ANZ Research
Monday 28th November 2011 |
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OUTLOOK
CURRENCY: Expect a post-election scramble for the NZD today as the ability to quickly form a government quells investor concerns. Positive US Black Friday shopping results should also help negate the European picture.
RATES: Rates are likely to open higher after rising in the London session without trading, although there could be decent buy-side interest in the bonds due to the resolution of pre-election uncertainty. This may cap any move.
REVIEW
CURRENCY: Further probing of lower levels for the NZD as risk concerns and the downgrade of Belgium by S&P did little to calm markets. The pre-election trading was extremely thin and illiquid as expected.
GLOBAL MARKETS: Not as quiet a day as one would’ve thought with the US still in holiday mode and no data released. Risk appetite was poor in the morning on headlines and rumours, but improved late in the afternoon session, with European equities rallying into the close to finish up as much as 1.2 percent. Elsewhere equities generally eased. Commodity prices tracked the day’s moves in currency markets. Gold ended down, while oil was fairly flat. Italian bond yields jumped again after a poor auction, while US Treasuries, the remaining “safe haven”, were in demand again, pushing the yield on the 10-year note under 2 percent.
KEY THEMES AND VIEWS
GROUNDHOG DAY. Risk appetite was hit on Friday by a poor bond auction (Italian this time, with their six-month bill yields almost double what they were a month ago) and sovereign debt downgrades (Belgium, cut one step to AA by Standard and Poor’s, and Hungary, cut to junk status by Moody’s). To top it off Reuters reported Greece is insisting on still higher effective write-downs (lower net present values) for new bonds issued as part of a debt swap, which really does stretch the definition of “voluntary” beyond its sensible limit. (One does wonder how much leverage Greece has left in bail-out negotiations now that the flaming train wreck has coasted right on past their station).
There’s plenty of potential for more of these kinds of ugly headlines to come, with a number of key European sovereign bond auctions next week (including Italy and Spain). A break up of the euro would be catastrophic for financial markets and disastrous for the real economies involved, but unfortunately that fact alone is not enough to ensure it will be avoided. Unless we get a circuit-breaker, such as the ECB being allowed to print money in unlimited quantities, the slide will continue to gather pace. There is still strong opposition to money-printing. However, there are some signs of compromise on other issues of principle. German Finance Minister Wolfgang Schaeuble suggested Germany may back away from demands that private bondholders should share the pain and contribute to bank rescues. This is of course morally and theoretically the correct position to take, but anything that scares away potential investors from bank bonds at present is very unhelpful.
OTHER EVENTS AND QUOTES
• Black Friday in shades of grey. The US’ traditional metric of consumers’ appetite for spending in the festive season was surprisingly strong. Spending on “Black Friday”, the busiest shopping day of the year, rose 6.6 percent on a year ago, with foot traffic up 5.1 percent.
NZDUSD: Looking up…
With the NZ election over market participants will return to fundamental and technical analysis to establish a trend. Any spike higher will be viewed with caution by many, given the European picture has not been resolved to the satisfaction of investors.
Expected range: 0.7385 – 0.7485
NZDAUD: Renewed vigour…
Increasing expectations of an interest rate cut on the Australian front should help to provide further moves higher for this cross. The 200 day moving average around 0.7669 should prove difficult to break today.
Expected range: 0.7605 – 0.7669
NZDEUR: All relative…
A continued move higher for this cross after the uncertainty around the NZ election is virtually eliminated. An extension towards 0.5634-0.5665 is likely, although it may take a few days to play out.
Expected range: 0.5570 – 0.5634
NZDJPY: Support in tact…
The 57JPY level appears to be a reasonable support level and may remain in place early this week. Japanese hints around further intervention have at this point come to nothing but cannot be discounted. Expect an initial move towards 58JPY in early trading.
Expected range: 57.00 – 58.00
NZDGBP: To QE or not to QE…
Continued talk around further UK QE is not helping the fortunes of the GBP. As such, moves back into the 0.48GBP territory are likely to start trading this week.
Expected range: 0.4780 – 0.4825
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