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European tension remains the global focus

Posted in Currencies

By Sam Coxhead*:

As expected the financial markets focus remained on Europe for the most part last week.

With low levels of liquidity as holidays and year end approaches, the price action in all markets was erratic at times.

Economic data remains patchy at best. In the US lower than expected retail sales numbers we countered by better jobless claims and manufacturing data releases.

In Europe, various Italian and Spanish debt auctions saw better than expected demand, but the threat of credit downgrades weighed on investor sentiment.

For the most part the US dollar remained in demand, before giving back a little of its gains as the weekend approached.

Major Announcements last week:

- Australian home loans +.7% vs +.1% expected
- UK inflation 4.8% as expected
- European economic sentiment +53.8 vs -56.1 expected
- US retail sales +.2% vs +.6% expected
- US Federal Reserve leaves monetary policy unchanged
- UK unemployment rate 8.3% vs 8.4% expected
- HSBC Chinese manufacturing index 49.0 vs 47.7 previously
- UK retail sales -.4% vs -.3% expected (previous month revised from +.6% to 1.0%)
- European inflation 3.0% as expected
- US weekly jobless claims 366k, best number in 3 years
- US Philadelphia Fed manufacturing index 10.3 vs 5.1 expected
- US core inflation  .2% vs .1% expected
- French credit rating placed on negative watch
- Chinese residential real estate prices see second month of declines

NZD/USD 
The NZD was under pressure from the US dollar for much of last week, before staging a late recovery to take back over half of its lost ground. The turnaround looked to be sold NZ dollar position covering as much as anything. With low levels of liquidity in the market this week, flow driven moves will be more evident than usual. The NZ focus will most certainly be the GDP number on Thursday. Further position squaring ahead of this cannot be ruled out and may provide support for the NZ dollar. Late Friday sees the most important economic data released in the US in the form of final GDP readings for the 3rd quarter and durable goods orders data. Any sharp appreciation by the NZD this week provides an opportunity for good value buying of US dollars.

  Current level Support Resistance Last wk range
NZD / USD 0.7588 0.7450 0.7650 0.7458 - 0.7752 


NZD/AUD (AUD/NZD)
The NZ dollar remained under pressure from the Australian dollar for most of last week. Interestingly on Friday the NZD finally saw some demand over the AUD and this pressure pushed the NZD higher across the board. With the pairing now moved away from the danger zone at .7500 (AUDNZD 1.3330), look for the NZD to see further demand, to push it further back towards more historically average levels. The slowing Chinese economy should mean the RBA maintain their cash rate easing bias well into 2012, and the closing of the interest rate differentials will aid demand for the NZD. Current levels still represent good value buying of NZD with AUD.

  Current level Support Resistance Last wk range
NZD / AUD 0.7652 0.7550 0.7750 0.7549 - 0.7627
AUD / NZD 1.3068 1.2900 1.3250 1.3111 - 1.3247


NZD/GBP (GBP/NZD)
The NZD dollar saw initial weakness against the Pound Sterling last week. The recovery from the lows was solid, and this week opens at mid range levels of the last six weeks or so. The NZ GDP numbers on Thursday will be the focus for the week. Also closely watched will be the BOE monetary policy meeting minutes on Wednesday. Any further moves down through the support at .4750 will be harder fought, as there will be increasing demand from those who have been patient, when the pairing  consolidated over .5000 (GBPNZD under 2.0000). 

  Current level Support Resistance Last wk range
NZD / GBP 0.4898 0.4750 0.4950 0.4826 - 0.4952
GBP / NZD 2.0416 2.0200 2.1050 2.0194 - 2.0721

 
NZD/CAD
The NZD was under pressure from the CAD for the first half of last week. Since then the recovery from the NZD has been impressive, although the NZD has opened softer this week. The NZ focus for the week will be the GDP numbers on Thursday.  It is a busy week in Canada to keep the interest up. Inflation numbers come on Tuesday, retail sales on Thursday and 3rd quarter GDP numbers on Friday. Expect the pair to remain in the recently familiar .7750 - .7950 range.

  Current level Support Resistance Last wk range
NZD / CAD 0.7892 0.7750 0.7950 0.7752 - 0.7931


NZD/EURO (EURO/NZD)
This pairing saw mainly sideways trade within a familiar range last week. Of note was the NZD resurgence from the lows on Thursday to the high set late Friday. This move illustrates the thin nature of markets coming into Christmas, as there was no material news of note. Expect further range bound trade this week. The NZ focus comes with the GDP number on Thursday. In Europe, apart from the constant eye on the debt respective sovereign markets, a speech by ECB President Draghi on Monday and German business climate numbers on Tuesday will be closely watched. A break of the resistance at .5850 - .5900 (support EURNZD 1.6950 - 1.7100), opens the way up for a further leg higher towards .6000 (lower EURNZD 1.6660).

