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ECONOMY

Weekly FX Update - 30th July 2012

Monday 30 July 2012, 4:58PM
By Direct FX
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By Sam Coxhead of www.directfx.co.nz

Market Overview:
Last week proved to be a very interesting one for the financial markets, and may prove to be a water shed one for 2012. Unsurprisingly, the lead came from Europe. In what appears to have been an orchestrated move to provide reassurance to  investors, the President of the European Central Bank (ECB) was joined by Euro-zone leaders in calls of commitment to the Euro-zone, and the single currency. The ECB head Mario Draghi stated that within the ECB’s mandate, the ECB will do whatever it takes to preserve the EURO. He was joined in chorus by various politicians including the leaders of both France and Germany. These initiatives have caused a material turn around in sentiment in Europe and around the world. The reversal of the recent risk aversion at times was at a furious pace. This week sees the ECB , along with the Bank of England (BOE) and US Federal Reserve (FED) make monetary policy announcements. It seems like the ECB will announce substantial initiatives to assure funding opportunities continue for the likes of Spain and Italy. Less certain are expectations for further moves from the BOE and FED. If the ECB are able to produce action to back up their words, the markets should react positively in the short term at least and would provide a significant boost for growth assets. Given the recent deterioration in sentiment globally,  policy makers must be acutely aware that to disappoint would likely have dire consequences in the real economy, both in Europe and elsewhere around the globe.

Australia
In Australia last week the domestic lead was provided by the 2nd quarter inflation number. The .5% result was high enough to see a paring back in expectations for further easing to the cash rate at next week’s RBA monetary policy announcement. These paring back in expectations of a lower cash rate extended further with the increase in risk appetite driven by Europe into the end of the week and over the weekend. Building approval, retail sales and trade balance numbers will be released in Australia this week. These domestic releases are likely to take a back seat to the sentiment driven from Europe and the actions of the ECB on Thursday at their much anticipated monetary policy announcement.

New Zealand
The Reserve Bank of New Zealand’s (RBNZ) monetary policy decision  dominated the local landscape last week. There was little to surprise in the unchanged decision to leave the cash rate at the emergency 2.50% level and the accompanying neutral statement. Interestingly, the reaction has been NZ dollar supportive in what looks to be a situation of offshore investors being caught out with “sold” NZD positions that have needed to be reversed. The increase in risk appetite driven from the ECB comments has further supported the NZ dollar to start this week. The majority of the lead will come from offshore this week with just the NBNZ business confidence survey to provide the local focus.

United States
Last week saw a continuation of the mixed economic data in the US. Stronger manufacturing data was balanced by some softer housing numbers and the 2nd quarter GDP result  that came in on expectation at  1.5%. The reasonable GDP result, coupled with pending ECB announcement and employment numbers on Friday, point towards an unchanged monetary policy decision from the FED on Wednesday. The employment numbers will be closely watched and any climb in the 8.2% unemployment rate will push for further action from the FED in the coming months. The reversal of US longer end interest rates from their record lows late last week hopefully signals a material change in sentiment for the wider market away from dangerous risk aversion.

Europe
The strong verbal stance taken by ECB officials last week will have to be backed up by action this week at the ECB meeting on Thursday. A commitment to further term lending to banks, possibly a lower cash rate and some kind of increased bond buying program are a minimum. To disappoint would point towards a failure of leadership and mean some kind of ugly conclusion to the EURO in the medium term. In the meantime, the Spanish and Italian costs of funding have fallen dramatically. This is the intended reaction that officials would have been looking for. The fact that Germany and France issued a joint statement  that they are “duty bound to keep the Euro-zone intact” is meaningful. The European Stability Mechanism(ESM) is likely to be granted a banking licence by the ECB. The effect of this is to increase its power to support distressed bond markets and would be another positive step if it can be achieved.

United Kingdom
In the UK last week the 2nd quarter economic contraction was confirmed larger than expected at -.7%. This number came as long end interest rates hit record low levels in the UK as funds flood in from Europe. If it had not been for inbound European funds the GBP would have seen widespread pressure. This week sees the BOE meet to announce monetary policy, and even after last week’s number it seem unlikely that we will get further easing at this meeting. But the pressure is mounting to see a further reduction in the cash rate from the current .5%. Along with the BOE announcement on Thursday, manufacturing numbers on Wednesday and construction data Thursday will be closely watched.

Japan
Early last week saw the Japanese long end interest rates driven to record lows as the risk aversion increased. The increased risk aversion drove some solid YEN demand , so it will have been a relief to the Bank of Japan (BOJ) and the Japanese export sector when the ECB verbal support  hit the news wires. The subsequent reduction in risk aversion has seen a lower YEN, almost across the board. In Japan there is increasing speculation that the lending program for offshore acquisitions will be extended. The BOJ also again have re-iterated they will ease monetary conditions if the continued YEN strength severely threatens Japan’s path to recovery. These points when put together should cap any material YEN increases in the short term. Also of note was another disappointing Japanese retail sales number. This week sees just the release of second tier economic data, so expect the wider market risk appetite to provide the lead.

