Weekly FX Update - 16th July 2012

Monday 16 July 2012, 5:28PM
By Direct FX

By Sam Coxhead of

Market Overview:
The financial markets saw mostly unremarkable price action throughout the course of last week. Little has changed on the global landscape, with both economic growth fears and credit availability remaining significant hurdles to the improvement of the near term economic outlook. The economic data flow remains mixed in the United States and Asia, while most indicators Europe and the United Kingdom remain under pressure. In Australian and New Zealand the somewhat surprising dislocation between the lowering growth expectations and the demand for Australian and New Zealand dollars continues. The all important Chinese economy has slowed as expected. Inflationary pressure has eased to 29 month lows and 2nd quarter GDP hit 7.6%. The trade surplus was wider than expected, pointing towards lower domestic demand for imports.  The overall global market conditions continue to point towards further sluggish activity for the remainder of 2012. This eventuality would be seen as a good result by many when compared to the downside risks at play.

The domestic focus for the Australian economy last week was the release of the softer than expected employment numbers. Lower fulltime employment numbers would be of concern if they continue as a trend. The raft of Chinese data last week provided a strong external focus for the Australian dollar market. There was certainly evidence of relief when the GDP numbers came in largely on expectation on Friday. This week’s focus comes almost solely on Tuesday with the release of minutes from the latest Reserve Bank of Australia’s (RBA) monetary policy meeting. Any further moves towards further stimulation from either the Peoples Bank of China (PBOC) or the US Federal Reserve (FED) in the short term would certainly lead to further demand for Australian dollars, and this factor has likely shielded the AUD from further downside moves in recent weeks.

New Zealand
There was a lack of domestic focus for the New Zealand economy last week. The Chinese numbers were of influence to the price action of the NZD, as were the Australian employment numbers to an extent. This week sees the focus on Tuesday’s release of the 2nd quarter CPI inflation numbers. The expected level of .5% for the quarter would garner little reaction as it puts the annual number in the middle of the Reserve Bank of New Zealand’s targeted band. The external focus will come from the release of the RBA monetary policy meeting minutes on Tuesday, and FED Chairman Bernanke’s testimony on Capitol Hill. Expectations for any move from the RBNZ at next week’s monetary policy meeting, where they set the NZ official cash rate, are very limited.

United States
Last week’s release of the minutes from the latest FED monetary policy meeting confirm that further quantitative easing (QE) initiatives remain an option. This week sees the release of the usual raft of economic data in the US, but the Bernanke semi-annual monetary policy testimony on Capitol Hill will be the focus. The minutes point towards strong debate within the monetary policy decision makers, so the comments from board chairman Bernanke will be closely watched. Retail sales numbers on Tuesday and manufacturing data Thursday will also be of focus.

It was interesting in Europe last week. The debt markets for Italy and Spain saw improvements in the face of a struggling EURO currency. ECB head Mario Draghi commented the near term data would decide if further stimulation was required. This week’s inflation number should not provide any hurdle as global inflationary pressure remains lows for the most part. Important German business sentiment numbers come on Tuesday. The increased level of bailouts still require court approval in Germany and this is a subject that may find more significant air time in the near term. Any kind of legislative hold up would prove uncomfortable for the wider EU membership, especially coming from its most important member. Last week’s ECB monthly bulletin revealed the acknowledgement that various downside risks have materialized. They also point out that they still have tools to use to help economic growth so long as inflationary pressure remain contained.

United Kingdom
The UK economy continues to struggle for growth as the housing and employment markets remain under pressure. Interestingly the new joint Bank of England and Treasury initiative has been announced. The Funding for Lending Scheme (FLS) should provide up to 80 billion GBP of fresh lending at varied rates. These kinds of non-traditional ideas should become more common in the coming years, especially if they prove successful. The UK inflation number on Tuesday will be closely watched as usual. The recent relative strength of GBP against the EURO should keep the recent downward pressure alive much to the comfort of BOE policy makers. The BOE monetary policy meeting minutes come on Wednesday, and retail sales Thursday, ahead of the preliminary 2nd quarter GDP numbers next week.

The Bank of Japan (BOJ) left monetary policy unchanged last week as expected. The trade data last week revealed that domestic demand is holding up relative to the export demand, so any further stimulation would be better kept for times when more stress is evident. The recent and material pull back from the YEN highs will have been a factor, but whether or not the pull back can be maintained is the key question. This week sees the release of the minutes from last week’s monetary policy meeting and these will be the sole focus in Japan for the week, ahead of trade balance, retail sales and inflation numbers next week.

