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Markets in wait and see mode with all eyes on this weekend's EU summit

Markets in wait and see mode with all eyes on this weekend's EU summit

By Mike Burrrowes

NZD

NZD/USD is virtually unchanged over the past 24 hours. FX markets appear to be in a holding pattern, waiting for the EU to announce its bailout plan at this weekend’s summit.

NZD/USD fell to an intra-day low just below 0.7860 as poor German data undermined sentiment. These losses were reversed early this morning as US equity markets posted modest gains. NZD/USD is currently trading around 0.7940.

While not gaining much attention, the bi-monthly Fonterra dairy auction was solid. The average dairy price rose 1.7% in USD terms. We expected a solid result given the recovery in commodity prices over the past fortnight.

NZD/AUD has remained on the backfoot over the past 24 hours, currently trading just above 0.7750. The weakness in the cross occurred after yesterday’s RBA board minutes provided no smoking gun for a near-term rate cut. Barring a financial market meltdown, our overall assessment is that the RBA will be on hold until trends for inflation and economic activity become clearer.

Despite the tone of the minutes, the OIS market is still pricing an 80% chance of a 25bp cut from the RBA at the next meeting. Over the next 12 months, the market expects over 110bps of cuts. The spread between RBNZ and RBA policy expectations over the next 12 months has narrowed to 145bps, from over 200bps in mid-September.

Looking to the day ahead, there is no local data due for release. Across the Tasman, we have a speech from the RBA’s Debelle and the Westpac leading index. On the day, NZD/USD support is seen at 0.7900 and resistance at 0.8010.

Majors

Risk sentiment stabilised overnight and moves in FX markets were relatively contained. For now, markets appear to be in a holding pattern ahead of the all important EU summit this weekend. The stabilisation in sentiment saw the AUD and CAD post modest gains against the USD.  

The S&P500 index gained almost 1%, while poor German data and lingering concerns over the European debt crisis (see below) saw the Euro Stoxx 50 index slipped -0.4%. The VIX index (proxy for risk aversion) eased to 31.7, from 33.0.

EUR/USD lost ground overnight, falling to an intra-day low around 1.3650. The German ZEW survey of investor sentiment survey plunged to its lowest level in almost 3 years (-48.3 vs. -45 expected). This highlights the feedback loops the European debt crisis is having on sentiment and economic activity more generally.

The EUR recovered to around 1.3750 early this morning after some encouraging comments from German Chancellor Merkel, noting the “EU summit will be important step to solving the crisis but will need more important steps”.

GBP/USD was the worst performing currency over the past 24 hours, falling 0.3% to just below 1.5700. The GBP fell after data showed UK inflation for September rose to 5.2%yoy (vs. 4.9% expected), raising concerns about stagflation. Despite the high inflation reading, the Bank of England announced further quantitative easing at its last policy meeting to support poor growth. The release of the BoE minutes from this decision will make for interesting reading when released tonight.

Overnight US Q3 earnings continued the mixed run of results. IBM and Goldman Sachs disappointed, while Johnson & Johnson and Coca-Cola beat estimates. At the close of US equity markets we get earning results from technology bell-weathers Intel and Apple.   

Comments from Federal Reserve Chairman Bernanke did little to stir markets early this morning. Bernanke noted that the Fed “should not rule out possibility of using monetary policy to help achieve financial stability goals”. The release of the Fed’s beige book tonight will give some more detailed insights into the state of the US economy.

Looking to the day ahead, we have the release of the Eurozone current account for August and the Bank of England minutes. In the US, we have the release of CPI, some housing data and the Fed’s beige book. Beyond this, the focus is likely to stay on the Eurozone debt crisis as EU leader/officials try to shape market expectations for the EU Summit over the weekend.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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