OUTLOOK

CURRENCY: The currency flip-flop continues today with downside tests likely as the NZD remains frustratingly within a narrow range. USD fortunes hang on credit rating concerns and potential slowing of the Chinese economy.

RATES: Expect local bond and swap markets to open broadly unchanged following a lacklustre trading session in London overnight.

Review

CURRENCY: Attempts to the topside were thwarted during the local session around concerns of rating agency changes to the US and UK Governments. The NZD eased to open this morning around recent lows.

GLOBAL MARKETS: Northern Hemisphere equity markets are mildly lower after a quiet day as markets contemplate US Senator Dodd's financial regulation bill. The CRB index is down, and bonds are broadly unchanged.

Key Themes and Views

FOREIGNERS BUYING US DEBT, BUT CHINA SELLING. US TIC data showed that foreign buyers continued to accumulate US Treasuries in January, adding $61bn to their holdings. China continued to reduce its holdings of US Treasury debt in January, albeit at a much slower pace. China reduced its overall holdings by $6bn to $889bn, but remains the largest holder, followed by Japan at $765bn.

LOOking ahead to the fomc statement tomorrow. All eyes are on tomorrow's FOMC statement, and while recent data in the US has improved, and the Fed are likely to make some tweaks to the language they use, few expect the "extended period" sentence to be dropped. Unemployment has started to fall, but it has only just started to do so, and the overall level of unemployment remains extremely high at 9.7%. Signs of a bumper non-farm payrolls number for March are building, but at this stage it's more likely the Fed talk about improved data, rather than signal an imminent move by dropping the "extended period" line. Overnight Comments/Events

Moody's Investors Service said that the US and UK have moved "substantially" closer to losing their AAA credit ratings. A spokesperson for Moody's said that "we expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing", and that "this story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics". He added that "those economies have been caught in a crisis while they are highly leveraged", concluding that "on balance, we believe that the ratings of all large AAA governments remain well positioned, although their 'distance-to- downgrade' has in all cases substantially diminished."

US Senate Banking Committee Chairman Dodd unveiled a proposal aimed at giving the government greater powers, limiting the activities of banks and curbing speculation. Amongst other things, the bill proposes a 9-member Financial Oversight Council that could place large interconnected financial institutions under the supervision of the Fed, and could give the government the power to break up large companies that pose a "grave threat" to the financial system. The plan has not been approved. NZD: Another dayanother tack

The NZD remains on course for further gains but is currently tacking to the other side of it's recent course. Support around 0.6973 may well be investigated today but attempts to push lower may well find the going too difficult.

Expected Range: 0.6973 - 0.7035

NZDAUD: Dialling up now

The market dance with the RBA meeting minutes will begin at 1.30pm NZT today. What should be clear is that management of strong growth by adjustments to monetary policy will take place and further hikes in the cash rate are inevitable. These minutes will not be enough to threaten a move lower at this point on the cross.

Expected range: 0.7648 - 0.7700

NZDEUR: Changing lead

Who really holds the balance of power in the credit rating race? Government regulation in the market versus increases in borrowing costs through a lower credit rating. This cross should continue to struggle on any attempts to move higher past 0.5140 today.

Expected range: 0.5098 - 0.5140

NZDJPY: Safe harbour?

Is the JPY really the safe harbour that many suggest? At this point markets are still comfortable keeping this cross within a narrow range although today a dip lower is possible.

Expected range: 62.84 - 64.00 NZDGBP: Blowout Moodys potential credit rating move has corrected recent GBP strength. This cross however will still struggle on topside moves past 0.4673 for now.

Expected range: 0.4629 - 0.4673