It was a quiet week in the Canadian economy. This week is more active with manufacturing numbers just prior to what should be an unchanged monetary policy decision from the Bank of Canada (BOC) on Tuesday. Wednesday sees the release of the Monetary Policy Report and press statement ahead of the inflation numbers on Friday. Next week is again quiet in Canada with just the monthly retail sales numbers on Tuesday.

Major Announcements last week:
•         Chinese Inflation 2.2% vs 2.4% expected
•         UK Manufacturing +1.2% vs +.1% expected
•         Australian Employment -27k jobs (Unemployment rate 5.2% as expected)
•         BOJ leaves monetary policy unchanged
•         Chinese GDP 7.6% vs 7.7% expected
•         Italy sees strong demand for bonds at auction
•         UK- BOE/Treasury announce Funding for Lending Scheme (FLS).
•         US Much. Consumer Sentiment Survey 72.0 vs 73.5 expected

Last week this pair continued to trade in its recently familiar .7850 - .8050 broader range. The conflicting forces of lower global growth forecasts and increased central bank monetary stimulation are extending this period of sideways movement. In the absence of any heavy flow, the broader range is likely to contain the price action again this week. The Bernanke testimony to policy makers on capitol hill will be the primary focus for the week in the US. Any increased chances of additional  FED QE would see the NZD push topside resistance at .8050, but that seems unlikely at this time in my view. NZ CPI inflation data should be of limited impact tomorrow, with the high level of the NZ dollar ensuring an easy job for the RBNZ controlling inflation in the current environment.
  Current level Support Resistance Last week’s range
NZD/USD    .7960     .7850    .8050   .7857 - .8002

This pair remains in familiar territory. Having been pushed down through support at NZDAUD .7830 (AUDNZD 1.2770 topside resistance), this level now becomes a target for any NZD appreciation. It is likely that the AUD will prove the driving force in the short term. The NZ inflation numbers are likely to be uneventful, so the RBA  will be the week’s primary focus. With last week’s fall in the full time employment numbers in Australia unable to make material changes to the rate for this pair, expect further contained tight price action for this pair. The initial support and resistance will likely come in at the .7760 - .7830 (1.2770 - 1.2885) levels this week.
  Current level Support Resistance Last week’s range
NZD/AUD    .7787     .7700    .7900    .7738 - .7818
AUD/NZD   1.2842    1.2660   1.2990  1.2791 - 1.2923

The NZD gave up ground to a relatively perky GBP last week. This week sees the focus remain in the UK for the most part. The NZ inflation numbers on Tuesday are likely to be of limited impact, with the inflation rate comfortably within the RBNZ targeted 1-3% band. UK inflation numbers later on Tuesday have a higher chance of impact. Stubbornly high pressures over the last few years has been a constant menace for the BOE, and for this reason the release will be closely watched. The monthly employment numbers and BOE monetary policy meeting minutes are released on Wednesday, ahead of retail sales on Thursday. Initial support at NZDGBP .5080 (GBPNZD resistance 1.9685) provides the first target for any further Pound Sterling appreciation.
  Current level Support Resistance Last week’s range
NZD/GBP      .5112     .5000   .5200    .5087 - .5152
GBP/NZD     1.9562    1.9230   2.000   1.9410 – 1.9658

The NZ dollar has finally ceded some of its recently gained ground against the Canadian dollar. The focus this week will be mainly Canada based, with just the predictably benign NZ inflation numbers to be released on Tuesday in NZ. Tuesday also sees the release of the latest BOC monetary policy decision ahead of the monetary policy report and press conference on Wednesday. The monthly inflation numbers round out what should be an interesting week in Canada. Expect the NZD to struggle to make any material ground against the CAD this week, with the wider .8000 - .8200 range likely to contain the price action.
   Current level Support Resistance Last week’s range
NZD/CAD    .8075    .8000   .8200   .8026 - .8144

This pairing had another week of relative volatility, with the NZD remaining close to the record all time highs. It is certainly more a case of relative EURO weakness, as opposed to any material outright NZ dollar strength. The EURO is under pressure from all sides and any unlikely correction could prove to be swift. The EURO struggled to attract demand last week, even in the face of improving Italian and Spain debt markets, and this will be something to watch this week. The Inflation numbers in NZ on Tuesday should be of limited impact, as will the business sentiment numbers in Germany. Current levels certainly still represent great value buying of EURO with NZ dollars from an historical perspective.
  Current level Support Resistance Last week’s range
NZD/EURO     .6503     .6330    .6530      .6440 - .6520
EURO/NZD     1.5378     1.5310   1.5800    1.5337 - 1.5530

