Weekly FX Update - 14th May 2012

Monday 14 May 2012, 4:55PM
By Direct FX

By Sam Coxhead at

Market Overview:

Risk aversion increased throughout the wider financial markets last week. The leading contributor was undoubtedly the inability of Greek politicians to cobble together some sort of leadership in order to avoid having to go to the polls again. The rapid rise of anti-austerity policy is gripping Europe across the board, but in Greece the effect is an immediate state of paralysis. The higher chances of Greece leaving the Euro-zone before the end of 2012 has far reaching ramifications, and this is why such a small country continually makes a large impact. Elsewhere the economic data remains patchy at best. Numbers in North America are holding up, but the deep slow down in Europe is impacting Asia. Over the weekend Chinese authorities cut the reserve ratios of their banks in an attempt to boost slowing growth.

Following the previous week’s larger than expected cut to the cash rate, the economic data in Australia last week was ironically, stronger than expected. Building approval and retail sales numbers started the week, both significantly higher than projections. But the real surprise came in the form of a 4.9% unemployment rate against an expectation of a 5.3% rate. However, this 4.9% headline number was stronger than the detail suggested, with a fall in full time jobs growth and a lower participation rate. The Federal Budget offered few surprises, and was of little material impact to the overall balance of the economy. This week sees the minutes from the previous Reserve Bank of Australia monetary policy meeting released on Tuesday. Given the larger than expected move, these will be closely followed, and provide the domestic focus for the week. Of note has also been the soft indicators coming out of the Chinese economy. Over the weekend the lowering of the reserve requirements for banks, will potentially provide a lending boost for Chinese business, and this should be of benefit to Australian exporters overtime.

New Zealand
There was little in the way of domestic economic news in New Zealand last week. The Real Estate Institute of NZ monthly numbers showed a slight pull back in house prices compared to the previous month. The interest rate market has seen plenty action over the last couple of weeks. Strange price action pushed expectations of a Reserve Bank of NZ cut to the cash rate at the next meeting in June to 80% priced. Given the demonstrably lower level of the NZD over the last month, a cut to the already low cash rate of 2.50% would be very unlikely. As the interest rate market corrects itself, the outcome should be somewhat NZ dollar supportive. Today’s release of the quarterly retail sales numbers showed a marked decline of -1.5% from the last quarter of 2011. This can be best explained away as a correction after the dramatic boost to retail spending over the Rugby World Cup. Producer prices will also be reported on Thursday, but will be of little impact to overall sentiment.

United States
The US economy had a relatively quiet economic data calendar last week. The latest Government bond auction was very well received and that was of little surprise given the strong risk aversion evident in markets of late. Weekly jobless claims numbers returned to more positive levels after a recent move back up towards problematic levels. Interestingly the consumer sentiment numbers came out stronger than expected. This is positive and correlates to the recent pick up in the residential housing market. This week is a busy one for economic data and central bank releases. Inflation and retail sales numbers come on Wednesday and will be closely watched. Thursday sees the release of the latest monetary policy meeting minutes from the Federal Reserve (FED). Friday rounds out the week with the important manufacturing numbers from the Philadelphia Federal Reserve.

The inability of Greek politicians to pull together a coalition is proving stressful for investors in Europe. Confidence is low and the Europe wide push back against adopted austerity measures signals further unrest to come. Apart from the prospect of another round of Greek elections, Spanish provisions to bail out its banks are also topical, as are the changing political landscapes in both France and Germany. This week sees the release of both inflation and GDP numbers. GDP numbers are expected to confirm that Europe is back in recession, being the second consecutive quarter of negative economic growth. 

United Kingdom
Last week’s UK economic indicators were mixed. House price and retail sales point towards a continuing lethargy in the economy. A bright spot was better than expected monthly manufacturing numbers. Longer end interest rates in the UK are lower on the back of capital flows out of Europe, and this is a positive for borrowers in the UK. As expected the Bank of England (BOE) left monetary policy unchanged last week. Wednesday is the focus this week, with employment numbers and the BOE Inflation Report taking center stage.

