Outgoing Italian PM believes elections will (hopefully) produce a “highly responsible” government

By Mike Jones


The NZD has started with week with a flourish thanks to yesterday’s encouraging local news. NZD/USD resistance at the top-end of the 0.8080-0.8355 range was tested again overnight, but ultimately held.

The NZD/AUD has also continued its upward march following more evidence Australian domestic demand is gasping for air, this time from weak Aussie home loans data. 

Based on yesterday’s NZ manufacturing survey data, we judge manufacturing production increased 0.5% in Q3. Nothing spectacular there, but enough to bump up our Q3 GDP estimate (figures published next week) to 0.5%, from the previously softish 0.3%.

Continuing the positive theme, Fonterra also nudged up its 2012/13 season milk price payout forecast yesterday. The 25c increase in the payout, to $5.50 kg/ms, is worth about $400m (0.2% of GDP) compared to Fonterra’s previous forecast.

The Fonterra news shouldn’t have been a major surprise given the positive trend in dairy prices we’ve been highlighting. But it does provide another piece of evidence (along with a reasonable Q3 GDP print next week) suggesting the RBNZ will not need to lower the OCR. And this, along with a late rally in US stock markets, has seen the NZD/USD outperform over the past 24 hours (albeit in an extremely tight 0.8320-0.8355 range).

In NZ, it’s mainly second tier data on the calendar this week. But through all the bits and bobs, a cautious recovery theme is expected to prevail. First up, we’re looking for a 0.5% gain from this morning’s electronic card transactions data.

For the NZD/USD, the key level to watch is 0.8360. This level has capped the NZD/USD since March. While speculative ‘long’ positioning looks increasingly stretched, NZD/USD momentum is positive and NZ-US relativities are still tilted in favour of NZD appreciation.

As a result, we think there is a good chance the 0.8360 level is tested and broken this week. If it is, the 2012 high of 0.8471 would then loom as the next key layer of resistance.


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Early risk aversion has gradually faded, as investors adopted a more upbeat tone late in the US trading session. The USD has softened as a result. Still, currency markets are suffering somewhat from subdued volumes and a lack of conviction as investors look ahead to Wednesday morning’s FOMC decision.

Italian Prime Minister Monti’s weekend decision to step down initially rattled European markets. Italian government borrowing costs rose sharply, and the Italian FTSE MIB plunged 2.2%, kick-starting broader declines across European equity markets. An uninspiring read on French industrial production (-3.6%y/y vs. -2.3% expected) probably exacerbated the gloomy sentiment. 

However, comments from Monti that elections will (hopefully) produce a “highly responsible” government seem to have had the desired soothing effect on confidence. Investors also took heart from the fact Berlusconi will find it extremely difficult to return to power and Monti himself may even end up running to head him off.

A ‘glass half full’ view of US fiscal cliff issues also seems to have provided a prop for risk assets. President Obama and House Speaker Boehner met on Sunday. No concrete progress appears to have been made, but some commentators are playing up the fact that at least communications lines are open.

US equity markets have notched up small gains, gold and oil prices are modestly higher, and the EUR/USD and AUD/USD have finished the session on the front foot around 1.2940 and 1.0490 respectively.

Ahead of the FOMC meeting, tonight’s German ZEW survey may receive some attention, particularly with signs of flagging German economic momentum providing a few speed bumps for the EUR/USD lately.

A small improvement in the economic sentiment index is expected (from -15.7 to -11.5). A failure to achieve this could see EUR/USD back testing key support at 1.2875.

Other News:

*China's November trade data underwhelmed. Exports rose just 2.9%m/m (9.0% expected), with imports flat (+2.0%m/m expected). The trade surplus narrowed sharply to US$19.6b (US$26.9b expected).

*Japanese Q3 GDP confirms a technical recession, falling 0.9%q/q, broadly as expected.

Event Calendar:

11 December: NZ electronic cards transactions; AU NAB business confidence; EU German ZEW; UK BoE’s King speaks; US trade balance;

12 December: AU consumer confidence; AU RBA’s Stevens speaks in Bangkok; EU German CPI; UK ILO unemployment EU Eurozone IP; UK BoE’s Dales speaks; US FOMC decision;

13 December: NZ PMI; US PPIs; US retail sales; US jobless claims;

14 December: JN Tankan; CH HSBC flash PMI; EU PMIs; US CPI.

All its research is available here.

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