Weekly FX Update - 4th June 2012

Monday 4 June 2012, 5:37PM
By Direct FX

By Sam Coxhead of


Market Overview:
Last week saw further deterioration of sentiment in financial markets. The clouds seem to be aligning for a perfect storm as  the market has been grappling with the political issues in Greece, and financial issues in the wider Euro-zone. Add to these slowing growth indicators in both the US and Chinese economies and the growing uncertainty is easily explained. As the uncertainty increases, so does the pressure on central banks and politicians alike to come up with further initiatives to support their respective economies. With numerous central bank monetary policy announcements this week, including the European Central Bank (ECB) and Bank of England (BOE), it will be interesting to see how policy unfolds. After Friday’s US soft employment data, the market was too quick to try and price further initiatives from the Federal Reserve (FED) and brief US dollar weakness proved unsustainable. Expect to see further uncertainty in markets over the next two weeks ahead of the June 17 Greek elections.
The economic news in Australia was mixed last week. Disappointing retail sales numbers were balanced by increased capital expenditure in the private sector, which was again driven by mining investment. Tomorrow’s Reserve Bank of Australia (RBA) monetary policy decision looms large for the Australian economy this week. Expectations for a 25pt plus cut to the cash rate have built into market pricing. This leaves the RBA in a tenuous position should they want to hold fire ahead of the GDP and employment numbers later in the week. Given the uncertainty in offshore markets it would be surprising if they did not cut the cash rate, and placate the current market pricing. Apart from Wednesdays GDP number, and Thursdays employment and trade balance figures, Friday’s Chinese inflation numbers will also be of particular note for the Australian dollar market.
New Zealand
Last week saw just the NBNZ Business Confidence Survey as a focus for the NZ economy. The survey results were as expected. They showed a pull back from the previous result, which is in line with lower global commodity markets and economic sentiment. This week again sees an absence of domestic market focus. Of note in related markets offshore will be the RBA monetary policy decision, Australian GDP and employment numbers ,and finally the Chinese inflation data on Friday.
United States
Of concern in the US, and the wider global economy, was the softer nature of the economic data in the States last week. Lower house sales, consumer confidence and manufacturing numbers were joined by lower than expected employment growth. The weaker employment growth saw the unemployment rate edge back up from 8.1% to 8.2% for the month. Preliminary GDP numbers were bang on expectations at 1.9%. The increased uncertainty across most markets saw demand for US debt again increase and this has pushed the level of yield across the US interest rate curve to record low levels. This coming week will see the domestic focus come from the monthly services number on Tuesday, and Fed chairman Bernanke’s’ semi-annual testimony on capitol hill on Thursday.
The situation in Europe has intensified further as the political issues in Greece are coupled with financial stress in the banking sector in Spain. All this noise comes with a back ground of economies going backwards in many parts of southern Europe. The next weeks and months are pivotal to the future of the Euro-zone. It is likely than Spain will require some kind of bailout so it is able to assist its underwater banking sector. This week’s ECB monetary policy meeting will be very closely watched. Many think the ECB should be more proactive in its support of members economies that are under pressure. The ECB in turn are placing pressure on the politicians for direction. In European debt markets the periphery member funding rates head higher, while yield on 2 year German debt went through zero for the first time late last week. This means investors essentially pay the German Government to look after their money.
United Kingdom
There was not much in the way of economic data in the UK last week. Friday’s manufacturing number came in softer than expected and adds to the recently mixed outlook. The European economy is weighing on the UK recovery and expectations are building for further quantitative easing  from the BOE at its monetary policy meeting on Thursday, albeit the likely result will be unchanged policy at this time. Central to the balance of potential policy change this week is the fact that yields are at , or close to record lows, and inflationary pressure remains stubbornly high. However, these are not standard market conditions, and uncertainty remains at highly elevated levels.
The Japanese economy had only second tier economic data last week. Spending and retail sales numbers were fairly much as expected , but industrial production and earnings number were of concern. There was further speculation about Japanese authority intervention in the market to weaken the YEN. Friday’s offshore session saw a brief, but sharp move lower from the YEN as rumours’ of intervention briefly spread through the market. This week sees current account data and final GDP numbers for the 1st quarter released.
It was a mostly quiet week for data in Canada last week, until Fridays release of the monthly GDP number. The weaker than expected number would appear to mirror what is happening in the US. Expect conditions in Canada to remain tenuous with a slowing US economy, and lowering of expectations for global growth. The Bank of Canada (BOC) will leave monetary policy unchanged at their meeting on Tuesday. Manufacturing numbers on Thursday will be closely watched, as will the employment report on Friday.