Canada
Last week Canada was amongst a large group of stable nations that saw their longer end interest rates pushed to record low levels. Interestingly the CAD remains in solid demand and this was highlighted by a massive 15 billion CAD takeover offer by the Chinese for the massive iron sands company Nexen. The takeover offer by CNOOC Ltd (China’s largest oil and gas explorer) would be China’s largest offshore acquisition if they get the go ahead from Canadian authorities. Canada’s retail sales number came in under expectations last week, and will have all eyes on the monthly GDP data when released on Wednesday.

Major Announcements last week:
•         HSBC Chinese Manufacturing 49.5 vs 48.2 previous
•         RBA Gov. Glen Stevens delivers an upbeat assessment of the Australian economy
•         Canadian Retail Sales +.3% vs +.5% expected
•         Australian Inflation +.5% vs +.6% expected
•         UK GDP -.7% vs -.2% expected
•         RBNZ leaves monetary policy unchanged
•         ECB’s Draghi commits to “Within our mandate, the ECB is ready to do whatever it takes to preserve the EURO”
•         French and German leaders in joint statement say they are ”duty bound to keep the Euro-zone intact”
•         US GDP 1.5% as expected (lowers chances of near term action from the FED)

NZD/USD 
Last week was a game of two halves for this pair. The initial increase in risk aversion saw the US dollar push the NZD down to the lows. However, the neutral statement from the RBNZ accompanying their unchanged cash rate decision saw some support for the NZD dollar come into the market. This demand for the NZD accelerated further thanks to the strong, and potentially game changing message from the ECB. Whether or not this bounce in sentiment can be sustained , or continue will be reliant on the central bank decisions later on in the week. Expect sideways trade within a contained range for the next few days ahead of the FED,ECB and BOE decisions on Wednesday and Thursday.
  Current level Support Resistance Last week’s range
NZD/USD    .8082     .8020    .8220   .7805 - .8112

NZD/AUD (AUD/NZD)
The NZ dollar saw further pressure from the boisterous Australian dollar at the beginning of last week. It was not until the neutral statement accompanying the unchanged cash rate decision from the RBNZ did the sentiment for the NZD pick up. The NZ dollar continued to outperform for the remainder of the week. The pair again finds its self pushing against the resistance at .7730 (support 1.2940). Consolidation through this level should open up the way for further corrective NZD appreciation.
  Current level Support Resistance Last week’s range
NZD/AUD    .7720     .7700    .7900    .7634 - .7738
AUD/NZD   1.2953    1.2660   1.2990  1.2923 - 1.3099

NZD/GBP (GBP/NZD)
After seeing some initial pressure from the Pound Sterling the NZ dollar managed to stage a solid recovery last week. The weak UK GDP number was coupled with the somewhat neutral statement from the RBNZ to turn around the direction for this pair. The ECB rhetoric towards supporting the Euro-zone boosted the wider market appetite for risk further and the NZ dollar was a main beneficiary. Further ground should prove harder to make for the NZD in the coming days, but assuming positive action the from the ECB on Thursday, further gains would not surprise.
  Current level Support Resistance Last week’s range
NZD/GBP     .5140     .5000   .5200    .5036 - .5150
GBP/NZD     1.9455    1.9230   2.0000   1.9417 – 1.9857

NZD/CAD
The NZD was weaker against the CAD in the first half of last week. Wide spread risk aversion drove the weakness but this was turned around by the neutral statement which accompanied the unchanged cash rate decision from the RBNZ. Then came the boost to growth assets following the strong ECB comments which pledged support for pressured Euro-zone members. This pushed the pair back up through the resistance at .8100. Given the larger global issues at play this week, neither the Canadian monthly GDP data or NBNZ Business Confidence Survey should have any great baring on the price action. Expect further appreciation from the NZD to be hard fought, especially ahead of the ECB announcement on Thursday.
   Current level Support Resistance Last week’s range
NZD/CAD    .8110    .7975   .8175   .7978 - .8139

NZD/EURO (EURO/NZD)
This pair was even more volatile than usual last week. After starting the week with the NZD at records highs the EURO put string pressure on the NZ dollar. This pressure continued until Wednesday when the RBNZ produced a more neutral (than some expected) statement accompanying their unchanged monetary policy decision on Wednesday. This drove the NZD off the weeks lows, and coupled with the turnaround in risk appetite following the ECB President’s comments to support the Euro-zone, pushed the NZD right back up to the record highs at which it started the week. Again expect further ground from current levels to be more hard fought, especially ahead of the ECB announcement on Thursday. Assuming the ECB do not disappoint, the NZ dollar may push higher. Even at current levels, the EURO remains great value buying with NZ dollars.
  Current level Support Resistance Last week’s range
NZD/EURO     .6575     .6400    .6600      .6470 - .6585
EURO/NZD     1.5209     1.5150   1.5625    1.6121 - 1.6559

