CURRENCY: NZD should be driven initially by a worsening in European sentiment and increased Arab tensions. Beyond that, NZD should grind out relative performance with fear-dominated descents possible.

RATES: Rates are likely to open unchanged after a quiet London session.

REVIEW

CURRENCY: Overall a stable week for NZD last week, with a large negative move setting the scene for the outlook.

Local data was stronger than expectations, highlighting the "relatively" positive fundamentals for NZD.

GLOBAL MARKETS: Weaker German business confidence saw a mild "risk-off" London session on Friday. European stocks fell for a second day, but in the US it was a case of "sell the rumour, buy the fact" as banking stocks rose following Moody's downgrades of 15 large banks after market close on Thursday evening. Commodities were mixed, with oil rising, recovering some of the previous day's sharp losses, but the overall CRB index little changed. US long-end rates rose despite the extension of Operation Twist.

KEY THEMES AND VIEWS

HEADING FOR THE SUMMIT. The leaders of Germany, Italy, France and Spain met in the weekend to discuss a plan to spur growth prior to next week's leaders' summit - the fourth this year. Angela Merkel continues to resist calls for the rescue funds to buy bonds of troubled sovereigns directly. However, she agreed to jointly lobby the EU for a growth plan of up to ?130bn (1 percent of GDP) - unlikely to be seen as a game-changer if it goes through, as sadly the money has to come from somewhere. The pressure is on to come up with a Plan for tighter political and fiscal union that is sufficiently detailed, and rapid, to soothe nervous markets. Meanwhile Greece announced it will be seeking at least a two year extension to its deficit-cutting timetable - and tax cuts, extra help for the poor and unemployed, and a freeze on lay-offs in the public sector. It should make for interesting discussions, but they may find themselves pushed firmly down the summit agenda by the more pressing issue of agreeing the nuts and bolts of Spain's bank recapitalisation.

MAKING IT UP?: A New York Times article over the weekend has been making some waves. Citing top executives and local economists (anonymously), it claims that not only China's economic growth but also closely-watched growth proxy electricity demand is being deliberately overstated by local officials, under pressure in a leadership changeover year.

OTHER EVENTS AND QUOTES

� Angel Merkel rejects suggestions rescue funds recapitalise Spanish banks directly: "Liabilities and control go together? [Germany has] no powers" of oversight of the Spanish banking sector.

� "We are critical? we won't accept what we don't have to accept." Bundesbank Spokesperson Michael Best underlines that the Bundesbank will be doing its best to stymie the ECB's announced looser collateral standards for liquidity provision.

� "The general target is for there to be no further reductions in wages or pensions and no more taxes." The new Greek Government aims high.

NZD/USD: Sentiment driven, with underlying support?

Europe and global growth fears dominate USD crosses, which will drive the immediate direction for NZD. Strong local fundamentals should keep NZD relatively in demand when there is an absence of overt global negativity.

Expected range: 0.7820- 0.7940

NZD/AUD: Mid range waiting for a break?

Despite rates differentials pointing higher there is technical resistance at 0.7850-0.7875 keeping this cross muted. Favour NZD outperformance once the resistance is overcome.

Expected range: 0.7825 - 0.7875

NZD/EUR: Euro summit?

Will we get a definitive solution for Europe this week? To say we are circumspect is an understatement and believe only time will heal the debt problem. Positioning is the caveat with Europe's issues lacking immediacy to force an "accident" keeping Euro counter-intuitively range-bound.

Expected range: 0.6250 - 0.6350

NZD/JPY: Lack of "safe haven" demand so far evident?

Global sentiment will drive this cross both ways. The medium-term view is for NZD gradually outperform JPY.

Expected range: 62.50 - 64.00

NZD/GBP: Fundamentals ...

We still believe July asset purchasing by the BOE will keep NZD outperforming GBP. British GDP this week could set GBP direction.

Expected range: 0.5025 - 0.5100