Direct FX Weekly FX Update - 31st Jan 2012

By Sam Coxhead of www.directfx.co.nz

Market Overview:
The dynamic start of 2012 in the financial markets continued last week. Within the same old issues from 2011, some new trends seem to be quickly emerging. The weakness of the Euro throughout December has been quickly reversed in January. The weakness seems to have re-ignited moves from various central banks to try and verbally lever their currencies lower. The Australasian currencies remain surprisingly strong on most cross rates. The US dollar has seen renewed pressure, whilst on most pairings remaining in somewhat familiar territory. Potentially 2012 may be a year of continued short term volatility, whilst remaining within a relatively contained broader range. No doubt the European issues will remain center stage, and their impact on the wider global growth profile will remain the key.

The economic data flow in the US has remained relatively positive for the most part to start the year. Ironically, in the face of the domestic evidence, the wider global outlook has seen the Federal Reserve (FED) point towards lower for longer interest rates and further quantitative easing (QE) has increased in its likelihood. Cynically, this move from the FED could be viewed simply as a means to curb the 4th quarter resurgence of the US dollar, but the effects remain the same, and sees the pressure come off the EURO, as large “sold EURO” positions are quickly exited by the speculative part of the market. This week sees the usual array of economic data due for release in the US, but the employment numbers on Friday will be of particular note.

The Australian dollar has had a strong start to 2012, although its progress appears to be coming more laboured. Benign Australian inflation numbers, coupled with a unexpected lack of action to loosen monetary conditions in China last week (looser conditions would be AUD supportive), has seen the AUD give up some ground in recent sessions. The boost provided by the possibility further QE in the US, will provided support so any falls will be somewhat subdued. Next week’s Reserve Bank of Australia (RBA) cash rate announcement should see the cash rate reduced by 25pts to 4%. Speculation is increasing that a further move in March may follow.

The New Zealand dollar has also been in demand in the New Year. The RBNZ monetary policy decision was to stay with an unchanged cash rate at 2.50%. It is expected that the cash rate will remain unchanged until the end of 2012 at the earliest. The buoyant NZ dollar will be causing issues for exporters at current levels. Buffering the NZD effect for the local economy, are continued good prices for the New Zealand commodities. There is little on the economic data calendar for this week, but next week we have employment numbers for the 4th quarter.

In Europe the situation remains tense with Euro-zone members starting to apply real pressure on Greece. The pressure is coming as Greece struggle to cut spending in a meaningful way. Austerity pledges are easy to make, but enforcing them is a different matter. The complex nature of required voluntary cuts to bond values, and the possibility of independent financial controls being put in place, means the path forward is not at all clear. Portugal is the latest to have their bond markets come under renewed pressure. On a positive note, measures in Italy seem to be having an effect and interest rates on Italian debt are trending down as sentiment improves on their outlook.

In the UK the economy remains under pressure. Speculation of increased QE from the Bank of England (BOE) remains rife. The GBP has recovered some ground as the US dollar saw some renewed pressure, but it remains low against both the New Zealand and Australian dollars. Manufacturing, services, housing and construction numbers towards the end of the week will provide some focus. Next week the BOE meeting on Thursday will be closely watched. It is likely that they will not increase the QE at this meeting, but more likely in March.

Major Announcements last week:
• Bank of Japan leaves Monetary Policy unchanged
• Canadian Retail Sales +.3% vs +.2% expected
• Australian Inflation 0.0% vs +.2% expected
• German Business Climate 108.3 vs 107.6 expected
• UK preliminary GDP -.2% vs -.1% expected
• US Federal Reserve Monetary Policy statement- cash rate on hold until 2014
• RBNZ leaves cash rate at 2.50% as expected
• US Durable Goods Orders 2.1% vs .9% expected
• US Advanced GDP 2.8% vs 3.0% expected
• UK Public debt reaches 1 trillion GBP for the first time.