NZD/YEN (NZD/YEN)     
The NZ dollar saw initial selling pressure against the Japanese YEN last week. The wider market risk aversion drove this move. However the pressure on the NZD was short lived. The RBNZ issued a measured statement with their unchanged monetary policy decision and this appears to have caught the market a little off guard.  NZD demand ensued and once the ECB became action on the news wires with EURO supportive comments the risk appetite surged the NZD again higher. Resistance at 63.50 seems to have capped the NZD appreciation for now. But if the ECB back up their words with action, expect further gains from the NZD later on this week.
  Current level Support Resistance Last week’s range
NZD/YEN    63.37     62.50   65.50    60.97 - 63.65

AUD/USD
The Australian dollar battled to start with last week. The wider market risk aversion meant demand for US dollars placed pressure on the AUD. The momentum was turned when the Australian inflation numbers were released. The +.5% number for the 2nd quarter has seen expectations for further easing to the 3.50% cash rate pared back. These expectations have been all but removed following the strong words of support for the Euro-zone from the ECB and various political leaders. Expect further gains to be harder to make ahead of the central bank meeting this week. It is unlikely the FED will active further monetary easing at its meeting on Wednesday, but satisfactory action from the ECB on Thursday should underpin AUD demand in the short term.
  Current level Support Resistance Last week’s range
AUD/USD    1.0468     1.0330    1.0530    1.0173 - 1.0491

AUD/GBP (GBP/AUD) 
Last week saw volatile price action for this pair, albeit for the most part within a contained range. The AUD saw initial weakness in line with the wider market risk aversion at play. Then came the weak UK GDP number and on expectation Australian inflation data and the momentum started to turn as the AUD pushed away from the weeks lows. The ECB headlines committing to further supportive action for the Euro-zone were beneficial to the Australian dollar via the pickup in the wider market risk appetite. Expect contained price action ahead of the central bank meetings on Wednesday and Thursday this week. Assuming the ECB follow their words with action, there is potential for further AUD appreciation in the short term following the ECB announcement on Thursday.
  Current level Support Resistance Last week’s range
AUD/GBP    .6659    .6480    .6680   .6566 - .6681
GBP/AUD    1.5017    1.4970   1.5430 1.4968 - 1.5230

AUD/EURO (EURO/AUD)
The AUD set new record highs against the EURO early last week. This came before the wider market risk aversion increased, and placed some downward pressure on the AUD. Since then the pairing has seen a sequence of whippy sessions within a relatively contained .8435 - .8515 (1.1745 – 1.1855) range. Direction this week will be very interesting. Assuming that the ECB back up their strong words with actions, further appreciation from the AUD cannot be ruled out. Until the ECB announcement on Thursday in Europe, expect somewhat limited ranges.
  Current level Support Resistance Last week’s range
AUD/EURO    .8518    .7750   .7950     .8430 - .8554
EURO/AUD   1.1740   1.2579   1.2903   1.1690 - 1.1862

AUD/YEN
The AUD struggled for demand against the YEN to start last week. The wider market risk aversion put the YEN in the driver’s seat. The BOJ and Japanese Ministry of Finance officials were quick to hit the headlines  as the demand for the YEN grew across the board. This , coupled with an on expectation Australian inflation number enabled the AUD to claw its way back. Further demand ensued once the ECB comments with regards to “committed support” started to hit the headlines. Expect the wider market risk sentiment to again provide the primary driver this week. It is most likely that the ECB will be setting the tone at its meeting on Thursday. Expect reasonably contained ranges through until this announcement.
  Current level Support Resistance Last week’s range
AUD/YEN    82.07     80.50    83.50    79.41 - 82.37

AUD/CAD
This pair started the week with choppy price action that lacked direction for the most part. By mid week the AUD had started to suffer a little , along with most other growth assets in the wider market. The AUD demand turned a little following the at expectation inflation number. This coincided with the interest rate market starting to pare back expectations for further easing to the 3.50% cash rate. The ECB commitment to supporting the stressed Euro-zone members gave the wider market sentiment a boost and this saw the AUD see grinding appreciation of the CAD. Again we are above the 1.0500 level and expect  further gains to be harder to make for the AUD, especially ahead of the ECB’s monetary policy announcement on Thursday.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0510     1.0050    1.0250    1.0404 - 1.0529