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Strategist Contents



27 October 2011

RBNZ’s Straight Bat                   2     Economic Outlook
                                            All eyes remain on Europe. That is where the main downside risk
Australia at a Glance                 4     to New Zealand’s economic outlook resides, even though the
                                            transmission may come through various channels such as lower
NZD/JPY: Set To Trend Higher?         8     commodity prices, lower export volumes or higher bank funding
                                            costs. Despite this risk and uncertainty, our central view remains
                                            one of decent domestic growth ahead, partly driven by the
The BNZ OIS-ter:                     11
                                            lagged effect of strong export revenue and reconstruction activity
                                            in Christchurch. We forecast 3.1% growth in 2012, up from
Key Fixed Interest Views             12     around 2% this year. A view similar, as it happens, to that
                                            published this week by the NZ Treasury and implicit in today’s
A Bit of Breathing Space             13     RBNZ announcement (that is little changed from its September
                                            MPS). Meanwhile, Q3 CPI inflation came in a little cooler than
Money Market Strategy                15     all expected, but keep an eye on upcoming labour market
                                            data in particular for any hint of increasing pressures on
                                            core/pipeline inflation.
NZ Credit Markets – Thoughts on Basel 316

Data Review                          22
                                            Interest Rate Outlook and Strategy
                                            The RBNZ delivered a straight bat in announcing, today, that the
                                            cash rate would remain unchanged at 2.50%. Still, it also kept a
Key Upcoming Releases                24     tightening bias contingent on global developments (presumably
                                            negative ones) having only a mild impact on the New Zealand
Quarterly Forecasts                  25     economy. If so, then ‘gradually increasing pressure on domestic
                                            resources will require future OCR increases’. Note ‘increases’,
Forecasts                            26     plural. We think cooler near-term domestic inflation (and likely
                                            inflation expectations) along with downside global risks will see
                                            the RBNZ not hiking until June next year. However, those with
Calendar                             27
                                            medium-to-long term debt exposures may well still find value in
                                            insuring against the multiple-rate rises that we, and the RBNZ,
Contact Details                      28     still see down the track.

                                            Currency Outlook
                                            More volatility seems a given as the market digests the latest
                                            news, rumour or anecdote from Europe. On trend though, over
                                            the coming 12 months, we still favour the NZD generally higher
                                            as interest rate and growth differentials are more in its favour.
                                            Risk sentiment may well add support too, as European leaders
                                            cobble together a plan. We see the NZD pushing into the mid-80s
                                            against the USD during 2012. We also favour decent gains in
                                            NZD/JPY to above 70 over this time frame. The main risk to
                                            these views is a sharper slowdown in global growth and
                                            associated risk aversion.                                                                                       Page 1
Strategist                                                                                                           27 October 2011

RBNZ’s Straight Bat
•   OCR stuck at 2.5%                                           % change                   GDP Growth
•   No move likely until mid 2012                              2.5

•   And then several moves
                                                                                                                                  Annual to June
                                                                                                                                  Six months to
•   Offshore vs. domestic tension remains                      1.5                                                                June

•   But NZ growth still creeping higher                        1.0


The RBNZ delivered its expected straight bat in                0.0
announcing, today, that the cash rate would remain
unchanged at 2.5%. Nonetheless, it maintained a clear
tightening bias saying “gradually increasing pressure on       -1.0

domestic resources will require future OCR increases”.         -1.5                       Beset by disaster!

In this regard, the RBNZ stands almost alone amongst           -2.0
                                                                           NZ   Euro   Canada       UK         USA    Australia          Japan
developed-world central banks. It is a stance that we                                             Country

feel is very much justified. And we note that the word
is “increases”, plural.                                        tightness in credit markets is doing the Reserve Bank’s
                                                               job for it in pushing up (relative to what would be the
That said, in the current environment anything could           case in a risk-free market) the effective interest rates that
happen and the Reserve Bank, like the rest of us in            people, particularly in business, are facing. The RBNZ is
New Zealand, is weighing up the possible negative              specific in stating that further upward pressure is possible
impacts stemming from ongoing European concerns                in saying: “The difficult international market conditions
against the probable pick up in activity associated            could also result in increased New Zealand bank funding
with NZ-specific developments. The RBNZ highlights             costs over the coming year”.
the reconstruction activity in Christchurch but there’s
also: pent up demand in residential construction               As we highlighted in our post-CPI-release note, the RBNZ
elsewhere; the lagged impact of strong commodity               should be very relaxed that inflation is currently headed
prices; a competitive manufacturing sector; and solid          towards the mid-point of its target band, and it says so.
employment growth to support activity too.                     Of course, it’s important to do this to encourage inflation
                                                               expectations to head lower sooner rather than later.
New Zealand is far from dead and buried and it is              So far the reduction in expectations has been a bit tardy.
notable that over the first six months of calendar 2011
it experienced one of the strongest rates of expansion         We recently pushed back our expectation of when the
in the western world, and that was despite the                 Reserve Bank would swing in to action until June 2012
Christchurch earthquake.                                       (from March). Today’s statement is not inconsistent
                                                               with this view. Nonetheless, it is worth noting that the
Of course, as a trading nation, we can’t escape the misery     statement is very similar to that issued by the Bank at its
offshore, particularly that emanating from Europe. In that     September MPS and at that time the Bank was looking
regard, it is notable that the Reserve Bank highlights both    at a first hike by March.
the potential real economy and financial impacts on New
Zealand. The real economy impact is most obvious to all        Following the OCR release swap yields rose modestly
and sundry and recent falls in commodity prices (in part       and the NZD jumped around 60 basis points. At face
to blame for the recent payout downgrade by Fonterra)          value, at least, this would suggest the statement was
are there for all to see.                                      more hawkish than anticipated though, in the case of
                                                               interest rate markets, offshore drivers may in fact have
Perhaps the bigger risk to the wider economy remains           been the dominant factor.
the fact that the New Zealand (and Australian) banking
systems still rely heavily on Europe for funding. As things    On balance, the Reserve Bank is very much on the same
stand, the European debt crisis is already putting upward      page as we are. We are very nervous about the plight of
pressure on bank funding costs. In the event that these        the world but cling to the hope that New Zealand can
costs blew up further, or funds simply became                  fumble its way through the mire. While we hold to the
unavailable, then this would have a potentially debilitating   view that growth will improve it is only consistent to also
impact on the whole economy. Perversely, for now, the                                                                                                                         Page 2
Strategist                                                                                                                                27 October 2011

                                    90 Day Bank Bills                                         believe that interest rates will forge higher. Of course, if
                                                                                              the growth pick up forecast does not eventuate then we,
                                                                             Forecasts        and the Reserve Bank, will, no doubt, change our interest
                                                                                              rate stance as well.

  5.0                                                                         Sept MPS




        00      01   02   03   04    05   06     07     08    09   10   11   12   13     14
 Source: RBNZ, BNZ                        Quarterly Average

        The full text of today's RBNZ OCR Review – OCR unchanged at 2.5 percent
        The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.

        Reserve Bank Governor Alan Bollard said: "Domestic activity has continued to expand at only a modest pace
        despite relatively strong commodity prices. More recently, domestic business confidence has fallen back somewhat.
        Further ahead, earthquake repairs and reconstruction in Canterbury are still expected to provide significant impetus
        for demand.

        "As foreshadowed at the time of the September Monetary Policy Statement, there is a real risk that the European
        sovereign debt crisis could cause a further slowing in global activity, putting downward pressure on New Zealand's
        commodity export prices. The difficult international market conditions could also result in increased New Zealand
        bank funding costs over the coming year.

        "Annual headline CPI inflation continues to be above the Bank's 1 to 3 percent target band. That largely reflects the
        one-off effect of last year's increase in the rate of GST. September quarter inflation data suggest that, once GST and
        other one-off influences have passed, underlying inflation is settling near 2 percent.

        "Given the ongoing global economic and financial risks, it remains prudent to continue to keep the OCR on hold at
        2.5 percent for now. However, if global developments have only a mild impact on the New Zealand economy, it is
        likely that gradually increasing pressure on domestic resources will require future OCR increases."                                                                                                                                   Page 3
Strategist                                                                                                                         27 October 2011

Australia at a Glance
•   Australia has performed well                              Contributions to GDP over the coming year
•   Retail, housing soft
                                                                                              Percentage points contribution to GDP (June 2012 annual)
•   Underlying inflation has cooled
•   Allowing RBS to cut rates
                                                                  Bus. investment

Overview                                                             Housing inv.

Australia’s economy was the best performer amongst                   Government
the OECD bloc of advanced nations in the aftermath of                      Stocks
the Global Financial Crisis (GFC). However, floods and
cyclones last December and January triggered a sharp                  Net exports
drop in GDP in the March quarter 2011.                                          GDP

Looking ahead, a full resumption of coal exports from                                  -2.0      -1.0      0.0    1.0     2.0     3.0      4.0     5.0
Queensland will make a big contribution to GDP over                 Source: ABS; NAB Global Markets Research

the next few quarters. Strong Business Investment,
notably in the mining and energy sector, will also add        Inflation
to GDP. By the middle of 2012 we expect the economy
to be growing strongly.                                       The slowing in economic growth in the wake of the
                                                              GFC had the effect of reducing the excessive rate of
There is much uncertainty about this central case at          inflation evident before the crash. By the second half
present. If the global economy slows, causing China           of 2010 the Reserve Bank’s preferred underlying inflation1
to slow substantially, this would be negative for the         measures had fallen to below the middle of the RBA’s
local outlook. On the other hand, if Asia merely slows        2-3% target band, having hit a peak of 4.8% in the
to a sustainable pace, as we expect, this would support       September quarter 2008.
solid growth in Australia. If Asia does not slow as
much as expected, this would amount to upside risk            After showing signs of bottoming out in the first half of
to our forecasts.                                             2011, inflationary pressures eased back in the September
GDP expected to rebound strongly into 2012                    quarter. Both headline and underlying inflation eased, the
                                                              latter to a greater extent, to a moderate 0.3%/2.5%.
                                                              Our inflation forecasting models point to a range of 2-
                                                              2½% underlying inflation rates between now and the
                                                              middle of 2012, before accelerating to around 2¾-3%
                                                              through late 2012 and into 2013. By 2013, inflation is
                                                              forecast to rise again, driven by a rising economy and
                                                              some closing of the ‘output gap’.

                                                              Underlying inflation lower in Q3

Outlook for growth

After accelerating after the GFC to about trend growth of
3.2% in mid 2010, Australia’s economy was hit by floods
and cyclones over the summer, causing severe disruption
to production and leading to a drop of 1.2% in GDP for
the first quarter of 2011. On our estimates, the damaging
weather lopped about 1.7 percentage points off output in
the quarter, partially offset by growth of about 0.5pps in
other parts of the economy.

Going into 2012, we expect the economy to rebound
strongly, to around 4.5% by mid-year. The rebound will be
driven by strong export growth and surging investment in      1
                                                                Underlying inflation is the average of two statistical measures: the trimmed mean;
mining and related industries. Consumption will likely be a   and weighted median. The trimmed mean ‘trims’ off the bottom 15% of CPI outcomes
moderate contributor to growth, and housing construction      and the top 15% and takes a mean of the remaining 70%. Both measures abstract from
                                                              quarterly outliers. They are not exclusion measures such as the US core CPI, ex food &
should contribute modestly. Beyond mid-2012, we expect        energy. Both are also seasonally adjusted.
a slowing of GDP growth back to near trend rates by the
end of 2013.                                                                                                                                  Page 4
Strategist                                                                                                                                      27 October 2011

Unemployment                                                   Business conditions show the economy is multi-speed

Australia’s unemployment rate fell from a post-GFC peak                                        NAB Business Conditions indexes
of 5.9% in June 2009 to 4.9% by December 2010 and has           70
                                                                                                         (sa, 3-mth moving averages)

risen to 5.2% as of September. Unemployment has been            60                                      Finance, Property &                  Recreation &
                                                                                                                                             Recreation &
hovering between 5-5¼ since the end of 2010, with a             50                                       Business Services                  Personal Servs
                                                                                                                                           Personal Services

recent high of 5.3% in August 2011.                             40

Recent trends in employment have showed a slowing               20

in the annual pace to about 1.1% by September, down
from 2.0% in June and 3.3% in December last year.              -10
With the heightened uncertainty around the outlook for         -20

the global and local economies, a re-acceleration in hiring    -30                                                Manufacturing
looks a way off. Hence, a modest rise in unemployment          -40

is quite possible over the remainder of 2011.                    Sep-07
                                                                 Source: NAB Business Survey
                                                                                               Sep-08            Sep-09                Sep-10            Sep-11

However, this rise is likely to be temporary and turn          Retail sector
around once the economy picks up pace again. By mid-
2012 we expect a renewed downtrend in unemployment             Our NAB Business Survey shows that the retail sector
to be evident.                                                 is experiencing very soft conditions, if a touch better
                                                               in September. The latest retail sales report showed a
Treasury estimates that full employment for the Australian     welcome rise of 0.6% in July and August, in line with
economy is somewhere in a range 4.5%-5.0% (known               the long running average over the history of the survey
as the Non Accelerating Inflation Rate of Unemployment         which commenced in 1982. However, conditions in the
or NAIRU).                                                     sector this past year have been subdued. Trend monthly
                                                               growth is a slow 0.2% and annual retail trade to
Unemployment rates: Economy near full employment
                                                               September is 2.1%.

