CURRENCY: Some semblance of sanity should prevail in markets today. Expect a certain wariness of movement for the NZD as it remains on the sidelines and focus is squarely on developments in the European arena.

RATES: Kiwi trading was quiet in the London session with the 2-year trading a couple of points lower than NZ closing levels. As such, this morning should see the market open a point or two lower in yield.

REVIEW

CURRENCY: Following increasing risk concerns in the Asian session yesterday, the NZD reluctantly moved lower. Overnight, while not moving technically deep enough, it did offer some relief to exporters against the USD.

GLOBAL MARKETS: Not a good start to the week in the northern hemisphere, with US and European equities down 2 to 3 percent, and Italian bourses down 4 percent as bank shares were aggressively sold. US and core European bond yields fell, with the US 10 year yield at 2.91 percent at the time of writing. Italian bond yields bucked the trend, and peripheral European bond yields also moved higher. Commodities fell, with the largest falls for soft commodities and industrials. Oil prices fell 1.3 percent.

KEY THEMES AND VIEWS

CONCERNS OVER ITALY GROW. Media reports suggest yesterday's meeting of the European Union was heavily focused on trying to prevent the escalation of the debt crisis. Providing bailouts for Greece, Ireland and Portugal is one thing, but addressing wobbly public finances in Spain and Italy is a different ball game altogether. While German finance minister Schaeuble said "there's no discussion whatsoever" on doubling the EU's rescue facility, media reports suggesting the ECB is seeking to increase the pool to ?1.5 trillion to cover an Italian crisis clearly have clearly spooked markets. Italian bond holders are looking for the exits, with the 10-year bond yield rising 42 basis points (to 5.67 percent), Italian CDS spreads blowing out to around 300 basis points, and Italian banking shares routed. Meanwhile, European finance ministers are trying to find a way to get private bondholders to maintain their exposure in Greek bonds in a way that does not trigger a formal default and force government's to pick up the tab. This is easier said than done.

US BUDGET IMPASSE CONTINUES. Congressional leaders are making little progress in resolving the Budget impasse, before the US Government exhausts it borrowing authority on August 2. Parties remain divided over taxation (the Democrats want more) and entitlements (the Republicans want less). While Obama is seeking to extend the US $14.3 trillion debt ceiling through to 2013, Republicans are opposing prospective corporate tax increases and have identified up to $2.5 trillion is spending cuts over the next decade. Democrats have countered with $1.1 trillion in spending cuts, but this would be conditional on new revenue initiatives.

OTHER EVENTS AND QUOTES

� China's massive local government debt does not pose "systematic" risks to the country's economy, the Xinhua news agency quoted the state auditor as saying today. The auditor also reiterated Beijing's vow to clean up its debt mess by saying the Government is taking "effective" measures to tackle the debt problems.

NZDUSD: Weighing the alternatives?

Offshore counterparties continue to weigh up the differences between the EU and the US situations. In the meantime the NZD should find the going tough as the 0.8350-0.8380 zone now represents increasing resistance. Potential for an extension lower towards 0.8250 remains on the day but will need some outside assistance.

Expected range: 0.8250 - 0.8330

NZDAUD: Tested but failed?

Attempts to break through the 0.7800-0.7830 zone failed yesterday. Further attempts will be made but today this zone seems out of reach. Australian business confidence data may well keep this cross supported but topside moves are too hard at this point.

Expected range: 0.7750 - 0.7820

NZDEUR: Little hope?

The EUR found a tipping point yesterday as many called the end to USD weakness. Clearly the EURUSD is in a battle of two evils. On the sideline sits the NZD enabling further elevation of this cross. While it will not be easy a move to 0.6049 cannot be ruled out in the medium term.

Expected range: 0.5885 - 0.5930

NZDJPY: Setbacks?

The strengthening JPY and weakening NZD helped this cross correct from recent moves. Deeper dips are possible as the Japanese become wary about the battle taking place in the EURUSD.

Expected range: 66.11 - 67.41

NZDGBP: Tied together?

With concerns growing for the EU picture the UK cannot be far behind. The pace of moves however should ease a little given the current level of the cross.

Expected range: 0.5185 - 0.5230