Weekly FX Update - 28th May 2012

Monday 28 May 2012, 5:45PM
By Direct FX

By Sam Coxhead of

Market Overview:
Last week the markets were again very uncertain and at times the fear was obvious with very negative price action. Risk aversion was apparent across all markets. It was only towards the end of the week that there was any real relief, as some profit taking emerged to provide support for growth assets. As expected there was nothing of substance to emerge from the EU summit, but behind the scenes planning for stablisation of the vulnerable European banking sector is positive. Spain has already taken steps to assure funding lines for important banks and a wider European solution is a distinct possibility, if the chatter is to be confirmed. Polls in Greece have not ruled out the backing of pro-bailout and EURO centralist parties, as the true prospect of a EURO exit dawns of the electorate. The US dollar resurgence continued for most of the week, only being outpaced by the YEN for appreciation. The major central banks remain on the sidelines for the time being. Further loosening in monetary policy remains an option, with most keeping the powder dry for the time being.
Last week was a quiet one for domestic Australian economic data. The focus came from offshore developments. European banking fears increased somewhat and this kept growth assets like the AUD under pressure for large portions of the week. Chinese manufacturing numbers were again softer and added to the theme of slowing Asian economic growth in 2012. Various Chinese officials have made pledges that policy will support growth, and infrastructure investment in particular and this is positive for the Australian export sector. Retail sales data on Wednesday,  and building and capital expenditure numbers Thursday, provide the domestic focus this week. Any positive developments with regards to the banking sector in Europe will help demand for the AUD.
New Zealand
Last week the National Government confirmed their fiscally disciplined budget plans. The trade balance showed a less healthy surplus that expected, with lower levels of log and diary exports highlighted. Fonterra’s annual payments have been revised lower, but positively CEO Spierings predicted auction prices were at their expected lows. The NZD saw sustained periods of large supply push it to levels not seen in six months, before rebounding. This week is again light on economic data in New Zealand with just the monthly NBNZ Business Confidence Survey results due out on Thursday.
United States
The outlook continued to look relatively buoyant in the US last week. The housing market looks to have seen the lows and volume and prices of sales have both increased. The weekly jobless claims numbers are also looking reasonable after creeping back up early in 2012. This week is a busy one for data in the US. Preliminary GDP numbers for the 1st quarter are due on Thursday and employment and manufacturing numbers on Friday. Whilst the FED tool of quantitative easing remains available, it is likely it would only come back into use should the European situation really implode. Until such time, expect the US dollar to remain in demand as long as the economy can continue on its stable footing.
Fears increased in Europe last week as the banking sector continues to remain under pressure as the possible Greek exit from the Euro-zone threatens to further destablise. Spain have been forced to make moves to underwrite their largest banks, and a Europe wide pledge to provide stability is likely to be forth coming. Greece remains the primary concern in the short term and is likely to keep the EURO heavy ahead of the June 17th election. German retail sales, European inflation and unemployment numbers will dominate the weeks data focus. 
United Kingdom
Last week UK inflation came in high at 3.0%, but below the 3.1% expectation. Retail sales numbers were alarmingly weak, as the consumer continues to look vulnerable. The final GDP numbers were also weak at -.3% for the first quarter, after an initial reading of -.2%. The Bank of England monetary policy meeting minutes were fairly much as expected and point towards further quantitative easing, if the downward growth pressures from beleaguered neighbor Europe persist. This week is less busy for economic data, with manufacturing numbers on Friday providing the highlight.
Japanese trade data was disappointingly soft last week. Lower domestic demand for imports was outstripped by lower international demand for Japan’s exports, as the first quarter slowdown globally starts to bite. The Bank of Japan held off from making any further loosening of monetary policy, as they join a team of central banks that look to be awaiting further developments in Europe, before deciding when to act. This week sees retail sales numbers on Tuesday and Industrial Production numbers Thursday, as the focus.
Last week saw weaker than expected retail sales numbers reported on Wednesday. The state of the residential property market was also under discussion, with a wide divergence in activity across Canada. Vancouver property is demonstrably weaker than cities further east and will weigh on Bank of Canada expectations of an interest rate hike. This week is again quiet on the data front, with GDP the focus on Friday to round out the week.