                                                               Recently, consumer confidence has been below the
                                                               average level of 100, partly in reaction to a number of
                                                               political stumbles by the minority Labor government in
                                                               Australia, to market volatility arising from the European
                                                               sovereign debt crisis, concerns over the health of the
                                                               US economy and some recent rise in Australia’s
                                                               unemployment rate.

                                                               There is also a structural factor holding back household
                                                               spending with households increasing saving, paying
                                                               down debt to repair balance sheets. The household saving
                                                               ratio has risen over the last few years to the highest rates
                                                               since the mid 1980s. The rate has been in a 10%-12%
                                                               range since 2008, after being -2.5% in 2003/2004.
The multi-speed economy
                                                               While this is bad news for retailers, it means that
Many commentators characterise Australia as a ‘two             households are consolidating their balance sheets and
speed’ economy, the impression being that mining is            hence will be less vulnerable to shocks in the future.
growing too fast and the rest of the economy is too slow.      Wages and incomes continue to grow solidly.
This phenomenon is also known as the ‘Dutch Disease’,
a reference to fears about manufacturing being ‘hollowed       Retailing and the household savings ratio
out’ in the Netherlands after a discovery of natural gas in
the 1970s.

The truth is that Australia has a multi-speed economy:
Mining is very strong; finance, property and business
services (big employers) are growing solidly; recreational
and personal services (including health and education
also big employers) are also solid; retail is weak, although
the past two months have been about trend; and
manufacturing is weak. Generic manufacturing is suffering
from the high Australian dollar which is the price signal
for structural adjustment in an economy where labour
and capital are likely to be in short supply ahead.                                                                                                                                             Page 5
Strategist                                                                                                                                                                                     27 October 2011

The housing market                                                                    Government budget and debt

There has been much written about Australia’s housing                                 During the GFC, the Commonwealth Government brought
market over the past few years with some commentators                                 down a big fiscal stimulus package, worth 2.9% of GDP in
claiming housing is unaffordable in Australia, that housing                           2009. Globally, this was the second biggest fiscal stimulus
is a bubble and prices are set to fall by 20% or more.                                outside of China (3.1% of GDP).

It is true that housing is expensive by international                                 The Government has committed to winding back the
standards. Using cross country comparison data, the                                   stimulus and is forecasting a budget surplus in 2012-13.
IMF estimated in March 2010 that Australian house                                     We have argued for a more aggressive removal of the
prices were 5-15% overvalued. By Dec 2010, the IMF                                    stimulus but we would support the Government allowing
had cut this overvaluation to 5-10%. In the latter report                             the ‘automatic stabilisers’ to operate in the event of a
they said an adjustment to a more affordable level might                              downturn, even if that means that achieving the surplus
come through faster growth in income and rents, rather                                is delayed.
than through falling house prices.
                                                                                      The turnaround of the budget from surplus to deficit has
House prices have now been falling for nine out of                                    seen the government move from a net creditor position
the past 10 months. The cumulative fall over the last                                 to a net debtor. The IMF projects that Australia’s net debt
year is 3.2%.                                                                         will peak at 8.3% of GDP in 2012.Gross debt is expected
                                                                                      to be 24% of GDP in 2011, way below most advanced
However, in our view, it is unlikely house prices will fall                           economies.
dramatically ahead. The fundamental problem is that fast
population growth since 2005 means that household                                     Government budget outcomes and forecasts
formation has been outstripping building starts, leading
to falling rental vacancies and rising rents over time.                               $ billion                                                        Budget Estimates
This should lead to a rise in yields on residential property.
                                                                                       30                                                                                                                      3
                                                                                                                                                                       2011 Budget forecasts
At present a major constraint on construction of dwellings                             20
                                                                                                                                 % of GDP

is the slow release of suitable land and the high taxes and                            10
charges imposed by Local and State governments on                                       0
developments. Cutting those payments seems unlikely                                   -10

due to the parlous budgetary positions of both levels of                              -20

Government. Rising yields will eventually attract investors                           -30

– a solution to the housing dilemma.                                                  -40

                                                                                                                                                                              Budget outcomes
House prices, demand and supply
                                                                                                  Source: Budget papers; NAB Global Markets Research
                                                                                      -60                                                                                                                      -5
                                                                                            82-83              86-87               90-91               94-95   98-99        02-03      06-07     10-11
                              Capital city re-sale dwelling prices *
      * Houses & units. Seasonally adjusted
                                                                                      Carbon price and mining tax
15%                                                                             8%
                        Annual % change. left                                         The Government has announced that it will put a price
10%                                                                             5%
                                                                                      on carbon emissions, commencing on 1 July 2012, policy
                                                                                      now formalised and that has now passed the Lower
 5%                                                                             3%    House. The price will initially be $23 per tonne of carbon.
                                                                                      In an effort to simplify its collection only the 500 largest-
 0%                                                                             0%    polluting companies will pay the tax. In a bid to minimise
        Monthly % change, right                                                       the effect on low and middle income households, the
   Aug-07                        Aug-08         Aug-09    Aug-10       Aug-11
                                                                                      policy includes generous tax cuts, which the Government
                                                                                      says leaves 2/3 of households no worse off.                                                                                                                                                                                                 Page 6
Strategist                                                                                                                                                27 October 2011

The impact on the CPI of the carbon price is estimated                                                      Australian dollar to remain high
to be +0.7%, which is likely to subsequently ‘wash out’
of the CPI data. Using our economic models, the impact
of this price effect on GDP for 2012/13 is small. This took
our forecast from 4.5% to 4.3% - still pretty strong.
Our modelling shows no measureable effect on the
unemployment rate.

A new Minerals Resource Rent Tax (MRRT) is to apply
to coal and iron ore from 1 July 2012. The rate is 30%
of profit from the resource. Because the tax only applies
to ‘above normal’ profits, the tax should not have a
significant impact on investment in mining projects.

The carbon price and the CPI

                                    Underlying Inflation *                                                  Monetary policy
                                              (annual % chng)
                                                                                                            There has been much debate locally about the outlook
                                                                                                            for interest rates but the RBA’s primary policy target is
                                                                                                            to keep inflation in a target band of 2-3%.
                                                                                     Underlying inflation

                                                                                     including carbon tax
                                                                                                            Its formal August forecasts saw inflation rising above
                                                                                                            3% in 2013, and so that meant the RBA had an implicit
 3.0                                                                                                        tightening policy bias. However, the recent turmoil in
                                                                                                            financial markets has had a severe negative effect on
                                                                                                            confidence at home and abroad. Also, the high AUD
       Source: DX data; Global Markets Research; * Underlying Inflation is the RBA trimmed mean
                                                                                                            and tight interest rates are restraining growth in the local
  Mar-01          Mar-03           Mar-05          Mar-07           Mar-09           Mar-11       Mar-13    economy. Lower overall growth of late, and the pleasantly
                                                                                                            low Q3 inflation report, means the RBA is likely to revise
The Australian dollar                                                                                       down its inflation forecasts in November. A now-likely
                                                                                                            downward revision of inflation forecasts back comfortably
The Australian dollar recorded strong gains as Australia                                                    within the 2-3% target zone would provide the RBA
and the global economy emerged from the GFC. The                                                            leeway to cut interest rates. We expect the RBA to cut
gains in the currency reflect: higher interest rates as the                                                 the cash rate to 4.50% (-25 bps) at the November Board
RBA tightened monetary policy; recovering commodity                                                         meeting. Any further cuts would depend on inflation
prices; and some improvement in risk appetite. Since                                                        in the December quarter and international events and
August, investors have become more risk averse again                                                        volatility; we expect a relatively benign Q3 CPI report (due
in the wake of the Euro crisis and US economy/debt                                                          25 January), just before the 7 Feb Board meeting.
concerns, including its sovereign debt downgrade.
The high point for the AUD so far has been 1.1081 on                                                        RBA cash rates: headed somewhat lower
27 July. The AUD/USD fell to 0.9388 on 4 October but
has since recovered. Since mid October it has tracked
in a range of 1.0100 to 1.0500.

In our view, interest rate relativities and commodity prices
are likely to support the currency over the next year and
we expect the AUD to travel in a range of 1.0000 -1.1000
over the next year or so. If the Fed starts tightening in
2013, then we expect the currency to fall back into the
90 US cent ranges. Over the next decade we expect the
currency to trade an average of around 0.90, well above
the post-float average near 0.70.

                                                                                                   /                                                                                                                                                     Page 7
Strategist                                                                                                                                                                           27 October 2011

NZD/JPY: Set To Trend Higher?
•        We expect a gradual appreciation in NZD/JPY over                                     Looking over the next 6-12 months, we expect NZD/JPY
         the next 12 months; to 63.00 by year-end and 71.00                                   to gradually trend higher as NZ interest rates begin to rise
         by Q3 2012                                                                           and risk sentiment stabilises at more historically normal
•        NZ’s economic growth outlook appears positive,                                       levels. At the same time, prospects for the Japanese
         while prospects for the Japanese economy                                             economy appear dim, even as it slowly recovers from the
         look dim                                                                             devastating Tsunami and nuclear crisis early in the year.
•        The prospect of higher NZ interest rates and/or an
         improvement in global risk sentiment should see                                      The table below gives a concise snapshot of the major
         demand for the carry-trade increase                                                  drivers of NZD/JPY and their likely direction over the next
•        The main risk to our forecast is a sharper slowdown                                  1-3 months and 6-12 months. We expand further on each
         in global growth, meaning NZD/JPY falls below 58.00                                  driver below.
         before the end of the year
                                                                                                     Factors affecting                                  Short-term Medium-term
                                                                                                         NZD/JPY                                        (1-3 months) (6-12 months)
Over the past couple of months, NZD/JPY has largely
taken its cues from the trials and tribulations if the                                        Risk appetite
European debt crisis. The flaring-up of the debt crisis
and concerns over slowing global growth saw risk                                              Interest rate differentials
aversion rise in markets, leading to demand for the
“safe haven” USD and JPY. At the same time, the risk                                          Growth differentials
sensitive NZD and AUD underperformed against the USD.                                                                                                             N/A
                                                                                              Long-run equilibrium
In early August, NZD/JPY reached a high just above
68.00 but subsequently fell to a low around 57.50 as                                          Relative growth differentials supportive
the European debt crisis intensified. The prospect of                                         The recent concerns over slower global growth has seen
a European rescue package to stem the debt crisis                                             many become less optimistic about the prospects for the
has helped risk sentiment stabilise and push NZD/JPY                                          NZ economy. While we acknowledge the NZ economic
above 60.00.                                                                                  recovery has slowed recently, we still remain upbeat.
                                                                                              Indeed, NZ export prices remain very high despite recent
As the chart below illustrates, NZD/JPY has spent the                                         declines and the rebuild from the Christchurch earthquake
past couple of years trading choppily in a 58.00 to 68.00                                     is due to begin sometime next year.
range. The top of this range has coincided with periods
of improved risk sentiment and rising NZ-JP interest rate                                     We forecast 2.3% annual growth in NZ this year
differentials. Conversely, breaks below the bottom of this                                    accelerating to 3.1% for the year 2012, although the
range occurred during periods of elevated risk aversion                                       recent global ructions may mean the recovery is slower
and falling NZ-JP interest rate differentials.                                                than we previously expected. In contrast, the consensus
                                                                                              forecast for Japan has a 0.5% annual decline for 2011
                            NZD/JPY Since 2008                                                recovering to 2.2% for 2012. This means the NZ-JP
                                                                                              growth differential will remain in NZ’s favour, helping
    85               Global Financial
                                                     Eurozone debt                            to pressure NZD/JPY higher.
    80                                               crisis rears its      Eurozone debt
                                                     ugly head             crisis flares-up
    75                                                                     again               % Diff
                                                                                                                        NZ-Japan Growth Differential and the NZD                                            Ann %
    70                                                                                                    Growth Differential                  Fundamentals go out the
                                                                                                7                                              window as the crisis hits
                                                                                                               NZ-JPY                                                                                          35
                                                                                                5                                                                                           Forecast
    60                                                                                                                                                                                                         25

    55                                                                                          3                                                                                                              15
                                                     Japanese Tsunami
                                                     and subsequent
    50                                                                                          1
                                                     nuclear crisis
    45                                                                                                                                                                                                         -5
     Jan-08     Jul-08   Jan-09     Jul-09    Jan-10       Jul-10       Jan-11     Jul-11
 Source: Bloomberg                           Daily                                              -3

                                                                                                                NZD/JPY (RHS)
Is NZD/JPY set to trend higher?

