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ECONOMY

Weekly FX Update - 11th June 2012

Monday 11 June 2012, 5:09PM
By Direct FX
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By Sam Coxhead from www.directfx.co.nz

Market Overview:

Last week had the potential to be a very interesting one for financial markets, and it certainly did not disappoint. The pressure building in Spain has finally given way and the Spanish Government has requested assistance from the EU for the banking sector. The assistance will likely be to the tune of 100 billion Euro’s. So Spain officially becomes the fourth Euro-zone member to receive assistance, if under somewhat different circumstances. Isolating the assistance to the banking sector will mean fewer concessions will have to be made. The Spanish approach for bank sector support is positive, if the Greek electorate can take its medicine and vote for the centre right pro-austerity parties then another step towards a more certain European future will have been taken. Elsewhere in the markets the central banks provided a high level of focus. The Reserve Bank of Australia (RBA) cut their cash rate as expected, and the Peoples Bank of China (PBOC) also cut by 25pts, to help their slowing economy. The Bank of England (BOE) and European Central Bank (ECB) held monetary policy unchanged for the time being, as did the Bank of Canada (BOC) which was expected. Certainly further central bank easing of monetary conditions is expected throughout the remainder of 2012, and this helped growth assets recover some of their lost ground in the latter half of the week.
Australia
The RBA’s 25pt cut to a new cash rate of 3.50% was within market expectations. The positive Q1 GDP numbers and monthly employment report saw demand for the AUD pick up demonstrably. These positive numbers coupled with the rate cut from the PBOC, provided a strong lead for the AUD to reverse some of its recent weakness. Certainly as the Chinese economy looks to have growth slowing to around the 8% level, and inflation confirmed at 3%, further stimulation for the Chinese economy is not out of the question and this will directly impact on Australian exporters. Of note were also comments from Treasurer Swan that Australia has ample room for fiscal stimulus, should conditions warrant it. This week is relatively light on economic data in Australia, so the lead will again come from the wider market risk appetite.
 

New Zealand
The New Zealand economy was somewhat off the radar last week. But of note was the bounce in diary prices at the latest Fonterra auction. The 13.5% rise in prices will be of welcomed relief to NZ’s largest export sector, that saw prices drop 40% from their peak not long ago. The rate cut in China will also be seen as a positive for the NZ dollar by international investors, as the Chinese market becomes ever more important for NZ exporters. This week’s focus is of course the Reserve Bank of New Zealand’s (RBNZ) monetary policy decision on Thursday. Money market pricing puts the odds at a 20% chance of an easing of 25pts. To my mind any easing will not likely come from the RBNZ, in the absence of a full blown return to turmoil in Europe. The pending Greek election on June 17th will be key to developments in the short term.
 

United States
Last week the economic news was mixed in the US. Factory orders were materially weaker than forecast, but the latest services numbers were relatively strong. There was a flora of FED rhetoric in the headlines, with the majority of it again pointing towards further quantitative easing if required. FED Chairman Bernanke made a balanced report on Capitol Hill, in his testimony on the economic outlook. Certainly Europe presents obvious concerns, but he stated the FED has options it can consider. This week’s focus starts with the monthly retail sales and producer price numbers on Wednesday. The latest inflation numbers come Thursday and consumer confidence on Friday.
 

Europe
News over the weekend that Spain has officially asked for assistance for its banking sector has come as some relief to the market. Whilst the mechanics of the package will take time to finalise, it does seem logical to remove the uncertainty surrounding Spain ahead of the Greek elections this coming weekend. The ECB kept their monetary policy powder dry last week, in what appears to be a prudent wait and see approach in the short term. Further policy accommodation is likely to come sooner in some form or another. The EURO has seen some demand to start the week so far. It is unlikely we will see a sustained EURO rally ahead of the coming weekends elections, as they rightly represent significant event risk for the EURO. Inflation numbers on Thursday, provide the data highlight for the week in Europe.
 

United Kingdom
The BOE held monetary policy unchanged last week, and we will have to wait for next week’s meeting minutes for a breakdown of that decision. It seems likely that further quantitative easing will be forth coming at some stage, and this fact has been weighing on GBP demand of late. On a positive note UK services data on Thursday was stronger than expected. This week sees manufacturing numbers on Tuesday and a speech from BOE Governor King late Thursday. Given the close correlation between the UK and Europe, any material bounce in the fortunes of the GBP, seems unlikely ahead of the Greek elections this weekend.
 

