Periods of intense pressure on equity markets weighs on demand for the NZ dollar

By Sam Coxhead*:

The financial markets performed relatively well in what was an uncertain environment last week.

Once the US election result was digested the focus quickly returned to on going issues in both the US and Europe.

Ironically, global economic data was better than expected for the most part. But consternation remains relatively high as the US fiscal issue starts to heat up.

Progress on Greek budgetary reform is positive, and the Spanish funding program has been completed for 2012.

These two events take a little pressure of the European focus in the short term.

The Asian growth profile remains mixed, but the signs are encouraging that China has managed to orchestrate a soft landing.

The Australasian picture proved dynamic will the Reserve Bank of Australia (RBA) holding the cash rate at 3.00% for the time being and the NZ unemployment rate unexpectedly jumping through 7%.

Major Announcements last week:

·  RBA leaves the cash rate unchanged at 3.25%

·  UK Manufacturing +.1% vs +.3% expected

·  NZ Unemployment rate 7.3% vs 6.8% expected

·  Australian Unemployment rate 5.4% vs 5.5% expected

·  BOE leaves monetary policy unchanged

·  ECB leaves monetary policy unchanged

·  Chinese Inflation 1.7% vs 1.9% expected

·  US Consumer Sentiment 84.9 vs 82.6 expected

·  Chinese Trade Balance 32.0B vs 27.1B expected

NZD/USD 

Last week was an interesting one for this pair. Following the US election equity markets saw periods of intense pressure and this weighed on demand for the NZ dollar. But the defining moment for the week was the release of the horrible NZ employment numbers. These lead to a dramatic fall in demand for the NZD that pushed the pair below the support at .8150 for a time. However, with the situation in Europe looking a little more positive the wider market sentiment has picked the NZD off the lows for the time being. Expect further appreciation for the NZD to be hard fought this week, and for the next few. The US fiscal situation means risk aversion should be the sentiment default and this should underpin demand for the US dollar. Initial support will again come at .8150, and then further below at .8100.

NZD/AUD (AUD/NZD)

Last week was significant for this pair. The decision from the RBA to hold off easing their cash rate to 3.00%, was followed by the disappointing NZ employment numbers. The upshot was the NZ dollar was pressured down through what had recently become reasonably strong support levels. The .7800 (1.2820) level has held for the time being, but certainly a renewed air of vulnerability has returned to the NZ dollar. However, it is probable that the .7800 (1.2820)  level will cap further AUD appreciation. The prospect of an easing at the next RBA monetary policy meeting should provide enough of a cushion for the NZ dollar from the current levels. NZ retail sales numbers on Wednesday provide the data focus for the week, with a +.4% increase in activity expected. Buying NZD with AUD around current levels should prove worthwhile over time. This assuming expectations for a cut from the RBNZ do not irrationally increase in the short term.

NZD/GBP (GBP/NZD)

Last week proved to be quite a volatile one for this pair. After seeing periods of reasonable demand and pushing up to recent highs, the NZ dollar saw a dramatic fall in demand following the US election result and Q3 NZ Employment numbers on Thursday. However the move beyond .5100 (1.9600) proved short lived and the NZ dollar has seen grinding appreciation since its low was reached. The pair currently finds itself right on NZD resistance at .5150 (GBP support 1.9420), and immediate direction is unclear. For the most part this week’s lead will come from the UK, and its flurry of top tier economic news. The pair remains stuck well within its wider .5000 - .5200 (1.9230 – 2.000) range that has been in place for almost three months now.

 NZD/CAD

The NZ dollar saw a dramatic fall in demand following last week’s NZ employment numbers. The move took the pair from close to the highs of last week’s range to set the lows. Since then we have seen mild NZ dollar appreciation as the wider market sentiment has improved a little. This week sees little in the way of economic news in Canada, so expect the Q3 NZ retail sales numbers on Wednesday to provide the bulk of the focus. Should the wider market risk aversion increase, the initial downside target for this pair remains support at .8100. A break of this level would open up the way for a move back towards more historically average levels for the pair.

