Weekly FX Update - 6th August 2012

Monday 6 August 2012, 5:33PM
By Direct FX

By Sam Coxhead of

Market Overview:
Last week proved to be a very interesting one for the financial markets, with a wide range of themes at play. The European Central Bank (ECB) held center stage with their much anticipated monetary policy announcement. Whilst short on details, the intent is clear. ECB head Mario Draghi has placed pressure back on European leaders to ratify changes to the European Stability Mechanism(ESM). These initiatives would enable then a bailout fund to work in tandem with the ECB to lower the cost of funding (bond yields) for stressed Euro-zone members. If these initiatives can be achieved, there would be a clearly lower funding cost for member states and more secure bond holdings for the European banks. This leads further to financial stability and viability of the Euro-zone and single currency going forward. Elsewhere in the market the Bank of England (BOE) left monetary policy unchanged as expected. Further policy easing should not be discounted before the end of the year, maintaining pressure on the Pound Sterling in the short term. US employment numbers were better than expected at 163,000 added jobs, and broke a three month streak of sub 100,00 jobs growth. Markets in Australasia proved robust once again. With economic news holding up relatively well, and stable monetary policy in both New Zealand and Australia, expect the offshore inflow of funds chasing  the high cash rates to continue to underpin demand in the short term at least.

Economic news in Australia was relatively strong last week. Building approvals, private sector credit and retail sales numbers were all close to, or better than expectation. The retail sales number had the largest impact in driving demand for the AUD. This week sees the Reserve Bank of Australia back in focus with what will be an unchanged monetary policy decision on Tuesday. The statement will be closely watched and will tie in with their release of the quarterly Monetary Policy Statement on Friday. Expect the RBA to remain relatively neutral, and ready to act should the situation in Europe deteriorate further. Last week did see a material paring back in expectations for any further easing in the near term. Also of crucial importance are the 2nd quarter employment numbers on Thursday, with the market expectation an uptick in the unemployment rate to 5.3%.

New Zealand
There was little in the way of top tier economic news last week. The NBNZ Business Confidence survey revealed slight increase in sentiment, in what was an otherwise unspectacular survey. The bounce back in the Fonterra diary auction prices stirred interest in the NZ dollar market, as these results are obviously closely followed by international investors. The interest rate market has pushed short term interest rates higher with the increase in wider market sentiment driven by the ECB initiatives underway. Also adding to the positive sentiment was the S&P affirmation of New Zealand credit rating. This week sees the employment numbers for the 2nd quarter released on Tuesday and these will be closely watched as usual, with the market expecting a small correction lower in the unemployment rate to 6.5%.

United States
Last week proved to be relatively positive one for the US economy. Consumer confidence and house price numbers increased by more than the market expected, but the increase of most impact was seen in the employment growth numbers released on Friday. The burst back through the 100,000 added jobs level to 163,000 was well received by markets and now any expectation for further quantitative easing has been pushed back to the end of the year at earliest. The one blight on the week was a disappointing manufacturing number. This survey will be closely followed next month to see if this fall in activity becomes entrenched. This week is relatively light on economic data in the US, but two separate speeches by FED chairman Bernanke will be closely followed.

The ECB monetary policy meeting was the primary focus for the European market last week. ECB President Mario Draghi started to put in place measures to back up his dramatic pledge of support from the previous week. Part of his initiative is to draw in support for coordinated action with the ESM. Further details and concrete moves are likely to be released at the next meeting on September 6th. Certainly the expectation of the effectiveness of efforts has started with both Spanish and Italian bond yields moving materially lower in the last couple of sessions. This week is light on economic data in Europe so any headlines from influential Euro-zone leaders will be closely followed. The ECB monthly bulletin on Thursday could also be used to further provide insight on the upcoming initiatives, and therefore should be closely watched.

United Kingdom
Last week’s UK manufacturing data mirrored the horrid GDP result from the week before. The number was the weakest since mid 2009 and further opens up the way for additional  monetary stimulation from the BOE at some point later this year. As expected last week’s BOE meeting saw no change after activity was increased at the previous announcement. This Wednesday’s inflation report offers a prime opportunity for further communication from the BOE, and is the highlight for the week. Expect any material recovery from the Pound Sterling to be some way off in the current environment, especially against the Australasian dollars.