                                                                                                -7                                                                                                             -45
Over the next 1-3 months, we see some upside potential                                               97    98      99      00      01    02   03   04    05   06      07   08   09    10   11   12     13
on NZD/JPY towards 63.00. This is based off our working
                                                                                              Source: BNZ, Consensus Forecasts, Ecowin

assumption for the Eurozone debt crisis to simmer down
and concerns over global growth to ease. While this looks
likely, expect trading to remain messy.                                                                                                                                                                                      Page 8
Strategist                                                                                                                                                                                                                          27 October 2011

Interest rate differentials and risk appetite                                                                                               Data on speculative positioning by Japanese retail clients
                                                                                                                                            (another popular vehicle for the carry-trade) backs up
The NZD is considered a “risk sensitive” currency. This is
                                                                                                                                            our claim of muted carry-trade demand for NZD/JPY.
partly because the NZ economy is highly exposed to the
                                                                                                                                            For example, speculative positioning in NZD/JPY has
fortunes of the global economy and ‘soft’ commodity
                                                                                                                                            remained flat while positioning in AUD/JPY is extremely
prices. In contrast, the JPY is considered a “safe haven”
                                                                                                                                            long relative to history. We will watch carefully for any
currency, i.e. in times of elevated risk aversion the JPY
                                                                                                                                            signs of a pickup in carry-trade demand in NZD/JPY when
tends to appreciate. This is partly because Japan has
                                                                                                                                            the RBNZ begins hiking rates or if volatility in FX markets
very high levels of private savings invested offshore.
                                                                                                                                            drops significantly.
These savings tend to get repatriated back into JPY
when investors become risk averse.
                                                                                                                                            Net Long
                                                                                                                                            Positions               Japanese Margin Accounts: Net Long Positions
Because of this dynamic, the NZD/JPY tends to be highly                                                                                     350,000

volatile. Indeed, with concerns mounting over the US                                                                                        300,000
and European economies slipping back into recession,                                                                                                                                                                                AUD/JPY
NZ interest rates have fallen sharply. At the same time,                                                                                    250,000                                          NZD/JPY

with interest rates in Japan already extremely low, there                                                                                   200,000
is little scope for further declines. The NZ-JP 3-year
interest rate differential is currently 3.00%, from almost                                                                                  150,000

3.70% in late-July.                                                                                                                         100,000

What’s more, not only have NZ-JP interest rate

differentials narrowed but volatility has increased. Indeed,                                                                                        0

our risk appetite index (scale 0 – 100%) is currently
                                                                                                                                                    May-07        Nov-07            May-08     Nov-08   May-09    Nov-09   May-10    Nov-10   May-11

languishing around 30%, well below its average of 50%.
                                                                                                                                            Source: BNZ; Tokyo Financial Exchange

                                                                                                                                NZD/JPY     Over the next 12 months, we expect NZD/JPY to become
Index                                               Risk Appetite & NZD/JPY
100%                                                                                                                                        more popular amongst carry-trade type investors. While
 90%                                                                                                                                85.00
                                                                                                                                            we recently pushed out our call for the RBNZ to begin
 80%                                                          NZD/JPY (RHS)                                                                 hiking rates to June 2012 (from March 2012), the RBNZ
                                                                                                                                            still remains the only developed-world central bank where

 60%                                                                                                                                        any rate hikes are priced in over the next 12 months. In
 50%                                                                                                                                        addition, we remain more hawkish than the market,
                                                                                                                                            expecting 75bps of hikes over the next 12 months from
 30%                                                                                                                                        the RBNZ. The OIS market is currently pricing around
                                                                                               Risk Appetite*(LHS)
                                                                                                                                    45.00   40bps of
 10%                                                                                                                                        hikes over the same period.
         *Average between VIX Index and Emerging Market Bond Spreads
  0%                                                                                                                                35.00
   Dec-06     Aug-07
Source: BNZ, Bloomberg
                          Apr-08     Dec-08      Aug-09
                                                             Apr-10                                         Dec-10     Aug-11
                                                                                                                                            Therefore, the prospect of higher rates in NZ and
                                                                                                                                            improvement in global risk sentiment would likely
This is important for NZD/JPY because the necessary                                                                                         see demand pick-up for NZD/JPY, helping to push the
conditions for the carry-trade (where speculators sell a                                                                                    cross gradually higher.
low yielding currency and buy a high yielding currency)
are a positive interest rate differential and low volatility.                                                                               Maturing offshore NZD bond issuance a drag
As the chart below illustrates, the NZD is less attractive                                                                                  Similar to diminished NZD/JPY speculative flows,
than other popular carry-trades, namely the Brazilian real,                                                                                 issuance of offshore NZD bonds have continued to
South African rand and Australian dollar.                                                                                                   languish. Indeed, issuance data of Eurokiwi bonds
                                                                                                                                            (NZD bonds issued in offshore markets, excluding
 Index                                            Carry Trade Attractiveness*                                                               Japan) and Uridashi bonds (NZD bonds issued in

 90                                                                                           BRL
                                                                                                                                            Japan) support this view. So far in 2011, only NZ$2.01b
                                                                                                                                            of Eurokiwi and Uridashi bonds were issued (blue bars
                                                                                                                                            below), well short of the NZ$5.33b of bonds that have
                                                                                                                                            matured (red bars below). The stock of outstanding
                                                                                                                                            Eurobonds now stands at NZ$21b, well below the
                                                                                                                              ZAR           peak of NZ$53b.
 40       Carry Trade
          More Attractive
                                                                                                                                            We do not expect Eurobond issuance to reach the giddy
                                                                                                                                            heights seen during the 2006-2008 period, even if NZ
                                                                                                                                            interest rates rise and risk appetite improves. As such,
  0                                                                                                                                         there is likely to be less support for NZD/JPY than
 Mar 2005         Dec 2005           Sep 2006           Jun 2007          Mar 2008           Dec 2008   Sep 2009   Jun 2010   Mar 2011
   *2-year interest swap rate dif f erential divided by implied currency option volatility
   Source: BNZ and Bloomberg
                                                                                                                                            compared to the period 2004 – 2008.                                                                                                                                                                                                                                     Page 9
Strategist                                                                                                                                                27 October 2011

NZ$bn                        NZD Bond Issuance in Offshore Markets                                     NZ$b   Strategy Conclusions
                                      Maturities     Issues   Amount Outstanding (RHS)
                                                                                                              We expect NZD/JPY to gradually appreciate over the next
 3.4                                                                                                    50    12 months to above 71.00. However, concerns over the
 2.4                                                                                                          European debt crisis and slow global growth will likely
                                                                                                              mean trading in FX markets remains volatile in the near-
 0.4                                                                                                    30
                                                                                                              term. As such, we would view any dips in NZD/JPY below
-0.6                                                                                                          58.00 as a good medium-term buying opportunity.
-1.6                                                                                                    20

-2.6                                                                                                          We don’t expect to see a large resurgence in carry-trade
                                                                                                              activity and offshore NZD bond issuance over the next 12

-4.6                                                                                                    0     months, like prior to the Global Financial Crisis. Therefore,
    1998            2000           2002       2004     2006   2008        2010           2012   2014          the move higher in NZD/JPY over the next 12 months will
 Source: Reuters, Bloomberg, BNZ
                                                                                                              be much more muted than the rally in NZD/JPY during
                                                                                                              2006 – 2007.

                                                                                                                                                                                                                                                       Page 10
Strategist                                                                                                                                                                                                  27 October 2011

The BNZ OIS-ter:
•       We have pushed back our expectation for the first RBNZ rate hike to June next year, from March. The risks are still tilted
        toward rate hikes starting later rather than sooner. However, a bias toward tightening was squarely confirmed in today’s
        RBNZ statement. The need for “future OCR increases” was still clearly stated. Note the plural. This intention was still
        made contingent on “global developments [having] only a mild impact on the New Zealand economy”. The market
        currently expects almost 30bps of rate hikes from the RBNZ in the coming year, down from 35bps last fortnight.
        The RBNZ is the only major central bank expected to hike rates over the next 12 months.
•       Across the Tasman, market pricing of interest rate cuts from the RBA appears to have been validated. Following a lower-
        than-expected AU CPI for Q3, the OIS market moved to be fully priced for a 25bp cut from the RBA next Tuesday. The
        data also saw the majority of analysts shift to calling for a rate cut as well, including our NAB colleagues. Over the next
        12 months, the OIS market continues to price around 125bps of cuts. We still believe expectations of rate cuts over the
        next 12 months are over-pricing the risk of a sharp global slowdown. As such, we expect expectations to be ultimately
        revised higher.
•       Expectations of rate cuts from the Bank of Canada were scaled back over the past fortnight. The OIS market is now only
        pricing a 60% chance of a 25bp cut over the next 12 months, from fully priced. In its quarterly Monetary Policy Statement,
        the BoC noted a “gradual reduction in monetary stimulus over the projection horizon” was likely.
•       Expectations of rate cuts from the ECB have increased as the Eurozone debt crisis weighs on growth. The OIS market is
        fully priced for a 25bp cut at the ECB’s meeting in January. The OIS market has a total of 32bps of cuts priced-in over the
        next 12 months.
•       Very little is expected from either the Bank of England or the US Federal Reserve in the coming year. The BoE has
        restarted its quantitative easing programme and the Fed is making noises about QE3.
                                             New Zealand                                                                                                            United States
  %                               RBNZ Cash Rate Expectations                                                   Bps       %                        US Fed Funds Rate Expectations
 3.50                                        (Derived from OIS Rates)                Market                      80      1.20                                   (Derived from OIS Rates)
 3.25                                                                                                                                                                                                             expectations

                                                                                                                 40      0.80
                                                                                                 13 October
                                                                                                                 20      0.60

 2.75                                                                              change (RHS)
                                                                                                                 0       0.40

 2.50                                                                                                                                                                                                                       Current
                                                                                               Current           -20     0.20                                                                            13 October

 2.25                                                                                                           -40      0.00
     Mar-09              Sep-09     Mar-10       Sep-10         Mar-11      Sep-11           Mar-12       Sep-12             Oct-08      Mar-09 Aug-09 Dec-09 Apr-10          Sep-10 Jan-11     Jun-11 Nov-11 Mar-12     Jul-12
Source: Bloomberg, BNZ                                                                                                 Source: Bloomberg; BNZ

                                                 Australia                                                                                                               Canada
    %                             RBA Cash Rate Expectations                                                    Bps      %                            BoC Cash Rate Expectations                                                   Bps
 5.50                                    (Derived from OIS Rates)                                                80                                             (Derived from OIS Rates)
                                                                                           Market                       1.25                                                                              Market                     40
                                                                                           expectations          70
 5.00                                                                                                            60
                                                                                                                 50     1.00
 4.50                                                                                                            40
                                                                                            13 October           30
 4.00                                                                                                            20                                                                                       13 October
 3.50                                                                                                            0
                                                                                             Current             -10
                                                                                   change (RHS)                                                                                                              change (RHS)
 3.00                                                                                                            -20    0.25
 2.50                                                                                                            -40    0.00                                                                                                         -20
    Dec-08 May-09 Sep-09 Feb-10              Jun-10   Oct-10    Mar-11   Jul-11   Nov-11      Apr-12   Aug-12               Jan-09       Jun-09   Oct-09   Mar-10    Jul-10   Dec-10   Apr-11   Sep-11   Jan-12 May-12    Oct-12
Source: Bloomberg, BNZ                                                                                                 Source: Bloomberg, BNZ

                                        United Kingdom                                                                                                                 Eurozone
                                   BoE Cash Rate Expectations                                                   Bps
                                                                                                                         %                             ECB Cash Rate Expectations                                                  Bps
 %                                                                                                                                                                  (Derived from OIS Rates)
3.50                                         (Derived from OIS Rates)                                            60
                                                                                                                       4.75                                                                                                         40
                                                                                              Market             50    4.25                                                                                     expectations
                                                                                              expectations       40
                                                                                                                       3.75                                                                                                         20
2.50                                                                                                             30
                                                                                                                       3.25                                                                                 Change (RHS)
                                                                                             change (RHS)              2.75                                                                                                         0
                                                                                                                 0     2.25

1.00                                                                                                             -10
                                                                                                                       1.75                                                                                                         -20
                                                                                                Current          -20                                                                                          14 October
0.50                                                                                                                   1.25
                                                                                              13 October                                                                                                          Current
                                                                                                                       0.75                                                                                                         -40
0.00                                                                                                             -40
                                                                                                                          Mar-08 Aug-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Feb-11                 Jul-11 Dec-11 May-12 Oct-12
   Nov-08 Mar-09           Jun-09 Nov-09 Mar-10       Jul-10   Nov-10 Mar-11      Jul-11    Nov-11 Mar-12
Source: Bloomberg, BNZ                                                                                                 Source: Bloomberg, BNZ                                                                                                                                                                                                                Page 11
Key Fixed Interest Views
 Category                             Strategic View (12mth)                                 Tactical View (1mth)

                                                                                     Market focused on global uncertainty.
                            RBNZ to begin raising the OCR in June 2011.
                                                                                      Negative European headlines could
 NZ Money                   OCR to be 100bps higher in 12 months time.
                                                                                    see markets remove expectation of any
 markets                            OCR to peak at 4.5% in 2013.                                 RBNZ hikes.
                            Bank bill margins to narrrow as global funding
                                                                                   Bank bill margins remain relatively elevated
                                           pressures ease.
                                                                                              at around 20-30bps.

