Direct FX Weekly FX Update - 6 November

Tuesday 6 November 2012, 5:22PM
By Direct FX

By Sam Coxhead of


Market Overview
The wider financial markets remain weary ahead of the tightly contested US Presidential elections. A second term for the Obama administration would likely see increased risk aversion in the short term lead to strength in the US dollar and lower global equity markets. Sentiment in Europe remains fragile as the economic data continues to underperform. While focus remains on Greece and their ability to achieve material labour reform, the back drop of Spanish indecision is unsettling. Asian economic indicators point towards a stabilisation of growth in the short term and this has helped maintain the relatively positive outlook for the Australasian economies.

Domestic news in Australia was mixed last week with buoyant building approval numbers tempered by lower Australian commodity price data. Yesterday’s solid retail sales numbers were encouraging, but the focus remains on the RBA monetary policy announcement due later today. The market expect a lower cash rate of 3.00% over the next two meeting, so debate surrounds whether it comes at this meeting or the next. With the market having fully priced this cut, market reaction should be relatively muted. Of positive influence to the Australian economy were last week’s stable Chinese manufacturing numbers. Later this week sees the monthly employment numbers released on Thursday, and the quarterly RBA monetary policy statement on Friday. Both will be keening watched by the market.

New Zealand
There has been little in the way of important economic news in New Zealand of late. Last week’s stable Chinese manufacturing numbers are a positive external influence, and the exporting sector will be hoping that the improved sentiment continues into the 4th quarter. This week sees the release of the 3rd quarter NZ employment numbers on Thursday and these will be keenly watched. The RBA cash rate announcement later today will also be of note, given that Australia remains New Zealand largest export market. Next week is again quiet for NZ economic news, with just retail sales on Wednesday to offer interest.

The United States
US employment numbers were solid last week. Although the unemployment rate was up .1 to 7.9%, the numbers actively looking for work also increased. This means the expectation of finding work has increased and this is in line with the recently improved personal spending numbers in the US. This week sees the attention squarely on the elections later today. The swing states of Ohio and Florida are again of major interest, in a contest where both candidates are polling equally on a national basis. The result will provide some material market “noise”, but the effects will likely be short term. An Obama win would lead to lower stock markets and general risk aversion, which drives the US dollar higher. Later in the week we have the trade balance and consumer sentiment numbers, but this will likely be of limited impact.

The United Kingdom
After recently looking more robust in the UK, the latest economic data has again been mixed. Lower manufacturing and services numbers came out alongside more encouraging construction figures. Continuing to drag on the UK economic prospects are moribund levels of activity in closely aligned Europe. This week sees the Bank of England have their latest monetary policy meeting, although no change to policy is expected. Next week sees  the inflation, unemployment and retail sales numbers released and these will be very closely watched.

Frustrations are again growing in Europe. Concerns of the ability of Greek policy makers to put in place labour market reform are again putting Greece’s future in the Euro-zone in question. Spain also continues to cause consternation with its gamesmanship with regards to requesting funding assistance. Given the complexity of the situation in Europe, it can be expected that hurdles will be seen along the long road of recovery. The current weak economic data is accentuating the situation. Apart from the upside surprise in the retail sales numbers, the rest of the data has been disappointing. The employment situation is dire as the unemployment rate hits a record high at 11.6% in Europe, and over 25% in in Spain. The European Central Bank (ECB) meet this week, but are not expected to make any changes to monetary policy at this meeting. Next week sees the release of business sentiment, GDP and inflation numbers in Europe. The US election will likely be providing the short term direction for the EURO, via the performance of the US dollar following the election result. If Obama wins re-election, the EURO may see further downward pressure.

The Bank of Japan placated the markets expectations for policy action last week. The 11 trillion YEN policy package was close to expectations, and the associated bank lending scheme has been well received. The intended consequence of a weaker YEN will please policy makers, albeit  the medium term that matters. There is little data on consequence and the direction for the YEN this week will likely be a result of the US election. Next week sees preliminary 3rd quarter GDP numbers due for release and these provide the focus.

Last week revealed Canadian unemployment was stable at 7.4%, as was widely expected. The Bank of Canada (BOC) Governor Carney testified to Parliament on the economy on Friday and commentated that a hike to the cash rate will likely be needed in time, as the inflationary pressure builds. The intensifies the debate on the timing of any potential hikes to the Canadian cash rate in 2013, and it at the heart of the recent CAD weakness. If the interest rate market returns to its hiking bias, the CAD should stage some kind of recovery. The focus in the near term will be the US elections later on today. The latest manufacturing numbers are due late Thursday, but will be of minimal impact. Next week is again quiet for economic data in Canada, with just second tier manufacturing numbers due on Thursday.

Over the last week this pair has continued to trade within in recent and familiar band. The NZ dollar has however seen increased demand and this has seen the pair approach the upper levels of this .8150 - .8350 range. The US elections and NZ employment numbers provide some high level focus this week. An Obama re-election would see a firmer US dollar in the short term. Any increase in the unemployment rate would increase calls for further policy accommodation from the RBNZ, in the form of lower interest rates. This would especially be the case if the RBA ease their official interest rate at their meeting later today.

