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ANZ Morning Currency Briefing

Fuseworks Media
Fuseworks Media
ANZ Morning Currency Briefing

CURRENCY: A return to an offshore focus is now likely with the NZD expected to be at the beck and call of USD moves. For today the EUR looks set to again test the topside helping the NZD do likewise.

RATES: A quiet session in London overnight for the NZ rates market means it is likely to open unchanged and take its cue from offshore moves, with the RBA minutes the highlight of the day.


CURRENCY: A corrective move for the NZD initially yesterday as it followed the fortunes of the EUR and AUD. Demand at 0.7500USD and a turnaround in both the EUR and AUD ensured that it did not go on to test major support.

GLOBAL MARKETS: A positive tone for equities, and therefore for risk generally. Gains in financials on better than expected earnings by Citigroup and takeover activitiy in Europe brushed aside concerns about the foreclosure issue for now. US bond prices reversed the previous session's losses as the focus turned to expectations that the Fed will provide more support, especially after the unexpected decline in US industrial production. Oil prices rose strongly as strikes in France affected refinery supplies.


IN TWO MINDS. The price action in global markets over recent sessions has been choppy, with participants seemingly in two minds over whether the Fed will go down the QE2 route, and what the impact of that will be on markets. The market is certainly already priced for QE2, and recent Fed rhetoric, most recently by Fed Chairman Bernanke, is being read as a green light for the November 3 FOMC meeting to announce further policy support. But as the selloff in US bonds late last week showed, at some point the market will need to focus beyond the FOMC meeting. If QE2 is successful, it will be inflationary. In fact, that is what the Fed wants - at present, inflation is too low and the threat of deflation is non-trivial. And of course, more inflation is not bond friendly. But at the same time, in the near term, further QE will act to hold longer-dated bond yields lower. Such tensions are likely to persist for some time, which is why we are likely to experience increased volatility. The currency market is also filled with tensions. More QE will, on the face of it, drive the USD lower. But with the market already heavily short against the greenback, and market participants seemingly reluctant to push some currencies beyond key resistance levels (parity for the AUD, 0.7640 for the NZD, 1.4150 for the EUR, 81 for USD/JPY), it might be too big an ask to see much further USD weakness. The risk of a massive short-covering rally in the USD is high - something of which the market will no doubt be well aware. So expect such tensions in financial markets, which will only be heightened by talk of "currency wars", to continue for a time yet, leaving the markets in two minds. The end result will be more volatile price action until we get a clearer sense of direction either from the data or from policymakers.

Overnight Comments/Events

IMF First Deputy Managing Director John Lipsky: "I don't think that there is any clarity whether first of all the Fed is going to act. It seems they have left it dependent on new data [looking at a broader range of policies to get countries with large trade surpluses to spend more] is the right way to view this. This is also the way to ensure that there will not be a currency war but a coherent and cooperative approach." NZD: Minor correction By Khoon Goh, Head of Market Economics and Strategy

Having tested lower levels yesterday the NZD looks comfortably back in the zone today. Despite having to follow an offshore lead the NZD may find itself testing topside levels throughout today's trading session.

Expected Range: 0.7525 - 0.7595

NZDAUD: Nothing new

Another day for this cross within similar ranges. The release of the RBA October meeting minutes later today however should ensure that topside test are unattainable as the AUD strength remains. The local market in Australia will want to see parity for themselves but this should not occur today.

Expected range: 0.7602 - 0.7662

NZDEUR: Waiting on engine diagnostics

Tonight's German October ZEW survey will be key to the short-term fortunes of the EUR. If the growth engine of Europe stalls expect further topside moves for this cross but they should be limited to resistance at 0.5443 at this point. Signs are that things are still humming along and this should assist in keeping this cross parked around 0.5400EUR for now.

Expected range: 0.5388 - 0.5443

NZDJPY: Reporting

The Japanese cabinet office monthly report should deliver nothing new as the JPY nudges again closer to the 80JPY area. This cross found appropriate support just below 61.05 and if it is seen again today, further buying interest should come to the market.

Expected range: 61.05 - 62.05

NZDGBP: Waiting

Relative GBP weakness helped this cross again look at the 0.4762 level overnight. This level should be under threat again today of a further test but whether it can push on towards 0.4820 will be largely down to the NZD moves. An extension today to that level looks too hard.

Expected range: 0.4732 - 0.4772

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