CURRENCY: Despite concerns within the European arena, expect Australasian currencies to remain strong and look towards breaking new recent topside ground in today's Asian session.

RATES: Kiwi rates markets are expected to give back much of yesterday's gains, with yields on Aussie bond futures around 5bps higher from our close on global moves.

REVIEW

CURRENCY: Returning concerns on Europe initially dented the Australasian currency progress. Reality then kicked in and the NZD led the risk rally higher as others attempted to keep up with the move.

GLOBAL MARKETS: Spain's 'bailout' continued to dominate global headlines overnight with investors seemingly more unsettled about the outlook for the entire Euro area. Spanish and Italian bonds again suffered heavy selling with 10 year yields closing up 18bps and 14bps respectively. Fitch comments were also damaging to market sentiment, the ratings agency saying that Spain is likely to "significantly" miss its 2012 and 2013 deficit targets and that Eurozone sovereign ratings are under "strong downward pressure". German 10 year Bund yields rose 12bps and French yields ended 17bps higher. With fears rising that the burden of any Eurozone rescue will increasingly fall on Germany, France and the remainder of Europe's core, there was probably little surprise that these Fitch comments were viewed as being bond market unfriendly. US bond yields were 7bps higher heading into the US close, outperforming moves in Eurozone bond markets on talk of large accounts switching out of Bunds and into Treasuries. Sentiment was a little more positive in equity markets with bourses in Europe and the US both trading in positive territory. Crude was flat to mildly positive, base metals weaker, although gold shot up 1.6% to USD1615/oz.

KEY THEMES AND VIEWS

REALITY CHECK FOR EUROPE'S CORE: Bond markets in Europe's periphery continued to hemorrhage overnight in the wake of Spain's 'bailout'. Spanish 10 year bond yields hit a euro-area high of 6.80% intraday on heavy selling as the prospect of bond-holder subordination becomes clearer. Comments from Fitch that Eurozone sovereign ratings are "under strong downward pressure" and that "a Greek exit could lead to downgrades to AAA-rated countries" put the fear into markets. Fitch also downgraded 18 Spanish banks. Spain's bailout has done little to ease markets concerns. Structural problems remain and policymakers continue to paper over cracks with more debt. Markets now look to EU meetings later in June for a tangible circuit-breaker (or third LTRO?). The task may be becoming too big for Germany alone, and we concur that a build up in contingent liabilities could see the country lose its AAA rating in time. Is the worst of the risk-off rally over, and could yields be close to an inflection point? With sovereign risk on the rise in Europe and the US facing a fiscal cliff of its own, the silver lining could be that NZ bonds (and other highly rated sovereign markets) further benefit from investor reallocation.

OTHER EVENTS AND QUOTES

� EU's Rehn says the euro area will impose no extra budget-austerity requirements on Spain's government when providing emergency aid to Spanish banks. Rescue conditions will focus on revamp of lenders.

NZD/USD: Recovering?

The approaching RBNZ Monetary Policy Statement and Official Cash Rate review should see further interest in the NZD. Expect attempts towards the topside assisted by global demand. News that China may cut import tariffs on meat and dairy products (amongst others) to meet rising demand are likely to assist the general acceptance of a relatively better NZD landscape.

Expected range: 0.7715 - 0.7815

NZD/AUD: Breathe deeply?

The sun returns to shine on the NZD as it finally makes another break through 0.78AUD. Despite the RBNZ likely to highlight increased concerns on Europe expect a no change to the OCR tomorrow to lift this cross further.

Expected range: 0.7790 - 0.7850

NZD/EUR: Relatively speaking?

Further topside moves are likely on this cross and yield differentials and the economic disparity continue to be highlights.

Expected range: 0.6195 - 0.6245

NZD/JPY: Having troubles?

The NZD should perform most of the heavy lifting on this cross in the coming days. Yield hunters should assist in breaking new recent topside ground.

Expected range: 61.20 - 62.20

NZD/GBP: Laid up?

Extensions back into the 0.50+ zone are likely as the GBP suffers from uninspiring economic releases overnight.

Expected range: 0.4970 - 0.5020