Weekly FX Update - 21st May 2012

Monday 21 May 2012, 5:28PM
By Direct FX

By Sam Coxhead of

Market Overview:
Risk aversion was a strong theme for a majority of last week. Slowing global growth and lower sentiment being driven by further increased Euro-zone uncertainty provided an uneasy mix for markets. For most of the week the US dollar enjoyed strong demand. This eased on Friday as profit taking entered the market and finally supported the major currencies. The Australasian pair remained under pressure almost across the board. The New Zealand dollar showing particular weakness as investors retreat from growth assets. In the wider market the uncertainty around the potential exit of Greece from the single EURO currency group will remain ahead of the June 17th election. Until leadership is found, the large structural issues in their economy remain unsolvable. The potential fallout from an exit would almost certainly lead towards a weaker EURO, and wider economy in the short to medium term.
Last week was a relatively uneventful one for the Australian economy. The Reserve Bank of Australia (RBA) monetary policy meeting minutes reveal a battle against the banks on funding margins was probably the leading factor in the larger than expected cut to the cash rate at their previous meeting. Lower prices and non-mining activity remain under average levels and this will mean the bank will continue to monitor data as it comes to hand. Anecdotal evidence in the media points towards an easing in demand in Asia for Australia’s mineral exports also, so this should be closely monitored. This week sees an empty economic data calendar in Australia, so the lead will come from external factors. Of note is the Chinese manufacturing data due for release on Thursday.
New Zealand
The recent run of weak data continued for the NZ economy last week. The Rugby World Cup induced hangover in retail spending was evidenced as first quarter retail sales numbers were released at -2.5% vs an expectation of a small +.3% rise. Similar to the recent employment data, the back ground of the number was actually more upbeat than the headline suggests. Adding to the poor sentiment were the latest online Fonterra auction results. These are closely watched by international investors, and were over 6% lower on a trade weighted basis from the previous month. This week sees peripheral data released with the RBNZ inflation expectations survey on Tuesday, and then the annual Government budget release on Thursday. Expect neither to dramatically affect price action. The wider market risk aversion last week saw the NZD the worst performing currency of those monitored. Sentiment remains very weak, much to the delight of the exporting sector. After such moves, quick reversals are possible, but look reasonably unlikely to be sustained in the current environment.
United States
In the United States the relatively good data run continues. Retail sales numbers hit expectations, housing numbers indicate a market that has finally bottomed out and industrial production numbers were reasonable. The FOMC monetary meeting minutes revealed little of inspiration as the FED look to wait and see what progresses over the coming months. A demonstrably worse than expected manufacturing number on a Philadelphia Fed survey was of note, and will keep the interest up for upcoming manufacturing  sector releases. This week’s focus comes from housing numbers on Tuesday and Wednesday, and durable goods sales numbers on Thursday. The US dollar was stronger for a majority of the week, before giving up gains. The market realizes that the FED will likely step in with further quantitative easing if the US data takes a materially softer tone. This could slow the momentum of the US dollar in the coming weeks.
New elections are scheduled in Greece on June 17th. The election will likely end up being a proxy for continued Euro-zone membership. The wait for this election is going to be painful. The increasingly isolated German officials are likely to be the drivers of any resolution to the current woes. No doubt scrambling behind the scenes will be ongoing. There is little prospect of a material improvement in the European data until sentiment can improve with certainty. At least the initial first quarter GDP numbers came in at flat, with Germany again providing the bulk of the strength. Inflation remains reasonably contained at 2.6%. There are various services and manufacturing numbers due this week, but direction is likely to come from headlines from various officials with regards to the handling of the Greek situation. The credit agencies have been active in their downgrading of various European banking sectors, which is unsurprising to say the least.
United Kingdom
The Bank of England (BOE) inflation report dominated the focus in the UK last week. It stated the UK growth prospects remain unusually uncertain and attributes the blame to the ongoing uncertainty in Europe. The path to economic recovery is likely to remain slow and uncertain, and an escalation of the credit crisis in Europe would likely sees further quantitative easing used to stimulate growth. The UK unemployment claims data was a bright spot which reports a unexpected fall in the level of claims. The reemergence of the possibility of QE undermined the recent GBP strength, and the GBP gave up some its recent gains, especially against the EURO. The focus this week comes from inflation numbers later on Tuesday, BOE monetary policy meeting minutes and retail sales data Wednesday, and the final Q1 GDP number on Thursday.