Major Announcements last week:
•          UK Inflation +3.0% vs +3.1%
•          US Exiting Home Sales 4.62m vs 4.62M expected
•           BOJ leave monetary policy unchanged
•           UK Retail Sales -2.3% vs -.8% expected
•           Canadian Retail Sales +.1% vs +.5% expected
•           US New Home Sales 343k vs 335k expected
•           HSBC Chinese Manufacturing PMI 48.7 vs 49.3 previous
•           German Business sentiment and manufacturing surveys lower than expected
•           UK revised GDP -.3% vs -.2% expected
•           US Durable Goods orders -.6% vs +1.1% expected (previous number revised higher)

The NZD saw some intense pressure from the US dollar in the first half of last week. After bouncing along the lows on this move, the pair has managed to grind higher to regain some of its lost ground. Initially profit taking provided the demand, but then sentiment turned positive a little, helping the move higher, as talk of stability funding for European banks increased. So the pair opens the week stronger, as the EURO drags it higher for the time being. This week will see much of the focus come from the US data, along with the wider market sentiment. US GDP Thursday and employment numbers Friday, will be of most significance.
  Current level Support Resistance Last week’s range
NZD/USD    .7623     .7520    .7720   .7454 - .7671

This pair continues to trade with the NZD at somewhat depressed levels. Trade was relatively orderly last week, considering some of the moves of other currency parings. This week sees mainly an Australian focus on the economic data front. Retail sales on Wednesday come ahead of building approvals and capital expenditure numbers on Thursday. The sole NZ focus is the NBNZ business confidence number on Thursday. If the NZD demand can be sustained, the .7800 level (AUDNZD 1.2820), will be the initial target.
  Current level Support Resistance Last week’s range
NZD/AUD    .7732     .7700    .7900    .7659 - .7739
AUD/NZD   1.2933    1.2660   1.2990  1.2922 - 1.3056

The NZD saw initial pressure again from the Pound Sterling last week, to set new lows for this recent move. The bounce from the lows has been reasonable, as the NZ dollar initially saw profit taking demand push it higher. The wider market risk appetite has started the week higher, and demand for the NZD has risen with it. The driver is the Europe wide potential solution to the banking woes, however whether or not this positivity can be sustained, remains to be seen. There is limited economic data in either economy this week, with just NBNZ Business Confidence in NZ on Wednesday, and UK manufacturing numbers on Friday.
  Current level Support Resistance Last week’s range
NZD/GBP      .4855     .4750   .4950    .4748 - .4858
GBP/NZD     2.0597    2.0200   2.1050   2.0585 - 2.1062

Last week proved to be a week of two halves, as the NZD saw initial pressure again from the CAD to push down to lows for this recent move. The fall below .7650 proved to be brief, as profit taking demand for NZD saw it higher against most currencies. The subsequent late turn around to positive risk appetite in the offshore session on Friday, has seen the NZD demand continue. Whether or not this rally can be sustained remains to be seen. Further positive developments in Europe would have to be seen to see consolidation as these higher levels. Economic data is light this week for the pair, with just NBNZ Business Confidence on Wednesday, ahead of the more important monthly Canadian GDP numbers on Friday.
Current level Support Resistance Last week’s range
NZD/CAD    .7810    .7700   .7900   .7631 - .7820

The NZ dollar has mounted an impressive fight back against the EURO since the middle of last week. At first the demand for NZ dollars was driven by profit taking after its recent dramatic fall. The profit taking was joined by a general rebound in global risk sentiment towards the end of the week, and over the weekend. This has seen the EURO in demand, which has dragged the NZD higher as well. Again this week the lead will likely come from the wider market risk appetite, with no top tier level economic data to influence sentiment due for the pair. If the NZD can consolidate through the .6000 level (EURONZD 1.6666), then further appreciation can be expected.
  Current level Support Resistance Last week’s range
NZD/EURO     .6053     .6000    .6200      .5903 - .6056
EURO/NZD     1.6521     1.6130   1.6666    1.6513 - 1.6940