NZD/USD
The January rally by the NZ dollar seems to have finally found some resistance at .8250. The FED’s statement last week provided the fuel to the latest boost, and looks to be a conscious effort to undermine the until recently, resurgent US dollar. Progress higher from current levels will be far more had fought for the NZD, as headwinds appear to have reemerged for both the EURO and AUD. US and NZ employment numbers on Friday and Tuesday (next week) respectively, will provide the important further insight to the domestic economies.
Current level Support Resistance Last week’s range
NZD/USD .8230 .7950 .8250 .8057 - .8239

NZD/AUD (AUD/NZD)
The NZD gained over the AUD last week following the release of benign Australian inflation numbers. The interest rate outlook should be the primary driver of this pairing in the short term. The RBA are expected to cut the cash rate 25pt to 4.0% next week. The resistance around the .7750 (AUDNZD 1.2900 support) level remains the key. A clean move through these levels opens up the way for further appreciation from the NZ dollar. As usual the timing of any NZ dollar appreciation can frustrate.
Current level Support Resistance Last week’s range
NZD/AUD .7741 .7550 .7750 .7670 - .7761
AUD/NZD 1.2918 1.2900 1.3250 1.2885 - 1.3037

NZD/GBP (GBP/NZD)
The NZD remains at high levels against the Pound Sterling. The appreciation has stalled somewhat, and any further progress from current levels would be hard fought by the NZ dollar. Talk about further QE from the BOE should be mostly factored in at current levels. There is little in the way of economic data to effect the domestic outlook in NZ this week, but employment numbers on Tuesday next week will be closely watched. In the UK, an array of numbers towards the end of the week will provide further insight, but next week’s Thursday BOE monetary policy announcement remains the focus in the short term.
Current level Support Resistance Last week’s range
NZD/GBP .5233 .5075 .5275 .5157 - .5254
GBP/NZD 1.9109 1.8960 1.9700 1.9033 - 1.9391

NZD/CAD
The NZ dollar has outperformed the CAD to start the year. Unsurprisingly the primary driver has been the re-emergence of US dollar weakness that has followed through to drag the CAD lower. This week sees a Canadian focus for the pairing, with GDP on Wednesday and employment numbers on Friday. Progress from current levels should prove harder fought for the NZ dollar.
Current level Support Resistance Last week’s range
NZD/CAD .8235 .8080 .8280 .8138 - .8276

NZD/EURO (EURO/NZD)
The NZ dollar set new all time highs against the EURO early in the New Year. Last week the performance of the pair was a little more mixed and the NZD gave up a little ground on the week. The European outlook continues to be muddled, with no definitive path apparent. The complex nature of the issues means that any great resurgence of the EURO is unlikely in the short term. The performance of the NZD with be driven by the global outlook for the most part. Ironically the lip service given to easier monetary policy in the US is providing demand for NZ dollars in the short term. Expect further sideways movement in the boarder .6100 - .6300 range in the short term. With little in the way of top tier economic data this week, NZ employment numbers Tuesday and the ECB monetary policy decision will be closely watched next week.
Current level Support Resistance Last week’s range
NZD/EURO .6244 .6100 .6300 .6183 - .6287
EURO/NZD 1.6015 1.5875 1.6400 1.5900 - 1.6173

NZD/YEN
The NZ dollar saw initial appreciation over the YEN last week, but towards the end of the week it started to give up its gains. Those gains accelerated yesterday as wider market risk aversion picked up. Expect any further investigations towards the resistance at 63.80 to be hard fought for the NZD. Next Tuesdays NZ employment numbers will provide the next focus for the domestic data, in the meantime the pairing will take its lead from the wider market appetite for risk.
Current level Support Resistance Last week’s range
NZD/YEN 62.78 61.80 63.80 61.89 - 63.81

