Weekly FX Update - 23rd July 2012

Monday 23 July 2012, 5:17PM
By Direct FX

By Sam Coxhead of

Market Overview:
The interesting environment continues to play out in the wider financial markets. Europe continues to stumble along. Growth is of an ongoing concern, and teamed up with the well established financial issues will maintain pressure on the EURO for some time to come. The Australasian currencies have direction being driven by two opposing forces. The slowing global growth outlook is most definitely a negative for the commodity currencies. The slowing global growth picture increases the chances of a slowdown in the US recovery, and increases the odd of further stimulation from the Federal Reserve (FED). Any increase in the stimulatory efforts from the FED are New Zealand and Australian dollar positive. These opposing forces are likely to continue to feature throughout 2012 and point towards a continuation of directionless trade within establish trading bands.

The Reserve Bank of Australia (RBA) monetary policy meeting minutes released last week were a little less down beat than expected. Further easing in the cash rate from the current 3.50% will be reliant on further slowing in economic conditions. Increased speculation around further central bank buying of Australian dollars underpinned demand for the AUD throughout the week. On Friday a lowering of Chinese 3rd quarter growth forecasts to 7.4% , and a lower EURO helped stem further appreciation of the AUD. This week’s focus sits primarily with the 2nd quarter inflation numbers due on Wednesday. Any result dramatically away from the +.6% market expectation will likely see a reaction from the interest rate market flow through into a change in AUD demand.

New Zealand
The 2nd quarter NZ inflation number were materially lower than expected. This provides the Reserve Bank of NZ (RBNZ) room to keep the cash rate lower if need to support economic growth. The latest Fonterra auction results were mixed. Ironically the outlook should improve as the continued drought in the US puts further pressure on the global grain markets, making the NZ grass fed dairy products more competitive. The focus this week is provided by the latest RBNZ monetary policy announcement. Expect no change from the RBNZ, and a short and concise accompanying statement. It seems like that the RBNZ will maintain its emergency low cash rate of 2.50% well into 2013.

United States
Economic indicators continued to show an again slowing economy in the US last week. Lower than expected construction, retail sales and manufacturing numbers were seen along with an .2% inflation number for the month of June. FED chairman Ben Bernanke made his semi-annual testimony on Capitol Hill on the economy and monetary policy. The testimony was unremarkable in that he has not altered from his recent rhetoric. Further monetary policy stimulation will be used if it is deemed appropriate. These comments seem to be keeping the US dollar from gaining momentum too fast, albeit seeing grinding appreciation against the beleaguered EURO. Undoubtedly this week’s focus will be Friday’s release of the 2nd quarter GDP numbers. The market expects 1.6% growth, although that maybe revised down following the weak series of data releases lately.

Spain has again come under serious scrutiny from the financial markets. Funding costs have again soared to record levels amid news that the EU have agreed the bailout package for the Spanish banks. An illustration of the concern is the fact that the Spanish equity market was 5.8% lower on Friday’s session alone. The wider situation remains horrible and this slow moving train wreck shows no signs of slowing down. This crisis is one of economic, financial and increasingly political issues. None of these are easily or quickly remedied. Last week German economic sentiment numbers dipped further and this week Europe wide manufacturing numbers are the focus.

United Kingdom
The UK inflation numbers were lower than expected when released last week. This eases the way for additional monetary stimulus if required and certainly eases pressure on the Bank of England (BOE). Also of surprise were the stronger than expected employment numbers, however these were countered by the continuation of weak retail sales figures. The BOE monetary policy meeting minutes were of interest because they revealed a voting split on the additional Quantitative Easing announced at the  meeting. Rather than pushing for 75billion as opposed to the 50billion delivered, two members voted for no additional easing at all. The sole focus in the UK this week will be the preliminary GDP numbers due for release on Wednesday. A number at the market expectation of -.2% would confirm a return to technical recession of contracting activity in two consecutive quarters.

The Bank of Japan (BOJ) monetary policy meeting minutes confirm that additional monetary stimulus remains a live option for the BOJ. The strong demand and level of the YEN remains a primary concern of policy makers and the rhetoric from the Ministry of Finance and Bank of Japan  confirm that further market intervention is likely at some stage. This week’s focus is the trade balance, retail sales and  inflation numbers. All three will be closely watched by the market.

