CURRENCY: NZD strength today may well be tempered by more strategic positioning. The approaching flood of global economic data, beginning this weekend, is unlikely to deliver much of a risk on environment.

RATES: Very few kiwi trades in the overnight London session. Kiwi rates are expected to open broadly unchanged.

REVIEW

CURRENCY: Stronger commodity and equity markets overnight helped lift the NZD from the low. The rally in these markets should be viewed with some scepticism as overall global economic conditions weaken.

GLOBAL MARKETS: Markets were generally quiet overnight, with thin trading conditions overall. A positive tone was evident for European equities with the Euro Stoxx up 1.8%, the FTSE 100 by 1.4%, with trade receiving a solid leg up following the open of the US equity market (currently +0.8%). Government bond yields generally edged higher, with the Spanish 10-year yield up 5bps to 6.84%, while US yields were slightly down across the curve. FX markets were more mixed, with EUR, GBP and JPY all losing ground versus the USD, while AUD and NZD were steady. The CRB index gained 1.2%, with crude trading higher, but gold was flat. Data was generally ignored.

KEY THEMES AND VIEWS

MERKEL STILL PLAYING HARDBALL. EU leaders meeting in Brussels this week are due to discuss plans for closer integration, focusing on common banking supervision and deposit insurance, along with a "criteria-based and phased" move toward joint debt issuance. The blueprint also suggests that the EU could impose upper limits on annual budgets and debt levels of nations that use the euro. While Angela Merkel said that she welcomed EU President Van Rompuy's proposals and agreed with his four building blocks toward integration, she rebuffed any notion Germany shoulder the cost. "I decisively reject the presumption in this report that the principle of collectivization takes priority." Rather, individual countries must "keep to agreed rules" and raise their competitiveness through structural reforms, using the best in Europe as the standard "rather than mediocrity." With Spanish bond yields edging up and approaching their mid June highs, there is growing pressure to soften her opposition to debt sharing in the euro area and do more to cut borrowing costs for Spain and Italy. While Merkel has a point and that some of the structural reforms that Germany has undergone are clearly needed to enhance economic flexibility in the Eurozone, it is much easier to enact these reforms when the economy is growing. Presenting a united front is unlikely to appease the domestic electorate, but it is needed to convince sceptical markets that policymakers mean business.

OTHER EVENTS AND QUOTES

� Federal Reserve member Evans on Operation Twist: While the move "has small effects its larger effect is that it indicates the Fed is continuing to think more accommodation is important and worthwhile."

� US durable goods disappoint. Once defence and transport orders are stripped out, underlying orders fell by 0.1% m/m, the second decline in three months. It is a sign that, in response to the easing in global demand, the US industrial recovery is running out of steam.

NZD/USD: Line call?

Local releases are unlikely to trouble the NZD too much as it remains in offshore watch mode. Expect moves today to remain with a tight range and tempered by the global picture. Any moves closer to 0.7940 will see increased strategic positioning looking for a corrective move lower next week.

Expected range: 0.7880- 0.7940

NZD/AUD: Fault one?

Despite slipping slightly this cross has found itself finding reasonable NZD buying interests as positioning for a move higher takes place. Some may be disappointed in the short-term delivered slightly deeper moves.

Expected range: 0.7830 - 0.7870

NZD/EUR: Challenge?

The EU summit is likely to present many calls for action. Some of which are impossible to deliver. Expect further NZD strength against the EUR as problems in Europe approach a tipping point.

Expected range: 0.6325 - 0.6375

NZD/JPY: Change of ends?

The lift into the low 63JPY zone sets up the next move towards 64JPY. This will not take place today but a move higher is possible provided inflows to the JPY ease marginally.

Expected range: 62.90 - 63.80

NZD/GBP: Outside court?

This cross is setting itself up for an extension higher towards the 0.5100 level. Expect a difficult road past that level.

Expected range: 0.5058 - 0.5098