                              Yields currently trading below "fair value".
                             Expect yields to move meaningfully higher.
                             Benefits to fixing 2-5 year interest rate risk.
 NZ Swaps                                                                         2-year swap yield range bound between 3.0%
                                 Taking A 5-year View - 23 Sept 2011                                 to 3.4%.
                     Worst case scenarios unlikely to result in much lower
                                     borrowing costs.
                                    A glass half full? - 12 Oct 2011

 NZ Swap                    Curve to flatten as short-end yields rise faster
 Curve                                      than long-end.                        Mild curve steepening as NZ long-end yields
                                                                                        get relief as US long yields rise.
                              2s-10s to decline to 120bps by end 2012.

                            NZ bond yields to move meaningfully higher.
 NZ Bonds                                                                           US 10-year yields have fallen below what
                            As NZ OCR rises and US long-rates rise from
                                                                                       US economic data would dictate.
                                     excessively low levels.
                                                                                    Rising US long yields should be met with
                     NZ-US 10-year spread to rise but remain below 3.0%.
                                                                                              rising NZ long yields.
                        Attractive or Not? - NZ Long Bonds - 20 Oct 2011

 NZ Swap-               Swap-bond spreads to rise - 10-year EFP to peak
 Bond                              at 50bps in late 2013.
 Spreads              What's Up With Swap Spreads Now? - 24 Aug 2011

                                                                                      NZ-AU 10-year bond yields at bottom
 NZ-AU Bond                 NZ 10-year yields to rise faster than AU yields.                   of 0-35bp range.
 Spreads                    10-year spread to widen to as much as 70bps.             Expect NZ 10-year yields to rise relative
                                                                                                 to AU yields.

                                                                                   NZ credit spreads remain relatively immune
                                                                                     from volatility in global credit markets.
                   Credit yields currently depressed relative to equity yields.
                                                                                  Relatively neutral on non-financial corporate
 NZ Credit            Some normalisation in credit-equity yields expected.
                                                                                  credits - lack of supply offsets global risks.
                    Shifting Focus From Governments to Corporates - 2 Aug 2011
                                                                                     Financial sector credits spreads remain
                                                                                                 biased to widen.
Strategist                                                                                                                                    27 October 2011

A Bit of Breathing Space
•   Low-side CPI prints has resulted in lower OCR                  %
                                                                                           RBNZ Cash Rate Expectations                                                %

    expectations on both sides of the Tasman                     3.50                                                                                                 3.50

•   NZ short-term swap yields to be range-bound                  3.25
                                                                                                                                      expectations                    3.25
    in the near term
•   Hedging 2-5 year interest rate risk still makes sense        3.00
                                                                                                                                                   BNZ                3.00

    from a borrower perspective, though now more
                                                                 2.75                                                                                                 2.75
    breathing space
•   Medium-term NZ curve flattening still expected,              2.50                                                                                                 2.50

    butnear-term steepening likely to persist                                                                                                 Market pricing
                                                                                                                                         (Derived from OIS rates)
•   NZ-AU 3-year swap spreads to be volatile near-term           2.25                                                                                                 2.25

    but move higher over the medium-term                         2.00                                                                                                 2.00
•   NZ-AU 10-year bonds to trade in a 0-35bps range,                    Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

    near-term; they are currently at the bottom of
                                                                 Source: Bloomberg, BNZ

    this range
                                                                 Our NAB colleagues now expect the RBA to provide some
                                                                 relief to its domestic economy by cutting rates by 25bps
A lot can happen in a fortnight.
                                                                 at its next meeting in November. The market is now fully
The key cross-Tasman releases, of late, have been                priced for this cut. It has also increased expectations for
Q3 CPI data for NZ and Australia. Both surprised to              cuts over the coming year to 120bps, expectations that
the low-side. NZ CPI came in at 0.4%q/q (0.7%                    we believe are too severe.
expected) and Australian CPI (trimmed mean) at
0.3%q/q (0.6% expected).                                         On a relative basis how do things now look cross-
Both have served to simplify the outlook for the respective
                                                                 Earlier in the month, Australian short-end swap yields
central banks. Both had been struggling recently with
                                                                 had risen sharply as global risk appetite improved and
the dichotomy of uncomfortably high domestic inflation
                                                                 AU employment data surprised to the upside. Not-
indicators, versus increasing global uncertainty. The
                                                                 withstanding the pullback in yields following the Australian
former argues for higher rates, the latter for lower rates
                                                                 CPI release, AU short-end swap rates have increased
to offset the potential negative impact of global events
                                                                 relative to NZ swap yields. e.g the NZ-AU 3-year swap
on domestic economies.
                                                                 spread has moved from -90bps at the start of the month
                                                                 to -100bps currently.
With the welcome step down in inflation indicators, and
implication of lower inflationary pressures going forward,
                                                                 Near-term volatility is likely to persist as the market,
both banks are in a better position to respond to negative
                                                                 on either side of the Tasman, tweaks its rate hike
global shocks if/when they occur. Remember, that both
                                                                 expectations. However, over the medium-tem we expect
central banks are in the privileged position globally, of
                                                                 NZ short-end yields to converge on Australia’s as the
having rates significantly above zero.
                                                                 NZ OCR (currently 2.5%) closes the gap with Australia’s
                                                                 (currently 4.75%).
The data have resulted in downward revisions to our rate
expectations on both sides of the Tasman.
                                                                                          NZ-AU 10-year bond yields spreads
We have pushed back our expectation for the first RBNZ                   0.4
rate hike to June next year. The risks are still tilted toward           0.3
rate hikes starting later rather than sooner. However, a
bias toward tightening was squarely confirmed in today’s                 0.2

RBNZ statement. The need for “future OCR increases”                      0.1

was still clearly stated. Note the plural. The intention, was              0

of course, still made contingent on “global developments                -0.1
[having] only a mild impact on the New Zealand economy”

The market continues to expect close to 30bps of rate                   -0.3
                                                                         1/07/2011              1/08/2011              1/09/2011               1/10/2011
hikes from the RBNZ in the coming year, whereas we look
for around100bps. i.e. once the RBNZ gets underway it                                                         NZ-AU 10-yr bond yield spread

will be involved in a gradual process of normalising rates.         Source: Bloomberg

We now expect the OCR to peak at 4.5% in late 2013.                                                                                                                                                  Page 13
Strategist                                                                                                                                 27 October 2011

Since the start of the month, Australian long bond yields        If you believe the market’s view is too benign (we do)
have closed the gap with NZ equivalents. Early in the            then fixing interest rates, now, still makes sense from a
month, Australian long-yields rose more sharply than             risk management perspective. But, we now potentially
NZ equivalents as global risk appetite improved, and US          have longer than we had previously expected, before a
10-year yields rose. Subsequently, NZ 10-year yields have        sharp upward repricing of rates. As discussed previously,
also fallen sharply after the NZ CPI release. The NZ-AU          however, we continue to caution, that NZ 2-5 year swap
10-year spread has come back close to zero from around           rates tend to trough well before eventual OCR rate hiking
35bps at the start of the month. We see 0-35bps as a             cycles. Historically, on average, swap yields begin to rise
near-term trading range for NZ-AU 10-year bonds                  9 months ahead of the OCR.
and would position accordingly. i.e. on a relative basis,
the risk of rising yields is greater for NZ than Australian                               NZ 2s-10s swap curve and OCR forecasts
long bonds, at present.                                             %
                                                                                                                                                               (inverse ) %

                                                                 3.00                                                                                                  0
What does this mean from a NZ borrower’s perspective?            2.50                                                                                                  1

After the adjustments to our OCR trajectory, we still see        2.00                                                                                                  2

value in fixing interest rate risk over a 2-5 year time frame.
                                                                 1.50                                                                                                  3

However, we are more relaxed about the risk of sharp
                                                                 1.00                                                                                                  4

near-term repricing of interest rates, given the immediate
                                                                 0.50                                                                                                  5

NZ inflation threat has subsided. We continue to believe
                                                                 0.00                                                                                                  6

                                                                 -0.50                                                                                                 7
that inflation pressures will build in the NZ economy to
                                                                 -1.00                                                                                                 8
unacceptable levels in the absence of rate hikes.
                                                                 -1.50                                                                                                 9
However, after the most recent CPI print that threat               1/09/2002           1/09/2004   1/09/2006     1/09/2008     1/09/2010       1/09/2012

has been pushed back.                                              Source: Bloomberg                2s-10s Swap curve        NZ 1-mth OIS with OCR forecasts

Over the next few months, therefore, we see short-end
                                                                 Our expectation for a medium-term flattening in the yield
swap rates being quite range-bound. For 2-year swap
                                                                 curve remains intact. As we have lowered our expected
yields we see a 3.0% to 3.4% range. The bottom of this
                                                                 peak in the OCR, this has slightly raised the level at which
range will be revisited during periods of heightened
                                                                 we expect the yield curve to trough. We now expect the
global turbulence when the market moves to eliminate
                                                                 2s-10s swap curve to trough at around 85bps (70bps
expectations of any RBNZ rate hikes. The upper end of
                                                                 previously). The sharp steepening in this curve from mid
this range will be tested if a credible plan for resolving
                                                                 September has been arrested for now. At 155bps, the
the EU crisis begins to be implemented and NZ growth
                                                                 curve is now closer to what would be expected, given
indicators remain solid.
                                                                 the current level of the OCR (chart above).
Based on our OCR trajectory (first rise in June next
                                                                 A bias toward slight further steepening is likely to remain
year, and OCR peak at 4.5% in late 2013). NZ 2 to 5-year
                                                                 in place over the next few months. We expect NZ long-
swap rates “fair value” is around 30 to 60 bps higher
                                                                 end yields to move up in line with rises in US long-yields,
than current.
                                                                 but the short-end to remain relatively well anchored.
                                                                 Therefore if borrowers are looking for a near-term
Alternatively, if we look at current market pricing, it is
                                                                 flattening in the curve, in order to minimise the immediate
consistent with the RBNZ raising rates next July, at the
                                                                 cash flow cost of medium term fixing, they may be
earliest. It also suggests the OCR will be only 100bps
                                                                 disappointed. That will be more of a story for later next
higher by the end of 2013. i.e. in two years time the OCR
                                                                 year, by which time the whole curve is likely to have
will be only 100bps above the historic low level of 2.5%.
                                                                 moved up.
Market pricing is also consistent with an eventual peak
in the OCR at 4.5%, but not until 2015.
                                                                                                                                                                                                    Page 14
Strategist                                                                                                 27 October 2011

Money Market Strategy
•   No surprises from RBNZ                                    We are looking to square up our long position in the front
•   Soft inflation print takes pressure off                   contract at current levels. Bill/OIS spreads have tightened
•   Neutral bill margins given risks around downgrade         in to 20bps (from 45bps) in the physical bills which is not
                                                              a great deal wider than where it was trading prior to this
The RBNZ held the OCR steady at 2.50% this morning,           most recent flare up. Given the imminent downgrade to
as broadly expected. The message from the Bank was            the New Zealand banking sector, and the risks that it
essentially unchanged from September, again as                could be two notches rather than the expected one, we
anticipated by most. The lack of any left-field comments      feel it prudent to take a neutral stance at the current level.
has meant the market has barely moved in the wake of
the announcement, with the small sell-off in the curve          %               NZ 3mth Bill and BBC Futures
as much of a function of offshore moves as anything            3.20

the governor said this morning.                                3.15


Weaker-than-expected inflation figures for the September       3.05

quarter, released earlier this week, have taken away any       3.00
niggly pressure to tighten policy in the immediate future,     2.95
and have enabled the Bank to sit back and observe how          2.90
the European sovereign debt situation unfolds. The             2.85
governor reiterated his September message that if the
New Zealand economy emerges relatively unscathed from
the current global ructions then rates are expected to go         3mth         NBBc1        NBBc2         NBBc3        NBBc4
higher at some point. But the latest inflation print means
any rate hikes are likely a second half of next year story.
                                                              Suggested trading ranges for the next fortnight are:
                                                              Dec bills 96.20 – 97.27
                                                              Mar bills 97.05 – 97.20

