US dollar strength short lived as Euro and GBP fight back

By Sam Coxhead*:

Initially last week widespread US dollar strength looked the likely theme of the week.

The resurgence of the US dollar lasted the first half of the week, but with an inability to follow through against the EURO and GBP, its dominance was short lived.

The confirmation of lower activity in the Chinese manufacturing sector, confirmed the vulnerability of the Australasian currencies. Both the New Zealand and Australian dollars underperformed, against those currencies with lower exposure to the developing Asian economies. This should now continue in the short term.

The Japanese YEN had an interesting week, as it halted its recent decline and recovered some lost ground, as the end of financial year in Japan approaches.

European debt concerns were somewhat muted, as the market seems happy to focus a little more of growth levels for the time being.

Major Announcements last week:

·  UK inflation 3.4% vs 3.3% expected

·  US Building permits 0.72m vs 0.69m expected

·  US Existing Home Sales 4.59m vs 4.61m expected

·  NZ GDP +0.3% vs 0.6% expected

·  HSBC Manufacturing PMI 48.1 vs 49.6 previous

·  UK Retail Sales -0.8% vs -0.5% expected

·  Canadian Retail Sales -0.5% vs +0.5% expected

·  Canadian Inflation +0.4% vs +0.3% expected

·  US New Home Sales 313k vs 326k expected

NZD/USD 

This pairing has had an almost identical range to the previous week. The resurgence of the US dollar could not be sustained as US longer term interest rates moved lower to finish the week. Much of the focus will come from the US this week, with a light NZ economic calendar. Further housing, durable goods orders and consumer sentiment numbers will be the focus. If we see another move back higher from US longer term interest rates, the NZD will gain come under pressure. Consolidation below .8050 is needed to enable another move lower from the NZD. A slowing Asian economy should see a weaker NZD overtime, but the .8050 support may prove tough to break this week.

NZD/AUD (AUD/NZD)

This pair remains very much within its recent range. While the cash rate differentials remain the primary driver for the pair, expect the lead to come from the ebbs and flows surrounding the likelihood of a further easing from its current 4.25% cash rate by the RBA. The RBNZ are unlikely to change the 2.50% cash rate in NZ in 2012, so their input is limited in the short term. The outlook of Asian trading partners remains crucial for the RBA. This week we are unlikely to see a break of the .7700 - .7830 recent range (AUDNZD 1.2770-1.2990), in the absence of top tier economic data in either economy.

NZD/GBP (GBP/NZD)

The Pound sterling put some good pressure on the NZ dollar for much of last week, before the NZD took back some of its losses late in the piece. Stronger than expected inflationary pressure in the UK, coupled with weak Chinese manufacturing numbers enabled the GBP appreciation. The weaker than expected UK retail sales numbers saw the GBP give up ground towards the end of the week. With little in the way of top tier economic data in either economy this week, expect a smaller, more contained range. The lead will come from the wider market appetite for risk, with the NZ dollar out performing in times of positive sentiment. Consolidation below .5100 (above GBPNZD 1.9600), will be the initial target for those looking for the GBP to outperform.

 NZD/CAD

This pair remains in its recent range. The Canadian dollar put reasonable pressure on the NZD for much of last week, but again support at .8000 proved too strong. Stablisation of stock markets in the latter part of the week supported the resurgence of the NZ dollar, as the CAD suffered along with the US dollar, which was also giving up ground. This week should see a further contained range ahead of the Canadian GDP number of Friday, in the absence of any top tier economic data in New Zealand.

NZD/EURO (EURO/NZD)

The NZ dollar was outperformed by the EURO last week, although it bounced from its lows. The slowing growth outlook for NZ’s important Asian trading partners, coupled with the weak 4^th quarter NZ GDP number, eased the way for NZD depreciation. In Europe this week’s economic data focus will be on the German Business sentiment numbers on Monday. In NZ it will be the NBNZ Business Confidence Survey release on Thursday. The ongoing debate over measures to contain further possible European debt contagion at the EU summit, will also be closely watched by the market.

 NZD/YEN

Last week saw the YEN finally take back some of the ground it has lost to the NZD so far in 2012. The release of a weak NZ GDP number accelerated the NZD depreciation. The pair did bounce off the lows as the global stock markets stablised, and the pair starts the week not too far from the now resistance at 67.80. Second tier Japanese and NZ data should be of limited impact this week coming. Expect the lead to come from the wider market risk appetite. If resistance at 67.80 holds, expect further downward pressure on the NZD.

AUD/USD

The Australian dollar has been under renewed pressure from the US dollar over the last week. The pair starts the week close to substantial support around the 1.0500 level. The initial pressure last week came after the Chinese authorities downgraded their growth expectation for 2012 to 7.5%. Then came the much weaker than expected Australian GDP numbers. Subsequently the interest rate market moved to increase the chances of a  cut to the cash from the RBA in the coming months, and again this is AUD negative. Apart from home loan data in Australia tomorrow, the focus will entirely come from the US. Do not expect the FED to make any changes to monetary policy at their meeting on Tuesday. The bias for this pair remains to the downside as the interest rate differential look to contract.

AUD/GBP (GBP/AUD)                            

The recent trend towards a weaker AUD against the Pound Sterling continued last week. The AUD did manage to bounce back from its lows,  but it remains poised to investigate back lower towards more historically average levels. The weaker Chinese manufacturing numbers were coupled with the materially stronger than expected retail sales numbers in the UK. This week sees little in the way of Australian or UK economic data, so expect the wider market risk appetite to provide much of the lead.

 AUD/EURO (EURO/AUD)

The Australian dollar has continued to see further pressure from the EURO. The AUD has managed to consolidate off the recent lows, albeit not by a large margin. As long as the pair can continue to consolidate below resistance at .7920 (above support 1.2620), then further investigations lower from the AUD will be forth coming. There is little in the way of economic data in Australia this week, so expect the bulk of the focus to come from Europe. German business confidence numbers will be the focus alongside the progress of the EU summit towards measures to contain any further debt issues from its members.

 AUD/YEN

The YEN finally reversed some of the Australian dollar gains it made in 2012. The pair started the week at its peak and the AUD was under steady pressure that accelerated as weak Chinese manufacturing data was released. The pair has bounced from the lows, but remains under initial resistance at 87.00. There is little in the way of top tier economic data in either economy, to provide direction this week. Therefore expect the bulk of the lead to come from the wider market risk appetite. Another factor that may come into play is further evidence of AUD denominated bond issuances in Japan. These “carry trade” vehicles, offer Japanese retail investors the AUD interest rate yield, which explains their popularity when compared to Japanese interest rates at .1%. Evidence of these issues will see AUD demand over YEN.