By Mike Jones*
The week has started with a broadly stronger USD, though for the most part this strength is focused against the EUR where once again analysts and markets have their focus on how the ECB and the politicians handle the sovereign crisis within their borders.
The NZ$ has tended to trade within a 0.7590/0.7640 for most of the overnight session, with ongoing support seen for the commodity currencies and selected risk FX from a mix of commercial and real money accounts.
Like the AU$ there has been demand against the beleaguered EUR in market flow to keep the NZ$ on a firmer footing.
The opportunity for the NZ$ to trade due to “local” influence rather than to the beat of international news is probably still a couple of days away, as we await Thursday’s MPS.
In the meantime today’s RBA is expected to deliver no change in rates, given Governor Steven’s parliamentary testimony last week where he indicated policy was appropriate, a view that was reinforced by some of the recent data releases (last weeks GDP & Retail Sales).
On the local calendar we seem limited to the midday update from QVNZ on the local Housing market.
So once again we will eye offshore developments, with sentiment determined by events from the US and Europe it would seem. Without a significant worsening in USD sentiment then the NZ$ should remain constrained by resistance at the 0.7650/0.7675 window with 0.7550/0.7575 immediate support after last week’s rally off the US74cent level.
As we look ahead to Thursday and the Monetary Policy Statement our thoughts are that the RBNZ is likely to play things cool, much like the OCR Review did in late October.
The local recovery continues to frustrate, while increased global uncertainty also argues for the Reserve Bank to sit with its stimulative 3.00% cash rate setting for the near future. However, looking into 2011, the much improved NZ growth we envisage, along with non-trivial inflation risks, should have the Bank resuming its OCR increases, with an early-2012 top higher than is now expected by the punctured markets.
This big-picture story we firmly maintain, notwithstanding the obvious litany of disappointments to date.
We believe this week’s MPS will approach things in a similar fashion, meaning it will most likely stick with the rhetoric of its October OCR review, where it did not throw in the towel (as some had expected it to do), even though it had to acknowledge the frustrating pace of recovery underfoot.
This is the balancing act still at play. In respect to timing, the RBNZ could start up again in March (as remains our core view), or conceivably wait until June, which is where market pricing has shifted to over recent weeks.
This March to June zone reasonably marks the boundaries for the next OCR hike, in our view. Majors As noted already the EUR is broadly weaker in the opening rounds of this weeks sparring, retreating in an orderly fashion to the 1.3250 as the market responds to ongoing comments from all manner of officials in Europe.
The dismissal by the German Finance Minister of earlier IMF calls for a larger EFSF the catalyst for the test of the lows before the NY session has tended to steady the market somewhat.
Financial press over the weekend speculated about the prospects for increasing the size of the EFSF, with the IMF recommending such a move while an article penned by the Italian & Luxembourg finance ministers suggested that euro area issuance be handled by a common debt agency.
However, it appears that no such decisions were made at the EU leaders meeting and so the “no increase” comments from Schaeuble attracted attention.
There is also the small matter of the Irish budget vote tonight, current indications are that this will pass though it is an event not without risk and would have immediate (negative) implications for the EUR if not passed.
From the US there is ongoing attention on Bernanke’s recent comments, his published support as expected of QE2 and the possibility that if required this could be extended.
US front end rates remain under pressure given the expectations for continued Fed asset purchases. Reports from Capitol Hill suggest that a deal is close to extend tax cuts for middle income earners as well as defer the expiration of the upper-bracket cuts in exchange for the extension of unemployment benefits as the political powerbrokers flex their muscles in the US.
The divisions in Europe meant an increase in the cost of insuring European sovereign bonds of the usual PIGS suspects.
German Chancellor Merkel, as well as Schaeuble, said Germany rejected calls to either introduce joint bond sales or increase the size of aid funds. Merkel signalling a refusal to bear extra costs to manage the crisis, with moves that might raise Germany’s borrowing costs which are of course the lowest within Europe. T
he political discord not surprisingly is an ongoing weight on sentiment in both debt and the EUR FX markets.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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