Intraday Market Thoughts

Europe Inches Forward, RBNZ Hawkish, BoJ Awaited

by Adam Button
Oct 26, 2011 23:25

Still no concrete details but European leaders moved forward on Wednesday but US economic data was positive. CAD was the top performer while AUD and JPY lagged. New Zealand held rates unchanged early in Asia-Pac with a hawkish stmt & and the BOJ decision is up next. Interim Premium Intermarket Insights, after Tuesday's 3/3 in EURUSD.

Markets continued to shift on every piece of news that trickled out of Europe. Positive indications about leveraging the EFSF and hiking bank capital ratios won the day as risk assets were generally higher even though EUR/USD was virtually unchanged.

The most concrete news was that EU agreed on bank recapitalization plan at a ratio of 9% by June 30, 2012. This dovetails with the long-rumoured 100B capital raise. A dispute remains, however, about what will be considered tier 1 capital.

The euro jumped on headlines suggesting the EFSF will be leveraged to around 1 trillion but none of the details have been decided and are unlikely to be finalized for a month. Two plans remain under consideration:

1) The EFSF would guarantee a first-loss provision on newly-issued debt in periphery countries

2) A fund backed by the EFSF will seek out investment (China is a heavily rumoured buyer) and buy periphery debt on the secondary market.

It is possible that both options will be implemented.

Another factor that boosted markets was a signal from Draghi that the ECB will continue to buy bonds in the secondary market despite German opposition.

Also helping sentiment was an agreement within Italys coalition on a fresh set of spending controls and reform but we warn that the situation remains tenuous -- a fist-fight broke out in parliament.

The one item that remains completely unresolved is the Greek restructuring. In the coming hours Markel and Sarkozy will meet with bondholders. For the market, a 50% haircut appears to be the sweet spot; any lower or higher and EUR will fall.

Durable Goods Orders Strong

US economic data helped boost sentiment. Durable goods orders ex-transportation rose 1.7% vs the +0.4% expected. Non-defense capital goods ex-air, climbed 2.4%, the most in 6 months, compared to the +0.5% expected. Overall orders fell 0.8% (-0.9% exp) but it was due to a 25.5% fall in civilian aircraft bookings (after outsized rises in July and Aug) and a 2.7% in motor vehicles and parts.

The S&P500 gained 1.1% to 1242.

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NZD Higher on Hawkishness

The New Zealand dollar climbed a half-cent late in the day after the RBNZ held rates at 2.50% but said rates will move higher if offshore developments have only a mild impact on the economy.

BOJ Upcoming

The BOJ will render a monetary policy decision at roughly 0030 GMT. Expectations are for the bank to hike the 50 trillion asset-buying program by about 5 trillion. The decision is unlikely to have a significant effect on FX. We may also get further jawboning about yen strength but Fin Min Azumi said today it would be very hard to convince G7 members on coordinated intervention.


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