                                                                                                                                                        Page 15
Strategist                                                                                                  27 October 2011

NZ Credit Markets – Thoughts on Basel 3
•   Basel 3 is one of a multitude of political and               underway, the issues banks face and the environment
    regulatory reforms currently being debated to                they will have to operate in will continue to be subject
    address weaknesses in banking systems.                       to significant change. Basel 3 will be a key driver of
    While Basel 3 is much further advanced than                  these changes and there will be both potential threats
    a number of other reforms, the issues and                    and opportunities for banks and corporates alike.
    environment it is seeking to address will
    continue to be subject to significant change.                What is Basel 3?
•   Fixed income investors realise they need less                Basel 3 presents significant regulatory change with
    systemic risk and greater diversification in their           the potential for profound impacts on the global financial
    fixed income portfolios. Changes in the relative             system. As an aftermath to the Global Financial Crisis
    market pricing between bank debt and corporate               (GFC) of 2008-2009, the Basel Committee and many
    debt is evidence of this.                                    national regulators are now demanding greater
•   The structural impacts Basel 3 will have on bank             conservatism and heightened supervisory oversight
    funding and lending will not only serve to solidify          of banks, with the intention of making their banking
    these changes on debt market pricing, but will               systems safer and reducing future public exposures.
    also drive bank disintermediation further.
                                                                 The principal requirements being adopted include
This is first of a series of updates on the impacts of           changes to banks’:
Basel 3 on the Australian banking and corporate sectors,
                                                                 • Capital
prepared by NAB’s Research and Portfolio Solutions
teams. This update looks at the broader impacts of Basel         • Liquidity, and
3 on banks’ role as intermediaries in providing funding
to the corporate sector. Future updates will cover specific      • Funding
topics such as the implications for cash management              Together with other regulatory changes in Securitisation
and derivatives products, as well as particular APRA             and Market Risk (sometimes referred to as ‘Basel 2.5’),
announcements and standards as they emerge.                      these new requirements will impact all banks (Australian
                                                                 and International alike) as well as their customers to
While this article is Australian focused, the effects and        varying degrees. Australian banks are generally well-
market dynamics are directly relevant to New Zealand             capitalised, but will face greater challenges in meeting
banks. Moreover, with much of New Zealand’s banking              their Stable Funding and Liquidity requirements, given that
sector owned by the Australian banks developments in             Australia is coming from the position of having a relatively
Australia will no doubt impact those at home.                    low level of domestic savings compared to a number of
                                                                 other banking systems, as well as there being a scarcity
In some respects New Zealand has already moved to                of high quality liquid assets.
the Basel 3 track. For example, the proposed Liquidity
Coverage Ratio is comparable to the                              In particular, the Net Stable Funding Ratio (NSFR) requires
RBNZ’s BS13 One Month Mismatch Ratio, while the                  banks have a much higher level of stable funding in place
Net Stable Funding Ratio (which ensures banks fund               for illiquid assets, such as infrastructure and corporate
assets with stable sources of funding) is comparable             loans with longer tenors. Concurrently, the Liquidity
with the RBNZ’s BS13 Core Funding Ratio.                         Coverage Ratio (LCR) places an additional tangible cost on
                                                                 liquidity facilities that banks provide their customers with
Still, we would like to state from the outset that Basel 3       by requiring banks to either hold more government bonds
has yet to be finalised and not all details and outcomes         than currently and/or pay a fee on a committed secured
are clear at this point in time. Indeed, in addition to Basel    liquidity facility they will need to establish with the RBA.
3, there are concurrent efforts underway to (i) recapitalise
and protect the European banks from the European                 As banks adapt and respond to a revised regulatory
sovereign debt crisis; (ii) make UK banks safer by ring-         environment, they will increasingly need to align the
fencing their retail operations (as well as increasing capital   maturities of their funding sources with those of their
requirements beyond Basel 3) from their other activities         assets. In fact, we have already seen material changes
as proposed in the Vickers Report; (iii) Implement a range       in the composition of bank funding in Australia with
of financial regulatory reforms in the US under the Dodd–        deposits now comprising a greater proportion of bank
Frank Wall Street Reform and Consumer Protection Act,            funding and short-term wholesale funding being replaced
including restricting the banks that operate in the US           with longer-term funding. Under Basel 3, further work
from engaging in proprietary trading as proposed under           will be required on these fronts and bank debt maturity
the Volcker Rule. These are at various stages of their           profiles will need to be extended further.
development and along with a number of other initiatives                                                                                                     Page 16
Strategist                                                                                                   27 October 2011

Chart 1 – Composition of Australian Banks Funding                 Higher bank debt funding costs is cited as the primary
                                                                  driver behind this increase, with increased capital
                                                                  requirements (estimated to have added a further 40 basis
                                                                  points to business loans) and increased loss provisioning
                                                                  also cited as significant contributing factors. While 120
                                                                  basis points is a material increase in the cost of funds
                                                                  for a business, we would note however, that spreads
                                                                  have simply been restored to their 2000/2001 levels,
                                                                  before competition drove them to unsustainably low
                                                                  levels leading up to the GFC.

                                                                  Chart 3 – Variable Rates on Outstanding Business Loans

Changes to bank funding profiles have cost impacts
that ultimately filter through to borrowers. In its March
Quarter 2011 Bulletin, the Reserve Bank of Australia
(RBA) estimates that the Australian banks pay around
130 basis points more relative to the cash rate for deposit
funds than they did prior to July 2007 (though it must be
said this has come back a little in recent months). Over
the same period, the RBA also indicated that Australian
banks pay around 100 basis points more for long-term
debt funding (and with recent market moves coming from            With loan pricing impacts already evident from a
the European sovereign debt crisis this is now probably           combination of market forces and regulatory requirements
closer to 120 basis points). After a period of high volatility,   with banks having to hold more capital, liquidity and more
the cost of short term wholesale debt funding is now              stable forms of funding, the fact that banks have further
about the same as its pre July 2007 levels.                       work to do on Basel 3 (particularly funding and liquidity)
                                                                  means that further pricing impacts on corporate funding
Chart 2 – RBA Estimates of Major Bank Avg Debt                    is inevitable. Additionally, banks may reorientate their
Funding Costs                                                     lending activities towards shorter tenors – and this
                                                                  could be of particular consideration for those companies
                                                                  operating in industries where longer-tenor lending
                                                                  is preferred.

                                                                  In addition, many US and European banks face significant
                                                                  and intensifying capital challenges. In fact, in response
                                                                  to the European sovereign debt crisis there are attempts
                                                                  currently underway to recapitalise the European banking
                                                                  system. Fortunately, Australia’s Big 4 are not nearly as
                                                                  challenged on this front and if an issue of capital scarcity
                                                                  arises in corporate lending markets, it will be less severe
                                                                  within the domestic market than it will be offshore.

                                                                  Basel 3 and the Future of Bank Intermediated Lending
                                                                  With increased capital, funding and liquidity requirements
                                                                  ultimately impacting the cost of intermediated bank debt,
                                                                  Basel 3 and other regulatory requirements logically work
                                                                  against bank intermediation as the competitiveness of

                                                                  bank-sourced debt against other funding alternatives is
Demonstrating the effect on lending, the RBA estimated            eroded. Indeed we have already seen this a number of
the average interest rate on outstanding business loans is        times this year with the domestic and international
around 120 basis points higher than it was pre July 2007.         corporate bond markets offering pricing to a number                                                                                                      Page 17
Strategist                                                                                                                                                                                                                                                                                                                                                                         27 October 2011

of single ‘A’ rated Australian corporates that has been                                                                                                                                                       pricing of 5yr senior unsecured bank CDS vs the broader
comparable or even tighter that what would be available                                                                                                                                                       iTraxx and CDX indices demonstrates these changes.
to a AA rated Big 4 Australian bank (see table 1 below).
                                                                                                                                                                                                              Domestically, the recent moves in the relative CDS
                                                                                                                                                                                                              pricing between the banks and the corporates have
Equally, the push into alternative (non bank) funding
                                                                                                                                                                                                              been less than what has been experienced in the US
sources has also been driven by investors seeking greater
                                                                                                                                                                                                              and European markets (see chart 6). This is partly due
sector diversification in their fixed income portfolios as a
                                                                                                                                                                                                              to the relative strength of the domestic banks. However,
way of reducing their exposure to global systemic risks,
                                                                                                                                                                                                              changing investor preferences for corporate credit vs
and investment grade corporates generally improving
                                                                                                                                                                                                              financial institution credit has also become evident in
their credit profiles post the GFC.
                                                                                                                                                                                                              the relative pricing within the domestic cash market
                                                                                                                                                                                                              (see chart 7). This is important as it is the cash markets,
Since mid to late 2009, global fixed income investors
                                                                                                                                                                                                              not the CDS markets, which banks and corporates
have shown an increasing preference for investment
                                                                                                                                                                                                              source their wholesale funds from and Australian
grade corporate credit over financial institution credit.
                                                                                                                                                                                                              corporates with access to the global debt capital
While the CDS markets can at times be significantly more                                                                                                                                                      markets will increasingly be drawn to these markets
volatile than the cash markets, the changes in the relative                                                                                                                                                   by the changes in investor preferences.

 Date                                                Issuer                                                             Amount (Mill's)                                                          Term         Pricing (Spread to Swap)                                                                                                  Big 4 Secondary Equivalent**
  7/03/2011                                          Woolworths                                                         AUD500                                                                   5yr          +105bps                                                                                                                   95bps
       1/04/2011                                     Woolworths                                                         USD300/USD550                                                            5yr & 10yr   AUD equiv +95bps & +140bps                                                                                                100bps & 115bps
 12/04/2011                                          Westfield Retail                                                   AUD900                                                                   5.5yr        +120bps                                                                                                                   115bps
       9/05/2011                                     Wesfarmers                                                         USD650                                                                   5yrs         AUD equiv +120bps                                                                                                         115bps
       4/07/2011                                     Fonterra*                                                          AUD300                                                                   5yrs         +100bps                                                                                                                   115bps
 14/09/2011                                          Rio Tinto                                                          USD2bn                                                                   5yr, 10yrs   AUD equiv +135bps for 5yrs &                                                                                              140bps & 175bps
                                                                                                                                                                                                              +170bps for 10yrs

* Fonterra is a New Zealand dairy Co-Operative group.                                                                                                                                                         Chart 5 – US Big 4 Bank 5yr CDS vs CDX
It is rated A+/Stable by S&P and AA- Stable by Fitch                                                                                                                                                                 400                                                                                                                                                                                                                2.00

** The comparisons between corporate and bank                                                                                                                                                                        360

funding spreads in the above table incorporates an                                                                                                                                                                   320

element of conservatism as the bank secondary market                                                                                                                                                                 280

spreads quoted above are often a couple of points tighter                                                                                                                                                            240

than where a new bank issue would be priced at.                                                                                                                                                                      200

The difference is referred to as a new issue premium                                                                                                                                                                 160

or a concession and is generally offered to investors                                                                                                                                                                120

as a way of enticing them to a new issue rather than the                                                                                                                                                              80

investor buying an existing bond in the secondary market.                                                                                                                                                             40
                                                                                                                                                                                                                                         Source: Bloomberg, NAB Wholesale Banking Credit Research
                                                                                                                                                                                                                       0                                                                                                                                                                                                                0.00











Chart 4 – European Senior Financial 5yr CDS vs iTraxx
                                                                                                                                                                                                                                                            US Big 4 Average                                          US CDX 5Yr                                    Bank CDS / CDS Ratio (RHS)
       400                                                                                                                                                                                        2.00
                                                                                                                                                                                                              Chart 6 – Australian Big 4 Bank 5yr CDS vs Australian
       280                                                                                                                                                                                        1.40
       260                                                                                                                                                                                                           400                                                                                                                                                                                                                2.00
       240                                                                                                                                                                                        1.20               380
       220                                                                                                                                                                                                           360                                                                                                                                                                                                                1.80

