Volatile price action as economic and macro factors influence investor decisions

By Sam Coxhead*:

Last week asset markets of all kinds saw reasonably volatile price action as both economic data and macro factors influenced sentiment.

The dominant factors of the Greek funding package and the US “fiscal cliff” continued to exert their influence. 

Adding to the complex mix were escalating tensions in the Middle East, and the calling of a snap election in Japan.

Australasian news was comparatively docile, with just the continued run of down beat 3rd quarter NZ economic data to provide interest.

The themes remain similar this week, though the markets uncertainty seems to have dissipated somewhat.

Friday saw surprising early progress in the US, and this has seen the positive sentiment extend into the start of this week’s trade.

Risk appetite increased further on trade overnight, driven by higher expectation of a solution for Greece, and an absence of negative news on the US fiscal situation.

This has seen investors scrambling to cover recent risk aversion trades, best illustrated by the NZ Dollar’s strong performance in offshore markets.

Major Announcements last week:

·  UK Inflation 2.7% vs 2.3% expected

·  NZ Retail Sales -.3% vs +.6% expected

·  UK Unemployment rate 7.7% vs 7.8% expected

·  US Retail Sales 0.0% vs +.2% expected

·  UK Retail Sales -.8% vs -.7% expected

·  US Inflation +.2% vs +.1% expected

·  Moody's downgrades France from AAA to AA1

NZD/USD 

The NZ dollar has had a mixed last week against the USD. The pressure really came on following the disastrous 3rd quarter NZ retail sales number. However, the recovery in sentiment in the offshore session on Friday has seen some scrambling to cover sold NZD positions. This increased NZ dollar demand has pushed the pair back into familiar territory. Yesterday’s demonstrably stronger October Services number in a survey from the BNZ illustrates that the Q3 weakness may just have been a speed bump in the economic recovery. There is little of material economic data for the remainder of this week in NZ, but tomorrow’s Global Dairy Trade auction results will be closely watched. These auction results affect international investor demand for New Zealand dollars, and can therefore affect price action in the short term. Assuming that the positive rhetoric on the US fiscal situation can be backed up in concrete progress towards a deal (be sceptical), the US dollar may see some further pressure in the short term. Expect the upper levels of the recent range between .8250 - .8300 to provide ample resistance should this current positive sentiment continue.

NZD/AUD (AUD/NZD)

The NZ dollar saw further pressure from the AUD following last week’s poor Q3 NZ retail sales numbers. The market moved to increase the odds of a cut to the NZ cash rate from the RBNZ and the pair adjusted accordingly. This week has seen a return of the markets senses and the pair now sits comfortably back in it’s recent range. This sits comfortably with the NZ interest rate market that has not reversed the moves lower, that followed last week’s retail sales result. The strong BNZ Services survey October result looks to have initiated the demand, and a scrambling to buy NZ dollars has ensued. Today’s RBA minutes revealed little of new insight, and the market remains weighted slightly towards a further easing to the Australian cash rate to 3.00% on December 6th. The Global Dairy Trade results could impact NZD demand in the offshore session today, and will be closely watched by the market.

NZD/GBP (GBP/NZD)

This pair remains in a wider, but still very familiar range. The NZ dollar has seen varying demand to provide the movement for the pair. The slump in demand for the NZD following the poor retail sales number last week, proved somewhat temporary. The boosted sentiment on Friday has continued through into this week, and this has seen the scramble to buy back NZ dollars push the pair back up towards last week’s highs. Progress from here is less certain with the pair having done the easy work. Certainly boosting through last week’s highs for the NZD, will require a solid Global Dairy Trade auction later on today. The BOE monetary policy meeting minutes tomorrow provide the focus in the UK, and will be closely watched. Current levels represent pretty fair value for this pair.

 NZD/CAD

The NZD initially started stronger against the Canadian dollar last week. The poor Q3 NZ retail sales number saw that strength completely reversed and the Canadian dollar pressured the NZD for much of the remainder of the week. A late bounce from the lows was driven by improved sentiment in the wider market, and this has certainly continued into this week. Yesterday’s strong result for the October BNZ Services survey has further fuelled demand for the NZD. The French credit downgrade has been of limited impact at this stage and the pair sits comfortably below the initial resistance at .8180. The focus for this week is certainly based in Canada, with the retail sales and inflation numbers later in the week.