Japan
Rhetoric from Japanese finance officials with regards to the strength of the YEN continued last week. The bounce in risk appetite assisted the YEN lower which will have been welcomed by Japanese exporters. Of note was also an upward revision in the Q1 GDP numbers from 1.1% to 1.2%. The Bank of Japan comes into focus later this week with their monetary policy decision due at some stage on Friday.
 

Canada
The BOC kept the cash rate unchanged as expected last week. A dramatic fall in monthly building permit numbers was balanced by very strong manufacturing numbers released on Thursday. The labour market remains steady with the 7.3% unemployment rate, which was expected. There is little in the way of top tier economic data this week.

Major Announcements last week:
•         Peoples Bank of China cut the cash rate 25pts for first time since June 2008
•         Spain formally requests EU assistance for its banking sector
•         RBA cut the cash rate 25pts to 3.50%
•         BOC, BOE and ECB all leave their cash rates unchanged
•         Australian GDP 1.3% vs 0.5% expected
•         Australian Employment +38.9k and unemployment rate 5.1% as expected
•         US services PMI 53.7 vs 53.6 expected
•         Canadian Manufacturing PMI 60.5 vs 53.5 expected
•         Chinese inflation 3.0% vs 3.2% expected

      
NZD/USD 
The NZ dollar saw some strong demand against the US dollar last week. This demand was driven by a return to risk assets spurred on by the dual proposition of better than expected Australasian data and further central bank stimulus. The Spanish request of the EU for funding for its stressed banking sector has added further to the NZD rise over the weekend. It seems likely that further moves higher will be harder fought from current levels for this pair. The focus for the week now starts in the US, with monthly retail sales number on Wednesday. Thursday sees the RBNZ announce their monetary policy decision. It will likely be unchanged, but expect acknowledgement of the potential risks to growth from the European debt crisis and slowing Asian economy. Later on Thursday in the US, the inflation numbers will be closely watched, as will consumer sentiment numbers on Friday. Consolidation back through the .7800 level is the initial target for a further move higher. Expect volatility to continue, ahead of the upcoming Greek elections on the 17th.
  Current level Support Resistance Last week’s range
NZD/USD    .7766     .7600    .7800   .7497 - .7789

NZD/AUD (AUD/NZD)
This pair has continued to trade in an orderly fashion. The pair remains stuck in its recent and now familiar .7700 - .7830 (1.2770 - 1.3000) range. Contracting interest rate differentials should see the NZD outperform in the coming weeks. The caveat being as long as the RBNZ is not too dovish with its comments accompanying what should be an unchanged monetary policy decision on Thursday. There is little top tier Australian data to watch for, so expect the RBNZ meeting to dominate the focus for this pairing again this week.
  Current level Support Resistance Last week’s range
NZD/AUD    .7783     .7700    .7900    .7715 - .7798
AUD/NZD   1.2849    1.2660   1.2990  1.2824 - 1.2962

NZD/GBP (GBP/NZD)
The NZ dollar again outperformed the GBP last week. The performance has been a continuation of its recent bounce. The move has been driven by a number of factors. Firstly, the latest Fonterra dairy auction was NZD positive as the prices jumped 13.5%. Secondly, the NZD has been boosted by the increasing probability for widespread central bank loosening of monetary policy. GBP demand has  fallen as the market has increased the probability that the BOE would increase its QE program once again. This week in the UK there are manufacturing numbers on Tuesday and BOE Governor King makes a speech on Thursday that will be closely watched. In NZ the focus comes from the RBNZ monetary policy decision on Thursday. Expect no change to the cash rate, but the accompanying statement will be closely watched.
  Current level Support Resistance Last week’s range
NZD/GBP      .4993     .4850   .5050    .4885 - .5013
GBP/NZD     2.0028    1.9800   2.0620   1.9948 - 2.0471

NZD/CAD
The NZD outperformed the CAD throughout the course of last week. Demand was driven by two factors. Firstly economic data in Australasia was stronger than expected. Secondly the probability of further QE of some kind from the US FED, has increased and this has seen the CAD dragged lower with the USD, and the NZD again benefit. However, further progress from the NZ dollar will certainly be more hard fought. The primary focus for the pairing this week is the RBNZ monetary policy decision on Thursday. Whilst the decision is likely to be unchanged, the accompanying statement will be closely monitored.
   Current level Support Resistance Last week’s range
NZD/CAD    .7931    .7750   .7950   .7813 - .7959