It was a quiet week for economic news in Japan last week. Second numbers of industrial production, household spending, and cash earnings all came in below expectations. The YEN has dropped across the board as the wider market sentiment has improved over the last week. This will be much appreciated by policy makers and the export sector. Expect no changes to monetary policy at this week’s announcement from the Bank of Japan on Thursday. 

The single piece of economic news last week in Canada was the close to expectation result for the monthly GDP. This week should prove of more interest with building and manufacturing numbers starting proceedings on Tuesday. These are followed by trade numbers Thursday, and the important employment numbers to round out the week on Friday.

Major Announcements last week:
•         NBNZ Business Confidence 15.1 vs 12.6 previous
•         Australian Building Approvals +2.5% vs -14.6% expected
•         Canadian GDP +.1% vs +.2% expected
•         UK Manufacturing 45.4 vs 48.6 expected
•         US Manufacturing 49.8 vs 50.3 expected
•         FED leaves monetary unchanged as expected
•         BOE leaves monetary policy unchanged as expected
•         ECB initiates action to stablise debt markets
•         Australian Retail Sales 1.0% vs .6% expected
•         US Employment growth 163k vs 101k expected

The NZ dollar continued to find solid demand against the US dollar last week. The increase in Fonterra diary auction prices and S&P affirmation of the NZ credit rating provided the domestic boost. Internationally, some better economic data and the acceptance of the steps the ECB is taking to stablise European debt markets drove risk appetite higher and the NZ dollar benefitted. The relatively high NZ cash rate is also proving attractive to international investors and this is providing latent demand also. This week direction will come from the important NZ employment numbers on Thursday. The political posturing in Europe with regards to the ESM participation is likely to drive wider market sentiment and may also be an influence.
  Current level Support Resistance Last week’s range
NZD/USD    .8187     .8000    .8200   .8063 - .8201

After seeing initial weakness, the NZ dollar recovered to post some reasonable gains against the Australian dollar last week. Continued consolidation through the .7730 (1.2940) level remains the key for further corrective NZD appreciation.  This week the RBA and their monetary policy decision and subsequent quarterly statement provide the focus alongside the respective NZ and Australian 2nd quarter GDP numbers on Thursday. Initial resistance will come in at .7800(support 1.2820), ahead of the .7850 (1.2740) level.
  Current level Support Resistance Last week’s range
NZD/AUD    .7747     .7650    .7850    .7679 - .7760
AUD/NZD   1.2908    1.2740   1.3070  1.2887 - 1.3022

The NZ dollar saw continued demand against the Pound Sterling last week. The price action was relentless, in what was simply one way traffic for this pair. Following the terrible GDP result two weeks ago, the data continues to print soft in the UK for the most part. Should this continue in the coming weeks, further expectations of easing from the BOE will be priced into the beleaguered GBP. This week sees the focus start in the UK with the BOE inflation report on Wednesday. Thursday sees the release of the important 2nd quarter NZ employment numbers and these will be the highlight in New Zealand. In the short term at least, it is hard to see the NZD giving up too much ground to the GBP. However the close lying .5250 (1.9050) level remains strong resistance (support), so further appreciation from the NZD will require increased demand.
  Current level Support Resistance Last week’s range
NZD/GBP      .5242     .5050   .5250    .5130 - .5248
GBP/NZD     1.9077    1.9050   1.9800   1.9055 – 1.9493

The NZ dollar saw further appreciation against the CAD last week. The appreciation was more laboured than in previous moves and was primarily driven by the increased prices fetched in the Fonterra diary auction and the S&P affirmation of the NZ credit rating. The rising NZ dollar was tamed by the substantial resistance at .8200, and this remains the initial target for further appreciation. The focus this week comes from the respective employment reports. The NZ report comes first on Thursday ahead of the Canadian number on Friday. Further appreciation from the NZ dollar will require increased demand, and given the recent appreciation this may not be forth coming.
   Current level Support Resistance Last week’s range
NZD/CAD    .8195    .8000   .8200   .8087 - .8208

The NZD once again set all time record highs against the EURO last week. The recent string of record NZ dollar highs against the EURO has usually been driven by EURO underperformance, as opposed to material NZ dollar strength. Last week was no exception. The highs were set following the initial response to the ECB measure to stem the bleeding in the European debt markets. But developing measures within the ESM has boosted the expected results from the ECB initiatives. Accordingly the EURO saw sharply increased demand late in the week. Much of the move will have come from the forced exiting of “sold EURO” investors. If further appreciation is forth coming expect further sharp moves in the EURO’s favour. 
  Current level Support Resistance Last week’s range
NZD/EURO     .6607     .6500    .6700      .6566 - .6678
EURO/NZD     1.5135     1.4925   1.5385    1.4975 - 1.5230