NZD/EURO (EURO/NZD)

The dramatic event for this pair last week was surprisingly provided by the NZ employment numbers. The NZ dollar saw considerable pressure following the dismal 3rd quarter data, and in the following sessions it saw the NZD lows for the week. Since then the hesitantly positive news from Greece has boosted wider market sentiment and this has enabled the NZD to take back some of its lost ground. The pair has returned back towards levels that offer reasonable value buying of EURO with NZ dollars, with the .6480 (1.5430) level likely to contain further NZ dollar appreciation in the short term. NZ retail sales numbers on Wednesday will be of note, but the real focus comes from the raft of top level economic data in Europe this week.

 NZD/YEN

This pair saw quite a dramatic turnaround of its recent form last week. The dual forces of increased risk aversion following the Obama election win, and the dramatic increase in the NZ unemployment rate drove the move. Yesterday’s Japanese GDP number and following Shirakawa comments have stemmed the tide and seen the NZ dollar start to grind back to recover some of its lost ground. Expect the pair to be contained by the downside support at 64.30 in the short term at least. Appreciation may also prove a little difficult as well, given the current sentiment over hang being provided by the US fiscal situation. The pair seems comfortable back close to the middle of a range where is has spent a majority of the last three months.

AUD/USD

The RBA leaving the cash rate unchanged at 3.25% set the positive tone for the AUD last week. This pair even endured the Obama win of the US election on a better footing than other pairs. This is because there was a scramble to buy back “sold AUD” positions from investors that were positioning for an easing of the cash rate. This week sees the pair poised just above the initial support level of 1.0400, and further appreciation for the pair should be reasonably hard fought with the US fiscal situation looming large in the back ground. The US will be the focus this week with the latest retail sales, inflation and manufacturing numbers being joined by the FED meeting minutes and fiscal negotiations as the focus.

AUD/GBP (GBP/AUD)                            

Last week the pair burst through the substantial .6500 (1.5385) mark when the RBA decided to leave the Australian cash rate unchanged at 3.25%. From there the pair traded a relatively tight range  until the AUD resumed its grinding appreciation to reach three month highs overnight. Whether or not this momentum can be maintained remains to be seen, and current levels offer relatively good value buying of GBP with AUD. The UK becomes the focus for the most part this week with the latest inflation, employment and retail sales numbers due for release. If wider market risk aversion eventuates, expect initial AUD support at the .6500 (1.5385) level.

AUD/EURO (EURO/AUD)

The Australian dollar had a strong week against the EUR last week. Underpinning demand was the decision from the RBA to leave the Australian cash rate unchanged at 3.25%. Positive news around Greece helped the wider market sentiment at times, and this combined with reasonable Chinese numbers further boosted demand for the AUD. This week the focus comes from Europe  with business sentiment, inflation, GDP and current account numbers. The pairing is fast approaching significant resistance at .8250 (support 1.2120) and this will present the target for further appreciation. Current levels will likely look to have offered good value buying of EURO with AUD over time. Wider market issues of the US fiscal situation should mean further appreciation for the AUD should be harder fought in the coming weeks.

AUD/YEN

Last week this pair continued its volatile trend of late. In what was strange price action the YEN returned to its normal correlation with the wider market risk aversion. The AUD saw demand following the RBA decision to hold the cash rate unchanged at 3.25%, but this demand was not sustained. The risk aversion following the US election result saw the YEN demand pressure the AUD down to support at 82.20, although consolidation below this level was not achieved. Yesterday saw the lower than expected Japanese growth numbers and continued rhetoric from the BOJ put a little pressure back on the YEN. With little domestic news left this week in either economy, expect the wider market risk appetite to again provide direction.

AUD/CAD

The AUD saw further grinding appreciation against the Canadian dollar last week. Its largest boost came following the RBA decision to leave the cash rate unchanged at 3.25%. The 1.0400 level proved to be a stalling point for a time, and certainly the pair does not seem very comfortable above this level. The loss of momentum should see further upside from the AUD curtailed by the resistance at the 1.0450 level. On the downside the first decent support below 1.0400 looks to come in at 1.0330. There is little in the way of material economic data in either economy this week, so periods of directionless trade can be expected in the short term. Next week sees the latest RBA monetary policy meeting minutes feature in Australian. In Canada, retail sales and inflation data will hold the focus.