Last week was a quiet one for Japanese economic indicators. Trade balance numbers were the focus and these revealed higher than expected export numbers, which was positive. Further jawboning from various Japanese finance officials with regards to the strength of the YEN provided a little colour to what was a week of mainly external focus.  This week sees the focus mainly on the GDP number on Thursday. A recovery from the negative growth of the last quarter of 2011 is expected to provide a +.9% result for Q1 2012.


Last week proved to be another relatively positive one for the Canadian economy.  Building numbers early in the week surprised with their strength and these were backed up by another strong employment number on Friday. Employment growth was over 58,000 against an expectation of around 10,000. This week is a little quiet, with the market having to wait until Friday for the week’s primary focus, in the form of the monthly inflation numbers.

Major Announcements last week:
•          Australian Building Approvals +7.4% vs +3.2% expected
•          Australian Retail Sales +.9% vs +.3% expected
•          Canadian Building Approvals +4.7% vs -.5% expected
•         Australian Unemployment rate 4.9% vs 5.3% expected
•         Chinese Trade Balance 18.4B vs 10.0B expected (lower import demand)
•         UK Manufacturing +.9% vs +.5% expected
•         BOE leaves monetary policy unchanged
•         Chinese inflation 3.4% as expected
•         Chinese RRR decreased by 50pts-freeing up capital for lending.
•         Canadian employment growth 58.2k vs 10.1k expected
•         US UOM Consumer Sentiment 77.8 vs 76.4 expected

The NZD saw continued pressure from the US dollar as the wider market risk aversion played out last week. Most of the sharp losses were seen early in the week as the uncertainty around the various European elections kept the market on edge. Further gains for the US dollar should prove harder fought from the current levels. Initial support comes in just below current levels at .7780, and then again at .7650. The correcting NZ interest rate market should provide an element of support also. Today’ disappointing NZ retail sales number has been shrugged off for the most part. Focus now comes from US inflation and retail sales numbers on Wednesday, ahead of Thursday’s US manufacturing index. Any material upside gains for the NZD seem unlikely in the short term.
  Current level Support Resistance Last week’s range
NZD/USD    .7818     .7780    .7980   .7791 - .7976

This pairing saw mostly sideways trading throughout the course of last week. Explaining the recent NZD weakness is the price action in the NZ interest rate market. As the market correctly reduces the probability of any change in the cash rate from the RBNZ next month, the NZD should find natural support. After today’s disappointing NZ retail sales number, the next focus comes on Tuesday with the release of the RBA monetary policy meeting minutes. The weakening growth indicators in China should drag on the AUD more so than the NZD in the near term. A break of the initial resistance at .7830 (support 1.2770) would enable further corrective appreciation of the NZD.
  Current level Support Resistance Last week’s range
NZD/AUD    .7800     .7700    .7900    .7767 - .7824
AUD/NZD   1.2820    1.2660   1.2990  1.2781 - 1.2875

The downward momentum of the NZ dollar against the Pound Sterling waned last week. The substantial support at .4850 (2.0620 resistance) has held the market for the time being. Given the magnitude of the move from this pairing in the last month, further gains from the GBP should prove to be much harder fought. Today’s disappointing NZ retail sales numbers were of limited impact to the price action. The focus now comes from the UK in the form of the employment numbers and inflation report from the BOE on Wednesday. Current levels off good value buying of NZD with GBP on a risk/reward basis.
Current level Support Resistance Last week’s range
NZD/GBP     .4867     .4850   .5050    .4846 - .4927
GBP/NZD     2.0547    1.9800   2.0620   2.0296 – 2.0636

The NZ dollar saw further grinding pressure from the Canadian dollar throughout the course of the last week. The .7900 and .7850 levels provided support levels, but could not tame the CAD in the wake of the stellar employment report on Friday. Today’s disappointing NZ retail sales data was of limited impact and now the primary focus becomes the Canadian inflation numbers on Friday. The .7800 level now provides the next support level, albeit very close to current levels. Consolidation through this level opens up the way for another investigation lower for this pair.
   Current level Support Resistance Last week’s range
NZD/CAD    .7818    .7800   .8000   .7797 - .7937

