News and views
Three big confidence boosters. The FASB decided to relax valuation rules for US banks, which may mean less pressure on toxic asset disposal and higher reported profits. The G20 meeting agreed to boost the IMF coffers by US$1 trillion, as well provide $250 billion in trade finance via a new fund. The ECB only cut rates by 25bp to 1.25%, 25bp less than expected, and did not discuss unconventional monetary measures. These events combined to send all global equity indices higher, Europe posting the biggest gains (Eurostoxx +5.7%), the S&P500 currently up 3.4%. Other asset classes behaved as expected: the USD index 01.3%, oil +8.5%, copper +2.4%, gold -2.4%, US 10yr notes +9bp. There was one notable negative story, the IMF withholding March payments to Latvia because budgetary targets weren’t met (note that Skandinavian banks are exposed to Latvia).
NZD traffic was one way, on the back of the positive sentiment, from 0.5680 to 0.5840, pulling back slightly this morning to 0.5780. The effects of Wednesday’s RBNZ verbal intervention have largely worn off.
AUD did much the same, from 0.7030 to 0.7200, with active buying seen by proprietary and real money entities. It has slipped slightly this morning, to 0.7160. AUD/NZD, then, did little, remaining in a two day range of 1.23 to 1.24.
EUR leapt above 1.33 on the ECB news, to 1.3515, before settling back to 1.3450. USD did gain against the JPY, renewed focus on poor Japanese data heralding a higher 99 to 100 range last night.
The European Central Bank cut rates by 25bps to 1.25%, against an almost universal expectation of a 50bps cut. Trichet repeated his comments that the economy was going into a severe downturn and inflation was going to undershoot the target at the policy-relecant horizon. He virtually confirmed that the ECB has not yet reached its terminal rate by saying “I don’t exclude that we could in a very measured way go down from the present level.” We expect a further 25bps cut at the next meeting. The rate paid on deposits at the ECB was lowered to 0.25%, and the rate charged for lending was lowered to 2.25%. Trichet said that the deposit rate was now “extremely low” and “I don’t expect that we’ll move in the period to come”. Future easings are likely to come via 50bps reductions in the lending rate, while the deposit rate is left unchanged, thus “narrowing the corridor” between the two. On quantitative easing, Trichet said only that a decision on policy towards “non-standard measures” will be taken at the next meeting of the Governing Council.
US factory orders rose 1.8%, the first increase for seven months. We knew that durable goods orders had risen to correct an outsize fall last month. But non-durables goods orders also rose, for the second conseecutive month. The improvement in factory orders was broad based, although orders for consumer goods fell. Destocking was a dominant theme, with the ratio of inventories to shipments fell for the first time in six months.
Initial jobless claims rose 12k to 660k for the week ending 28 March, showing that the labour market deterioration is still accelerating. Continuing claims rose 161k in the week ending 21 March.
UK March house prices rose 0.9% according to Nationwide, the first rise since October 2007. This follows a fall in mortgage rates, improved mortgage availability, and a greater number of mortgage approvals.
Outlook
The NZD is being powered by global factors at present, and domestic influences (RBNZ, economic data) have taken a back seat. A sustained break of 0.58 points to 0.60+. Otherwise, 0.5730 should provide support today.