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Market commentary:

The financial markets performed relatively well in what was an uncertain environment last week. Once the US election result was digested the focus quickly returned to on going issues in both the US and Europe. Ironically, global economic data was better than expected for the most part. But consternation remains relatively high as the US fiscal issue starts to heat up. Progress on Greek budgetary reform is positive, and the Spanish funding program has been completed for 2012. These two events take a little pressure of the European focus in the short term. The Asian growth profile remains mixed, but the signs are encouraging that China has managed to orchestrate a soft landing. The Australasian picture proved dynamic will the Reserve Bank of Australia (RBA) holding the cash rate at 3.00% for the time being and the NZ unemployment rate unexpectedly jumping through 7%.

Australia

The RBA’s decision to hold the cash rate steady saw a reasonable market reaction. It was unsurprising given the markets split expectations between an easing at that meeting or next months. The monthly retail sales and employment numbers were both slightly stronger than expected. Friday’s release of the quarterly RBA Monetary Policy Statement pointed towards a move at the next meeting to see a 3.00% cash rate to end the year. Also of note was an earlier and lower expected mining capital expenditure peak. More positively, of direct impact will be the continued stabilisation of the Chinese economic data, and its positive contribution to the Australian export sector over time. This week sees little in the way of top tier economic news due for the release.

New Zealand

Last week saw the 3rd quarter employment numbers bounce the unemployment rate strongly higher to 7.3% from its previous level of 6.8%. The number indicates demonstrably weaker employment market conditions than had been previously seen, and points towards the possibility of an aberration in the data. But until the 4th quarter data comes to light, the market will work to the 3rd quarter numbers. On a positive note was the further bounce of average dairy prices at the latest Global Dairy Auction. The 1.1% increase for the month is encouraging and follows the recent increases. Also of note was credit agency Moody’s confirmation the NZ credit rating and stable rating outlook. New RBNZ Governor Wheeler continued his well balanced comments with regards to the economy, in face of criticism from attention seeking opposition politicians. This week is quiet for NZ economic news with just 3rd quarter retail sales numbers to hold interest on Wednesday.

United States

The election took primary focus in the US last week. The Obama win was never going to be particularly positive for sentiment, and this proved to be the case. The equity markets struggled in the sessions following the election result, and bond yields have continued to remain subdued. The economic data was relatively uneventful, with the latest consumer sentiment numbers portraying consumer indifference to the significant issue of the Federal Government’s “fiscal cliff”. This issue will be central in the coming month, and will dominate US headlines. This week will see the latest retail sales, inflation and manufacturing numbers released. Also of note will be Wednesdays release of the FED monetary policy meeting minutes.

Europe

Positive moves in Greece dominated the European landscape last week. The Progress of austerity measures through the Greek Parliament has been central to this. However, until the Troika review in the coming weeks, there is no certain funding path for Greece, so concerns remain. Spain is somewhat off the radar for the time being, having completed its funding requirements for 2012. The European Central Bank (ECB) made no changes to monetary policy at its meeting on Thursday. This week sees business sentiment, GDP, inflation and current account numbers scheduled for release.

United Kingdom

Last week was a relatively quiet one for news in the UK. Services and manufacturing numbers were mildly disappointing, and the Bank of England (BOE) made no change to monetary policy as widely expected. This week should prove more lively with inflation, retail sales and unemployment numbers all due for release. Wednesday sees the release of the BOE inflation report and speech from Governor King whose comments will be closely watched by the market. Of course sentiment will also be closely correlated to Europe, and any developments that play out there.

Japan

There was little in the way of economic data last week. Of note was a rebound in the correlation between risk aversion and the YEN. Following the Obama election victory the equity markets saw considerable pressure and this drove renewed demand for the YEN. Yesterday we saw the preliminary 3rd quarter GDP numbers released at -.9% against expectation of a .8% contraction. Bank of Japan (BOJ) Governor Shirakawa followed the GDP numbers with comments backing up the BOJ’s latest policy easing. He commented that the BOJ would continue its powerful easing program and that the Japanese economy is continuing to weaken. He also stated that the BOJ would continue to guide policy whilst taking into account the risks of YEN rises hurting the economic growth prospects.

Canada

It was a quiet week for economic news in Canada last week. Manufacturing numbers were slightly lower, but as expected, and the trade deficit was a little smaller than expected. This week is almost devoid of economic data and the majority of the focus will come from developments in the US. Next week retail sales numbers couple with the latest inflation data to increase the domestic focus.

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