Weaker Chinese numbers and slowing commodity demand makes Australasian currencies vulnerable

By Sam Coxhead*:

Last week amongst intensifying market noise, familiar themes continued. Further evidence came of a fragile global economy struggling for growth.

There were soft indicators from Europe, the UK , the US and China. Increased speculation about further central bank accommodation countered the weak economic data, and these two opposing forces will continue their battle in the near term.

The European Central Bank  (ECB) appears to be making progress on their strategy to protect vulnerable European debt.

This has seen the EURO in hot demand at times, as investors scramble to cover sold positions. Even with the prospect of further policy accommodation, the equity markets are lethargic.

This looks to be an indicator that their three month run of form may be close to an end.

Weaker Chinese numbers and slowing commodity demand have exposed an air of vulnerability for the Australasian duo.

Given the relative strength of the Australian and New Zealand dollars over the last few months, a period of lower demand would not surprise.

Of note this week coming is the annual central bankers symposium in Jackson Hole. In the past the US Federal Reserve Chairman Ben Bernanke taken this event as an opportunity to vocalise thought on monetary policy. Given the uneven reaction to last week’s FED monetary policy meeting minutes, it would not surprise to see Bernanke once again articulate this thoughts.

Major Announcements last week:

·  RBNZ NZ Inflation Expectations Survey 2.3%

·  Canadian Retail Sales -.4% vs +.3% expected

·  Chinese HSBC Manufacturing Survey 47.8 vs 49.3 previous

·  German Manufacturing PMI 45.1 vs 43.5 expected

·  European Manufacturing PMI 46.2 vs 43.7 expected

·  UK revised GDP +.5% as expected

·  US Durable Goods Orders -.4% vs +.5% expected

NZD/USD 

This pair continues to trade within its broader .8000- .8200 range that we have seen for the last month or so. The US Federal Reserve monetary policy meeting minutes initially increased expectation for further action from the FED and this boosted the NZ dollar to the highs for the week. The boost was brief, as the Chinese manufacturing data aptly pointed out the vulnerability of the NZ dollar to slowing Asian growth. In the absence of a surprise from the central bankers symposium in Jackson Hole, expect the pair to remain within its broader range this week. Certainly NZ dollar efforts to the topside should be somewhat limited in the current environment, with Asian growth increasingly fragile.

NZD/AUD (AUD/NZD)

The NZ dollar outperformed the Australian dollar lasts week. News of a pull back in mining infrastructure investment, lower commodity prices and further contraction in Chinese manufacturing saw the AUD under increasing pressure. The NZD appreciation has stalled at tough resistance at .7800 (1.2820 support) . Consolidation through this level is needed before any further NZ appreciation will be seen. The lead is unlikely to come from NZ this week. More important are the Australian numbers. The latest building approval  data will be released alongside the private capital expenditure numbers on Thursday. The capital expenditure will likely provide the lead, ahead of further Chinese manufacturing data on Friday.

NZD/GBP (GBP/NZD)

The NZ dollar saw a little more of the recent pressure from the Pound Sterling last week. It was a case of underperformance of the NZD , as opposed to any material GBP strength. Expect weak Asian growth indicators to further weigh on the NZ dollar should they be forth coming in the near term. Expect external leads to continue to be the driver for this pair this week, with just the NBNZ business confidence numbers on Thursday of any material note. Overall, it seems likely that the recent sideways trade will continue in the short term. Lower risk appetite in the wider market should feed through to further pressure on the NZ dollar at some stage.

 NZD/CAD

This pair saw further sideways shuffling within its broader range last week. The NZ dollar saw initial appreciation as the Canadian retail sales number was followed up by downbeat comments from the BOC Governor Carney. However the tide was turned as the Chinese manufacturing numbers saw renewed softness and posted their 10th consecutive month of contraction. Expect further sideways trade from this pair to start this week. With only the NBNZ business confidence survey on Thursday in New Zealand, expect intense focus on the Canadian GDP and further Chinese manufacturing numbers on Friday.

NZD/EURO (EURO/NZD)

The NZ dollar saw further pressure from the resurgent EURO last week. As the ECB continue their work on how best to stablise European funding markets, it appears that investors with “sold EURO” have decided to scramble and exit their positions. This pickup in demand for EURO is coupled with increasing NZD supply as growth softens in Asia. This eases the way for this pair back towards more historically normal levels, although we are not there yet. The .6450 (1.5500) level presents the next hurdle to further EURO appreciation. Any evidence the ECB are floundering with solutions would see renewed pressure on the EURO. German business confidence numbers later on today present the initial focus for the week. The results from the tentative Italian 10 year bond auction will also be very closely followed. A good take up would likely see further covering demand for the EURO.