The Bank of Canada did not surprise the market at their monetary policy announcement. The cash rate remains unchanged, as it will likely continue to be so until 2014. Monthly manufacturing numbers were softer than expected and are a good indicator of the staggering nature of the recovery. The volatile monthly inflation number show a sharper monthly fall than expected. Retail sales numbers will be the focus of the week coming and will be released on Tuesday.

Major Announcements last week:
•         US Retail Sales +.4% vs +.1% expected
•         NZ Inflation +.3% vs +.5% expected
•         UK Inflation 2.4% vs 2.8% expected (YoY)
•         German Economic Sentiment -19.6 vs -17.3 expected
•         US Inflation +.2% as expected (MoM)
•         Bank of Canada leave monetary policy unchanged
•         UK Retail Sales +.1% vs +.6% expected
•         US Philadelphia FED Manufacturing Index -12.9 vs -7.9 expected
•         Canadian Inflation -.4% vs -.1% expected

This pair was contained in a relatively tight range throughout the course of last week. The opposing forces of slowing global growth, and the prospect of further Quantitative Easing(QE- electronic printing of money) from the US Federal Reserve kept the volatility low, and this will likely continue for the most part this week. Expect initial resistance to come in at .8000 on any NZD attempts to appreciate. The weak EURO will likely weigh on the NZD dollar ahead of the RBNZ monetary policy meeting on Thursday.  Expect no change from the RBNZ. The accompanying measured statement should acknowledge international risks, but also firmer domestic prospects on the back of the developing Christchurch rebuild. On NZ dollar weakness, the .7800 level should provide reasonable initial support and should contain the price action for the week.
  Current level Support Resistance Last week’s range
NZD/USD    .7938     .7800    .8000   .7926-.8050

The NZ dollar remains under pressure from the Australian dollar. Further central bank buying of AUD has supported the AUD of late and it will be interesting to see if this continues. The paring back of expectation of further RBA cash rate cuts in the near term has also been an AUD supporting factor. This week sees the focus start in Australia with the quarterly inflation numbers, a higher than expected number would certainly see the AUD put further pressure on the NZ dollar. On Thursday the RBNZ will deliver an unchanged monetary policy decision. The accompanying statement should short and simple, and point toward s a stable cash rate for the next year or so. Current levels for this pair represent good value buying of NZ dollars with Australian dollars in my view. Consolidation below the very close support at .7700 (1.2990 resistance) would again be NZD negative in the short term.
  Current level Support Resistance Last week’s range
NZD/AUD    .7697     .7700    .7900    .7695 - .7789
AUD/NZD   1.2992    1.2660   1.2990  1.2839 - 1.2994

This pair traded a relatively narrow range last week. With the respective inflation numbers both coming in lower than expected, the price action was relatively subdued. The initial support level of .5080 (resistance 1.9685) remains the key in the short term. Various attempts at this level have failed so far, but its remains close to the current price level. Consolidation through this level would open up the way for further GBP strength. The focus this week comes in the form of preliminary GDP numbers in the UK on Wednesday, and the RBNZ monetary policy decision on Thursday.
  Current level Support Resistance Last week’s range
NZD/GBP      .5097     .5000   .5200    .5083 - .5133
GBP/NZD     1.9619    1.9230   2.0000   1.9482 – 1.9672

This pair traded a relatively contained range last week. The lower than expected NZ inflation numbers eased the pairing to the lows for the week, before the Australian dollar demand dragged the NZD higher with it by association. This week has seen the NZD start the week lower as the concerns emanating from Europe spread. The Canadian focus for the week comes in the form of the monthly retail sales number on Wednesday. The RBNZ monetary policy meeting on Thursday is the focus in NZ. Most likely the lead will come from the wider market appetite for risk, with the NZD underperforming if the concerns deepen in Spain. If NZD weakness does transpire, initial support comes in at the .8000 level.
   Current level Support Resistance Last week’s range
NZD/CAD    .8063    .8000   .8200   .8048 - .8111

The relentless push lower by the EURO continued throughout last week. Fresh records highs for the NZD against the EURO were set at .6586 (1.5184). The deepening concerns in Spain have driven the moves. Interestingly the NZD has started the week lower. These concerns in Europe obviously feed through to concerns for global growth, so it is logical that the NZD would give the EURO back some of its lost ground. This week will see renewed focus on the peripheral members in Europe with the economic data taking a somewhat back seat in proceedings. In NZ the RBNZ monetary policy decision on Thursday will be closely watched. Current levels again offer excellent value buying of EURO.
  Current level Support Resistance Last week’s range
NZD/EURO     .6554     .6400    .6600      .6474 - .6586
EURO/NZD     1.5257     1.5150   1.5625    1.5184 - 1.5446