This pairing was contained by a small range throughout the course of the last week. Whilst the fears for global growth are being driven by the uncertainty in Europe, the NZD has matched any EURO weakness of late. The NZD may find some support in the short term, given it is at pivotal levels on other pairings. Today’s disappointing NZ retail sales number was of limited impact and now the focus resumes on Europe. GDP numbers on Tuesday provide the initial focus, ahead of the inflation numbers Wednesday.
  Current level Support Resistance Last week’s range
NZD/EURO     .6066     .6000    .6200      .6040 - .6108
EURO/NZD     1.6485     1.6130   1.6666    1.6121 - 1.6559

The NZ dollar saw renewed pressure from the Japanese YEN in the early part of last week. The support level at 62.20 has managed to contain the NZD weakness for the time being. A bounce back higher in NZ interest rates aided the stablisation of the NZ dollar. This morning’s weak NZ retail sales numbers were of limited impact, and now the Japanese GDP numbers on Thursday become the primary data focus. Overall the lead will again come from the wider market appetite for risk, no doubt driven by developments, or more accurately a lack thereof, in Europe.
  Current level Support Resistance Last week’s range
NZD/YEN    62.57     62.20   64.20    62.14 – 63.72

The Australian dollar has seen renewed pressure from the US dollar throughout last week. The primary driver for the renewed pressure was the wider market risk aversion, driven by uncertainty in Europe. The moves have been aided by softer than expected Chinese economic data also. The strong headline Australian employment numbers did offer some support, but the AUD demand proved to be short lived. The parity level offers the initial support this week, consolidation through this level would open up investigations of lower levels again. The RBA monetary policy meeting minutes tomorrow offer initial focus ahead of the US inflation and retail sales numbers also on Tuesday. Manufacturing numbers in the US round out the week. It seems likely that the risk aversion continues in the short term, but further gains from the US dollar should prove harder fought than in previous moves.
  Current level Support Resistance Last week’s range
AUD/USD    1.0026     .9900    1.0100    .9992 - 1.0222

The Australian dollar saw further pressure from the Pound Sterling last week. However the downside moment for the AUD is starting to wane. The better than expected Australian employment numbers aided the slowing of the momentum last week. Any further gains from the GBP will likely be harder fought. However the pairing is sitting right on the recent lows and crucial support level of .6220 (1.6080 resistance). This week’s focus will be on the release of the RBA monetary policy meeting minutes on Tuesday, and UK employment numbers and BOE inflation report on Wednesday.
  Current level Support Resistance Last week’s range
AUD/GBP    .6240    .6220    .6420   .6215 - .6312
GBP/AUD    1.6025    1.5500   1.6000 1.5843 - 1.6090

The recent range continues for this pair., albeit the AUD is under some pressure. As the European crisis is the cause of the slowing global growth profile, the AUD economy is directly affected and this is causing the AUD under performance. This week’s Australian focus comes in the form of the RBA monetary policy meeting minutes on Tuesday. Later on Tuesday in Europe, the European GDP numbers are released. On Wednesday come the Inflation numbers. Expect the current established range to continue in the short term.
  Current level Support Resistance Last week’s range
AUD/EURO    .7779    .7750   .7950     .7745 - .7826
EURO/AUD   1.2855   1.2579   1.2903   1.2778 - 1.2911

The Australian dollar saw renewed pressure from the Japanese YEN last week as the global risk aversion increased. Let up from the relentless pressure only came after the release of the better than expected Australian employment data. We start the week close to the previous lows and just above the initial support at 80.00. The lead will again come from the wider market risk appetite for the most part. The small Australian focus comes at tomorrow’s release of the RBA monetary policy meeting minutes. In Japan the preliminary GDP numbers for the 1st quarter will provide the focus.
  Current level Support Resistance Last week’s range
AUD/YEN    80.25     79.00    81.00    79.68 – 81.70

The AUD has again seen pressure from the resurgent CAD throughout the last week. In dipping below parity lat in the offshore session on Friday, the pair saw levels not seen since early October last year. Further investigations lower could be seen if the risk aversion again increases in across the wider markets. The better than expected Australian employment numbers did provide a bounce of sorts for the AUD , but the demand was short lived. Friday’s release of the strong Canadian employment figures drove the push to the lows. This week the focus in Australia will be the release of the RBA monetary policy meeting minutes tomorrow. In Canada, it is a long wait until the inflation numbers on Friday. Current levels offer good value buying of AUD with CAD.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0026     .9950    1.0150    .9995 - 1.0160


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