Economic views and news - Monday 8 August

Monday 8th August 2011

OUTLOOK

CURRENCY: Global markets are on tenterhooks this morning after credit rating agency Standard & Poor’s downgraded the US to AA+ from AAA after the close of financial markets on Friday US time.

RATES: Swap yields will open lower and are likely to continue falling as the market digests the S&P downgrade on top of recent carnage. The market will continue to price out RBNZ hikes.

REVIEW

CURRENCY: An extremely turbulent end to the week for the NZD as it recovered from Friday’s local session lows with a slightly positive US July non-farm payrolls release.

GLOBAL MARKETS: Following the carnage on Thursday, Friday brought another day of volatility in northern hemisphere markets. Markets were initially heavy, carrying on from the Asian session, with equities and oil prices down. Better-than-expected US non-farm payrolls figures turned the tide for a while, with equities up and fixed income selling off aggressively, but the relief didn’t last, as rumours started circulating that S&P were going to downgrade the US after the close. Equities were pummelled and Treasury yields were all over the shop as the market gyrated between viewing them as a safe haven or as a poisoned chalice. The downgrade rumour proved correct, and pulses are high awaiting market open today. Omens for equities aren’t good, with the Arabian markets, the only ones that have opened since, falling. In terms of currencies and rates, it is widely agreed that moves will be big and messy. Just don’t ask in which direction. Watch headlines like a hawk – some official response in the next 24-48 hours to try to calm markets is assured, though its effectiveness is not.

KEY THEMES AND VIEWS

ONE FOR THE ECONOMIC HISTORY BOOKS. Standard & Poor’s downgraded US sovereign debt from AAA to AA+ on Friday, signalling a new era in global financial markets. With a negative outlook to boot. Given the unsustainable path for US debt if bold action is not taken, and the shenanigans around finally grinding out a debt-ceiling agreement that went only halfway towards the generally accepted minimum level of savings needed, S&P have decided that quite frankly, there are better bets around.

French, German and UK sovereign debt are now all rated as less risky. The US Treasury reacted angrily, and the Chinese Government, holders of more than a trillion of the stuff, put the boot in, with the official news agency commenting that “the US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone”.

Now the question is how already panicky markets will react when they open today. More equities carnage seems a given. In terms of rates, there will be some automatic liquidation of positions by those who have to hold a certain proportion of AAA-rated debt (though these rules may likely not be triggered until a second ratings agency follows suit). This could cause an initial sell-off. But this would run counter to recent moves in US Treasury yields, which have fallen as petrified investors seek safe(r) havens. So the move may not last long, as after all, a downgrade at some point was anticipated and the unsustainable path for US debt is not new news. The weak economy story is likely to dominate rates. In the long term, however, the downgrade is likely to cost the US Government and other US borrowers dearly.

NZDUSD: And up again?
The news of the US downgrade by S&P will have markets questioning everything in early Asian trading. Weekend developments are likely to set a scene where governments issue support for the US. Interestingly, the US S&P credit rating now equals that of NZ, just without the yield.
Expected range: 0.8350 – 0.8550

NZDAUD: Markets not yet pricing in RBNZ inactivity…
This cross has closed last week very close to the resistance at 0.8080, being unable to take it out. With markets starting to realise that the RBNZ’s September MPS/OCR is not a done deal, this will ensure topside moves for this cross are difficult at this point.
Expected range: 0.8020 – 0.8080

NZDEUR: Global turmoil…
Things will not be easy to pick this morning as the markets may well favour EUR initially given US concerns. Rumours that the ECB will announce massive Italian and Spanish bond purchases to stabilise markets should see this cross ease initially.
Expected range: 0.5850 – 0.5950

NZDJPY: Intervention is not over…
Japanese officials have been laboured in their weekend comments that intervention is not over. Perhaps this might mean a floor is placed on the USDJPY side of this cross and help to deliver 67+ levels.
Expected range: 65.69 – 67.36

NZDGBP: Surely there is no escape…
The UK should not escape the current turmoil in the US and Europe. Some GBP weakness as a result should help to cushion recent falls on this cross. For today a stronger start should help lift the cross towards 0.5165.
Expected range: 0.5117 – 0.5165

Source: ANZ Research

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