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ANZ Morning Currency Briefing

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Fuseworks Media
Fuseworks Media
ANZ Morning Currency Briefing

CURRENCY: Expect another day where the NZD will follow the leader in advance of tomorrow's key releases. It may well break higher on the day but would do so tentatively and would not be the initiator of such a move.

RATES: Expect the bonds and the back end of the yield curve to open lower after a decent rally in US Treasuries. However it's difficult to see short end rates move any lower ahead of the MPS, with the RBNZ likely to publish a much higher 90-day bill track than what's currently implied by the market.

REVIEW CURRENCY: As expected yesterday's local economic data delivered the corrective move. Perhaps a little unexpected was the exuberance of markets overnight that drilled through stop losses in the EUR dragging the NZD up.

GLOBAL MARKETS: US Treasuries rallied on speculation the Fed would engage in quantitative easing (QE) as soon as early as November. Gold rallied to an all time high and the USD got thumped, seeing EUR, AUD and NZD surge higher. Major equity markets rallied, and the CRB jumped 1%..

KEY THEMES AND VIEWS Quantitative easing IS back on the agenda, according to a top US investment bank. Speculation the Fed might need to take policy one step further has been rife for some time, and is the main reason why bond yields have fallen so far in the past few months. But while the market was clearly gunning for it, whipped up into a frenzy by St Louis Fed Governor Bullard's paper comparing the US to Japan, Fed chair Bernanke has been cautious in recent speeches, suggesting that while the Fed will do "all it can", the hurdle for doing so remains high. With no prospect of immediate QE, US 10 year Treasury bond yields had been retreating higher, reaching 2.84% on Monday, 42 basis points off the late August low of 2.42%. However the suggestion today by a tier-one investment bank (mentioned in the Wall Street Journal) that the Fed might wade into QE with a $1 trillion package has seen the market turn around, with bonds back to 2.67% at the time of writing, and the USD much lower (and thus Gold higher). This was all despite generally better than expected US data, with core retail sales coming in twice as strong as expected. Regular readers will be familiar with our view - we tend to think the Fed has few other legitimate choices other than to adopt QE. Indeed, the Fed has a so-called dual mandate - jobs and inflation. With inflation trending lower, and at a 48 year low, and the unemployment rate stubbornly high, having been above 9% for 16 months, what would you do?

Looking to the MPS tomorrow. While we expect the RBNZ to leave the OCR on hold tomorrow, and for them to adopt a more cautious tone relative to June, even with the Fed potentially adopting QE, we struggle to see them making the sorts of noises that might endorse current market pricing. We expect a cautious attitude with regard to the immediate future, but with the economy still slowly recovering and the OCR at only 3%, it's inconceivable to think the Bank won't have interest rates rising in their projections. We could be in for a mild surprise tomorrow, even on a no change outcome.

Overnight Comments/Events

* IMF's Strauss-Kahn calls for single European fiscal authority. The head of the IMF said that euro countries need to coordinate fiscal policy better, recommending a central authority charged with enforcing rules.

NZD: Watching offshore The NZD is unlikely to find momentum of it's own today as markets become increasing wary of tomorrow's RBNZ Monetary Policy Statement tone. Expect any moves in the NZD to be as a result of offshore moves and as such one cannot rule out being dragged reluctantly higher.

Expected Range: 0.7350 - 0.7420

NZDAUD: Still waiting Australian confidence data today should help this cross remain on the back foot and testing key support around 0.7792. Local exporter demand on this cross is slowing the move lower at this point.

Expected range: 0.7792 - 0.7846

NZDEUR: EUR explodes Perhaps stronger US August retail sales data was the key but more likely short EUR positions accentuated the move once 1.2897EURUSD was broken. The NZD barely kept up the pace of the EUR move and should struggle again.

Expected range: 0.5646 - 0.5698

NZDJPY: Leadership issue resolved With the resolution of the Japanese leadership issue came further JPY strength to new 15 year highs. This left the cross in neutral as it initially tested and found support around 60.40.

Expected range: 60.80 - 61.60

NZDGBP: Still too hard to break it The key resistance level at 0.4762 has survived another day and should do so again today if tested. It may mean that many are building short NZD positions so once the severity of UK austerity measures are revealed risks for a further spike higher increase.

Expected range: 0.4722 - 0.4762

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