 NZD/YEN

It was an interesting week for this pair last week. The NZ dollar saw some initial appreciation before coming under a little pressure following the release of further contraction in the Chinese manufacturing sector. The weak US data on Friday further contributed to the downward pressure on the NZD. The YEN remains a safe haven destination, if not quite to its former status. With little economic data of note in either economy this week, expect the lead to come from the wider markets appetite for risk.

AUD/USD

This pairing saw further volatility within a contained range last week. After initially seeing some strong demand the AUD succumbed to pressure from the US dollar. The FED meeting minutes immediately then boosted the AUD by over 100pts to go close to resistance at 1.0550. From then selling pressure has been quite relentless. The weak Chinese manufacturing numbers coupled with a pull back in mining investment saw impetus for lower AUD. This week will see the majority of focus for the pair come from the US. Consumer confidence, preliminary GDP, home sales and weekly jobless claims numbers all come ahead of FED chairman Bernanke’s speech at the central bankers meeting in Jackson Hole. In Australia the private capital expenditure numbers on Thursday will garner attention. A break down through the near term support at 1.0350 would open up the way for further US dollar appreciation.
 

AUD/GBP (GBP/AUD)                            

The Australian dollar underperformed against the Pound Sterling last week. In a perfect storm of lower Asian growth and stalling mining investment, the AUD remains vulnerable. Current rates are close to crucial support at .6550 (resistance 1.5270), consolidation through this level would open up the way for further investigations lower for the AUD. With a quiet week for news in the UK, expect the lead to come from Australia and growth indicators in Asia. Thursday sees building approval and private capital expenditure numbers due in Australia. The official Chinese manufacturing numbers on Friday will be closely watched, as well as any headlines emanating from the central bankers meeting in Jackson Hole.

 AUD/EURO (EURO/AUD)

The Australian dollar saw periods of considerable pressure from the resurgent EURO last week. The scramble from investors to buy EURO , coupled with lowering AUD demand lead the move. Weaker Chinese manufacturing numbers, and the stalling on considerable mining investment lead to the lower demand for the AUD. The EURO has seen increased demand as the ECB works its way through what will hopefully be a definitive support structure for European debt markets. European employment, inflation and retail sales numbers will provide the lead in Europe. In Australia, Thursday’s release of the building approval and private sector credit numbers will be closely watched. The official Chinese manufacturing numbers come late Friday, and could be an impact particularly if demonstrably weak. A break of the support at .8250 (1.2120 resistance) would open up the way for another leg weaker for the AUD.

 AUD/YEN

The AUD was under pressure last week, and against the YEN was no exception. After touching resistance at 83.50 early in the week, the sell off to 81.50 was almost in a straight line. Weaker Chinese data and stalling of mining investment drove the most. This week sees all the focus again in Australia, with a lack of economic data due in Japan. Thursday sees both building approval and private capital expenditure number released. Along with the Bernanke speech at the Central bankers symposium on Friday, the official Chinese manufacturing numbers will be closely followed.

AUD/CAD

Last week this pairing was a battle of the weakening currencies. Initially the CAD underperformed following the weak Canadian retail sales numbers, and the US FED monetary policy meeting minutes. However the turnaround came with the news of weak Chinese manufacturing numbers and stalling mining investment in Australia. A break down through the 1.0280 level would open up the way for further investigations lower. This week sees the Australian focus come on Wednesday, with the release of the building approval and private capital expenditure numbers. On Friday in Canada the monthly GDP numbers will be released and these will be closely watched. These come against a background of the central bankers symposium in Jackson Hole. Traditionally US Fed Chairman Bernanke has used this event as a means to communicate thoughts on monetary policy with the market.

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Market commentary:

Last week amongst intensifying market noise, familiar themes continued. Further evidence came of a fragile global economy struggling for growth. There were soft indicators from Europe, the UK , the US and China. Increased speculation about further central bank accommodation countered the weak economic data, and these two opposing forces will continue their battle in the near term. The European Central Bank  (ECB) appears to be making progress on their strategy to protect vulnerable European debt. This has seen the EURO in hot demand at times, as investors scramble to cover sold positions. Even with the prospect of further policy accommodation, the equity markets are lethargic. This looks to be an indicator that their three month run of form may be close to an end. Weaker Chinese numbers and slowing commodity demand have exposed an air of vulnerability for the Australasian duo. Given the relative strength of the Australian and New Zealand dollars over the last few months, a period of lower demand would not surprise.

