Oil continues to rise on back of continued political tensions

By Sam Coxhead*:

Last week the foreign exchange markets took their lead from Europe, and the unfolding events in Greece.

The progression from Greek Parliamentary voting of austerity measures, was followed by the commitment of a further 130 billion EURO worth of bailout funds from the Euro-group.

The final leg in the process will be attaining 75% participation of private sector involvement (PSI) in the proposed debt swap.

Greece has opened the process and it is widely expected to succeed in getting at least 75% participation. The progress of the PSI process, and the European Central Bank’s (ECB) Long Term Refinancing Operation (LTRO), will again provide the lead this week.

The previous LTRO from the ECB is widely accepted as stablising financial markets in December.

Much is expected from this round, with around 500 billion EURO expected to be lent to banks and institutions for the three year period.

The YEN also continued to weaken last week, as the follow through from the Bank of Japan (BOJ) quantitative easing (QE), was boosted by the positive sentiment driven from Europe.

Stock markets are at or close to post 2008 highs, albeit their momentum waning somewhat.

Oil continues to post strong gains as continued political tensions provide the driving force.

Major Announcements last week:

· NZ RBNZ Inflation Expectations Survey 2.5% from 2.8% previously
· Euro-group confirms bailout funds to Greece
· Canadian Retail Sales 0.0 vs +.1% expected
· China HSBC Manufacturing 49.7 vs 48.8 previously
· German Business Sentiment 109.6 vs 108.7 expected
· UK revised GDP 4th QTR -.2% as expected
· US revised Consumer Sentiment 75.3 vs 72.8 previously
· Australia: Gillard gets vote to continue as Labor leader
 

NZD/USD 

This pairing remains stuck in its recent range. The NZD has been unable to break through resistance at .8420, even with the positive progress made in Europe and the associated EURO recovery. Expect the range bound nature of the current market to continue in the short term. Obviously any further headway from the NZD will be hard fought. Expect some volatility within the range as the week unfolds, with the EURO likely to provide the lead for the NZD. From the US perspective, GDP numbers Wednesday and manufacturing numbers Thursday will provide the focus. Increasing long term US interest rates should lend support to the USD support, but that correlation has been somewhat loose of late.

NZD/AUD (AUD/NZD)

This pairing remains in what has become very familiar territory, having traded an small range over the last week. The NZ dollar has tested the topside .7820 level (AUDNZD support 1.2790), but has yet to make a consolidated break. It is likely that if the NZD can break higher, the lead will come from softer Australian economic data. This is because that would push the bias towards the RBA easing the cash rate lower at some stage. This week that would seem unlikely, but the best chance would be on Thursday, when building and private capital expenditure numbers are announced.

NZD/GBP (GBP/NZD)

This pairing remains stuck in the recent range. Last week saw a very small range for most of the week, with both the high and low being set in the offshore session on Friday. The absence of top tier data releases continues this week. The NZ focus comes from the NBNZ business confidence numbers on Wednesday. In the UK manufacturing and construction numbers on Thursday and Friday respectively provides the lead. Expect further range trading from this pair this week. Current levels still represent good value buying of GBP from a historical perspective.

 
NZD/CAD

This pair remains in the tight range it has seen for the last month or so. The NZD remains poised to test higher levels against the CAD, but the inability to push higher in earlier attempts, makes the move all the more difficult. The current high oil price should provide some support for the CAD, and in the absence of top tier economic data, a push higher from the NZD would have to come via renewed global risk appetite. NBNZ business confidence numbers on Wednesday in New Zealand will be watched. In Canada the month GDP numbers on Friday will provide the focus.

NZD/EURO (EURO/NZD)

The NZD dollar was under constant pressure from the resurgent EURO throughout the course of last week. The market is taking heart from the ongoing process towards the successful introduction of the Greek debt swap deal. Expect focus on the PSI (debt deal) and the ECB long term funding issuance to continue this week. The NZD focus will come solely from the NBNZ business confidence survey on Wednesday. With the EURO still at historically low levels against the NZ dollar, further gains from the current levels cannot be ruled out. A consolidated break of the .6175 (NZDEUR 1.6200) level, opens up the way for a further move back towards more historically average levels.

 
NZD/YEN (NZD/YEN)

This pair spent the first half of last week in a relatively contained range before appreciating strongly on Thursday and Friday. The move higher was driven by YEN weakness, that flowed on through to the pairing from larger moves in the USDYEN pairing. The pair looked to be consolidating through the resistance at 68.00, before the NZD gave up ground as the AUD was sold earlier today against the YEN. It will be an interesting week from the current levels. Further upside moves from the NZ dollar will be harder fought than the previous moves have been.

AUD/USD

The Australian dollar remains at elevated levels against the US dollar, but the price action points towards less enthusiastic demand. Whilst the pair broke the downside support at 1.0630 for a short period, it did not consolidate below that level. Increasing longer term US interest rates should keep a little pressure on the AUD in the coming week. The focus will come predominantly from the US, with GDP numbers due Wednesday, ahead of important manufacturing numbers on Friday. FED chairman Bernanke’s semi-annual testimony will also be closely watched. In Australia there are retail sales numbers on Wednesday, ahead of construction and private capital expenditure numbers on Thursday.