       200                                                                                                                                                                                        1.00               340
       180                                                                                                                                                                                                           320                                                                                                                                                                                                                1.60
       160                                                                                                                                                                                        0.80               300
       140                                                                                                                                                                                                           280                                                                                                                                                                                                                1.40
       120                                                                                                                                                                                        0.60               260
       100                                                                                                                                                                                                           240                                                                                                                                                                                                                1.20
        80                                                                                                                                                                                        0.40               220

        60                                                                                                                                                                                                           200                                                                                                                                                                                                                1.00
        40                                                                                                                                                                                        0.20               180
        20                                                                                                                                                                                                           160                                                                                                                                                                                                                0.80
                         Source: Bloomberg, NAB Wholesale Banking Credit Research
         0                                                                                                                                                                                        0.00               140

                                                                                                                                                                                                                     120                                                                                                                                                                                                                0.60











                                                                                                                                                                                                                      80                                                                                                                                                                                                                0.40
                                                                                                                                                                                                                      40                                                                                                                                                                                                                0.20
                                          EUR SEN FI CDS                                     EUR iTraxx                             SEN FI / iTraxx Ratio (RHS)
                                                                                                                                                                                                                      20                 Source: Bloomberg, NAB Wholesale Banking Credit Research
                                                                                                                                                                                                                       0                                                                                                                                                                                                                0.00










                                                                                                                                                                                                                                                             Big 4 SENIOR                                    AUS 5yr iTraxx                                         SEN Bank / iTraxx Ratio (RHS)                                                                                                                                                                                                                                                                                                                                                                                                        Page 18
Strategist                                                                                                                                                                                                                                                     27 October 2011

Chart 7 – Big 4 Cash Spreads to Swap vs Australian                                                                                                                                                                  will be very keen to demonstrate their wares by bringing
Corporates                                                                                                                                                                                                          offshore names clients to the AUD Kangaroo market and
                          400                                                                                                                                                                                2.00   the NZD Kauri market. For Middle-Market and SME
                          360                                                                                                                                                                                1.80   businesses, the absence and lack of depth of alternative
                          320                                                                                                                                                                                1.60   debt markets means bank intermediated lending will
                          280                                                                                                                                                                                1.40   remain as the primary source of debt finance for
 Basis Points over Swap

                          240                                                                                                                                                                                1.20
                                                                                                                                                                                                                    these segments.
                          200                                                                                                                                                                                1.00
                          160                                                                                                                                                                                0.80
                                                                                                                                                                                                                    Within the financial sector, as well as focusing efforts on
                          120                                                                                                                                                                                0.60
                                                                                                                                                                                                                    helping clients access debt capital markets, banks will
                           80                                                                                                                                                                                0.40
                                                                                                                                                                                                                    have an increased incentive to develop and distribute
                           40                                                                                                                                                                                0.20
                                                                                                                                                                                                                    assets that appeal to a range of investors beyond the
                                            Source: NAB Wholesale Banking Credit Research
                                                                                                                                                                                                                    traditional senior unsecured wholesale debt investor.











                                                                                                                                                                                                                    At an institutional level these might include syndicate
                                                 5yr Big 4 Cash Spreads                          5yr Aus Corporate Cash Spreads                              Bank / Corporate (RHS)                                 type structures, loan funds, bridge-to-bond type financing
                                                                                                                                                                                                                    and a range of co-investment strategies. At the sub-
 * Note the iTraxx and the CDX indices in the above charts                                                                                                                                                          institutional levels, lower outright bond yields could
contain within them the banks and financials they are                                                                                                                                                               make subordinated debt and hybrid equity assets more
being compared with. Therefore the changes in the                                                                                                                                                                   appealing to a new range of high net worth and retail
relative pricing between the banks and the indices are                                                                                                                                                              investors. These are all evolving opportunities and the
less (more conservative) than what they would otherwise                                                                                                                                                             challenges for banks will be to bridge the links between
be if the banks and financial institutions were removed.                                                                                                                                                            their borrowing and investing clients.

While investors’ growing preference for corporate credit                                                                                                                                                            While regulators around the world are still considering
over financial institution credit has no doubt been heavily                                                                                                                                                         how to best implement the Basel 3 reforms, it is clear
influenced by the GFC and now the European sovereign                                                                                                                                                                the impacts on how banks fund themselves and how
debt crisis, there are also a range of regulatory influences                                                                                                                                                        they lend are already being felt within the debt markets.
that are playing their part. Amongst these Basel 3 is                                                                                                                                                               And these impacts will only become more evident as the
forcing banks to make structural changes to their funding                                                                                                                                                           key Basel 3 implementation dates draw nearer.
and capital bases and ultimately these will influence
how they lend money. Basel 3 is an important part in                                                                                                                                                                As we said at the outset of this note Basel 3 has yet to
an environment that is experiencing ‘regulatory jaws                                                                                                                                                                be finalised and not all details and outcomes are clear at
of disintermediation’.                                                                                                                                                                                              this point in time.

The impact on bank intermediated lending across the                                                                                                                                                                 And as we mentioned above, this will be the first in a
various segments of corporate borrowers will not be                                                                                                                                                                 series of updates we will be providing on the impacts of
uniform. A lot of Australia’s largest and most highly rated                                                                                                                                                         Basel 3 on the Australian banking and corporate sectors.
investment grade corporates already have good access                                                                                                                                                                It is anticipated that APRA will be releasing its draft
to the global debt capital markets. However, a key impact                                                                                                                                                           standards on the implementation of the LCR and the
might be for other ASX200 companies who don’t carry                                                                                                                                                                 NSFR in November and we expect our next update will
strong investment grade ratings. Relationship banks may                                                                                                                                                             be shortly after these standards are released.
need to put an increased emphasis on their debt capital
                                                                                                                                                                                                                    Please feel free to contact either one of us if you have any
markets capabilities to help their domestic corporate
                                                                                                                                                                                                                    comments on this article or if you have any suggestions or
clients gain access not only to the domestic market but
                                                                                                                                                                                                                    requests on future ones.
also the offshore markets, such as the US Public (144A)
and Private Placement (USPP) markets, and the European
                                                                                                                                                                                                                    (see overleaf for regular NZ Credit Market News)
(EUR and STG) and Asian capital markets. Equally they                                                                                                                                                                                                                                                        Page 19
Strategist                                                                                                 27 October 2011

Credit Market News                                          –    Fitch downgraded both Royal Bank of Scotland and
                                                                 Lloyds TSB from to A from AA- and placed the ratings
                                                                 of Barclays, BNP Paribas, Credit Suisse, Deutsche
–   The European Sovereign debt crisis remains front             Bank, Societe General, Bank of America Corp, Morgan
    and centre for the market, with multiple rumours and         Stanley and Goldman Sachs on credit watch negative.
    announcements but very little in the way of concrete
    news. At time of writing the EU summit is still in      –    S&P cut the rating of Spain to AA- from AA, citing high
    progress. Markets are generally in a holding pattern         unemployment, tightening credit and high private-
    as they await further direction.                             sector debt.

–   Watercare Services Limited (AA-/stable) issued          –    S&P also cut the rating of French bank BNP Paribas to
    NZ$75m of a new 7 year fixed rate issue at 5.685%,           AA- from AA.
    or swap+130bps.
                                                            –    Reporting season in the US with JPMorgan reporting
–   Insurance Australia Group Limited has announced it is        an approximate 33% decline in profit for the quarter
    considering making an offer of NZ$150 million (plus          excluding a $1.9bn accounting benefit as investment
    oversubscriptions) of unsecured subordinated bonds.          banking earnings slumped. Citigroup profits rose
    The bond would pay interest quarterly, have a 25 year        +74% after a $1.9bn accounting gain and a reduction
    maturity and be callable after 5 years and every             in bad debts. Net income for Q3 was $3.77bn or
    interest payment date thereafter. They are expected          $1.23 per share compared to 72c for the same period
    to be rated A- by S&P. ANZ and UBS are the lead              last year. Wells Fargo disappointed despite net
    arrangers of the deal.                                       income climbing +22% to a record $4bn or 72c per
                                                                 share which was up from $3.34bn last year. Morgan
–   Telecom shareholder agreed to separate the company           Stanley announced Q3 net income of $2.2bn or $1.15
    into “New Telecom” and a fixed line access                   per share vs expectations of 30c per share, although
    infrastructure business, “New Chorus”, meaning the           much of the gain was in accounting gains.
    latter can participate in the government’s Ultrafast
    Broadband initiative. Domestic bond holders have        –    The senior unsecured debt market offshore has
    already agreed to the demerger on the basis of their         clearly reopened for banks, with a number of new
    credit being with New Telecom and receiving a one-           deals including;
    off 50bps payment.
                                                                • Svenska €1.25bn 10yr at ms+170
–   Moody’s confirmed New Zealand’s Aaa (stable) rating         • Standard Chartered €1.25bn 5yrs at ms+188
    after the Treasury released its pre-election economic       • HSBC €1.25bn 7yrs at ms+160
    and fiscal update. The agency stated "the future path
    of government deficits and debt is overall not too          • Commerzbank €800m 2yr FRN at 3mE+158
    different from earlier projections. As a result, this       • ANZ £300m 3yr senior unsecured FRN at £L+110
    document does not change our thinking about New             • Citibank with a long 10yr $1bn at T+245
    Zealand's rating,"
                                                                • Goldman Sachs tapped its July 2021 for $1b at
–   ANZ National issued its inaugural covered bond into
    the European market with a 5 year €500m deal at /
    swap+95bps.                                    /

–   ANZ issued an A1$billion 4yr senior unsecured FRN in
    the Australian market yesterday at BBSW +135bp,
    roughly flat to its secondary curve.                                                                                                  Page 20
Strategist                                                                                                                                                                                       27 October 2011

Global Credit Indices
 Index                          iTraxx Europe Investment Grade Index                                              Index                             iTraxx Europe Crossover Index
220                                                                                                               900



170                                                                                                               750



120                                                                                                               600
 31-Aug-11           7-Sep-11    14-Sep-11   21-Sep-11 28-Sep-11   5-Oct-11   12-Oct-11   19-Oct-11   26-Oct-11    31-Aug-11          7-Sep-11   14-Sep-11   21-Sep-11 28-Sep-11   5-Oct-11   12-Oct-11   19-Oct-11   26-Oct-11
 Source: Bloomberg                                       Daily                                                    Source: Bloomberg                                      Daily

 Index                   CDX North America Investment Grade Index                                                 Index                          CDX North America High Yield Index
160                                                                                                               900






100                                                                                                               550
 31-Aug-11           7-Sep-11    14-Sep-11   21-Sep-11 28-Sep-11   5-Oct-11   12-Oct-11   19-Oct-11   26-Oct-11    31-Aug-11          7-Sep-11   14-Sep-11   21-Sep-11 28-Sep-11   5-Oct-11   12-Oct-11   19-Oct-11   26-Oct-11

 Source: Bloomberg                                       Daily                                                    Source: Bloomberg                                      Daily

 Index                                       iTraxx Australia Index                                               Index                      Itraxx Western Europe Sovereign Index
250                                                                                                               350

240                                                                                                               345

200                                                                                                               330

190                                                                                                               325

180                                                                                                               320

140                                                                                                               305

130                                                                                                               300
 31-Aug-11           7-Sep-11    14-Sep-11   21-Sep-11 28-Sep-11   5-Oct-11   12-Oct-11   19-Oct-11   26-Oct-11    31-Aug-11          7-Sep-11   14-Sep-11   21-Sep-11 28-Sep-11   5-Oct-11   12-Oct-11   19-Oct-11   26-Oct-11

 Source: Bloomberg                                       Daily                                                    Source: Bloomberg                                      Daily                                                                                                                                                                                                    Page 21
Strategist                                                                                                            27 October 2011

Data Review
BNZ Services PSI (Sep) – 17 October                                         Credit Card Billings (Sep) – 21 October
September’s PSI was solid at 53.2, close to August’s                        Predictably, September’s credit card billings were
53.8 and the six month average of 53.5. It was indicative                   bolstered by huge spending on foreign-issued cards,
of ongoing economic recovery overall, but the detail was                    related to the early stages of the Rugby World Cup.
all over the place. The Rugby World Cup and change                          However, billings on NZ-issued cards were subdued,
in timing of school holidays severely disrupted usual                       meaning overall transaction values in New Zealand
seasonal and travel patterns.                                               pretty much just made up for August’s 1.4% slip.

