With 'QE Infinity' underway investors turn attentions to greener pastures

By Mike Jones

NZD

Encouraged by the actions of the Federal Reserve and QE3, or QE infinity as it is being labelled investment & trading accounts have immediately embraced risk appetite & diversification.

For the NZD this has underpinned its performance, Friday’s session seeing the currency hold to the US83 cent handle for the most part.

However, by the end of the New York day the NZD & AUD had retreated off their best levels, a function of position adjustment and also investor’s willingness to broaden their risk appetite into emerging markets and their assets.

The NZD and AUD both easing from London session highs – to close near 0.8290 & 1.0550 respectively and lose some ground to the rampant EUR.

For the week ahead local attention will be on Thursday’s Q2 GDP, our own pick of -0.1% is a fair bit weaker than the market medians, which are around +0.3/0.4%, and the June MPS, which estimated +0.4%.

We’re also conscious of some slower indicators beginning to show for Q3. With this in mind, we’ll be attuned to Monday’s WMM consumer confidence and BNZ PSI.

However, any tenderness in these could well be countered by Wednesday morning’s Fonterra auction and Friday’s tourism and credit card statistics.

Also watch for Wednesday’s current account deficit, which we think expanded even more over the year to June – to $10.9b, equivalent to 5.4% of GDP (the market’s at 5.2%).

It could be even larger, given the revisions indicated by Statistics NZ for this release. A large-to-larger current account deficit, coupled with a potentially weak GDP report, would hardly be NZD supportive.

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Majors

Friday’s trading saw investors broaden their risk appetite, there was a predictable catch up across European equity indices (IBEX +2.75% the best) thanks to QE infinity. Wall Street saw out the day with light gains, unable to sustain earlier gains – while commentary notes the gains made amongst mining & commodity stocks on both sides of the Atlantic.

Sovereign debt markets were mixed – Spain weaker ahead of 3Y and 10Y auctions this coming week, US Treasuries and German Bunds markets also weaker as investors looked for greener pastures away from the haven these two traditionally offer.

The move higher in US rates helped underpin the greenback against the Japanese Yen, which forced traders to cover “short” EURYEN positions – the end result, EUR climbing onto a 1.31 handle  (nearer 1.3000 on our Friday afternoon).

The weekend’s financial press highlights commentary from Schaeuble that seems to setback hopes for a swift move towards a common European banking union.

Germany backed it seems by ministers from Sweden, Poland and the Netherlands fighting the rush towards a banking union with the ECB the final supervisor. A proposed January 1st launch date seen as leaving too little time to resolve key issues.

Elsewhere most press carries stories on the impact of QE3, the investment into emerging & riskier assets as the US deploy further policy stimulus. Of course the move by the Fed means that many other CB’s will be compelled to use policy tools to slow their own currencies advance.

The financial press also note comments that are seen to be paving the way for Spain to request a bailout. This is most likely to take the form of a credit line from the ESM – allowing the ESM to buy Spanish bonds at auction & leaving the ECB to support the secondary market.

There are central bank meetings in Asia to note this week, notably the BOJ on Wednesday – but we also see the central banks of India & Taiwan update policy & rate settings.

The RBA minutes are released on Tuesday of their September meeting, and should allude to the RBA being very comfortable with the current pace of growth and the outlook for the domestic economy, as the earlier rate cuts are still working their way through the economy. The BOE minutes are due Wednesday.

US data is dominated by various housing indicators midweek – though now the Fed have engaged QE3 data releases and analysis is more about just how many bio’s per month will be justified, rather than a change in policy outlook per se for the foreseeable future.

Chinese concerns and opinion are still front and centre, so Thursday’s Flash update of HSBC’s PMI will intrigue. In Europe key numbers in the form of Germany’s ZEW series and various flash PMI updates.

Event Calendar:

17 September: NZ PSI and WMM Consumer Confidence; AU New Motor Vehicle Sales; UK Rightmove House Prices; Bank of India meeting; Eurozone Trade Balance: US Empire Mfg; Bill auctions in France and the Netherlands.

All its research is available here.