range: 0.7920 – 0.7980

NZDAUD: Stretching out…
While not breaking new ground as yet this cross looks ready to take on resistance levels on the topside. Today it may well spend another day reflecting on possibilities before looking towards the first difficult hurdle at 0.7745 later this week.
Expected range: 0.7685 – 0.7725

NZDEUR: Yawning gap…
Relative differences between the European and Australasian arenas should see this cross continue to move higher. It may well be tempered during today’s trading but a move to 0.63EUR+ levels looks likely in the short-term.
Expected range: 0.6240 – 0.6300

NZDJPY: Taking it easy…
Further narrow trading ranges with a bias towards the topside will continue today. Support in the mid 60JPY zone remains in place at this point.
Expected range: 60.65 – 61.35

NZDGBP: New goals…
Today the goal of getting over 0.52GBP may be realised as NZD strength emerges. Resistance levels above this around 0.5225 should not be taken out as easily.
Expected range: 0.5175 – 0.5210

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