Of note this week coming is the annual central bankers symposium in Jackson Hole. In the past the US Federal Reserve Chairman Ben Bernanke taken this event as an opportunity to vocalise thought on monetary policy. Given the uneven reaction to last week’s FED monetary policy meeting minutes, it would not surprise to see Bernanke once again articulate this thoughts.

Australia

Last week in Australia the release of the minutes from the previous Reserve Bank of Australia (RBA) monetary policy meeting provided the focus. The familiar themes continued with Europe providing ongoing concerns, and their view that China has seen growth reduce to more sustainable levels. Interestingly they seem relatively relaxed about the level of the Australian dollar. It has certainly kept any inflationary pressure under control for the most part. The news that around 50 billion of mining investment has been put on hold is of increasing concern. Given that mining investment has been a dominant driver in the economy, this will be closely monitored going forward. A tenth consecutive month of contracting manufacturing activity in the HSBC Chinese manufacturing survey has increased concerns that Chinese growth is more vulnerable than previously thought. The state of manufacturing numbers will be released this Friday and these will be closely watched to see if the lower activity is mirrored.  The Australian data focus comes on Thursday, with the release of the monthly building approval and quarterly private capital expenditure numbers. Given the current headwinds, the Australian dollar looks a little vulnerable, and any upside surprises should be limited in the short term at least.

New Zealand

Last week there was limited economic news in New Zealand. The highlight was provided by the Reserve Bank of New Zealand (RBNZ inflation expectations survey and this saw a slightly lower result at 2.3% (previously 2.4%). This week is similarly quiet with just the NBNZ business confidence results on Thursday. The weak HSBC Chinese manufacturing survey result was of note last week. China will again be the focus this Friday when the official numbers are released. The RBNZ are not expected to change the emergency low cash rate of 2.50% in the coming 12 months according to the latest pricing in the interest rate markets.

United States

Last week the Federal Reserve monetary policy meeting minutes pointed towards further accommodative monetary policy from the FED. The market’s reaction was lower demand for the US dollar initially, before sanity prevailed and the US dollar took back the lost ground. The economic data was mixed, with strength coming in from housing and manufacturing numbers, while Fridays Durable Goods sale figures painted a gloomier than expected outlook. This week will be another interesting one for the US economy. Preliminary GDP and the latest housing numbers are due on Wednesday. These come ahead of the annual central bankers symposium over the weekend. In the past, FED Chairman Bernanke has used this symposium as an opportunity to communicate further on monetary policy.

Europe

Sentiment has improved on the European debt markets as the ECB continued to work on their stability solution. Capping funding costs for bailout nations is one option gathering momentum. The ensuing demand for the EURO was driven by investors scrambling to exit “sold” Euro positions, and this reversal may have some way to go yet. Ironically the economic data remains horrible for the most part, and there is certainly a long road ahead to see a decent recovery in economic growth. One number that bucked the trend was the better than expected manufacturing numbers released Thursday. Whilst still contracting, the contraction was less than expected, as can be directly attributed to a lower level of the EURO making goods more competitive. This week sees the release of European inflation and employment numbers. These come on Friday and their impact maybe lessened by the focus that will be on the central bankers symposium in Jackson Hole. Also of note will be the German business confidence numbers due for release later on this evening.

United Kingdom

The residential housing market remains under pressure in the UK. The House price index was -2.4% for July and is seemingly coupled with lower retail spending. Final GDP numbers for the 2nd quarter confirm a .5% contraction in activity. Unsurprisingly business investment numbers have also fallen, down 1.5% for the quarter. This week is again light on economic data in the UK. Expect the focus to be centered around any developments in Europe, or headlines from the central bankers symposium in Jackson Hole. Whilst the Pound Sterling has recovered from the lows seen a couple of weeks ago, the economy is now confirmed to have had its 3rd straight quarter of contraction and remains under considerable pressure.

Japan

It was a relatively quiet week for economic news in Japan last week. The trade balance numbers reveal a drop in demand for imports. This fall in import demand is indicative of a slow domestic economy, and will not be the result wanted at the Bank of Japan (BOJ). This week sees the retail sales, inflation and industrial production numbers due for release. Along with these numbers, expect the lead to come from the central bankers symposium in Jackson Hole.

Canada

Last week saw the July retail sales number disappoint the market in Canada. It was -.4% versus an expectation of a +.3% rise. This was followed by a scheduled speech by Bank of Canada Governor Carney. He spoke at length about the current vulnerability of segments of the Canadian housing market. Once interest rates started to rise from their current historic lows he pointed out that the current problems could become more acute. He also stated that the CAD was seeing demand as a safe haven market, and these flows were pushing longer term interest rates to record low levels. This week sees the monthly GDP numbers released on Friday, and these provide the domestic highlight for the week.

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