Fonterra Auction – 19 October                                               Rugby World Cup (Final) – 23 October
Global dairy prices rose 1.7%, on average. This is the                      The All Blacks capped a consummate tournament by
first rise since early June, offering a hint that dairy prices              pipping a gallant Gallic squad, 8-7, in a final that was
are stabilising.                                                            tough on the fingernails. Most importantly, the result
                                                                            avoided the wave of utter despondency that would
ANZ-RM Consumer Confidence (Oct) – 20 October                               have descended upon the (rugby-mad) nation, had
ANZ-Roy Morgan consumer confidence was little changed                       France once again proved New Zealand’s arch nemesis
in October sitting at 112.2, from 112.6 in September.                       at Rugby World Cups. Phew! Consumer confidence
Confidence has been remarkably stable over the past five                    lives to fight another day.
months and at a still reasonably positive level.
                                                                            CPI (Q3) – 25 October
                              ANZ Roy Morgan Consumer Confidence            September quarter CPI inflation, of 0.4% (4.6% y/y,
                                                                            or about 2.5% ex-GST), proved slower than expected -
                                                                            thanks to tumbling prices for electronic goods,
                                                                            communications and international airfares. The
                                                                            undercurrents were also friendly, reflected in capped
                                                                            core inflation measures. This should help inflation
                                                                            expectations abate from recent heights – helped next
                                                                            by the GST bubble dropping out of the Q4 y/y CPI
100                                                                         computations. However, any stickiness in this process
                                                                            of getting expectations down would be a genuine problem
                                                                            for the RBNZ. Especially to the extent supply pressures
  80                                                                        re-emerge, particularly in the jobs market, as we think is
       02             03       04   05   06      07     08   09   10   11
Source: ANZ/Roy Morgan, BNZ                   Monthly                       likely over 2012/13.

Int’l Travel and Migration (Sep) – 21 October                               National Employment Indicator (Aug) – 25 October
Short-term visitor numbers in September were 26.3%                          We continue to be encouraged by the signals from
above last year – largely thanks to the Rugby World Cup.                    New Zealand’s labour market. August’s Employment
Also no surprise was the sharp drop in NZ resident                          Indicator was but the latest example. It went a long way
departures; likely reflecting the change in school holiday                  to expunging July’s weak spot, in jumping a seasonally
timing for the Rugby World Cup. The surprise came in net                    1.1%. This restored a clearly positive trend, and meant
migration with a net outflow of 660 people in September,                    annual growth of around 2.0%. That’s robust in
seasonally adjusted. Fewer arrivals and more departures                     normal circumstances, let alone for a supposedly
drove the change from the small net positive in August.                     struggling economy.                                                                                                               Page 22
Strategist                                                                                                 27 October 2011

Pre-election Economic & Fiscal Update– 25 October             NBNZ Business Survey (Oct) – 26 October
Fears that the deteriorating world would dump on New          October’s NBNZ business survey harboured bad news,
Zealand’s fiscal accounts were allayed by the Treasury        and good. The bad news was that business expectations
boffins. Domestic robustness managed to counteract            and general confidence continued to lose gas, from their
global headwinds, such that PREFU path looked similar         hot-spots of only a few months ago, in July. The good
enough to May’s Budget, in the end. Sure, this still          news was that there was still enough positiveness left
means a tough slog back to surpluses, with little room        over to suggest reasonable economy growth ahead.
for complacency. Still, it’s a credible path, in our view,    Rather like the economy slowing into a 50 kph speed
shored up by a serious and clear political intent.            zone. Not as breezy as the open road, but still progressing
                                                              at a respectable pace.
Fonterra Dairy Payout Forecast – 25 October
Dairy conglomerate Fonterra surprised many by revising        RBNZ OCR – 27 October
downward its forecast milk-solids payout for the current      The RBNZ delivered its expected straight bat in
(2011/12) season. While we were conscious of downside         announcing, today, that the cash rate would remain
potential on the payout, from what was a solid forecast       unchanged at 2.5%. Nonetheless, it also maintained
reiterated by Fonterra on 22 September, this was more         a clear tightening bias saying, “gradually increasing
for down the track rather than up front. The 45 cent drop     pressure on domestic resources will require future
in the milk price component amounted to a 6.25% fall in       OCR increases”. In this regard, the RBNZ stands almost
the overall payout per kilogram of milk-solids (for a fully   alone amongst developed-world central banks. It is a
shared up farmer). From a macro point of view, this was       stance that we feel is very much justified. And we note
worth around $700m (0.4% of nominal GDP). The                 that the word on the OCR is about “increases”, plural.
consolation is that dairy production is off to a cracking
start (notwithstanding the immediate disruptions from         Merchandise Trade (Sep) – 27 October
Maui gas-line leak).                                          September’s merchandise trade figures were close
                                                              enough to what we expected. The seasonal deficit,
Gas Leak – 25 October                                         of $751m, was mainly worse than expected owing
Just when we thought the economy was through its long         to higher oil imports. The guts of the trade figures
run of ghastly misfortune, along comes a ruptured gas         appeared consistent with our views of reasonable
main that disrupts many businesses in the upper North         volume growth under the surface. Notably, there was
Island. While it’s difficult to assess the GDP impacts at     a decent lift in imports of plant and machinery though
this stage we will certainly keep monitor the situation,      the September quarter
and progress, closely.

                                                                                                                                                      Page 23
Strategist                                                                                                                               27 October 2011

Key Upcoming Releases
Building Consents (Sep) – 31 October
Residential building consents surged a cumulative 29%
through July and August. While this is off a very low base
and some pullback is possible in September, it sets up
construction to be a strong positive contributor to H2
GDP growth. Moreover, we still envisage a further
material pick-up in trend residential building consents
over the coming 18 months.
 Number                                 Dwelling Consents

 3000                                                                  Seasonally


                                                                                          RBNZ Financial Stability Report (H2) – 9 November
                                                                                          This Financial Stability Report will probably take the
                                                                                          opportunity to highlight New Zealand’s ongoing
                                                                                          vulnerability to the global financial markets, especially
 1000                                                                                     in relation to what’s going on in Europe. Fundamentally,
                                                                                          however, the FSR will reiterate the way in which New
        98      99      00    01   02     03   04     05    06   07   08   09   10   11   Zealand is well placed to keep weathering the storms.
 Source: Statistics NZ, BNZ                    Monthly

                                                                                          Electronic Card Transactions (Oct) – 9 November
Credit Aggregates (Sep) – 31 October                                                      We’d be surprised if October’s ECT data are anything
New Zealand’s credit aggregates will probably keep                                        other than very strong. A patent jump in foreign visitor
plodding about sideways, as de-leveraging continues.                                      spending would seem likely, given the crescendo in the
And the money aggregates will likely keep picking up,                                     Rugby World Cup. There’s also the spending to account
as folk are clearly saving more. This is helping the                                      for locally by Kiwis who, absent the tournament, would
domestic funding of the banks.                                                            otherwise have been holidaying abroad.

LCI/QES Wage Reports (Q3) – 1 November                                                    QVNZ Housing Report (Oct) – 9 November
While it seems too early to expect any material pick-up                                   There shouldn’t be much news here. Expect house
in wage inflation, it will still be something to watch for                                prices to be a smidge above year ago levels.
in these Q3 data – especially with headline CPI inflation                                 The anecdote should speak of a market well off
running above 4.0%. We are looking for the QES measure                                    its knees, albeit not racing away.
to be running at 3.0% y/y, and the unit labour cost proxy,
                                                                                          BNZ Manufacturing PMI (Oct) – 10 November
the LCI, at around 2.1% y/y.
                                                                                          In sagging to 50.8, the Performance of Manufacturing
ANZ Commodity Export Prices (Oct) – 1 November                                            Index lost a fair bit of momentum in September. Was
We believe New Zealand’s commodity export prices will                                     this the beginning of a genuine stalling or more in the
again withstand much of the global turmoil, albeit still                                  nature of a wobble? We suspect the latter, meaning
likely to edge down a fraction further through October.                                   October’s PMI should hold its head above water (50).
                                                                                          However, in these uncertain times we just can’t be sure.
Fonterra Auction – 2 November
Global dairy prices have shown some signs of stability                                    Crown Financial Statements (Sept) – 10 November
over recent auctions. Something similar this time around                                  The dreadful year-to-June accounts are behind us, with
would be commendable, given rising global supply, and                                     about half of that year’s deficit owing to the quakes.
ongoing risks to near-term demand growth stemming                                         The PREFU has since outlined a fiscal path back to
the European debt crisis.                                                                 surpluses. These 3-months to September accounts will
                                                                                          help us judge whether things are meeting this plan.
HLFS (Q3) – 3 November
We expect this Household Labour Force Survey to keep                                      Food Price Index (Oct) – 11 November
showing some backbone, probably strengthen a bit                                          We anticipate further technical correction in the monthly
further. Namely, a 0.3% advance in employment and                                         Food Price Index. Call it a fall of 1.0%, which would
a drop in the unemployment rate to 6.4%, from 6.5%.                                       reduce the annual rate to 4.7%, from 6.6%.
Hours-worked will also be a test of our view Q3 GDP
expanded a robust 1.1%.                                                          /                                                                                                                                Page 24
Strategist                                                                                                                            27 October 2011

Quarterly Forecasts
Forecasts as at 27 October 2011

Key Economic Forecasts
Quarterly % change unless otherwise specified

                                       Jun-10     Sep-10      Dec-10     Mar-11     Jun-11      Sep-11      Dec-11      Mar-12     Jun-12      Sep-12
GDP (production s.a.)                     0.2        -0.1        0.6        0.9         0.1         1.1        1.2         0.4        0.5          1.0
Retail trade (real s.a.)                  0.5        -0.4       -0.5        1.1         0.9        -0.1        1.5         0.2        0.7          1.0
Current account (ytd, % GDP)             -2.5        -3.5       -3.5       -3.6        -3.7        -4.0       -3.6        -4.2       -4.8         -5.3
CPI                                       0.2         1.1        2.3        0.8         0.9         0.4        0.6         0.1        0.4          0.6
Employment                               -0.1         1.0       -0.3        1.3         0.0         0.3        0.5         0.4        0.6          0.7
Unemployment rate %                       6.9         6.4        6.7        6.5         6.5         6.4        6.1         5.9        5.7          5.4
Avg hourly earnings (ann %)               0.4         0.7        1.8        2.5         3.1         3.0        3.4         4.1        4.1          4.3
Trading partner GDP (ann %)               5.5         4.8        4.5        3.5         3.0         3.2        3.5         4.0        3.9          3.8


Interest Rates
Historical data - qtr average                   Government Stock                  Swaps                               US Rates               Spread
Forecast data - end quarter           Cash      90 Day    5 Year       10 Year    2 Year      5 Year      10 Year     Libor      US 10 yr     NZ-US
                                                Bank Bills                                                            3 month                Ten year
      2010 Jun                         2.40        2.88      5.03        5.73       4.35        5.22        5.79         0.54      3.17        2.56
           Sep                         2.82        3.22      4.59        5.31       3.96        4.56        5.13         0.29      2.59        2.72
           Dec                         2.91        3.17      4.63        5.47       3.87        4.61        5.28         0.30      3.30        2.17
      2011 Mar                         2.77        3.00      4.47        5.58       3.62        4.56        5.34         0.31      3.40        2.18
           Jun                         2.47        2.65      4.20        5.32       3.36        4.47        5.25         0.25      3.00        2.32
           Sep                         2.40        2.83      3.96        4.68       3.38        4.20        4.91         0.30      2.41        2.27
           Dec                         2.50       2.75        4.40       4.85       3.40        4.40        5.05        0.30       2.50        2.35
      2012 Mar                         2.50       2.75        5.15       5.35       3.80        5.15        5.50        0.30       2.75        2.60
           Jun                         2.75       3.15        5.40       5.75       4.40        5.40        6.00        0.35       2.75        3.00
           Sep                         3.25       3.65        5.25       5.60       4.50        5.50        5.90        0.40       2.75        2.85
           Dec                         3.75       4.00        5.10       5.45       4.60        5.45        5.80        0.40       3.00        2.45
      2013 Mar                         4.00       4.20        4.95       5.35       4.65        5.30        5.75        0.40       3.25        2.10
           Jun                         4.25       4.45        4.85       5.25       4.65        5.25        5.65        0.55       3.50        1.75
           Sep                         4.50       4.70        4.90       5.10       4.65        5.30        5.55        0.80       3.75        1.35
           Dec                         4.50       4.70        4.75       5.05       4.60        5.20        5.50        1.05       4.00        1.05
      2014 Mar                         4.50       4.75        4.70       5.00       4.60        5.10        5.50        1.45       4.25        0.75