Major Announcements last week:
•          US Consumer Confidence 64.9 vs 69.8 expected
•          Australian Retail Sales -.2% vs +.2% expected
•           US Pending Home Sales -5.5% vs 0.0% expected
•           NBNZ Business Confidence 27.1 vs 35.8 previous
•           Australian Private Capital Expenditure +6.1% vs +4.1% expected
•           US preliminary GDP 1.9% as expected
•           Chinese Manufacturing 50.4 vs 52.1 expected
•           UK Manufacturing 45.9 vs 49.7 expected
•           Canadian GDP +.1% vs +.4% expected
•           US Unemployment rate 8.2% vs 8.1% expected
•           US Manufacturing 53.5 vs 54.0 expected

After starting last week with a burst of energy, the NZD quickly found supply in the market and the US dollar dominance came back to the fore. The weak US jobs number on Friday saw a the NZD jump immediately as the market saw potential for further QE from the FED. But again the enthusiasm could not last and the US dollar starts this week in demand once again. Direction this week will come from external influences. The RBA decision on Tuesday will be closely watched , as will the Bernanke testimony on Thursday. Overall the wider market risk appetite will again be the primary driver. If the .7450 level is broken , investigations back to Decembers low at .7371 should be quickly made.
  Current level Support Resistance Last week’s range
NZD/USD    .7511     .7450    .7650   .7453 - .7650

This week is all about the Australian economy for this pair. The focus starts tomorrow with the RBA, and the second very uncertain monetary policy decision in a row. The interest rate market is placed for at least 25 points of easing, but given GDP and employment numbers come later in the week, a move is far from a certainty to my mind. The NZD saw quiet appreciation over the AUD last week, as it climbs back towards what should be a good first test at .7830 (1.2770). No doubt this week will be volatile with GDP Wednesday, and employment Thursday. From a NZ perspective, the market is currently pricing further cuts to the cash rate from the RBNZ in the coming months. This seems unlikely to me given the material correction lower we have seen from the NZD in the last month. Reversing of expectations for a lower cash rate will potentially underpin NZ demand in the coming months.
  Current level Support Resistance Last week’s range
NZD/AUD    .7790     .7700    .7900    .7785 - .7896
AUD/NZD   1.2837    1.2660   1.2990  1.2665 - 1.2845

The NZ dollar saw grinding appreciation against the Pound Sterling last week. The reversing of recently lost ground came as the expectation of lower growth emerged in the UK. This is a bi-product of the slowing European economy. The focus of the week will be the BOE monetary policy decision on Thursday. With some analysts expecting up to 50 billion GBP worth of additional QE from the BOE, a decision not to add to the stimulus already in place would see strong GBP demand. The balance of the lead will again come from the wider market appetite for risk in the absence of any NZ economic data.
  Current level Support Resistance Last week’s range
NZD/GBP      .4890     .4720   .4920    .4812 - .4917
GBP/NZD     2.0450    2.0325   2.0110   2.0338 - 2.0781

The NZ dollar finally managed to take back a little of its recently lost ground to the Canadian dollar. The CAD become vulnerable as last week’s US economic data was softer across the board. Fridays weak US employment numbers coupled up nicely with the weak Canadian manufacturing data to enable the NZD to push to the highs for the week. The pair opens this week just below the .7850/75 resistance level and this level remains the key to direction from here. Further gains for the NZD are likely to be harder fought for the NZ dollar from the current levels. Canadian economic data dominates the week. The BOC monetary policy starts things off on Wednesday. Thursday sees the release of further manufacturing numbers, and the employment data comes on Friday.
   Current level Support Resistance Last week’s range
NZD/CAD    .7838    .7675   .7875   .7727 - .7867

This pair remains very much within its recently familiar range. The Euro-zone will again provide the lead this week, with the ECB monetary policy meeting of particular note. There is a possibility that further long term bank funding operations could be forth coming, and this should provide the EURO with at least a small boost. Also of influence with be the Chinese inflation numbers on Friday. Lower inflation would open up the way for increased stimulation if needed by Chinese officials. This would benefit the NZD more so than the EURO. In the meantime expect the pair to continue to wobble around in its recent, and reasonably contained, but familiar range.
  Current level Support Resistance Last week’s range
NZD/EURO     .6060     .6000    .6200      .5999 - .6103
EURO/NZD     1.6502     1.5875   1.6400    1.6385 - 1.670