AUD/USD
The Australian dollar has seen some strong demand to start 2012. This demand tempered somewhat into the end of last week, especially after the release of some monetary policy in China. A strong boost mid week came after the FED pledged to keep the cash rate lower for longer, and again pushed out their unchanged track, this time until 2014. The prospect of further QE from the FED will also affect prospects for the US dollar in the short term. The primary focus for the remainder of the week will be Chinese manufacturing numbers tomorrow and US employment numbers on Friday. Tuesday next week sees the RBA announcement monetary policy and the cash rate is expected to be lowered from 4.25% to 4.0%. Chinese inflation numbers Thursday and the quarterly Monetary Policy Statement on Friday will also be closely watched.
Current level Support Resistance Last week’s range
AUD/USD 1.0634 1.0500 1.0700 1.0424 - 1.0674

AUD/GBP (GBP/AUD)
The rapid appreciation of the AUD on this pairing appears to be running out of steam. A potentially lower cash rate in Australia could lead to further weakness from the AUD, especially if Asia again starts to show signs of a sharply slowing economy. This week the Chinese manufacturing numbers tomorrow will be closely watched, as will the construction and services numbers in the UK on Thursday and Friday. Next week the focus will squarely be on the central banks, starting with the RBA on Tuesday. Expect a 25pts cut to the cash rate to 4.0%. The BOE announce monetary policy on Thursday with just a small chance for further QE initiatives this month. Current levels still represent good value buying of GBP with AUD from a historical perspective.
Current level Support Resistance Last week’s range
AUD/GBP .6760 .6620 .6820 .6690 - .6807
GBP/AUD 1.4793 1.4663 1.5106 1.4691 - 1.4807

AUD/EURO (EURO/AUD)
The Australian dollar set all times highs against the EURO early in the New Year. The resurgence of the EURO over the last week has seen the AUD pushed back from those extremes, but it remains at elevated levels. A consolidated break of the .8000 level (EUROAUD 1.2500), would open up the way for a corrective more lower for the AUD. Given the uncertain outlook in Europe, nothing can be assumed in the short term. Theory would say that with the RBA poised to cut the cash rate next week the demand for the AUD should temper somewhat, but reality may be a different story. A gloomier outlook for Asian prospects would weigh on the AUD and this would increase the likelihood of a corrective more lower from the AUD. Chinese manufacturing numbers tomorrow, and inflation numbers next week will be the key to the short term outlook.
Current level Support Resistance Last week’s range
AUD/EURO .8065 .7950 .8150 .8012 - .8114
EURO/AUD 1.2400 1.2270 1.2580 1.2324 - 1.2481

GBP/USD
The Pound Sterling has seen mixed form against the US dollar in the first month of 2012. Last week it managed to make some good gains as the US dollar came under increasing pressure. The US dollar pressure came from a combination of the exiting of bought US dollar positions and the rhetoric from the FED at their monetary policy meeting. Verbally committing to lower interest rates until 2014 saw support for the US dollar evapourate and the resurgence of the GBP came even as odds of further QE from the BOE increased. The level of 1.5800 provides the initial target for those who want to see GBP higher. Next week’s BOE monetary policy meeting on Thursday will be closely watched, as will the US employment numbers this Friday.
Current level Support Resistance Last week’s range
GBP/USD 1.5731 1.5600 1.5800 1.5512 - 1.5740

GBP/EURO (EURO/GBP)
After ending 2011 at the years lows against the GBP, the EURO has recovered as the market has unwound some of it “sold EURO” positions. Progress will continue to be hard fought for the EURO as there is no quick fix to the structural issues the Euro-zone face. Easing the way for the initial EURO resurgence has been the increasing odds that the BOE will increase the amount of QE at one of the two next meetings. Next week is less likely than in March, but Thursdays announcement will be closely watched.
Current level Support Resistance Last week’s range
GBP/EURO 1.1930 1.1870 1.2160 1.1892 - 1.2086
EURO/GBP .8382 .8225 .8425 .8274 - .8409

This article was first posted at www.directfx.co.nz - Currency transfer specialists