Opinion: NZ dollar supported above 75.75 USc as Korean conflict concerns and Eurozone nerves bubble along

By Mike Jones*

With the US celebrating Thanksgiving and Europe devoid of key data releases, markets were contained to tight ranges overnight with only positioning and occasional official comment to spark marginal movement.

Early risk aversion, with equity markets of Euro Zone peripheral countries moving modestly into the red - while core Euro area equity indices maintained positive territory - saw the USD push modestly higher.

However the NZD could not breach the support window of 0.7550/0.7575. We have once again seen real money demand, including onshore commercial names appetite for the NZ$, and the AU$, soaking up any proprietary accounts supply.

As we open for the day the NY session, sans most NY desks, sees the NZ$ stable above the US76cent level, the AU$ likewise above US98cents and the EUR about a cent off early lows at 1.3375.

We wrap the week with no local data releases, watching the media for Asian news & mindful of the Korean peninsula where Uncle Sam is sailing into town for some timely military exercises over the weekend.

From Asia there is Japanese inflation updates and Chinese Business Conditions updates while aside from day two of the Ashes some might like to note the RBA's Governor Stevens appearing at a House Committee on Economics.

On the day we’ll start as we did yesterday expecting any extended rallies to be limited to the 0.7650/0.7675 window with ongoing broad support eyed at the 0.7550/0.7575 area.

Aussie spending solid

Yesterday from Australian private spending in Q3 increased a solid 6.2%qoq, double the rise expected by economists. The solid rise in capex in Q3 helps plugs the hole left by yesterday's news of an unexpected fall in residential construction spending last quarter. It was thanks to more evidence of the commodity price boom kicking in with a 15.5% surge in mining investment.

This would no doubt leave the RBA continuing to worry about capacity pressures on the Australian economy down the track (with news of significant pay rises to air freight workers leaving the central bank a little more edgy).

No rise in RBA rate hike expectations but perhaps consistent with our view that the RBA has more work to do in 2011. As mentioned last night there was a strong start for the DXY, however, there was reported buying by European exporters in some size that helped stabilise the EUR. Most analysis and commentary still shows a sense of resignation the EUR is being lined up for a move lower in coming days.

Uncharacteristic comments from Slovakia central bank head and ECB policy member Makuch that the EUR was slightly overvalued gets a mention though to be sure the ECB does not have an exchange rate target and Trichet will not thank his colleague for such forthright comment.

Bond yields also nudged a shade higher with Spanish 10-year yields pushing new highs, despite Spain's Campa noting that funding for the rest of the year remains "comfortable" & they don't expect any issues tapping financial markets. Equity markets managed to muster a modest recovery into positive territory, interest rate futures eased lower and the USD DXY index once again backed off from the 80.0 level that it has so far been unable to break above.

The UK's CBI reported a strong distributive trades survey for the retail sector, with headline sales improving to 43 from 36 and well above the forecast decline. There was some chatter that comments from BoE MPC members testifying in front of the UK Treasury Select Committee was GBP negative.

We disagree and saw heard nothing new or significant for GBP or UK markets. Luxembourg PM and Euro Group Chairman Juncker said his worry is that Germany is slowly losing sight of European common good - a reference to Chancellor Merkel's desire to push through a Treaty change to see private investors and bond holders share the pain of a future Euro Zone debt crisis.

ECB member Weber said the rescue fund for indebted nations is sufficiently capitalised, while Benoit from the EC said "we're far from having to discuss the issue of capacity".

Finally, a somewhat conciliatory Merkel speaking in Berlin is quoted as saying that the Euro Zone is in much better shape than before the crisis with no country in any danger of insolvency. She is at pains though to explain German policy favours investors sharing sovereign risk from 2013 under proposed changes to the current mechanism.

* Mike Jones is part of the BNZ research team. 

All its research is available here.