  Current level Support Resistance Last wk range
NZD / EUR 0.5834 0.5650 0.5850 0.5744 - 0.5862
EUR / NZD 1.7141 1.7100 1.7700 1.7059 - 1.7409

 
NZD/YEN (NZD/YEN)
The NZD was under pressure from the YEN in the first half of last week, as the wider market risk aversion increased. The turnaround came Thursday and the NZD performance since then has been solid. The focus this week will be the NZ GDP number on Thursday. If the wider market sentiment improves, expect the initial resistance at 59.70 to be broken and the way opened for investigations to further resistance at 61.00. The BOJ announces monetary policy on Wednesday, but expect no change in their stance at this meeting.

  Current level Support Resistance Last wk range
NZD / YEN 59.14 57.70 59.70 58.22 - 59.66


AUD/USD
The AUD came under waves of pressure from the US dollar for most of last week. It did manage to take back a portion of its losses into the end of the week. The AUD has started this week again a little softer, as wider market risk aversion again increases. The prospect of credit downgrades in Europe, and a falling property market in China is providing the lead. This week the focus in Australia is on the RBA monetary policy meeting minutes, which are to be released on Tuesday. In the US there are various housing numbers throughout the week which will be closely watched. Also there are final US GDP numbers on Thursday, followed by the important durable goods orders numbers on Friday. Expect a good portion of the lead for this pairing to again come from sentiment driven by the debt markets in Europe.

  Current level Support Resistance Last wk range
AUD / USD 0.9915 0.9850 1.0050 0.9857 - 1.0215


AUD/GBP (GBP/AUD)                            
The AUD came under waves of pressure from the Pound Sterling last week. Initial support at .6380 (GBPAUD 1.5675), should be tested early this week, as risk aversion increases after credit rating issues in Europe and property market concerns in China. This week sees the focus on the two economies central banks, as they release their monetary policy meeting minutes from their meetings a fortnight ago. The RBA minutes come on Tuesday ahead of the BOE minutes on Wednesday. Although the downside bias for the AUD against the GBP remains in place, the pace should not be too dramatic. The prospect of an increased UK quantitative easing program in 2012, should somewhat undermine the GBP demand in the short term.

  Current level Support Resistance Last wk range
AUD / GBP 0.6401 0.6340 0.6540 0.6381 - 0.6523
GBP / AUD 1.5623 1.5290 1.5775 1.5330 - 1.5672

 
AUD/EURO (EURO/AUD)
This pair remains in very familiar territory. Last week saw mixed trade which mostly proved sideways movement. Events in Europe have been leading the demand for AUD for the most part, so it is of little surprise that the pairing has been relatively stable. In Australia this week the release of the RBA monetary policy meeting minutes on Thursday will be a focus. In Europe, a speech by ECB President Draghi late Monday provides the focus, ahead of the German business climate numbers on Wednesday. Expect the pairing to remain within the .7500 - .7700 range this week.

  Current level Support Resistance Last wk range
AUD / EUR 0.7625 0.7500 0.7700 0.7594 - 0.7710
EUR / AUD 1.3115 1.2990 1.3200 1.2970 - 1.3168


GBP/USD
The GBP saw early pressure from the US dollar, as the wider market risk aversion increased early last week. Towards the end of the week, it did manage to stage a partial recovery, but over the weekend, further sentiment negative events hit the news wires and this has the  GBP under renewed pressure. Crucial support at 1.5400 looms large, and a push down through these levels indicates another leg lower from Pound Sterling. This week in the UK the BOE monetary policy meeting minutes released on Wednesday will be the focus. In the US there are various housing reports throughout the week and these will be closely watched. Final GDP readings on Thursday and durable goods orders data on Friday will provide some insight. In the absence of a escalation of fears in Europe, expect some consolidation around current levels to occur. 

  Current level Support Resistance Last wk range
GBP / USD 1.5490 1.5400 1.5600 1.5406 - 1.5657


GBP/EURO (EURO/GBP)
Once the pair broke the initial 1.1765 resistance last week (GBPEUR .8500 support), the momentum was all in the favour of the GBP. The pairing has stablised just below the next resistance at 1.1975 (GBPEUR support .8350). Given the pair is usually relatively stable, it would be surprising if this second level was given up immediately by the EUR. Expect further consolidation by the pairing around current levels. In the UK the focus is on Wednesdays release of the latest BOE monetary policy meeting minutes on Wednesday. In Europe a speech by ECB president later on today will be closely watched, and is followed by German economic climate numbers on Tuesday.

