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ANZ Morning Currency Briefing

Contributor:
Fuseworks Media
Fuseworks Media
ANZ Morning Currency Briefing

CURRENCY: Tentative tests of the topside for the NZD should continue but it will remain wary of the RBNZ's Thursday announcements. Local data due today may also ensure any moves higher are a struggle.

RATES: Expect NZ interest rates to open unchanged to slightly lower, following reasonable rallied in US Treasuries and Australian bonds. However, this will be offset by caution ahead of Thursday's RBNZ MPS.

REVIEW CURRENCY: The risk on theme continued into the overnight European session as heavy demand spiked the NZD higher marginally through key resistance at 0.7330.

GLOBAL MARKETS: Bonds and equities both rallied overnight, with bond retracing losses in earlier sessions. The CRB Commodity Price Index was up around 1%, with broad based gains, with livestock the only category to record price declines.

KEY THEMES AND VIEWS No data in key markets, but markets still put in decent moves. With the exception of some fairly mundane and barely watched US budget data, there was no data out of the US, UK, Germany or Canada overnight, leaving markets to their own devices. Luckily markets are good at that sort of thing, and fresh back from the weekend, traders bought the lot - stocks, bonds, commodities. Our London colleagues report that early talk was centred on the proposed Basel III capital rules, with the broad consensus being that the proposals were not as strict as feared, and the timeframes for implementation were more generous. As such, it was a "risk on" day, to use the pop parlance of the day.

Leadership challenge in Japan?. Media reports indicate that the ruling Democratic Party of Japan will decide whether to replace incumbent Prime Minister Naoto Kan with Ichiro Ozawa, an old-timer nicknamed the "Shadow Shogun. If Ozawa succeeds, he will be the third PM Japan has had in a year. The possibility of an Ozawa victory has left markets on the back foot, as he has promised to more than double Kan's proposed stimulus package to 2 trillion yen, ignoring concerns that it will add to Japan's debt woes. He has also signalled a preparedness to intervene to halt JPY strength. The JPY is within 30bps of the low reached last week, which was the lowest in 15 years.

Looking ahead to The monetary policy statement. Thursday's RBNZ MPS is the must-see event of the week, and with market pricing as relaxed as it is, it'd hard to see how it's going to be a bullish event for the interest rate market. A rate hike this week is highly unlikely, and we suspect we'll see a pause again in October. And even if the tone of the document is more circumspect than June's upbeat number, it's hard to imagine a 90 day bill track that will peak out as low as the circa 4.4% implied by bank bill futures. The June projections had 90 day bills at 4.6% by mid 2011 and 5.3% by Dec 2011, so we'd have to see a significant paring back to market expectations to be met. Indeed, even in March, before the first hike those figures stood at 4.4% and 5.0% respectively, and back then things looked very uncertain.

NZD: Little local data flavour Local data today should not be too supportive of a much higher NZD. In truth however the direction of the NZD should be determined by moves offshore and thus attempts to reverse recent gains should be thwarted.

Expected Range: 0.7285 - 0.7360

NZDAUD: In neutral With offshore markets playing the Australasian game it should be no surprise to find this cross with little impetus to break out of the recent ranges. Downside tests are still likely as the Australian data and upcoming RBNZ announcements favour the AUD as the currency of choice in this region.

Expected range: 0.7820 - 0.7880

NZDEUR: EUR gaining steam A stronger EUR overnight helped to lower this cross. The EU commission's upgrade of their 2010 GDP forecasts and a solid Italian bond auction should place the EUR on solid ground for today and ensure this cross struggles with any topside moves.

Expected range: 0.5672 - 0.5712

NZDJPY: Waiting Japanese official comments around the current strength of the JPY should intensify today as the leadership challenge kicks off. NZD strength has neutralised this to a point and resistance at 61.60 has been reasonable effective and should continue to be so today.

Expected range: 60.80 - 61.60

NZDGBP: Topside tough A tough rough higher for this cross as it potentially looks at the key resistance level of 0.4762 today. It will not be easy getting above this level despite the relative weakness of the GBP likely to continue.

Expected range: 0.4732 - 0.4762

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