Economic views and news - Thursday, 26 January

ANZ Research

Thursday 26th January 2012

OUTLOOK

CURRENCY: A continued struggle for the NZD today is expected. Support levels should be further investigated as the RBNZ OCR this morning delivers a hold the line approach with close monitoring of offshore developments.

RATES: Expect yields to open with a strong downside bias following the massive rally in US Treasuries after the FOMC, even if there is some treading water ahead of this morning’s RBNZ OCR Review.

REVIEW

CURRENCY: Support levels were tested over the past 24 hours as a weak Australian Q4 CPI headline release returned the focus to local events. The US FOMC statement however weakened the USD across the board.

GLOBAL MARKETS: All eyes were on Greece (see below) and corporate earnings (which were generally disappointing) prior to the FOMC. European stocks closed in the red, but the Fed’s hint that it may adopt QE has seen US equities rally back strongly. The USD and US bond yields plummeted.

KEY THEMES AND VIEWS

FOMC STATEMENT DOVISH, OPENS THE DOOR TO QE3. It wasn’t just the dovish tone of today’s FOMC statement that seemed to catch a market that was getting used to strong data on the back foot. It was more the explicit nature of some of the comments. Of note, the Fed extended the timeframe for “exceptionally low levels” for the Fed Funds rate from “at least through mid-2013" to "at least through late 2014". The Fed is also apparently no longer worried about inflation, and completely dropped the sentence "However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations” that has been in earlier FOMC statements for some months. But it was the Fed’s apparent willingness to embark on QE3 that really caught the market off guard. Although this was something of a re-arranging of the order of sentences used in earlier statements, by joining the comment “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate” with “to promote a stronger economic recovery in a context of price stability”, this is a sign that QE3 may be on the cards. Thinking back to past episodes of QE, we may have to get used to a stronger NZD and lower long term interest rates for a while – not ideal for structural rebalancing.

GREEK DRAMA. Prior to the FOMC, all eyes were on Greek PSI negotiations, and this time the issue is whether the ECB should take a haircut. Both the OECD and the IMF have said they would like the ECB to accept losses, on the basis that they bought the bonds at a discount, but Germany (and of course the ECB) do not support this. This weighed on EUR (dragging down other currencies) and equity markets. A solid German bund auction result had only limited impact, despite reasonable demand and a yield 20bps below that achieved at the last sale. UK data was weaker than expected, but the market had already sold off, and BOE minutes were not as dovish as expected.

OTHER EVENTS AND QUOTES
• RBA watcher McCrann: “The Reserve Bank will almost certainly kick off the new year with an official interest rate cut at its meeting in two weeks”, adding that “the banks will just as certainly not cut their actual lending rates by the full 25 points of the RBA cut”.

NZDUSD: Reversing the gains…
Today’s RBNZ OCR should not surprise many that are close to the coal face of the economy. A hold the line and watching brief over world developments means the OCR can remain low for a longer period. Further cuts may be on the table but out of reach if the local picture improves marginally. The US FOMC statement however will provide support for the NZD on any dips.
Expected range: 0.8060 – 0.8130

NZDAUD: Just not getting it…
Further attempts to outclass the AUD continue to fail despite a weak Australian Q4 CPI release yesterday. Underlying Australian inflation eliminated any chance of gains on this cross which looks set to languish around current levels today.
Expected range: 0.7665 – 0.7715

NZDEUR: Still waiting…
Reversals back to key support at 0.6185 have not taken place but still remain the dominant theme on this cross. The RBNZ OCR Review and accompanying statement may be enough to deliver another test of this level.
Expected range: 0.6185 – 0.6229

NZDJPY: Tick it off…
JPY weakness, off the back of the first Japanese annual trade deficit since 1980, assisted in the NZDJPY cross completing the move to the 200 day moving average target. Today expect it to struggle to make further ground.
Expected range: 62.35 – 63.30

NZDGBP: Spot the difference…
Negative UK Q4 GDP growth and a BoE MPC firmly in the do nothing and hold your breath mode failed to avert the test of support on this cross. Further moves lower are likely.
Expected range: 0.5175 – 0.5215

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