This pair traded a very narrow band last week. Whilst the wider market saw periods of risk aversion, the NZD was supported by a buoyant Australian dollar that was in demand from various central banks. This week has seen the Japanese Finance Minister and BOJ head ramp up the intervention rhetoric, unfortunately the equity markets continue to slide and this has seen the NZD start the week under renewed pressure. The focus in NZ this week comes in the form of the RBNZ monetary policy announcement on Thursday. In Japan the trade balance on Wednesday, and inflation and retail sales on Friday will be closely watched.
  Current level Support Resistance Last week’s range
NZD/YEN    62.08     60.50   62.50    62.00 – 63.17

The Australian dollar saw decent central bank inspired demand last week. The move was relentless through until the offshore session on Friday when the beleaguered EURO dragged the AUD back from the highs. The risk aversion has continued into today’s session and the USD is in demand across the board. The Australian focus for the week will be the inflation number on Wednesday. In the US there are various releases due early in the week, but the real focus comes with the preliminary Q2 GDP number on Friday. In the meantime expect the Spain inspired risk aversion to dominate the lead on the price action.
  Current level Support Resistance Last week’s range
AUD/USD    1.0312     1.0170    1.0370    1.0197 - 1.0448

The Australian dollar saw some further appreciation over the Pound Sterling last week as the central bank inspired demand pushed it higher across the board. The weak finish to the equity markets saw the appreciation taper off to finish the week. Today the continued equity market weakness has seen the GBP push back and take back some of the lost ground. The Australian focus for the week comes on Wednesday with the release of the latest inflations numbers.  In the UK the preliminary GDP numbers for the 2nd quarter are released on Wednesday also, and provide the focus for the week. Given the softening on the global growth indicators, the current levels still offer reasonably good value buying of GBP with AUD to my mind.
  Current level Support Resistance Last week’s range
AUD/GBP    .6622    .6450    .6650   .6537 - .6652
GBP/AUD    1.5101    1.5040   1.5500 1.5033 - 1.5297

The Australian dollar again set new record highs against the beleaguered EURO. The appreciation was relentless amongst central bank inspired demand for AUD. However the pair has seen a change in sentiment to start the week, along with the under pressure Asian equity markets. The risk aversion has pushed the AUD from its highs and its is approaching initial support at .8500 (resistance 1.1765). The focus this week in Australia will come from the inflation numbers on Wednesday. In Europe the focus will remain on the state of the Spanish and Italian debt markets. Obviously current levels represent excellent value buying of EURO with AUD from a historical perspective.
  Current level Support Resistance Last week’s range
AUD/EURO    .8514    .8350   .8550     .8333 - .8554
EURO/AUD   1.1745   1.1700   1.1975   1.1690- 1.2000

The Australian dollar saw rapid appreciation against the YEN last week. The buying was central bank inspired peaked in the local session Friday. Once the equity markets in Europe can under pressure and the risk aversion grew, the AUD easily gave up ground. This has continued into the start of this week and the selloff has been sharp. In Australia the focus comes on Wednesdays release of the Q2 inflation numbers. In Japan the trade balance comes Wednesday and inflation and retail sales numbers Friday. Overall however the bulk of the lead will likely come from the wider market risk appetite. Given current sentiment, the AUD may struggle to make headway in the short term.
  Current level Support Resistance Last week’s range
AUD/YEN    80.64     80.00    82.00    80.43 – 82.11

The AUD saw relentless appreciation against the CAD for the majority of last week. Central bank portfolio diversification inspired the bulk of the move. The momentum waned into the end of the week and the uncertainty and concern in Europe increased. Softer economic data in the US on Friday added to lowering of sentiment and this week has started in a similar manner. Accordingly the AUD has come under pressure and given up a portion of last week’s gains. It does remain at elevated levels and still offers great value buying of CAD with Australian dollars. In Australia the release of the Q2 inflation numbers on Wednesday will be the focus. In Canada the sole focus comes in the form of the monthly retail sales data on Tuesday, and should be of limited impact.
  Current level Support Resistance Last week’s range
AUD/CAD    1.476     1.0320    1.0520    1.0352 - 1.0518

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