The NZD saw further pressure from the YEN last week as the pair was pushed to levels not seen since December. The NZD has managed to drag the pair back higher from the lows, as profit taking emerged after the recent falls. The turnaround in sentiment should continue to benefit the NZD in the short term, if it can be sustained. The 61.00 level provides the initial target for further NZD appreciation. The economic data influence will be limited this week, with just NBNZ Business Confidence in NZ of any note.
  Current level Support Resistance Last week’s range
NZD/YEN    60.53     59.00   61.00    59.15 – 60.87

Last week initially saw further pressure from the US dollar on the AUD. After almost reaching the lows for the pair last seen in November last year, the AUD has bounced back quite impressively. Spurred by profit taking and some hope for the banking sector in Europe, the pairing has started higher again this week. If the turnaround can continue, the next target to the topside will be the .9900 level, that provided support on the way down. It is a busy week for economic data for this pair. Australian retail sales on Wednesday, comes ahead of Australian building and capital expenditure numbers, US GDP on Thursday, and US employment and manufacturing numbers Friday.
  Current level Support Resistance Last week’s range
AUD/USD    .9860     .9700    .9900    .9686 - .9937

This pair saw the AUD arrest its recent slide against the GBP, and grind off the eight monthly lows. The positive start to this week has been driven by talk of potential stability funds for European banks. It will be an interesting next couple of weeks, as the Greek elections approach and Europe readies itself for the next chapter of events. Sentiment from Europe will provide a dominant lead, as the GBP has benefited greatly from the recent capital flight from Europe. In Australia retail sales numbers Wednesday, are followed by building and capital expenditure numbers Thursday. In the UK the focus comes from the manufacturing numbers on Friday.
  Current level Support Resistance Last week’s range
AUD/GBP    .6278    .6200    .6400   .6175 - .6282
GBP/AUD    1.5929    1.5625   1.6130 1.5918 - 1.6194

The AUD saw grinding appreciation throughout the course of last week. The positive sentiment coming from reports of a bank funding facility over the weekend has accentuated the move. Whether or not the resurgence in risk appetite continues, remains to be seen, but the break of .7800 (1.2820), opens up the way for further AUD appreciation. Headlines from Europe will no doubt be the primary driver this week. Australian data will be less of a factor, but will provide some focus. Retail sales numbers come on Wednesday, ahead of building and capital expenditure numbers Thursday. Greeks polls will also be a factor, and will benefit sentiment, if the centralist pro-bailout vote continues to see a resurgence.
  Current level Support Resistance Last week’s range
AUD/EURO    .7830    .7750   .7950     .7683 - .7829
EURO/AUD   1.2771   1.2579   1.2903   1.2773 - 1.3016

This pair has managed to finally find some support and start to bounce off levels not seen since December. The improvement in sentiment late last week has continued into that start of this week. Talk is of a European bank funding facility to reduce the pressure on banks and sovereigns alike. At any rate, the improved sentiment if continued, will see further gains from the AUD. The Australian economy provides the economic data focus for this week, with retail sales on Wednesday and building and capital expenditure numbers on Thursday.
  Current level Support Resistance Last week’s range
AUD/YEN    78.30     77.00    79.00    76.84 – 79.19

This pair finally found some solid support mid way through last week. As sentiment started to improve, an element of the profit taking emerged in the AUD, and against the CAD has been no exception. Initial resistance will come in at 1.0100. If a sustained break above this level can be made, further appreciation in the short term cannot be ruled out. Sentiment from Europe will continue to be the overall driver of markets, ahead of the Greek elections on 17 June. Data of note this week starts in Australia. Retail sales numbers on Wednesday are followed by building and capital expenditure numbers Thursday. In Canada the monthly GDP numbers on Friday will be closely watched.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0101     1.0050    1.0250    .9948 - 1.0109


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