This pairing saw mostly sideways price action within a contained range last week. However Friday saw the S&P affirmation of the NZ credit rating and this started to drive some reasonable NZ appreciation. The better than expected US employment numbers further added to the NZD upside momentum until the resistance was reached at 64.50. This level remains the initial target for any further NZD appreciation in the short term. The NZ employment numbers on Thursday present the economic data focus for the week. No change is expected from the BOJ at their monetary policy meeting, although further lip service will likely be paid to the ongoing relative strength of the YEN.
  Current level Support Resistance Last week’s range
NZD/YEN    64.23     62.50   64.50    63.00 – 64.41

The Australian dollar saw further appreciation against the US dollar last week, although its appreciation was less energetic. The stronger than expected US employment numbers combined with a more positive sentiment in Europe helped push the AUD higher late in the week. The RBA monetary policy decision and subsequent quarterly policy statement are the focus for the week. These come alongside the important employment numbers on Thursday. In the US the focus comes from a couple of Bernanke speeches in the absence of top tier economic data. The recent demand for AUD has been under pinned by international funds seeking the relatively high interest rates. This seems unlikely to change in the short term , but certainly does not provide much comfort for any in the Australian export sector.
  Current level Support Resistance Last week’s range
AUD/USD    1.0566     1.0430    1.0630    1.0432 - 1.0581

The Australian dollar has continued its recent appreciation against the GBP throughout last week. With further soft numbers emanating from the UK economy, expect the pairing to remain at somewhat elevated levels in the short term at least. With the increasing market expectation for further monetary easing from the BOE, Wednesdays inflation report will be closely watched. In Australia the RBA monetary policy decision and subsequent quarterly report continues the central bank focus for the week, alongside the 2nd quarter Australian employment numbers on Thursday.
  Current level Support Resistance Last week’s range
AUD/GBP    .6767    .6600    .6800   .6644 - .6776
GBP/AUD    1.4778    1.4700   1.5150 1.4758 - 1.5051

The Australian dollar again set new record highs against the EURO last week. As with most of the recent moves, it was more a case of EURO underperformance as opposed to any rampant AUD demand. Following indications that the recent ECB initiatives are starting to take shape, the EURO saw some strong demand to finish the week. Given the extent of the EURO underperformance of late, there is ample room for further appreciation should the ECB/ESM plans continue to play out in a positive light. This week will see the focus return to domestic issues in Australia. The RBA monetary policy decision and quarterly statement will provide the central bank focus. Additionally the 2nd quarter employment numbers are due for release on Thursday and these will garner attention.
  Current level Support Resistance Last week’s range
AUD/EURO    .8527    .8400   .8600     .8487 - .8614
EURO/AUD   1.1727   1.1630   1.1900   1.1609 - 1.1783

After spending most of last week stuck in a sideways grind, this pair broke higher on Friday as positive sentiment from Europe teamed up with a healthier than expected US employment number. This week sees a distinctly central bank focus with the BOJ and RBA both due to release unchanged monetary policy decisions. The accompanying statements will be closely watched. The RBA also issue their quarterly Monetary Policy Statement on Friday. Additionally the 2nd quarter Australian employment numbers will be announced on Thursday, with a market expectation of a small rise in the unemployment rate to 5.3%.
  Current level Support Resistance Last week’s range
AUD/YEN    82.90     80.50    83.50    80.59 - 83.74

The Australian dollar saw further grinding appreciation against the Canadian dollar last week. With the Canadian GDP number close to expectations, the hard fought AUD gains started out with the better than expected retail sales number. Further appreciation followed the good US employment results, as the wider market increased appetite benefitted the AUD. This week sees the initial focus come from the RBA monetary policy decision on Tuesday. No change is expected at this meeting, and the quarterly Monetary Policy Statement on Friday will shed further light on how the RBA perceive the current economic conditions. Thursday sees the 2nd quarter Australian employment numbers and these come ahead of the Canadian employment numbers on Friday . Current levels offer continued buying of CAD with AUD at opportunistic levels.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0578     1.0400    1.0600    1.0487 - 1.0592

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