Economic views and news - Monday 22 August

Monday 22nd August 2011

OUTLOOK

CURRENCY: The NZD is likely to head lower to start off the week. Minor support levels should be taken out in early trading as currency markets brace themselves for the Asian equity market opening later this morning.

RATES: After a quiet London session, rates are likely to open unchanged.

REVIEW

CURRENCY: The initial positive start to the overnight Friday session was quickly eradicated as global equity markets melted further. The NZD finished the week clinging to minor support levels.

GLOBAL MARKETS: Despite a complete lack of interesting data, equity markets still had a rough Friday following on from an unhappy Thursday. Equities traded in the red for the majority of the London session, though early losses were pared back by the European close. All major bourses were down by the end of the day. Other asset markets were steadier on Friday.

US 10-year bond yields were steady but are down a whopping 34 points for the week. Commodity futures rebounded somewhat after Thursday’s losses. Oil futures were little changed. Gold was also marginally weaker on the day but the trend is clear, with the price of the metal having risen for seven straight weeks.

KEY THEMES AND VIEWS

LITTLE ENTHUSIASM FOR EUROBONDS. Joining the Merkel chorus, German Finance Minister Wolfgang Schaeuble said the euro region would become an “inflation community” if member countries decide to sell bonds jointly without unifying their fiscal policies. EU President Herman Van Rompuy isn’t a fan either, ruling out any common borrowing until European economies and budgets are better aligned. “We could have Eurobonds on the day when there is genuine budgetary convergence, the day when everyone is in balance or virtually in balance.” Sounds remarkably similar to the historical prerequisites for the common currency itself, so time will tell how rigidly these principles are followed. Economically, it is clear that for the euro to be a viable long-term proposition, much greater fiscal policy coordination is required. The politics of this, however, are daunting, as it would be a considerable emasculation of the European nation state.

Meanwhile, those calling for Eurobonds are of course those who wouldn’t be putting their own euros or sovereign debt rating on the line, such as the UK, or those who be on the receiving end of the cash, such as Greece. Taxpaying voters in the donor nations are, not surprisingly, less keen, according to surveys. Angela Merkel, the German Chancellor, faces a tricky PR problem attempting to sell to a sceptical public the argument that they should continue to bail out their troubled neighbours one way or another. Essentially she can’t baldly point out that the health of their own banking system is at risk if they don’t, as nothing would be surer to provoke a banking crisis than that. But benevolence arguments don’t hold much water at this point.

OTHER EVENTS AND QUOTES
• US mortgage rates have fallen to their lowest in at least 50 years, according to Freddie Mac, with the average rate for a 30-year fixed loan at 4.15 percent. Anyone game to pick a boom?
• “Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous — in my opinion.” Texas Governor and newly launched Republican Candidate Rick Perry wastes no time in having a go, albeit a rather muddled one, at the Fed.

NZDUSD: The three bears…
The NZD should find itself looking to hibernate at lower levels today as the Asian equity markets react to Friday’s European and American markets. Expect moves towards the low of 0.81USD area to be cushioned only by local exporter support. Sellers above 0.8220 may become impatient and join the fray, which is unlikely to be a picnic without ants.
Expected range: 0.8090 – 0.8220

NZDAUD: Catching up…
Markets are clearly catching up with reality on this cross. Suggestions by some that the relative economic picture on the NZ front warrants a move back closer to longer-term moving averages hold little weight at this point. Deliveries versus promises are needed in order to see real gains above 0.8080.
Expected range: 0.7820 – 0.7890

NZDEUR: Every dog has its day…
A test of a critical longer-term daily uptrend line could result in a sharp sell off of this cross during coming days. An extension down to at least the 200 day moving average (0.5630) is likely on a break of the line.
Expected range: 0.5633 – 0.5693

NZDJPY: Land ahoy!
The USDJPY ran aground at another post-war low on Friday evening. Weekend newspaper reports that the BoJ is contemplating further intervention may temper one side of this equation but should not eliminate lower levels for the cross towards the next level of support.
Expected range: 62.20 – 63.10

NZDGBP: Lower…
Another visit of the low 0.49GBP levels are likely as the UK July PSNB results lifted the GBP. Topside moves should be limited throughout this week.
Expected range: 0.4935 – 0.4995

Source: ANZ Research

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