Weekly FX Update - 2nd July 2012

Monday 2 July 2012, 4:20PM
By Direct FX

By Sam Coxhead of

Market Overview:
As the markets patiently waited for the EU summit last week, the expectations were not great. There had been little in the way of progress from previous summits, so the market positioned itself for disappointment. Then came the news of progress. Direct long term support for struggling banks from the European Stability Mechanism (ESM), with European wide banking supervision to come from the ECB. This decoupling of pressures into separate banking and sovereign issues, paves the way for recovery of peripheral member debt markets overtime. The credit rating agencies have already commented that the scheme will materially take pressure off the government debt loads. There are still many details to be drawn up and issues to be sorted out, but these moves are positive and take away the immediate pressures on Government funding costs.

The market’s reaction has been to rush into risk assets. This indicates the markets positioning heading into the summit. Commodities rallied higher with oil up over 8% in Fridays offshore session. Equity markets raced higher led by European bourses and eased by sound economic data in the US. Whether or not the gains can be sustained remains to be seen, but the near term uncertainty has materially reduced. This week the focus  turns back to various monetary policy meetings. Expect easier monetary conditions from both the Bank of England (BOE) and the European Central Bank (ECB), as economic growth measure receive renewed attention.

There was little of Australian domestic focus last week. Private sector credit numbers were as expected and new homes sales were down on the previous month, but still in positive territory. Indirect influence from China came as various reports point towards further stimulation to support their slowing economy. This comes as the latest official Chinese manufacturing numbers point towards a return to growth in the sector. In Australian this week the focus is varied from building numbers and the RBA monetary policy decision tomorrow, to retail sales numbers Wednesday and the trade balance Thursday. The RBA are expected to leave the cash rate unchanged at 3.50% at this meeting, but as usual their accompanying statement will be closely watched.

New Zealand
It was a relatively quiet week in New Zealand for economic data. The NBNZ Business Confidence survey revealed an unsurprising fall in business confidence. Given the uncertainty in offshore markets over the last few months, this was to be expected. Interestingly trade balance figures show increased exports and imports, pointing towards more activity than expected in the 2nd quarter. This week sees another week lacking any top tier economic data. There has been latent demand for NZ dollars over the last couple of weeks, and this should continue, if the wider market improvement in risk appetite continues.

United States
It was an interesting week for US economy observers last week. Importantly, the housing market continues to show signs of life. This materially should impact on sentiment over time, even if consumer sentiment gauges continue to see pressure in the short term. Durable goods order numbers were mixed and the final GDP number for the 1st quarter was unrevised at 1.9%. The primary inflation gauge watched by the FED came in below expectations. This further eases the way for future monetary stimulation if required. This week coming sees the focus move back to the labour market with the employments numbers on Friday the primary focus of the week. Manufacturing numbers later on today, and services numbers on Thursday will also be closely watched.

European stock markets reacted positively to the announcements made at the conclusion of the EU summit. Funding costs on the peripheral nations have reacted positively also, moving demonstrably lower. The ECB is the focus of the week and there is an expectation of finely seeing a cut to the cash rate from the ECB. A move of 25 points is expected, but there are some seeing potentially for a 50 point cut, to a cash rate of .5%. The EURO will again likely take its lead this week from how the Spanish and Italian bond markets behave, as they remain the primary indicator to sentiment in Europe in the short term.

United Kingdom
Last week was a quiet one for UK economic data. Public sector borrowing and trade deficit numbers were both higher than expectations, and comments from BOE officials were more downbeat than recent rhetoric. The European economy remains the primary concern and drain on UK growth aspirations in the short term. Expect another 50 billion GBP worth of quantitative easing (UK bond purchases to lower long term borrowing interest rates), at the BOE monetary policy meeting on Thursday. Also of note this week are manufacturing numbers late on Monday, construction numbers Tuesday and services data Wednesday.

Last week saw an interesting political landscape emerge in Japan. A positive vote to double the sales tax over the next few years saw the ruling party split and points to a likely leadership change in the short term. On the economic side the retail sales and household spending numbers were above expectations and deflationary pressure came in slightly less than forecast. Today has seen the important manufacturing numbers reveal that conditions have slowed by less than expected. The accompanying Services index was also positive, and shows stronger expectations for growth.  The positive reaction to the conclusions from the EU summit has seen the YEN weaken as risk sentiment improves and this will be very much welcomed by Japanese policy makers and exporters alike. However the YEN remains at extremely high levels, and further weakness will be needed to materially negate the current intervention risk of policy makers in the short term.