Last week saw the preliminary GDP numbers for Japan beat the market expectations. The 1.0% result was against an expectation of .9% and was driven by strong activity in the export sector. This week’s focus is solely on the Bank of Japan’s (BOJ) monetary policy decision on Wednesday. Further easing of monetary policy cannot be ruled out given the rampant and relentless march higher of the YEN.
The Canadian inflation data was materially higher than expected on Friday last week. The lowering oil price has obviously been a balancing factor, otherwise the CAD would have seen a dramatic pickup in demand. This week sees the retail sales number  on Wednesday as the focus. Given the CAD strength of late, any further gains on most pairings are likely to be harder fought than in recent weeks.

Major Announcements last week:
•          NZ Retail Sales -2.5% vs +.3% expected
•          German Economic Sentiment 10.8 vs 19.1 expected
•           US Inflation +.2% as expected
•           US Retail Sales +.1% vs +.2% expected
•           GBP Unemployment Claimant Change -13.7k vs +4.9k expected
•           Japanese GDP 1.0% vs +.9% expected
•           US Philadelphia FED Manufacturing Index -5.8 vs 10.3 expected
•           Canadian Inflation +.4% vs +.2% expected
•           Greek elections scheduled for June 17th

The NZ dollar saw severe and dramatic selling pressure against the US dollar throughout the course of last week. It was almost completely one way traffic. It would be surprising if we saw a continuation of this determined trend this week, albeit not out of the equation. Led by the EURO, the NZD has moved back to take back some of its lost ground in early trade. The .7500 level will provide initial support. There is an absence of material NZ data this week. The lead from the pair will almost wholly come from the wider market appetite for risk. Having bounced a little from the lows, current levels look good for the purchase of NZD with US dollars, especially for those looking to stagger transfers.
  Current level Support Resistance Last week’s range
NZD/USD    .7597     .7500    .7700   .7518 - .7843

The NZD saw further pressure from the AUD last week as it lost ground against almost all currencies. It was driven by a distinct lack of liquidity in the NZD, and the exiting of bought NZD positions by international investors as they retrenched to “safe haven” assets. The move does look over done, and provides good value buying of NZD with Australian dollars. In market conditions like we have seen, the levels become meaningless in the short term, as flow dictates the price action. With a distinct lack of domestic data in either economy this week, the direction will likely be provided by other pairings. A weak Chinese manufacturing number on Thursday will likely impact the AUD more so than the NZD. If the pair can consolidate through the .7700 (1.2990) level, the NZD should see demand and open up the way to take back some of its recent losses.
  Current level Support Resistance Last week’s range
NZD/AUD    .7710     .7650    .7850    .7655 - .7815
AUD/NZD   1.2970    1.2740   1.3070  1.2796 - 1.3063

The NZD again saw considerable pressure from the GBP last week. We did see the NZD bounce initially from the .4800 (2.0833) level, but it was unable to consolidate its gains. There looks to have been an wide spread liquidation of NZD holdings from investors, and this has driven the NZD weakness. Whether or not the selling pressure is now complete remains to be seen. Whilst we have seen the NZD again bounce from the lows, current levels offer good value buying of NZD with GBP. The BOE have not ruled out further QE of the Euro-zone crisis escalates, and this would be NZD supportive. The data lead undoubtedly comes from the UK this week, with inflation, BOE minutes, retail sales and the final Q1 GDP numbers.
  Current level Support Resistance Last week’s range
NZD/GBP      .4799     .4750   .4950    .4907 - .5049
GBP/NZD     2.0838    2.0200   2.1050   1.9806 - 2.0379

Opening last week down through the .7850 support level was a negative sign for this pair. The pressure increased on the NZD right through until Thursday when there was a period of relief before the selling resumed. The .7700 level now offers the next level NZD support, consolidation through this support level would herald another leg lower. The focus will come from Canada for this pairing this week in the absence of any material NZ economic data. Retail sales number on Wednesday will be the key.
   Current level Support Resistance Last week’s range
NZD/CAD    .7740    .7700   .7900   .7682 - .7836