  Current level Support Resistance Last wk range
GBP / EUR 1.1910 1.1700 1.1975 1.1690 - 1.1949
EUR / GBP 0.8396 0.8350 0.8550 0.8369 - 0.8554

 

Market commentary:

As expected the financial markets focus remained on Europe for the most part last week. With low levels of liquidity as holidays and year end approaches, the price action in all markets was erratic at times.  Economic data remains patchy at best. In the US lower than expected retail sales numbers we countered by better jobless claims and manufacturing data releases. In Europe, various Italian and Spanish debt auctions saw better than expected demand, but the threat of credit downgrades weighed on investor sentiment. For the most part the US dollar remained in demand, before giving back a little of its gains as the weekend approached.

In New Zealand there was a lack of domestic focus last week, in the absence of local economic news. This week we have the much anticipated 3rd quarter GDP numbers to look forward to on Thursday. Expectations are for around a .8% increase in activity on the quarter, with a boost expected to have come through the Rugby World Cup. Expect a little positioning ahead of this number. Evidence of this came in the offshore session on Friday, when the NZD finally saw some decent demand. This looked to be some squaring up of speculative “sold NZD” positions, especially against the Australian dollar.

In Australia last week there was little in the way of major economic news. Mondays home loans data was better than expected, but this was tempered by a downward revision of the previous months number. With a gloomier global growth outlook permeating on a weekly basis, the bias towards a lower Australian dollar is now firmly in place. Further evidence of a slowdown in China came over the weekend with news national property prices were lower for the second straight month. Speculation is now increasing that further loosening of monetary conditions from Chinese authorities is imminent. A slowing Chinese and wider Asian economy will materially affect the Australian economic outlook for 2012. Expect further easing to the cash rate in 2012, and the contraction of interest rate differentials, should lead to easing in demand for Australian dollars across the board in the coming quarters. This week’s focus will be Tuesday’s Reserve Bank of Australia’s (RBA) meeting minutes from the RBA monetary policy meeting two weeks ago.

In the US the economic picture remains one of sluggish growth. The much lower weekly jobless claims numbers last week are encouraging. This was the best number in three years for this series and points to a further reduction in the unemployment rate if momentum can be maintained. The surprisingly strong manufacturing index is also another positive sign for the economy. By far the largest risk is  further implosion in Europe in the first half of 2012, in terms of both economic and financial risks. If stability can be found in Europe, the gradual emergence back to health for the US economy should continue. This week’s focus is on the various housing numbers due for release, along with final 3rd quarter GDP readings and the “durable goods“ number on Friday.

European tensions remain the focus globally. Close attention to debt markets continues, especially as the speculation of moves by credit agencies continues. Fitch has placed France on negative watch, and rumours of a move by S&P this week are rife. Expect focus to continue on Greek and Italian debt markets in the first half of 2012, as some massive borrowings mature for both countries. The ability to rollover debt remains the key. Fast paced structural changes are required to placate lenders. Until hard evidence is in place that changes are being made, the pressure will remain. Tuesday will be the primary focus this week, with ECB President Draghi speaking ahead of the important German Business Climate numbers.

Economic news in the UK remained downbeat for the most part last week. One bright spot was a small pick up in the monthly employment numbers. This improvement will need to continue for a number of months for this to materially change the outlook in the UK. Expect more quantitative easing early in 2012 from the Bank of England (BOE), now that the inflationary pressure is finally falling. The focus for the coming week will be on the BOE monetary policy meeting minutes due for release on Wednesday. If sentiment again turns nasty in Europe, expect the Pound Sterling to make further ground against both the New Zealand and Australian dollars.

There was very little in the way of top tier economic data in Canada last week. Most of the lead came from the US dollar for the CAD. This week keeps those with Canadian dollar interests focused ahead of Christmas. Tuesday sees the release of the inflation numbers, Wednesday retail sales numbers, and on Friday monthly GDP numbers are released. If the global uncertainty picks up in 2012, the CAD will push back towards more historically average levels against both the NZD and AUD.

The Japanese economy had no top tier economic news last week. Interestingly in a survey of Japans largest manufacturers there was evidence of again growing pessimism as the high level of the YEN strangles the economy.  This week sees the Bank of Japan (BOJ) announce monetary policy on Wednesday. Whilst no change is expected to the conventional monetary policy, alternative methods may be on offer. Various offshore investment initiatives have struggled to have the desired effect on the YEN, but Japanese authorities remain poised to make significant contributions to the IMF to bolster European bailout resources. This has the double effect of placing downward pressure directly on the YEN, and hopefully providing stability for Europe, which overtime will aid the EURO’s recovery, and again reduce demand for YEN. Expect further measures such as these from authorities and the BOJ throughout 2012.

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Sam Coxhead is a currency analyst with DirectFX You can contact him here >>

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