A big week lies ahead in the financial markets : Weekly FX Update - 3/9/2012

Monday 3 September 2012, 5:56PM
By Direct FX

By Sam Coxhead of

Last week proved to be as interesting as was expected in the financial markets. The conflicting pressures of slowing global growth, and the prospect of further monetary easing both played their parts throughout the week.  Tension continues in Europe as this week’s European Central Bank (ECB) monetary policy announcement approaches. German resistance to ECB buying of stressed member debt is at the crux of the tension. Expect detailed measures of bond buying to be announced along with the reduction to the European cash rate to .50%. With so much expected from the ECB, the risk is that they disappoint at Thursday’s announcement. In the United States the run of positive economic data has continued for the most part. US Fed Chairman Bernanke did little to disappoint the market looking for further monetary easing at the next monetary policy announcement. Over the weekend further evidence of a slowing Chinese economy emerged. The official manufacturing numbers were weaker than expectation and this saw demand for the Australasian dollars once again under pressure.

The negative sentiment in the Australian economy continued this week. Much has been made about the falling commodity prices and there is no better example than iron-ore that saw a 6.7% drop in a single day. Building approvals fell dramatically also, but this number was balanced by a better than expected private capital expenditure number. This week is a congested one for economic news in Australia. Today’s retail sales number revealed a seasonally adjusted -0.8% result against a forecast 0.3%. Tomorrow sees the RBA announce what should be an unchanged cash rate, but of note is the interest rate markets pricing of 50 points of easing by the end of the year to a cash rate of 3%. Next comes GDP on Wednesday, and then the employment numbers Thursday. Expect volatility to be seen this week given the amount of noise on the horizon.

New Zealand
In New Zealand last week the NBNZ business confidence number revealed a subtle rebound in sentiment.  However without doubt the lead for the week came from the news that Fonterra has revised down their payout forecast for the 2012/13 season by 30 cents, potentially wiping .5% off the GDP. This news was opportunistically followed by some downbeat comments by the NZ Finance Minister Bill English. This helped drive down demand for the NZ dollar to the lows of the week. The lead this week will undoubtedly come from Australia. In the absence of material local economic data, the fortunes of New Zealand’s largest trading partner will drive direction.

United States
The economic data in the US continues to take a positive tone. GDP numbers came in within expectation and the housing market is showing continual signs of increased activity. The Bernanke speech at the central bankers symposium offered nothing materially new, but reiterated the FED’s willingness to further stimulate if needed. Speculation now surrounds the September 14th monetary policy decision. This week’s data will have a bearing on that decision, in particular the employment numbers on Friday. Stagnation in the employment market is the primary concern to the FED, and any disappointment in this number will likely see further quantitative easing measures employed.

This week is a significant one in Europe. The ECB will no doubt be scrambling behind the scenes to try and ensure the measures they announce at their monetary policy announcement are widely supported. Any disappointment in the measures taken could potentially see the EURO aggressively sold. Positive German support to these measures remains the key. There has been some recent nervousness in the European debt markets, and this has seen renewed pressure on Italian and Spanish debt. This nervousness has not been expressed  as a slowdown in the demand for EURO, for the time being at least. Tuesdays speech by ECB President Draghi provides the initial focus ahead of Thursday’s announcement.

United Kingdom
There was limited economic news in the UK last week. This enabled the Pound Sterling to be dragged higher by the EURO. This week’s Bank of England (BOE) monetary policy meeting will likely see unchanged policy. Again the lead will come from the EURO for the most part. Manufacturing, construction and services data will be closely watched but are likely to be of limited impact on the price action.  The largest drag on the UK economy is the depressed nature of its largest trading partners in Europe. Any positive steps in Europe will materially impact in Britain. Recent gains made by the GBP over the Australasian duo have offered some respite for those looking to repatriate funds from the UK to New Zealand and Australia.

Last week saw the Japanese Government downgrade the economy in their monthly economic assessment. The economy has seen a moderate rebuilding recovery, but a weak point has been seen lately. Certainly the retail sales number of -.8% was well below expectations, and industrial production numbers were also disappointing. However the increased risk aversion in the wider market saw the YEN in demand. Today’s capital spending numbers were slightly lower than expected and tomorrows cash earnings data provides the other data focal point of the week in Japan. With the downgrading of Asian economic growth profiles, further gains over the New Zealand and Australian dollars cannot be ruled out in the week coming.