The NZD ironically saw significant pressure from the EURO last week. The rush out of the NZD saw it give up significant ground against the beleaguered EURO. The last push through the .6000 support last on Friday opened up the way for heavy selling. If last week’s levels offered good value buying of NZD with EURO’s, then this week’s looks even better. The lead will wholly come from the wider market risk appetite this week. Hopefully the pairing sees larger levels of liquidity this week, which should in turn reduce the volatility.
  Current level Support Resistance Last week’s range
NZD/EURO     .5940     .5800    .6000      .5889 - .6075
EURO/NZD     1.6835     1.6670   1.7240    1.6461 - 1.6980

The NZD again gave a severe underperformance against the YEN throughout the course of last week. In what was across the board liquidation of NZD holdings the selling was relentless at times. Having bounced off the 59.50 support for the time being, current levels offer good value buying of NZD with YEN. The focus this week comes from the BOJ monetary policy decision in the absence of any NZ economic data.
  Current level Support Resistance Last week’s range
NZD/YEN    60.17     59.50   61.50    59.46 – 62.74

The Australian dollar again saw sustained pressure from the US dollar last week. The increased risk aversion being driven by the desperate situation in Europe being the driver of the USD demand. Concerns about the sustainability of Asian growth may well weigh on the AUD again this week. The lead this week will again come primarily from then wider market appetite for risk. If the pair can stay above the .9800, a relief rally may ensue.
  Current level Support Resistance Last week’s range
AUD/USD    .9854     .9800    1.0000    .9791 - 1.0043

The Australian dollar has finally seen some demand against the Pound Sterling. This saw seven month lows as the general market risk aversion stepped up a notch last week. The emergence of the prospect of further QE from the BOE should steady the pairing for the time being. Current levels offer good value buying of AUD with GBP. If we see any further weakness, further solid AUD  support will come in around the .6100 (1.6400) level. The UK economy dominates this week, in the absence of Australian economic data. On Tuesday we have inflation, Wednesday the BOE meeting minutes and retail sales and Thursday the final GDP numbers. If we see a continuation of the bounce in the EUR against the GBP, this will aid the AUD in its demand.
  Current level Support Resistance Last week’s range
AUD/GBP    .6225    .6200    .6400   .6179 - .6289
GBP/AUD    1.6064    1.5625   1.6130 1.5900 - 1.6184

This pair remains in recently familiar territory. The EURO did see some good demand late in the week, but this was demand that fed through from the strong reversal of the EURO underperformance of the GBP in the last month. This week will again see the wider market risk appetite provide the lead. Quiet economic calendars in Europe and Australia means that comments from various European finance officials will be closely watched. The Chinese manufacturing numbers on Thursday could be of significance for the AUD dramatically surprising.
  Current level Support Resistance Last week’s range
AUD/EURO    .7705    .7650   .7750     .7656 - .7827
EURO/AUD   1.2978   1.2740   1.3070   1.2776 - 1.3062

Once this pair broke down through the 79.50 support level last week, the AUD saw significant pressure from the YEN. This week will see the focus come from the BOJ monetary policy decision on Wednesday. Any additional monetary easing will weaken the YEN, even if just in the short term. In the absence of any Australian data, the remainder of the lead will come from the wider market appetite for risk, primarily driven by headlines from Europe.
  Current level Support Resistance Last week’s range
AUD/YEN    78.05     77.50    79.50    77.52 – 80.87

Having broken the support at parity early last week the CAD was unable to continue with its recent pressure on the AUD. The higher than expected inflation number on Friday saw the pair fall from the highs and bounce again from the 1.000 level. There is a distinct lack of data in Australia this week, so the majority of the lead will likely come from the wider market appetite for risk, positive stock markets will see the AUD outperform, which negative comments from Europe will see the pressure from the CAD increase on the AUD. The Canadian retail sales numbers on Wednesday will be closely watched, but will likely only impact if dramatically different from expectations.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0040     .9950    1.0150    .9977 - 1.0112


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