AUD/GBP (GBP/AUD)                            

The Australian dollar came under pressure from the Pound Sterling towards to the end of last week. It has pushed the AUD down towards its lows of the last six weeks. If the AUD continues to see selling pressure, we may see a test of the .6650 level (GBPAUD 1.5040) this week. The Australian focus this week starts with retail sales on Wednesday, ahead of construction and capital expenditure numbers on Thursday. In the UK manufacturing numbers on Thursday will be closely followed, as will construction numbers on Friday. Current levels still represent good value buying of GBP with AUD from a historical perspective.

 
AUD/EURO (EURO/AUD)

The Australian dollar saw constant pressure from the resurgent EURO throughout the course of last week. This has continued into the start of this week, on the announcement Greece had opened the PSI, or debt swap program. Whilst this is not finalized, it appears at this stage that the 75% threshold for successful progression will be reached. Given the EURO is still at extremely elevated levels from a historical perspective, further demand for EURO should be seen. Along with potential PSI speed bumps, risks to further appreciation for the EURO come in the form of this week’s ECB longer term lending operations. The market has an expectation of around 500 billion worth of three year lending from the ECB, a number wide of that either side, would have repercussions for EURO demand.

Market commentary:

Last week the foreign exchange markets took their lead from Europe, and the unfolding events in Greece. The progression from Greek Parliamentary voting of austerity measures, was followed by the commitment of a further 130 billion EURO worth of bailout funds from the Euro-group. The final leg in the process will be attaining 75% participation of private sector involvement (PSI) in the proposed debt swap. Greece has opened the process and it is widely expected to succeed in getting at least 75% participation. The progress of the PSI process, and the European Central Bank’s (ECB) Long Term Refinancing Operation (LTRO), will again provide the lead this week. The previous LTRO from the ECB is widely accepted as stablising financial markets in December. Much is expected from this round, with around 500 billion EURO expected to be lent to banks and institutions for the three year period. The YEN also continued to weaken last week, as the follow through from the Bank of Japan (BOJ) quantitative easing (QE), was boosted by the positive sentiment driven from Europe. Stock markets are at or close to post 2008 highs, albeit their momentum waning somewhat. Oil continues to post strong gains as continued political tensions provide the driving force.
 
In Europe the mood continues to lighten, as the feeling of pending doom continues to dilute. However the pressure will remain for months, if not years, until sovereign balance sheets are bolstered for the most part. Economic growth will become more closely followed from now. German business sentiment was better than expected last week, and inflation and employment numbers on Wednesday and Thursday this week will gain attention. The expected completion of the Greek debt swap will take time, so potential speed bumps remain a risk to the EURO’s resurgent form from its recent lows in January.
 
Last week  was a quiet one for New Zealand economic data. The Reserve Bank of New Zealand (RBNZ) two year Inflation Expectations Survey revealed a tame inflation outlook. The New Zealand dollar looks like it has lost its upward momentum for the most part, with the exception of the happily downtrodden Japanese YEN. This week just sees the release of the NBNZ Business Confidence Index on Wednesday.
 
In Australia the ugly battle for the Labor Party leadership has not been too derailing for the markets. Today saw the confirmation that PM Julia Gillard retains the leadership following the challenge from previous PM Kevin Rudd. Like the NZD, the Australian dollar looks somewhat labored at current levels on multiple pairings. The Reserve Bank of Australia (RBA) monetary policy meeting minutes confirmed the RBA are on economic data watch for further moves in the cash rate. Any softer than expected top tier data will see the market increase the likelihood of a cash rate reduction. This week sees the release of the latest retail sales numbers on Wednesday, and building and private capital expenditure on Thursday.
 
In the US the economic calendar was also light last week. The housing market remains the primary concern to the improving economy. Of note were consumer sentiment numbers which beat expectations. This week sees an array of economic data due for release. Key will be the preliminary GDP numbers on Wednesday, and manufacturing numbers on Friday. FED chairman Ben Bernanke also makes his semi-annual monetary policy testimony to the House Financial Services Committee on Wednesday. It will be a relief to US manufacturers to see the EURO recovery in the recent weeks, a further extension higher from the EURO would provide further relief to those US exporters.
 
The UK economy remains under pressure. Last week was a relatively quiet one for economic data. The Bank of England (BOE) monetary policy meeting minutes were interesting, with two of the seven members voting for 75 billion more QE, than the 50 billion that was decided on. This sentiment should cap any potential for real GBP strength in the short term at least. Revised GDP numbers were as expected at negative growth of .2% in the final quarter of 2011. This week is quiet again, with just manufacturing numbers Thursday and construction numbers on Friday due for release.
 
There was no economic data in Japan last week, but exporters finally got plenty to cheer about. The YEN continued its move lower across the board following the QE initiative from the bank BOJ. The reduced level of risk aversion saw further supply of YEN come to the market, to accentuate the moves. This week sees Japanese retail sales numbers on Monday and inflation data on Thursday. Expect these to be of limited influence, as an apparent fundamental shift continues to weaken the YEN.
 
Retail sales number in Canada were slightly worse than expected when released last week. They came out flat against an expectation of a .1% rise. The increasing level of the oil price should benefit the CAD at some stage soon, if political tensions surrounding Iran and Syria remain high. The week coming is a relatively quiet one for the Canadian market, with the focus coming from the monthly GDP numbers on Friday.
 

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