The NZD again ceded ground to the dominant Japanese YEN last week. Further lip service towards market intervention to weaken the YEN from Japanese officials on Friday saw increased volatility. The NZD will likely remain under pressure ahead of the Greek elections on 17 June. With little in the way of economic data for either economy this week, expect the wider market risk appetite to continue to dominate the lead.
  Current level Support Resistance Last week’s range
NZD/YEN    58.72     58.00   60.00    57.94 – 60.79

The Australian dollar saw further pressure from the dominant US dollar last week. There was some reaction to the soft US employment numbers on Friday that pushed the AUD higher. That move was short lived and the prospect of a cut to the cash rate from the RBA tomorrow has investors exiting AUD positions. Current levels have not been since October last year, and the subsequent rally was sharp. However this year is different and the June 17th Greek elections may mean that any material bounce from the AUD is still some time off. The fact that US long end interest rates are at historic lows has to reduce the likelihood of imminent quantitative easing from the FED. This underpins US dollar demand. Australian GDP and employment numbers later in the week provide further scope for volatility in what could be a very interesting few sessions for this pairing.
  Current level Support Resistance Last week’s range
AUD/USD    .9645     .9500    .9700    .9620 - .9899

The AUD saw some appreciation against the GBP last week. It was an interesting week for this pair in what was a battle of weakening currencies for the most part. This week sees a distinctly central bank focus. The RBA start the ball rolling with their decision tomorrow. Australian GDP comes on Wednesday, ahead of the employment numbers on Thursday. On Thursday the BOE make their monetary policy decision, with debate being on whether or not their QE program will be increased at this juncture. Volatility can be expected this week, and the pair starts out with the AUD at the upper end of the last months somewhat contained range (.6181/.6331 – 1.5795/1.6178).
  Current level Support Resistance Last week’s range
AUD/GBP    .6276    .6250    .6450   .6219 - .6331
GBP/AUD    1.5934    1.5500   1.6000 1.5795 - 1.6080

The AUD saw a little pressure from the EURO last week as it gave up some of its recently made ground. The pair remains within its familiar broad range of .7700/.7900 (1.2660/1.2990) that we have seen for the last six weeks or so. Both central banks are in focus this week with monetary policy decisions. In Australia the RBA start of with their decision tomorrow. The market has priced at least a 25pt cut to the current 3.75% cash rate. This decision is followed the first quarter GDP number on Wednesday, and the latest employment numbers Thursday. It is the turn of the ECB on Thursday, with a chance that the term funding operations for banks could be extended. It is likely the pairing will continue to lack general direction ahead of the Greek election on the 17th June.
  Current level Support Resistance Last week’s range
AUD/EURO    .7777    .7750   .7950     .7768 - .7892
EURO/AUD   1.2858   1.2580   1.2900   1.2671 - 1.2873

The AUD saw further pressure from the rampant Japanese YEN last week. The wider market risk aversion was strong and drove a good portion of the moves. Weaker than expected data to start the week eased the way for the YEN appreciation initially. This week is most of the focus will come from Australia. The RBA monetary policy decision starts things off tomorrow. Wednesday the first quarter GDP numbers are released and are followed by the employment numbers on Thursday. In Japan the current account and final read of the GDP numbers are due on Friday, but should be of limited impact. Further YEN appreciation from current levels should be harder fought, assuming not global meltdown occurs this week.
  Current level Support Resistance Last week’s range
AUD/YEN    75.38     75.00    77.00    75.19 – 78.66

The AUD continued its recent stablisation against the CAD. Both currencies saw periods of sustained pressure on other pairings, so this pair was a battle of the vulnerable. This week sees an incredibly busy economic calendar. In Australia the RBA start proceedings with their monetary policy decision tomorrow, with a cut of at least 25pts to the current cash rate of 3.75% expected. Wednesday sees the release of the first quarter GDP figures and Thursday the monthly unemployment numbers. In Canada the BOC will likely announce unchanged monetary policy on Tuesday. This is followed by manufacturing numbers Thursday and the employment numbers on Friday.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0063     .9950    1.0150    .9965 - 1.0116


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