The long awaited focus for the Canadian economy last week was Fridays release of the slightly stronger than expected monthly GDP number. This week sees the focus again come on Friday with a raft of data due. The latest building and manufacturing numbers are accompanied by the important employment numbers, with the unemployment rate expected to be static at 7.3%.

Major Announcements last week:
•         EU summit progress well received by market
•         US pending Home Sales 5.9% vs 1.2% expected
•         NZ NBNZ Business Confidence 12.6 vs 27.1 previous
•         US Durable Goods Sales +.4% vs +.9% expected
•         Japanese Retail Sales and Household Spending stronger than expected
•         UK Q1 GDP unrevised at -.3%
•         US Q1 GDP number unrevised at +1.9%
•         US PCE Price Index (inflation) +.1% vs +.2% expected

For the most part the NZ dollar was supported against the US dollar last week. It dipped to the lows in a period of fierce risk aversion just prior to the conclusion of the EU summit, but for the most part there was again the latent demand that we have seen over the last couple of weeks. The increased risk appetite following the positive steps taken in Europe saw the NZD rise rapidly on Friday, matching the EURO in its strength. Having consolidated above the psychological .8000, further headway cannot be ruled out in the short term, but the ground should be harder fought. The focus should now move back to growth prospects and the better than expected Chinese manufacturing data released during the weekend was encouraging. With a lack of NZ data this week, US economic data will be of primary focus for this pair. Of particular note are the employment numbers on Friday, with an unchanged 8.2% employment rate expected.
  Current level Support Resistance Last week’s range
NZD/USD    .8015     .7900    .8100   .7847 - .8035

This pair remains in its familiar range. The NZD initially saw demand early last week, before softening as the week progressed. With little in the way of material economic data in either economy, the move looked to be more about positioning ahead of this week’s RBA meeting. The RBA should leave the cash rate unchanged at 3.50% at this meeting, and further easing is less likely following the EU summit. This paring back in expectations of further easing, may prove to be temporary, but it will be AUD supportive none the less. The RBA statement accompanying the rate decision tomorrow, will be the key for direction this week.
  Current level Support Resistance Last week’s range
NZD/AUD    .7836     .7780    .7980    .7781 - .7886
AUD/NZD   1.2761    1.2531   1.2850  1.2681 - 1.2852

The NZ dollar remained in demand against the Pound Sterling last week. Gains from current levels will prove to be more hard fought, but the fundamentals do remain on the side of the NZ dollar in the short term at least. Chinese manufacturing numbers released over the weekend show a return growth in that sector and this kind of sentiment is NZD supportive. The main focus of the week will be the BOE monetary policy meeting on Thursday, but we do have UK manufacturing and construction numbers ahead of that. The market has currently priced in 50 billion GBP for additional QE from the BOE, and any other result will garner a marked reaction.
  Current level Support Resistance Last week’s range
NZD/GBP      .5119     .4950   .5150    .5038 - .5125
GBP/NZD     1.9535    1.9420   2.0200   1.9513 - 1.9849

The staggering bounce in demand for the NZD against the Canadian dollar continued last week, albeit the pair has signs of slowing momentum. The surprisingly positive result from officials at the EU summit prompted the extension on the recent move. Further appreciation should be harder fought from the current levels, as the focus back on global growth comes to hand. Also the lower probability of further QE from the FED, in the short term, should be CAD supportive also. In the absence of any NZ economic data this week, the majority of the lead will come from the wider market sentiment ahead of the raft of Canadian data due for release on Friday.
   Current level Support Resistance Last week’s range
NZD/CAD    .8165    .8000   .8200   .8063 - .8195

The NZ dollar saw further appreciation over the EURO last week, ahead of the EU summit. The release of the EU summit decisions saw the EURO in hot demand and push the NZD back from its highs, albeit not by much. The pairing remains with the NZD at elevated levels, and not far from the all time .6411 high (1.5598 lows) for the pair. This week sees Europe again dominate the focus in the absence of any material economic data in New Zealand. The ECB are expected to cut the cash rate from its present 1.0% to .75% or even .5%. Obviously the current levels offer great value buying of EURO from a historical perspective. Any material recovery for Europe will take years, so we can expect the NZD to remain at somewhat elevated levels against the EURO form sometime yet.
  Current level Support Resistance Last week’s range
NZD/EURO     .6349     .6200    .6400      .6268 - .6374
EURO/NZD     1.5750     1.5625   1.6130    1.5689 - 1.5954

