Economic views and news - Wednesday, 11 January

ANZ Research

Wednesday 11th January 2012

OUTLOOK

CURRENCY: Expect the NZD to maintain levels attained overnight after demand emerged from several sectors. Record levels against the EUR remain justifiable and should be maintained again today.

RATES: It was another “snoozer” for kiwi rates trading in London, and with the bellwether US 10yr bond broadly unchanged, expect no change today.

REVIEW

CURRENCY: Very little supply of NZD in the market during the past 24 hours accentuated the move through resistance levels. It maintained the spike in early morning trading as underlying demand remained present.

GLOBAL MARKETS: The improvement in sentiment during yesterday’s Asian session carried though into European and US trading overnight, driven by as-expected earnings results from Alcoa (which was actually a loss) and strong gains in Chinese equities. Equities rallied, and commodity markets extended yesterday’s gains, as did the FX majors versus the USD. Comments from Fitch that it was not planning to downgrade France’s credit rating in 2012 (although note that it is S&P that has them on negative watch) gave an additional boost to confidence, with the differential between “safer” core and peripheral sovereign bond yields narrowing. An early sell-off in US Treasuries later unwound to leave yields little changed in the session.

KEY THEMES AND VIEWS

FEDSPEAK. There was also a fair bit of Fedspeak out overnight. San Francisco President Williams was upbeat on the recent US jobs data, but said it wasn’t a “game changer”, adding that inflation is falling, and if it continues to do so, it might warrant QE3. He also said that Fed forecasts of short-term interest rates (to be released for the first time on 25 January) should reduce the uncertainty that is impeding growth. Indeed, he believes that the Fed could also unveil its policy strategy and longer-term goals more explicitly in the future. Meanwhile, Cleveland Fed President Pianalto stated that it could take 4-5 years for the unemployment to fall back to a “neutral” rate of around 6%, and highlighted that some economic models suggest that monetary policy should be more accommodative. It’s also worth flagging the potential change in the tone of the voting members of the FOMC given the overnight speeches from Fed presidents John Williams, Sandra Pianalto and newcomer, Esther George. Remember that the annual game of musical chairs at the Fed takes effect this month, with the regional Fed presidents having their annual rotation of voting members. Taking cues from past biases, the tone of Fed voting is set to become slightly more neutral, with those with a noted hawkish bias (Fisher, Kocherlakota and Plosser), plus dove Evans, rotating out of voting positions, and Lockhart and Williams (neutral), Pianalto (dovish bias) and Lacker (hawkish) substituting in for 2012.

OTHER EVENTS AND QUOTES:
• US Treasury Secretary Geithner starts his visit to China today. Among other things, he’s seeking to resolve US differences with China on the weak yuan, and to seek Chinese support to curb Iranian oil imports.
• IMF Head Lagarde to meet Merkel to nut out Greek debt deal. The IMF is pressing for a lower coupon on new bonds issued after the proposed 1 for 2 debt swap (i.e. 50% “voluntary” haircut) goes ahead.

NZDUSD: Continued support…
Support remains in the wings for the NZD that should enable it to trade today in the 0.79USD zone. With little on the local economic front to trade off markets will continue to look to offshore activity for direction. A break higher past 0.80USD is possible but should not occur today.
Expected range: 0.7920 – 0.7980

NZDAUD: Technical traffic…
The 200 day moving average just above 0.77AUD proved itself overnight to be a tough barrier to break through. Eventually this level will be taken out but it may need another round of poor Australian data to achieve.
Expected range: 0.7670 – 0.7710

NZDEUR: Another record…
Momentum increased yesterday on the break through last year’s high. The EUR remains troubled by familiar issues while the NZD retains its relative attractiveness. Expect some difficulty getting past the mid 0.62EUR level.
Expected range: 0.6200 – 0.6250

NZDJPY: Changing lanes…
Virtually no movement on the JPY side of this cross left the NZD in control. A shift into another technical lane should see this cross supported today.
Expected range: 60.75 – 61.40

NZDGBP: Stop loss buying…
The break of 0.5100 delivered a real momentum kick on this cross as many covered short NZD positions and selling interests evaporated. Expect further support for this cross on any dips.
Expected range: 0.5105 – 0.5155

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