This pair continues to trade well within its wider range. The NZ dollar did see demand pick up last week in what looked to be positioning ahead of the RBA monetary policy decision this week. This demand has pushed up to levels that do offer good value buying of AUD with NZ dollars, whilst the pair remains within the recent contained range. The interest rate market has factored in a RBA cash rate at 3.00% at the end of the year, so reaction either way should be somewhat limited. Both employment reports on Thursday provide increased focus to round out what should be a very interesting week for this pair.

The NZ dollar saw some periods of strong demand against the Pound Sterling last week. The weak EURO proved to drag on the GBP, and together with some disappointing economic data, eased the way for the move lower. The pair now is close to the key NZD resistance level at .5200 (GBP support 1.9230). The US elections impact on the wider market risk appetite will provide the lead ahead of the NZ employment numbers on Thursday. From a risk reward perspective, current levels offer good value buying of GBP with NZ dollars at current levels.

The NZ dollar has made steady progress against the again beleaguered EURO over the last week. Although the momentum does seem to be waning, further gains from the NZ dollar cannot be ruled out. The growing concerns in Europe have driven the underperformance from the EURO. Any news of a Spanish approach for funding assistance would be viewed as positive for the EURO. The wider markets reaction to the US election result will likely provide the direction ahead of the NZ employment numbers on Thursday. The ECB monetary policy announcement should not garner much of a reaction with little expectation of policy changes at this meeting. The .6400 (1.5625) level will provide the initial target for any bounce in the fortunes of the EURO this week.

The Canadian dollar managed to tame the NZ dollars recent momentum last week. Whilst the pair remains at elevated levels, any further appreciation should be hard fought, especially if the pair approaches last week’s highs. Expect the US elections to drive the direction in the short term ahead of the NZ employment numbers on Thursday. A positive result for President Obama would likely see the CAD outperform as the risk appetite would lower in the wider market. There is little of direct Canadian influence this week, or next, so expect the lead to continue to come from the performance of the US dollar.

The NZ dollar remained in demand against the Japanese YEN last week. The much anticipated BOJ stimulus package did not disappoint, despite the initial reaction setting the pairs low for the week. The resistance at 66.50 was taken out relatively easily as latent NZ dollar demand emerged. However the pair was not able to consolidate above that level and again it provides an initial target for any further NZD appreciation. The US election will provide the lead for the pair ahead of the 3rd quarter NZ employment numbers on Thursday. For the time being the YEN’s “safe haven” status is in question, and it will be interesting to see if the breakdown of this entrenched correlation can remain in place over the coming weeks.

This pair again saw a very contained range last week. The advance through resistance at 1.0400 proved short lived as the prospect of the US election and the RBA meeting later today proved unattractive for investors with bought AUD positions. These two events will certainly provide the lead in the short term. Given the markets expectance of a RBA 3.00% cash rate before year end, the election result will likely be of more relevance in the short term. The Australian employment numbers and quarterly RBA monetary policy statement on Thursday will provide focus for what should be a an action filled week. Any consolidation through the initial resistance at 1.0400, would mean the higher resistance level at 1.0470 quickly becomes the target.

This pair saw another week of contained ranges last week. Both currencies saw periods of pressure, with the AUD outperforming the GBP over the course of the week. The increasing tension in Europe may continue to drag on the fortunes of the GBP in the short term at least. Today’s RBA monetary policy decision provides the initial focus ahead of the Australian employments numbers and ECB monetary policy decision on Thursday. These all come with a backdrop of the US presidential elections, that should ensure an action packed week. Expect stern resistance at .6500 (support 1.5385) on any further AUD out performance. Current levels offer good value buying of GBP with AUD from a risk versus reward perspective.

The EURO has seen steady pressure from the AUD over the course of the last week. The EURO under performance has been driven by renewed concerns around Greece and Spain. The pair sits just over the substantial resistance level of .8100 (support 1.2350) and todays RBA meeting will certainly provide immediate direction ahead of the US presidential election results. Thursday also sees the latest Australian employment data released ahead of what should be an unchanged monetary policy decision from the ECB. Any progress on a Spanish approach for funding would ease concerns in Europe, and likely take some of the pressure off the EURO.

The Canadian dollar finally found support against the Australian dollar last week. The recent under performance has been relentless from the CAD, and it was the resistance at the 1.0400 level that managed to tame the AUD appreciation. Comments from BOC Governor Carney on Friday lead the move lower. This central bank focus continues later on today with the RBA’s cash rate decision. Thursday sees the release of the latest Australian employment numbers. All of this information comes with a back drop of the closely fought US presidential election. The result will be of material impact, with a Obama re-election likely to put the AUD under renewed pressure in the short term.

Last week the Australian dollar saw further appreciation against the recently under pressure Japanese Yen. The BOJ’s stimulation package was enough to satisfy the market for the time being. This coupled with the markets questioning of the YEN as a safe haven asset, should see the pair remain at, or above, its recently elevated level in the short term at least. This week’s action starts with this afternoons RBA monetary policy decision. The market expects a 25 point easing to a cash rate of 3.00% by year end, so if it comes at this meeting or the next, should not be of too much consequence. Thursday’s Australian employment numbers are also of interest. These events come against the back drop of the US election in what is proving to be a closely fought contest. Overall, do not rule out further YEN under performance in the short term, albeit the AUD appreciation maybe somewhat more hard fought from the current levels.


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