Last week saw positive news emerge for the Canadian economy. House prices saw year on year gains of 4.8% and the monthly GDP number was more positive than expected at +.2%. A Reuters survey revealed that  11 out of 12 of the primary dealers in Canada expect the next move on the cash rate to be a hike from the Bank of Canada in the 3rd quarter of 2013. Needless to say they expect no change from the BOC at Thursdays meeting. Building, employment and manufacturing numbers on Friday will be closely watched by the market.

Major Announcements last week:
•         German Business Sentiment 102.3 vs 102.7 expected
•         US Consumer Confidence 60.6 vs 65.8 expected
•         Preliminary US GDP 1.7% as expected
•         US Pending Home Sales 2.4% vs 1.1% expected
•         NBNZ Business Confidence 19.5 vs 15.1 previous
•         Australian Building Approvals -17.3% vs -4.8% expected
•         Australian Private CAPEX 3.4% vs 2.7% expected
•         Canadian GDP +.2% vs +.1% expected
•         Chinese Manufacturing Index 49.2 vs 49.8 expected (below 50 indicates contraction)

The NZ dollar saw sustained pressure from the US dollar last week. Lower global growth, and in Asia in particular, is curbing demand for the NZ dollar. The lows were set ahead of the Bernanke speech at Jackson Hole, and following the speech the NZD saw reasonable gains as the market anticipated further monetary easing from the FED at their September 14th meeting. However, over the weekend the release of the Chinese weak manufacturing numbers has once again undermined demand for the NZ dollar. The US economy will provide the lead for the pair this week , in the absence of any material NZ economic data. The main focus comes from the employment numbers on Friday. These will be the final piece of the puzzle ahead of the FED decision next week. Any material drop in the unemployment rate would put further monetary easing in doubt and the NZD would likely suffer as a consequence.
  Current level Support Resistance Last week’s range
NZD/USD    .8012     .7850    .8050   .7965 - .8128

It was a game of two halves for this pair last week. The NZD saw initial pressure following the downward revision of the expected Fonterra payout. This coupled with comments from the NZ Finance Minister pushed the NZ dollar to the lows of the week. However before long the commodity markets saw further pressure, and the emergence of increasing concerns about the Australian mining sector saw the AUD give up its gains. The weekend release of the weak Chinese manufacturing numbers saw renewed pressure on the AUD. This week sees the Australian economy in the spot. Expect no change from the RBA at their monetary policy meeting on Tuesday. GDP numbers Wednesday and employment numbers Thursday will be very closely watched and provide the bulk of the lead for the week. The pair starts the week close to where it started last week, and is pushing initial resistance at .7800 (support 1.2820).
  Current level Support Resistance Last week’s range
NZD/AUD    .7802     .7700    .7900    .7722 - .7804
AUD/NZD   1.2817    1.2660   1.2990  1.2814 - 1.2950

The NZ dollar was softer against the Pound Sterling throughout the course of last week. Following the release of the weak Chinese data over the weekend, the NZD has opened lower again, and remains just below the important .5050. (1.9800) level. A further break of the support at .5000 (resistance 2.0000) would open up the way for further NZD weakness. The UK provides the lead this week with manufacturing, construction and services numbers. The BOE monetary policy announcement should reveal an unchanged decision on Thursday. Of greater importance will be the ECB announcement also on Thursday, as the EURO has provided the bulk of the lead for the GBP of late.
  Current level Support Resistance Last week’s range
NZD/GBP      .5050     .5000   .5200    .5025 - .5136
GBP/NZD     1.9801    1.9230   2.0000   1.9470 – 1.9900

This pair saw dual pressures of a stronger CAD and a softer NZD last week. In what was almost one way traffic the NZD lost significant ground to the CAD. The weak release of the softer than expected Chinese manufacturing data has ensured that the NZ dollar has started this week under renewed pressure. In the absence of any economic news in New Zealand the focus will come from events in Canada. The BOC monetary policy announcement will likely be unchanged and of limited impact on Thursday. Friday sees the release of building, employment and manufacturing numbers in Canada and provides this week’s focus. In the meantime expect the fortunes of the Australian and US dollars to provide direction for their respective closely aligned currencies.
   Current level Support Resistance Last week’s range
NZD/CAD    .7899    .7850   .8050   .7854 - .8078

The EURO saw further demand against the under pressure New Zealand dollar last week. The largest move was following the downward revision of the Fonterra payout for 2012/13. This week sees the focus squarely on events in Europe. In what is one of its most important monetary policy announcements, the ECB will set the tone for the coming months on Thursday. Given the renewed pressure to start this week following the weak Chinese manufacturing numbers over the weekend, the bias remains for a weaker NZ dollar ahead of the ECB announcement. If initial support at .6300 (resistance 1.5875) breaks, then the way is opened for this pair to continue to correct to more historically average levels.
  Current level Support Resistance Last week’s range
NZD/EURO     .6368     .6300    .6500      .6350 - .6492
EURO/NZD     1.5704     1.5385   1.5875    1.5403 - 1.5748

