CURRENCY: Expect more tentative steps for the NZD today. Local support for the NZD is likely should it attempt to scout out territory under 0.7850.

RATES: NZ rates are expected to open broadly unchanged, taking a breather following yesterday's strong rally. China's HSBC PMI will be eagerly awaited.

REVIEW

CURRENCY: As expected the fortunes of the EUR weighed heavily on the Australasian currency bucket. While the EUR recovered from further lows overnight the reversal has not yet hit the NZD and AUD.

GLOBAL MARKETS: Another risk-off session in Europe overnight as markets continued to digest the weekend's news out of Spain and Greece. Catalonia joined the growing list of regions expected to request bailout monies. Spanish bond yields hit fresh record highs of above 7.50% before recovering to 7.39% (20bps higher in the day) following the reintroduction of a short selling ban on Spanish and Italian financial stocks. Spanish equities had fallen 5% early, before recovering to close down only 1%. The Euro Stoxx fell 2.6% to a six-week low, the FTSE ended down 2.1% and US bourses were down around 1% heading into the close. Safe-haven bond yields had earlier rallied to all-time lows. Trading activity was again light, with little data apart from another mediocre Eurozone consumer confidence reading (to fresh 3 year lows in July). Commodity prices ended lower, not helped by comments from an adviser to China's central bank that Q3 GDP may slow to 7.4%. Crude fell 4% to US$88/bbl, wheat and soybeans fell by 3.5-4%.

KEY THEMES AND VIEWS

BOND YIELDS HIT NEW RECORDS ON EUROZONE DEBT CRISIS: Market fears surrounding peripheral Europe saw the Spanish 10 year bond yield print fresh intra-day highs of above 7.50% overnight - the spread to Bunds widening to euro-era highs of +635bps. Both Spain's government and its regions face funding needs of around ?15bn in H2, with limited access to markets. Italian yields tagged along for the ride, closing up 16bps to 6.29% - although the spread to Bunds remains 35bps shy of last November. Risk continues to be shut down ahead of the August holidays and G3 sovereign bond yields were again the main beneficiary of the risk-off move. German Bund yields printed fresh all-time lows of 1.12% in intra-day trading before closing unchanged at 1.17%. Further gains may prove harder to come by for Bunds - although to some extent German yields are pricing in the potential for currency gains should an eventual Eurozone break-up see the bonds be redenominated into DEM. Record 10 year bond yield lows were also recorded intra-day in the UK (1.41%), Japan (0.72%), Canada (1.56%) and the US (1.40%). NZ 10 year bond yields hit fresh lows of 3.25% yesterday and remain best in class on a majority of relative value metrics we follow.

OTHER EVENTS AND QUOTES

� The Bank of Spain said GDP contracted 0.4% in Q2 (following Q1's 0.3% q/q drop). Official Eurozone GDP figures are due next week.

� The EU Commission stated that they are 'confident' that the next Greek disbursement of funds will occur, although a decision is unlikely to be made before September. The troika returns to Greece tomorrow to review progress on the austerity front.

NZD/USD: Finding support?

It should be a day of looking for support for the NZD which is likely from local connections. Moves under 0.7850 at this point will require the EUR to fall further and the USD index to break key levels. Neither look likely today.

Expected range: 0.7855 - 0.7930

NZD/AUD: Back to base?

It appears further positioning ahead of the RBNZ OCR review on Thursday has helped deliver the break of key support at 0.7692. At this point further support for the NZD around 0.7650 should be enough to hold the base during today's trading.

Expected range: 0.7650 - 0.7700

NZD/EUR: Not yet?

A brave recovery overnight for the EURUSD as the USD index was repelled from the critical 10 year moving average level. Risk off trading delivered a sharp reversal from recent highs. More corrective moves are possible but will require the NZD to stabilise.

Expected range: 0.6488 - 0.6518

NZD/JPY: Testing the resolve?

Those seeking yield should have their nerves tested in the coming days as this cross drops lower than expected. An extension down towards the low 61JPY zone would find further support at this stage.

Expected range: 61.50 - 62.10

NZD/GBP: Falling behind?

Despite tight local ranges overnight support at 0.5080 was broken. Moves lower should not be delivered today as the NZD stabilises the ship.

Expected range: 0.5070 - 0.5100