Economic views and news - Tuesday, 31 January

ANZ Research

Tuesday 31st January 2012

OUTLOOK

CURRENCY: Topside attempts for the NZD against the USD should be limited by resistance closer to 0.8212 as markets continue to await a resolution around the Greek debt situation that appears credible.

RATES: A bid tone to the NZ rates market in the overnight London session is expected to see the NZ curve open a couple of points higher.

REVIEW

CURRENCY: Initial trading this week has seen risk concerns elevated and profit taking which ensured a corrective move lower for Australasian currencies. A real test of initial support at 0.8147 has been avoided for now.

GLOBAL MARKETS: Risk off bias as Greece signalled opposition to economic oversight in exchange for aid and concerns about Portugal continued.

The Portuguese CDS sprinted to new highs indicating a 71% chance of default and trading at a 39.5% upfront with trickle effects across other worry nations, including Spain and Italy.

Italy 10 year yields rose 18 basis points. This weighed on the S&P and the Euro currency throughout the day.

Fixed income was better bid across most currencies. Early morning NZT, risk recovered on news EU leaders have agreed on a permanent ESM bailout mechanism to come into effect from July – though to be signed at a later date.

KEY THEMES AND VIEWS

THE MOUSE ON THE EXERCISE WHEEL. Another night where activity and developments resembled the poor old mouse on the exercise wheel…..this looks familiar, this looks familiar, as fickle risk-on and risk-off price action dominates.

Last week’s semblances of euphoria courtesy of more liquidity from central banks has been replaced with caution given the economic realities. For fundamentals to remain superseded by liquidity and for risk-on sentiment to continue, political decision making needs to instil confidence, via credibility and competence for this is how liquidity gets circulated. In short order.

And therein lies the contradictions and inherent tensions for we are in the realms of politics. The promise of concluding Greek talks has not been completed, proposed fiscal unions will take time to address today’s problems, you can see unilateral steps in some areas (i.e. the pressing ahead with a financial transactions tax in France) whereas multilateral action is required.

Markets need to see progress beyond low hanging fruit initiatives, a lot seems to be promised but not delivered, and Portugal now looks odds on to follow Greece with 2 year Portuguese bond yields rising to just under 20 percent.

Once again we appear to be following the pattern of pre-summit / talk fest hopes and gains and post summit losses. Given the realities of trying to corral 17 member Eurozone nations and 27 EU members we should not be surprised and of course with this backdrop little heed is paid to actual data by the market.

So we start this week with the sentiment weaker, peripheral European sovereign bond yields under pressure as safe-haven yields declined, equities down (European markets fell around 1.3%, while the US is trading 0.6% lower at the time of writing), the USD is broadly stronger and commodities weaker.

OTHER EVENTS AND QUOTES
• Philadelphia Fed President Charles Plosser (non voter) said in a CNBC interview that he projects the first rate rise by the FOMC in 2012.
• Fitch placed Australia’s four major banks on credit watch negative, in what looks a catch up move to Moody’s and S&P.

NZDUSD: Corrective moves to come…
Having moved up over 10% since mid December the NZD looks ripe for some form of correction. Last week’s US FOMC statement will ensure that any correction is a mild one at this stage with weekly support around 0.8044 a possible target.
Expected range: 0.8147 – 0.8212

NZDAUD: Building up…
This cross has made further failed topside attempts in anticipation of a move by the RBA next week to lower the cash rate. Many will still see a 1.5% differential in favour of the AUD as reason enough to keep this cross weak.
Expected range: 0.7712 – 0.7752

NZDEUR: Congestion…
A long road ahead for Europe even when the Greek debt situation is finalised. There are more cabs in the debt taxi rank and no passengers to fill them so expect this cross to remain relatively supported. Getting past 0.63EUR however will not be an easy task.
Expected range: 0.6220 – 0.6265

NZDJPY: JPY strengthening (again)…
The failure of the USDJPY to push through a key 200 day moving average has meant this cross will have to rely on NZD strength to move higher. At this point there is none to be found so expect a corrective move lower.
Expected range: 62.10 – 63.00

NZDGBP: Spent…
UK should be able to differential itself enough, particularly in light of the incoming French financial tax, and thus resistance at 0.5250 will not be easily broken in the short-term.
Expected range: 0.5200 – 0.5240

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