The NZ dollar underperformed the Yen throughout the course of last week. After breaking support at 63.00, the pair sits perilously close to further support at 62.50. The slowing Asian growth profile has adversely affected the NZ dollar and driven some safe haven demand for the YEN. Today’s capital spending number in Japan was of limited impact, and the pair should take direction from the wider markets appetite for risk this week. The ECB monetary policy announcement and US employments numbers are likely to provide the bulk of the lead later in the week. There is potential for further sideways trading around currents levels in the absence of any material NZ or Japanese data this week.
  Current level Support Resistance Last week’s range
NZD/YEN    62.75     62.50   64.50    62.44 – 63.94

Sentiment towards the Australian dollar has dramatically turned sour over the last couple of weeks. The related and tandem forces of lower commodity prices and falling Asian growth prospects have seen investors flee the AUD. The prospect of further monetary policy stimulus from the FED has softened the fall, but the lower global growth prospects are winning that battle for the time being. With the interest rate market now pricing another 50pts of easing from the RBA before the end of 2012 , there will be less yield chasing demand for the Australian dollar. This week provides an impossibly busy economic data calendar for this pair. Apart from today’s weaker than expected retail sales number and what should be an unchanged RBA monetary policy announcement tomorrow, we have  GDP Wednesday and employment numbers on Thursday in Australia this week. In the US there is the usual myriad of data releases but the major focus comes from the employment numbers on Friday.
  Current level Support Resistance Last week’s range
AUD/USD    1.0270     1.0180    1.0380    1.0234 - 1.0429

The pressure on the AUD from the Pound Sterling has continued last week, and this week opens with the AUD under further pressure again. Both central banks feature this week with monetary policy announcements. Expect both the RBA and BOE to announce unchanged monetary policy. In the UK we have manufacturing, construction and services numbers that will garner attention. Whilst in Australia, Wednesday’s GDP number and Thursday’s employment numbers will be very closely watched. Given the Australian dollar has lost 5% in the last 3 weeks or so, consolidation at some stage is warranted, but the timing of this will be key. Expect the current trend to remain in place ahead of the ECB decision Thursday, and US employment numbers Friday.
  Current level Support Resistance Last week’s range
AUD/GBP    .6472    .6400    .6600   .6455 - .6590
GBP/AUD    1.5451    1.5150   1.5625 1.5174 - 1.5491

The AUD continued to underperform against the EURO last week. The dual pressures of EURO demand and weakening Asian growth prospects providing the lead. Both central banks announce monetary policy this week, but the ECB is the one that will provide the real focus. The ECB must set out a clear program for support of bailout nations, and one that appeases the worries of the primary lenders.  With the RBA likely to make an unchanged decision at this meeting, more important will the GDP number on Wednesday and employment numbers Thursday. Further EURO appreciation should be more hard fought ahead of the ECB decision.
  Current level Support Resistance Last week’s range
AUD/EURO    .8162    .8050   .8250     .8147 - .8332
EURO/AUD   1.2252   1.2120   1.2425   1.2002 - 1.2274

The Australian dollar further underperformed the YEN last week. The slowing Asian growth profile and associated lower commodity prices meant there was little chance of any other outcome. With the interest rate market pricing further policy accommodation from the RBA, it only makes sense that the FX rates should adjust accordingly. The pair opened the week lower after the weak Chinese manufacturing numbers over the weekend. With little in the way of material economic news this week in Japan, the lead will mostly come from news in Australia. Apart from today’s weak retail sales numbers, we have what should be an unchanged RBA monetary policy decision tomorrow. Wednesday sees the 2nd quarter GDP numbers released. And these come ahead of  Thursdays employment numbers. After the ECB decision finishes holding attention this is followed by the US employment numbers on Friday.
  Current level Support Resistance Last week’s range
AUD/YEN    80.42     79.50    81.50    80.08 – 82.09

The AUD saw sustained pressure from the Canadian dollar last week. The pair has opened the week lower again following the soft Chinese manufacturing numbers released in the weekend. Both central banks are likely to announce unchanged monetary policy decisions this week. In Australia, apart from today’s weak retail sales number, we have 2nd quarter GDP numbers on Wednesday, and employment numbers Thursday. In Canada Friday sees the release of the latest building, employment and manufacturing numbers and these will be closely followed.
  Current level Support Resistance Last week’s range
AUD/CAD    1.0124     1.0050    1.0250    1.0100 - 1.0343

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