The NZD saw pressure from the Japanese YEN in the build up to the EU summit last week. With low expectations of the EU summit the market wide risk aversion was the driving force behind the NZD underperformance. The positive outcome from the EU summit saw the NZD rapidly appreciate against the YEN as market sentiment leapt. This week sees the pair start close to the recent highs and the lead will again come from the wider market risk appetite in the absence in top tier economic data in either economy after this morning’s positive Japanese services and manufacturing data.
  Current level Support Resistance Last week’s range
NZD/YEN    63.94     63.00   66.00    62.21 - 64.21

Last week this pair saw mostly sideways trade ahead of the EU summit, in what was mostly uneventful trading. Following the positive moves at the summit the AUD has seen some solid appreciation against the US dollar. However, further ground from the current levels seems likely to be harder fought. The weekends release of the latest manufacturing numbers in China show a surprising return to growth for the sector, but these have not been enough to entice further AUD demand at this stage. Tomorrows RBA monetary policy decision will most likely see the cash rate unchanged, but the accompanying statement will be closely watched none the less. Australian retail sales numbers on Wednesday and trade balance Thursday round out the Australian focus. In the US there is the usual myriad of economic data releases. The primary focus will be the employment numbers on Friday, with the unemployment rate expected to remain unchanged at 8.2%.
  Current level Support Resistance Last week’s range
AUD/USD    1.0226     1.0080    1.0280    .9965 - 1.0269

Last week saw the Australian dollar outperform the Pound Sterling. After seeing some initial weakness it was almost one way traffic that accelerated once the details of progress at the EU summit emerged. Further progress from the current level is likely to be harder to gain for the AUD. The respective central banks both have monetary policy decisions to announce this week. On Tuesday the RBA will likely announce unchanged monetary policy, but their statement will be closely read. Thursday sees the release of the BOE’s decision, with the market currently pricing an additional 50 billion GBP worth of QE to be announced. Current levels certainly offer good value buying of GBP with AUD.
  Current level Support Resistance Last week’s range
AUD/GBP    .6530    .6350    .6550   .6406 - .6540
GBP/AUD    1.5314    1.5270   1.5750 1.5291 - 1.5610

Last week the Australian dollar saw solid appreciation against the under pressure EURO ahead of the EU summit. The surprisingly positive news to come from the summit has stemmed the AUD’s progress for the time being. Both the ECB and RBA have monetary policy announcements this week. The RBA will likely release an unchanged decision tomorrow, although the accompanying statement will be closely monitored. The ECB are poised to cut their cash rate now that the politicians have committed to making changes to help Europe’s desperate situation. It is likely the ECB will cut the cash rate 25pts to .75%. It is hard to see any material EURO bounce in the short term, as the EU summit policy changes will take up to a year to put in place. That aside, current levels offer good value buying of Euro with Australian dollars.
  Current level Support Resistance Last week’s range
AUD/EURO    .8100    .7950   .8150     .7984 - .8110
EURO/AUD   1.2346   1.2270   1.2580   1.2330 - 1.2525

The Australian dollar was weaker against the YEN ahead of the EU summit last week. Downbeat wider market sentiment drove the YEN outperformance. The release of the EU summit progress saw the market rapidly scramble to cover risk aversion positions. This pushed the AUD dramatically higher against the YEN in what was almost one way traffic. The pair finally consolidated at the 82.00 resistance and that remains the next hurdle for further AUD appreciation. After today’s reasonable Japanese manufacturing and services numbers the RBA monetary policy decision tomorrow is the focus. It will likely see an unchanged cash rate announced, but as always, the measured RBA observations will be closely followed. Retail sales numbers on Wednesday will also be watched, but are unlikely to be of material impact.
  Current level Support Resistance Last week’s range
AUD/YEN    81.57     80.00    82.00    79.27 - 82.03

This pairing saw sideways trade ahead of the EU summit last week, in the absence of any material economic data in either economy. The release of the EU summit progress saw the AUD in demand as the wider market appetite for risk increased markedly. The close to expectation Canadian GDP number on Friday was of limited impact, but coincided with the AUD slowing in momentum. This week sees the focus start tomorrow with the release of the RBA monetary policy decision. Expect an unchanged 3.75% cash rate, but the accompanying statement will be closely followed. In Canada the data all comes on Friday with the building data, employment numbers and finally manufacturing results. Any further progress from the AUD will be much harder made for the AUD from the current levels, which offer very good value buying of CAD.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0418     1.0250    1.0450    1.0271 - 1.0456


Originally posted at the direct FX website