NZD/EURO (EURO/NZD)
The NZ dollar saw further appreciation against the EURO last week. The general boost in growth assets was joined by some better than expected Australian data, and a bounce back in diary prices to the tune of 13.5%. The Spanish request for EU support of its banking sector has seen little change for the pair as both currencies moved higher in tandem. This week has two key events. Firstly the RBNZ monetary policy decision on Thursday. Secondly and more importantly will be the June 17th Greek election. A pro-austerity package vote for the centre-right would see EURO demand, but the latest polls point towards a very tight race. Expect volatility to increase to start next week.
  Current level Support Resistance Last week’s range
NZD/EURO     .6148     .6000    .6200      .6035 - .6168
EURO/NZD     1.6265     1.5875   1.6400    1.6213 - 1.6570

NZD/YEN (NZD/YEN)     
The NZ dollar bounced strongly against the YEN last week. Better than expected Australasian economic numbers coupled with an increased probability of further central bank stimulation drove the move. The weekends announcement of the Spanish request for banking sector support, has boosted the NZD further, along with other risk assets. There is a distinctly central bank focus for this pair this week. The RBNZ are due to make their monetary policy decision on Thursday, ahead of the BOJ decision on Friday. Expect no change from the RBNZ or the BOJ.
  Current level Support Resistance Last week’s range
NZD/YEN    61.85     60.50   62.50    58.58 - 61.98

AUD/USD
The AUD outperformed the USD last week. The two pronged attack of better than expected economic data and central bank loosening (or prospect of), drove the AUD demand. The weekends announcements that Spain has requested assistance for its banking sector, and the Chinese trade data, have pushed the AUD back towards its recent highs. Direction from current levels is unclear, but further upside from the AUD is likely to be harder fought. This will be especially true if the EURO comes back under renewed pressure. There is a lack of Australian domestic focus this week, so expect the US to provide the primary lead. Retail sales on Wednesday, inflation data on Thursday, and consumer sentiment Friday provide the focus. The Greek elections on the 17th will also be closely watched.
  Current level Support Resistance Last week’s range
AUD/USD    .9976     .9850    1.0050    .9625 - 1.0010

AUD/GBP (GBP/AUD) 
The AUD saw grinding appreciation last week. The better than expected GDP and employment data in Australia was joined by the increasing likelihood of further central bank stimulation around the world, and these factors paved the way for the AUD increase. This week could potentially see further volatility as we lead into the Greek elections on Sunday. There is little material economic data in either economy, so expect the lead to come from the wider market appetite for risk. Consolidation through the .6450 (GBPAUD 1.5500) level opens up the way for further AUD appreciation, albeit the ground would likely be harder fought.
  Current level Support Resistance Last week’s range
AUD/GBP    .6414    .6250    .6450   .6270 - .6444
GBP/AUD    1.5591    1.5500   1.6000 1.5518 - 1.5949

AUD/EURO (EURO/AUD)
The AUD saw further grinding appreciation over the EURO last week. Demand was driven from a two pronged attack. Firstly, the better than expected Australian GDP and employment numbers. And secondly the increasing likelihood of further quantitative easing from the major central banks. This week sees little in the way of top level economic data in either economy. Volatility may increase as we head into the weekends Greek elections. As mentioned above, the Spanish approach for bank sector support is positive, if the Greek electorate can take its medicine and vote for the centre right pro-austerity parties then another step towards a more certain European future will have been taken.
  Current level Support Resistance Last week’s range
AUD/EURO    .7897    .7750   .7950     .7761 - .7942
EURO/AUD   1.2663   1.2579   1.2903   1.2591 - 1.2885

AUD/YEN
The AUD saw strong appreciation against the YEN, to take back more of its recently lost ground. Speculation around further central bank monetary stimulation was joined by the stronger than expected Australian GDP and employment numbers and lead the move. Chinese trade numbers and Spanish approach to the EU have pushed the AUD back to the highs of the week. Direction from here will be primarily driven by the wider market risk appetite ahead of the BOJ monetary policy meeting on Friday. Expect further gains to be harder fought for the AUD, ahead of the weekend’s elections in Greece.
  Current level Support Resistance Last week’s range
AUD/YEN    79.45     78.50    80.50    75.21 – 79.73

AUD/CAD
The AUD saw further appreciation against the CAD last week, albeit with slowing momentum. Resistance at 1.0250 remains in place, and provides the initial hurdle for any further investigations higher. The positive Australian data, and increased likelihood of the further central bank monetary stimulation, drove the move. The prospect of further QE from the FED at some stage in 2012, will tame CAD demand in the short term. There is little in the way of top level economic data in either economy this week, so expect the lead to come from the wider market appetite for risk. Next weekend’s Greek elections will be a primary focus for the markets in the short term. A anti-austerity vote from the Greek electorate would likely lead to USD demand and the CAD would be dragged higher with it.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0187     1.0050    1.0250    1.0045 - 1.0251

 

Oringinally posted at www.directfx.co.nz