Hope in changing of the guard: Berlusconi to go; Papademos to arrive

By Mike Burrrowes

NZD

The NZD/USD has spent the last 24 hours trading inside a narrow 0.7920 to 0.7980 range. For now, investors prefer to wait on the sidelines and allow the political developments in Europe to run their course.

The subdued trading was not isolated to the NZD/USD. NZD/EUR spent the evening oscillating around 0.5770 and NZD/GBP flatlined at 0.4940. Should the tension in Europe ease, we expect NZD/EUR and NZD/GBP to trade towards 0.6200 and 0.5300 respectively by the end of the year.

The NZD/AUD briefly broke above the 0.7700 level overnight, but is now trading around 0.7680. There is only some second-tier data out in NZ and Australia, both unlikely to have much impact on the cross. In Australia, we have the Westpac consumer confidence survey and in NZ we have credit card spending and QV house prices due for release. The bigger focus for the cross will come tomorrow with the release of Australian employment data.

Looking to the day ahead, support on NZD/USD is eyed at 0.7920 and resistance at 0.8000.

Majors

Just when the Greek debt crisis appears to be stabilising, the market has swiftly shifted its focus to Italy. So expect the European debt crisis to keep dominating headlines. Overnight, the moves in FX markets were relatively small as investors wait for a clearer picture to immerge. Over the past 24 hours, the old “safe haven” trio of the CHF, JPY and USD were the best performing currencies, whilst the AUD, CAD and NZD lead the declines.    

Moves in other asset classes were mixed overnight as most prefer to watch developments unfold from the sidelines. The S&P500 index and Euro Stoxx 50 index gained 0.5% and 1.2% respectively. Our risk appetite index (scale 0 – 100%) held steady overnight above 34%, well off the 24% low seen in October.

The focus overnight has remained on Europe with the market hopeful Greece and Italy are on the right track. The EUR/USD rose from 1.3750 to an intra-day high above 1.3850, currently 1.3820.

Overnight, Italian Prime Minister Berlusconi managed to pass the 2010 accounts in the parliament but lost his majority in the process. Following this, the Italian President has announced Berlusconi will resign once the austerity law is passed. Berlusconi’s resignation should pave the way for an election and a new government with the power to pass further austerity measures.

Developments in Greece appear to be on track, for once. The media are reporting the coalition government leader will be Loukas Papademos. Expect this to be confirmed in the coming days. Given his background as the Vice President of the ECB, he is seen as the best equipped to push through the necessary reforms in Greece.

UK data painted a mixed picture overnight. UK industrial output flatlined in September (0.1% m/m expected), while manufacturing output for September rose 0.2% (0.1% m/m expected). Encouragingly, the NIESR GDP estimate for October printed at 0.5%, helping to allay fears the UK economy is heading for a recession. GBP/USD crawled from 1.6050 to 1.6090 currently.

The CHF strengthened against both the USD and EUR overnight after comments from the SNB Chairman Hildebrand disappointed. He noted “price stability and focused monetary policy does not always guarantee financial stability”. While not much in this for CHF, there was some speculation Hildebrand would lift the 1.20 floor in EUR/CHF.

Looking to the day ahead, the initial focus will be on the monthly release of Chinese data (retail sales, industrial production and CPI) for any hints of a faster slowdown. Tonight the highlight will be a speech from Fed Chairman Bernanke, expect him to emphasize the potential for further monetary stimulus. On the data front, we have the UK trade balance and US wholesale inventories.   

Mike Burrowes is part of the BNZ research team. 

All its research is available here.