A long way from needing to take a ‘sky is falling’ interpretation of the indecisive Italian election result

By Ray Attrill


The NZD was the biggest loser across the G10 currency spectrum overnight, losing over 0.9% against the US dollar to a low of 0.8224.

There was no idiosyncratic news driving the kiwi lower, rather a succession of ‘stop loss’ selling orders below the 0.8300 level and perhaps a belated reaction to the ‘risk off’ moves seen in other markets following news of the indecisive Italian election but which had largely passed the NZD (and AUD) by in yesterday morning’s trade.

We also saw across-the board weakening in NZD  cross rates, with a revival in the fortunes of the  AUD/NZD cross particularly apparent.

Today, we have the monthly net migration data, but more interesting the January trade balance where the market expects shrinkage in the surplus to $125m from $486m in December. We forecast a $46m surplus.

This morning, Fonterra has reaffirmed the forecast made in December: milk price kept at $5.50 / kg of milk solids and earnings range of 40c to 50c per share.

This is a touch disappointing given the strong product price increases we have seen at the global dairy trade auction since December.

These gains had outstripped gains in the NZ dollar giving some chance of a small increase.

There is still a chance the payout is lifted before the season payments are finalised (in October).  Fonterra also noted the dry conditions, particularly in the North Island, in mid-December and January had resulted in a slowdown in milk supply growth. The NZD dipped mildly.


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US equities have ground out modest gains in afternoon US trade but with little impact on the US dollar.

It’s hard to credit the improvement directly to Ben Bernanke’s Senate Banking Committee testimony even though he was very much ‘on message’ offering a detailed rationale for why the benefits of maintaining the current QE/low yield programme continues to outweigh the cost and giving no indication that the FOMC might cut short its current QE3 bond buying.

Mr Bernanke was also forceful in arguing that allowing the so called ‘sequester’ to kick  in from Friday would hurt jobs and incomes and could damage the cause of deficit reduction by hurting growth, also playing to the view that the Fed is intent on keeping the pedal to the metal.

The failure of early-day, Italian-centric pressure on European market to turn into a rout has been helpful  to the cause of risk. 

Though Italian bond yields predictably jumped at the European re-open with  10-year BTPs rising 41bp on the day, the yield held  below 5% and the EUR/USD rate was spared a test  of the 1.3000 level.

Indeed, our NAB strategists viewed the Asia session drop in EUR/USD and EUR/JPY as offering good levels to recommend re-entering long positions, content that we are as yet a long way from needing to take a ‘sky is falling’ interpretation of the indecisive Italian election result.

Fresh elections are far from a given, they argue, and it is quite possible that Mr Berlusconi and Mr Grillo, following their strong electoral showings, can achieve their aims (and which may include Mr Berlusconi wanting immunity from prosecution) without having to bring the Italian political system back to its knees.

Perhaps a bigger factor helping risk markets recover their poise in US afternoon trade has been two impressive data prints. January new home sales were up 15.6% to a 437k annual rate (and off an upwardly revised December reading) and consumer confidence has jumped to 69.6 from 58.6 and much better than the 62.0 expected.

After the NZD, the AUD is the second weakest performer overnight, seeing a low of 1.0201. The GBP also suffered followed comments from BoE MPC member Tucker that no-one on the MPC things QE has reached the end of the road and that negative interest rates (i.e. charging banks to park reserves at the bank) were a discussion point on the MPC. 

Other News:

*Dow Jones interview with RBA external Board member Roger Corbett in which he rejects the notion of using monetary (or fiscal) policy to try to drive down the Australian dollar.

Event Calendar:

27 February: NZ net migration; NZ trade balance; NZ FM English speaks; UK GDP; US durable goods orders; US pending home sales; EU ECB’s Draghi speaks;

28 February: NZ building permits; AU new home sales; NZ ANZ business confidence; AU Capex; EU German unemployment; US jobless claims;

1 March: NZ terms of trade; CH PMI; EU PMIs; UK PMI; US ISM manufacturing.

All its research is available here.

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