After initially seeing further sideways trade last week, this the NZ dollar saw pressure from the Japanese YEN following the weak Australian employment numbers. The NZ dollar did manage to make a grinding recovery from the lows, but has started the week under a little pressure once again. This week the pair will be again driven by the wider market appetite for risk. The risk appetite provides the lead in an absence of material Japanese economic data, and after what should be a benign inflation number in NZ on Tuesday. The 62.30 level provides a reasonably substantial support level and initial target for  any NZD weakness, and should be considered when making transfers between NZD and YEN this week.
  Current level Support Resistance Last week’s range
NZD/YEN    62.95     62.30   64.30    62.29 – 63.66

This pair continues to trade within its wider 1.0000 - 1.0300 range that has eventuated over the last month or so. Last week saw volatile price action within this contained range. The weaker full time employment number in Australia saw the AUD aggressively sold before it was able to stage a recovery into the end of the week as the equity markets gained some momentum. This week sees the RBA monetary policy meeting minutes on Tuesday the focus in Australia. In the US there is a busy economic calendar to maintain the focus. Monday sees the release of the retail sales numbers. Tuesday the latest inflation data as well as the start of a two day testimony at Capitol Hill by the FED chairman Bernanke, that will be the highlight of the week. Also of note is the Philadelphia FED Manufacturing Survey results on Thursday. Given the current resistance of the FED to commit to further QE initiatives, the AUD is starting to look somewhat vulnerable amongst a back drop to patchy growth indicators in Asia. From a risk rewards perspective, current levels look to offer good value buying of US dollars with AUD in my view.  
  Current level Support Resistance Last week’s range
AUD/USD    1.0219     1.0100    1.0300    1.0096 - 1.0284

The Australian dollar finally started to show signs of lethargy against the Pound Sterling last week. Weak fulltime employment numbers in Australia provided the bulk of the pressure to take the AUD off its highs. The initial support at AUDGBP .6540 (GBPAUD 1.5290 resistance) has held for the time. This week sees the RBA monetary policy meeting minutes on Tuesday the focus of the week in Australia. In the UK the monthly inflation numbers come later on Tuesday, ahead of the BOE’s monetary policy meeting minutes on Wednesday, and retail sales numbers on Thursday. Given the price action, and outlook for Australian trading partners in Asia, current levels offer good value buying of GBP with AUD from a historical perspective.
  Current level Support Resistance Last week’s range
AUD/GBP    .6563    .6420    .6620   .6542 - .6614
GBP/AUD    1.5237    1.5106   1.5576 1.5119 - 1.5286

The Australian dollar set all time highs against the beleaguered EURO last week. The AUD was pushed from the historic peak by the weak full time employment numbers released on Thursday. The ensuing 100 point sell off did not last long, as the equity markets finished the week on a positive note and dragged the Australian dollar higher. This week sees the Australian economic focus fall on the RBA monetary policy meeting minutes release on Tuesday. In Europe the economic focus comes on the German business sentiment numbers also on Tuesday. Current levels obviously represent great value buying of EURO with AUD from a historical perspective. Given the high level of “sold EURO” positions apparently in the market, any EURO correction, could be steep and swift, even if only for a short time.
  Current level Support Resistance Last week’s range
AUD/EURO    .8350    .8180   .8380     .8262 - .8376
EURO/AUD   1.1976   1.1930   1.2225   1.1939 - 1.2104

The AUD saw sudden pressure from the YEN last week following the release of the weak fulltime employment numbers on Thursday. The AUD recovered half of the lost ground as the equity markets managed to finish the week on a positive note and dragged the AUD from its lows. This week has started with further risk aversion placing pressure on the AUD ahead of the release of the RBA monetary policy meeting minutes which provide the focus for the weeks trade on Tuesday. The Japanese economy has little economic data of note to watch for this week, so the demand for the YEN will be lead again by the wider market risk appetite, or lack of as the case may be. The level of 80.00 provides the initial target for any increased risk aversion observed in this pairing.
  Current level Support Resistance Last week’s range
AUD/YEN    80.83     80.00    82.00    80.02 - 81.79

After initially seeing further AUD appreciation last week, the AUD came under intense selling pressure following the release of the weak fulltime employment numbers on Thursday.  The pair bounced from the lows of the week to end 50 points higher as the Australian dollar was dragged higher by a positive end to the week in the equity markets. The RBA monetary policy meeting minutes provide a brief Australian focus for the week. In Canada the BOC provide the focus with their monetary policy decision on Tuesday, and the following Monetary Policy Report and press conference on Thursday. The week is rounded out with Canadian monthly inflation numbers on Friday. Expect any further AUD appreciation to be hard fought in the current environment, and current levels offer good value buying of CAD with Australian dollars.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0367     1.0300    1.0500    1.0312 - 1.0466

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