Exchange Rates (End Period)
USD Forecasts                                                                     NZD Forecasts
              EUR/USD USD/JPY GBP/USD NZD/USD AUD/USD                             NZD/EUR NZD/JPY NZD/GBP NZD/USD NZD/AUD                      TWI
Current         1.3952   76.05  1.6001  0.8044  1.0472                              0.5765   61.17  0.5027  0.8044  0.7681                     69.7
Dec-11          1.3400   76.00  1.5600  0.8300  1.0200                              0.6194   63.08  0.5321  0.8300  0.8137                     73.3
Mar-12          1.3800   78.00  1.5800  0.8500  1.0300                              0.6159   66.30  0.5380  0.8500  0.8252                     74.5
Jun-12          1.4000   80.00  1.6000  0.8600  1.0300                              0.6143   68.80  0.5375  0.8600  0.8350                     75.3
Sep-12          1.4200   82.00  1.6200  0.8700  1.0200                              0.6127   71.34  0.5370  0.8700  0.8529                     76.2
Dec-12          1.4000   83.00  1.6300  0.8400  1.0000                              0.6000   69.72  0.5153  0.8400  0.8400                     74.3
Mar-13          1.3800   84.00  1.6400  0.8200  0.9800                              0.5942   68.88  0.5000  0.8200  0.8367                     73.3
Jun-13          1.3600   85.00  1.6500  0.8000  0.9600                              0.5882   68.00  0.4848  0.8000  0.8333                     72.2
Sep-13          1.3500   86.00  1.6600  0.7800  0.9400                              0.5778   67.08  0.4699  0.7800  0.8298                     71.0
Dec-13          1.3400   87.00  1.6700  0.7600  0.9200                              0.5672   66.12  0.4551  0.7600  0.8261                     69.7
Mar-14          1.3300   88.00  1.6800  0.7500  0.9100                              0.5639   66.00  0.4464  0.7500  0.8242                     69.2
                                                                                  TWI Weights
                                                                                    0.2797    0.1425         0.0629     0.3023      0.2126
Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, BNZ                                                                                                                                    Page 25
Strategist                                                                                                                    27 October 2011

      Forecasts                                                 March Years                                  December Years
      as at 27 October 2011                         Actuals                 Forecasts                             Forecasts
                                                   2009 2010        2011         2012      2013   2009    2010        2011    2012    2013

GDP - annual average % change
Private Consumption                                 -1.1      0.3     2.0         1.5       2.9    -0.8     2.2        1.6      2.4     3.1
Government Consumption                               4.2      0.2     3.8         0.9      -0.8     0.5     3.4        1.7     -0.6    -0.6
Total Investment                                    -7.7     -9.5     5.9         3.5      12.5   -10.6     2.2        4.3     10.3    10.2
Stocks - ppts cont'n to growth                       0.2     -2.2     1.4         0.4       0.0    -2.9     2.0        0.0      0.4    -0.1
GNE                                                 -1.4     -3.7     4.5         2.2       4.4    -5.1     4.2        2.1      3.9     4.0
Exports                                             -3.0      4.8     1.9         3.5       2.4     2.0     2.9        3.1      2.7     3.5
Imports                                             -4.3     -9.4    10.5         4.8       5.2   -14.6    10.3        5.5      5.0     4.5
Real Expenditure GDP                                -0.9      0.8     1.9         2.0       3.4     0.1     2.3        1.6      3.1     3.7
GDP (production)                                    -1.5     -0.7     1.6         2.6       3.3    -2.0     1.6        2.3      3.1     3.7
GDP - annual % change (q/q)                         -3.5      1.8     1.7         2.8       3.8     0.2     1.3        3.3      3.1     3.0

Output Gap (ann avg, % dev)                         0.0     -1.1     -0.9        -0.5     0.6      -1.5    -0.9        -0.7     0.2     1.4
Household Savings (gross, % disp. income)          -0.9      1.2      5.5         5.4     5.1
Nominal Expenditure GDP - $bn                     185.2    187.4    198.0       208.9   222.3     185.9   195.2      206.1    218.6   232.8

Prices and Employment - annual % change
CPI                                                  3.0      2.0     4.5         2.1       2.2     2.0     4.0        2.8      2.1     2.9
Employment                                           0.7     -0.1     1.8         1.3       2.6    -2.4     1.3        2.1      2.4     2.1
Unemployment Rate %                                  5.1      6.1     6.5         5.9       4.9     7.0     6.7        6.1      5.1     4.7
Wages - ahote                                        5.2      0.6     2.5         4.1       4.7     2.2     1.8        3.4      4.5     4.5
Productivity (ann av %)                             -2.2      0.8     0.1         1.0       1.0    -0.8     0.6        0.6      1.1     1.2
Unit Labour Costs (ann av %)                         7.5      2.1     2.7         3.1       2.9     4.7     1.4        3.5      2.9     2.6

External Balance
Current Account - $bn                              -14.8     -3.6    -7.2        -8.7   -13.7      -4.6    -6.8        -7.4   -12.8   -15.3
Current Account - % of GDP                          -8.0     -1.9    -3.6        -4.2    -6.1      -2.5    -3.5        -3.6    -5.8    -6.6

Government Accounts - June Yr, % of GDP
OBEGAL (core operating balance)                     -2.1    -3.3     -9.2        -5.1      -2.0
Net Core Crown Debt (excl NZS Fund Assets)           9.3    14.1     20.0        25.4      28.5
Bond Programme - $bn                                 5.8    12.4     20.0        13.5      12.0
Bond Programme - % of GDP                            3.1     6.5     10.0         6.4       5.3

Financial Variables (1)
NZD/USD                                             0.53    0.70     0.74        0.85      0.82    0.72    0.75       0.83     0.84    0.76
USD/JPY                                               98      91       82          78        84      90      83         76       83      87
EUR/USD                                             1.31    1.36     1.40        1.38      1.38    1.46    1.32       1.34     1.40    1.34
NZD/AUD                                             0.80    0.77     0.73        0.83      0.84    0.79    0.76       0.81     0.84    0.83
NZD/GBP                                             0.37    0.47     0.46        0.54      0.50    0.44    0.48       0.53     0.52    0.46
NZD/EUR                                             0.41    0.52     0.53        0.62      0.59    0.49    0.57       0.62     0.60    0.57
NZD/YEN                                             51.8    63.7     60.4        66.3      68.9    64.2    62.6       63.1     69.7    66.1
TWI                                                 53.8    65.1     65.2        73.3      74.3    64.7    67.8       73.3     76.2    71.0
Overnight Cash Rate (end qtr)                       3.00    2.50     2.50        2.50      4.00    2.50    3.00       2.50     3.75    4.50
90-day Bank Bill Rate                               3.24    2.67     2.69        2.75      4.20    2.78    3.17       2.75     4.00    4.70
5-year Govt Bond                                    4.02    5.09     4.32        5.15      4.95    5.41    4.79       4.39     5.12    4.76
10-year Govt Bond                                   4.77    5.86     5.58        5.34      5.37    6.02    5.82       4.86     5.45    5.04
2-year Swap                                         3.52    4.20     3.30        3.80      4.65    4.52    3.85       3.40     4.60    4.60
5-year Swap                                         4.48    5.18     4.38        5.14      5.30    5.53    4.77       4.40     5.43    5.18
US 10-year Bonds                                    2.80    3.78     3.40        2.75      3.25    3.57    3.30       2.50     3.00    4.00
NZ-US 10-year Spread                                1.97    2.08     2.18        2.59      2.12    2.45    2.52       2.36     2.45    1.04
      Average for the last month in the quarter

Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ                                                                                                                      Page 26
Strategist                                                                                                          27 October 2011

                                     Forecast   Median      Last                                                              Last
Friday 28 October                                                    Wednesday 9 November
Jpn, Industrial Production, September 1st est    -2.1%     +0.8%     NZ, RBNZ Fin. Stability Report
Jpn, Unemployment Rate, September                 4.5%      4.3%     NZ, Electronic Card Transactions, October               +0.2%
Jpn, CPI, September y/y                         +0.1%      +0.2%     Aus, Consumer Sentiment - Wpac, November                  97.2
US, Personal Spending, September                +0.6%      +0.2%     Aus, Housing Finance, September                           1.2%
Monday 31 October                                                    China, Retail Sales, October y/y                       +17.7%
NZ, Household Credit, September y/y                        +1.1%     China, Industrial Production, October y/y              +13.8%
NZ, Building Consents, September (res, #)                 +12.5%     China, CPI, October y/y                                 +6.1%
Aus, Private Sector Credit, September                      +0.2%     Jpn, Eco Watchers Survey (outlook), October               46.4
Euro, CPI, Oct y/y 1st est.                                +3.0%     UK, Trade Balance, September                            -£1.9b
US, Chicago PMI, October                          59.0      60.4     US, Wholesale Inventories, September                    +0.4%
Tuesday 1 November                                                   Thursday 10 November
NZ, ANZ Comdty Prices ($NZ), October                       +0.3%     NZ, BNZ PMI (Manufacturing), October                     50.8
NZ, LCI Priv Ord Wages, Q3 y/y      +2.1%                  +2.1%     NZ, ANZ-RM Consumer Confidence, November                112.2
Aus, House Prices, Q3                                       -0.1%    Aus, Employment, October                              +20.4k
Aus, RBA Policy Announcement         4.50%      4.50%      4.75%     China, Trade Balance ($US), October                  +$14.51b
China, PMI (NBS), October                                    51.2    Jpn, Machinery Orders, September                      +11.0%
Jpn, BOJ Minutes, 6/7 Oct Meeting                                    Jpn, Consumer Confidence, October                        38.6
UK, CIPS Manuf Survey, October                              51.1     Euro, ECB Monthly Bulletin
UK, GDP, Q3 1st est                                        +0.1%     UK, BOE Policy Announcement                              0.50%
US, Construction Spending, September            +0.3%       1.4%     US, International Trade, September                     -$45.6b
US, ISM Manufacturing, October                   52.2       51.6     Friday 11 November
Wednesday 2 November                                                 NZ, Food Price Index, October                            -1.0%
NZ, Fonterra Auction                                       +1.7%     UK, PPI (core output), October y/y                      +3.8%
Aus, Building Approvals, September                        +11.4%     Monday 14 November
Germ, Unemployment Rate, October s.a.                       6.9%     NZ, BNZ PSI (Services), October                           53.2
US, ADP Employment, October                     +100k       +91k     NZ, Retail Trade, Q3 vol s.a.                           +0.9%
US, FOMC Policy Announcement        0.25%       0.25%      0.25%     Jpn, GDP, Q3 1st est                                     -0.5%
Thursday 3 November                                                  Euro, Industrial Production, September                  +1.2%
NZ, HLFS Unemployment Rate, Q3          6.4%                 6.5%    Tuesday 15 November
Aus, Services PMI (AiG), October                             50.3    Aus, RBA Minutes, 1 Nov Meeting
Aus, Retail Trade, September                               +0.6%     Euro, GDP, Q3 1st est                                   +0.2%
China, Non-manufacturing PMI, September                      59.3    Euro, Trade Balance, September                          -€3.4b
Euro, ECB Policy Announcement                              1.50%     Germ, ZEW Sentiment, November                            -48.3
UK, CIPS Services, October                                   52.9    UK, CPI, October y/y                                    +5.2%
US, ISM Non-Manuf, October                        53.9       53.0    US, Retail Sales, October                                 1.1%
US, Factory Orders, September                      flat     -0.2%    US, Business Inventories, September                     +0.5%
Friday 4 November November                                           US, Empire Manufacturing, November                       -8.48
Aus, RBA Quarterly Statement                                         US, PPI ex-food/energy, October y/y                     +2.5%
Germ, Factory Orders, September                             -1.4%    Wednesday 16 November
US, Non-Farm Payrolls, October                  +100k      +103k     Aus, Labour Price Index, Q3                             +0.9%
Monday 7 November                                                    Jpn, BOJ Policy Announcement                            0.10%
Aus, TD Inflation Gauge, October y/y                         2.8%    UK, BOE Inflation Report
Aus, ANZ Job Ads, October                                     -2.1   US, Industrial Production, October                      +0.2%
Euro, Retail Sales, September                               -0.3%    US, CPI ex food/energy, October                         +2.0%
Germ, Industrial Production, September           -2.0%      -1.0%    Thursday 17 November
Tuesday 8 November November                                          NZ, PPI Outputs, Q3 y/y                                 +4.5%
Aus, NAB Business Survey, October                              -2    China, Leading Index (Conference Board), September
Aus, International Trade, September                       +$3.00b    Jpn, BOJ Economic Report
Germ, Trade Balance, September                            +€11.8b    UK, Retail Sales vol., October                          +0.6%
UK, BRC Retail Sales Monitor, October y/y                  +0.3%     US, Housing Starts, October                              658k
UK, Industrial Production, September                       +0.2%     US, Philly Fed Index, November                           +8.7                                                                                                           Page 27
Strategist                                                                                                                                                                               27 October 2011

Contact Details
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