The NZD will remain in the thick of the risk off action on the currency battlefield. The wounds sustained overnight may prove to be fatal and deliver the ultimate test, and breach, of support currently at 0.8084.
RATES: Kiwi rates remained off the radar in London trading, although a rally in Aussie 3y futures is expected to see NZ swap rates open a touch lower.
CURRENCY: All was quiet on the currency front during the local session yesterday. Overnight intense fighting erupted with perimeter defences being easily breached as risk concerns rose dramatically.
GLOBAL MARKETS: Market sentiment soured again overnight with the Euro Stoxx 50 equity index falling 2.9 percent on weak April PMI data and as the Dutch PM offered his cabinet's resignation after an anti-EU party refused to back big deficit cuts (perhaps early signs of a wider political and social backlash that may threaten the longevity of the euro experiment?). The Dutch 10 year yield increased a further 10bps, Spanish yields rose 4bps, and Italian yields were up 6bps. With the April flash PMI especially weak in Germany, 10 year Bunds rallied 5bps to new lows of 1.63 percent. In the US, the S&P 500 index fell by 1 percent and Treasuries fared better than their European counterparts with yields lower by only 3bps. Commodity prices also weakened across the board on the poor manufacturing PMI data.
KEY THEMES AND VIEWS
EUROZONE APRIL PMI'S REMAIN IN CONTRACTIONARY TERRITORY: The Eurozone Composite PMI fell back to 47.4 in April (49.1 prev), suggesting the recession inflicting many parts of the region will continue into Q2. The EZ Services PMI fell back to 47.9 (49.1 prev), while the EZ Manufacturing PMI dropped unexpectedly to 46.0 (47.7 prev) to be mired in contractionary territory for a ninth month. Germany's manufacturing PMI was especially weak, falling to 46.3 (48.4 prev.) despite recent strength in the Ifo survey. In other data, 2011 Eurozone gross government debt increased to 87.2 percent of GDP (with Greece rising to 165.3 percent), Italian consumer confidence fell to 15-year lows, and the Bank of Spain predicted its economy contracted 0.3 percent in Q1. The Eurozone crisis looks to have taken a turn for the worse.
ALL EYES ON AUSTRALIAN CPI DATA AT 1:30PM: Today's Australian Q1 CPI release is not expected to stand in the way of a May rate cut, with the market's focus expected to quickly to shift to next Tuesdays RBA meeting (23bps of cuts priced). Our Australian economists are expecting both headline and underlying CPI measures to increase 0.5 percent q/q (market consensus of 0.6 and 0.5 respectively) with downside risk given the fall in fruit and vegetables prices in yesterday's PPI release. In terms of outliers, they think an underlying reading of 0.8+ percent would dent the chances of a May rate cut, while an underlying reading of 0.4 percent (or lower) would condone market pricing and open the door to further cuts beyond May.
OTHER EVENTS AND QUOTES
� PM John Key said overnight "I don't believe in intervention, never have and frankly never will", adding that "Dreaming that we can somehow get the exchange rate down through intervention is la-la land stuff."
NZD/USD: We will remember them?
Exporters may have forgotten sub 0.80USD levels however markets in general have not. Should the 200 day moving average support (0.8084) break the ability of the NZD to extend the move to sub 0.80USD increases.
Expected range: 0.8084 - 0.8134
NZD/AUD: Into the valley?
An extremely surprising negative Australian Q1 PPI did little damage to the AUD compared to the risk off sentiment overnight. This cross failed, rightfully so, to poke above 0.7900 as it continues the path lower.
Expected range: 0.7850 - 0.7900
NZD/EUR: No man left behind?
The European troop continues its failure to perform. Miracles are not close at hand and as such increasing pressure on the EUR should help to steady this cross. New topside ground is unlikely to be trodden today.
Expected range: 0.6150 - 0.6200
This cross may find itself retreating through support at 65.50 today. If broken it may well result in a deeper correction into the 64JPY territory where local support awaits.
Expected range: 65.28 - 66.98
NZD/GBP: In the bunker?
NZD moves led the way for this cross as it dropped close to key support at 0.5025. While this level holds initially it will come under further attack.
Expected range: 0.5000 - 0.5050