NZD/EURO (EURO/NZD)

Last week revealed choppy price action for this pair. The NZ dollar started the week initially well, before the weak retail sales number completely undermined demand for the NZ dollar. Support at .6250 (resistance 1.6130) was broken, but consolidation through this level proved a step too far for the pair. As the wider market sentiment improved as positive news from the US emerged, the NZ dollar started to recover. Yesterday’s release of the strong services survey for October further boosted demand for the NZD. The pair comfortably sits within its recent range, as the EU prepare to release their latest solution for Greece. Expect the volatility to continue into the end of the year, whilst the pair could well remain contained within its wider range.

 NZD/YEN

The NZ dollar has seen pretty constant demand against the YEN throughout the last week. Not even the demonstrably poor Q3 NZ retail sales number could stem the momentum. The monetary stimulation numbers being talked about in the run up to the December 16th election are huge, and the YEN should remain under pressure in the short term at the very least. No doubt there will be a bounce from the YEN at some stage, but exactly when will be hard to pick. The pairs appreciation has stalled at the significant resistance at 66.75 and that remains the target in the short term. Expect little from the BOJ monetary policy meeting this week, as there is no chance of change ahead of the election.

AUD/USD

After initially making up some ground last week, the Australian dollar saw some solid pressure from the US dollar. Only late on Friday did the sentiment turn, as the positive rhetoric on the fiscal negotiations out of the US hit the headlines. This has continued this week as some more positive economic news also boosted sentiment. Today’s RBA minutes re-iterate to the market that they remain poised to ease to 3.00% if appropriate. This has stalled the AUD demand and the pair remains in what has become very familiar ground. Wider market sentiment will be the main driver from current level. Anywhere from current levels to the resistance at 1.0450, offers good value buying of US dollars with AUD.

AUD/GBP (GBP/AUD)                            

This pairing traded a relatively subdued range last week. The AUD saw a sustained period of pressure from the GBP, but the initial support at .6500 (resistance 1.5380) managed to contain the weakness. The rebound in global sentiment late on Friday has continued through into this week, and this has walked the pair back into what is becoming a newly familiar range for the pair. Today’s RBA minutes reveal the cash rate could still move lower to 3.00% if appropriate, and the market still have it even balanced whether or not this comes at the next meeting. The BOE monetary policy meeting minutes on Wednesday, should reveal on going discussions between the members about further policy accommodation. Expect the pair to see further contained ranges this week, offering levels that should represent good value buying of GBP with AUD over time.

AUD/EURO (EURO/AUD)

This pair saw periods of rapid movement last week. After some initial appreciation the AUD saw a sustained period of pressure as the risk aversion increased throughout the belly of the week. The turnaround on Friday was right on suspected support levels and the AUD has put in a grinding out performance since then. Today’s RBA monetary policy meeting minutes are unsurprising. They remained poised to cut the cash rate to 3.00% is deemed “appropriate” and it seems increasingly likely that the state of the mining sector will provide much of the lead on this. Current levels look to be very mid range, and it the EU deliberations on Greece will look to dominate the focus for the remainder of the week.

AUD/YEN

It has been fairly much all one way traffic for this pair throughout the course of the last week. The YEN pressure has been widespread and was seen even as general market risk aversion increased through the belly of last week. Progress from current levels remains unclear. Certainly further AUD  out performance cannot be ruled out and the substantial resistance at 84.80 remains the first target and it remains close. The BOJ monetary policy meeting should reveal no change now we have an election scheduled for mid December. With the likelihood of an increased mandate for the BOJ following the election, the next few months are going to be very interesting for the Japanese economy.

AUD/CAD

Last week provided further volatility for this pair. The AUD put on steady ground early to make the highs for the week. The turnaround came from a reversal of risk appetite in the wider market. The middle of the week saw the AUD steadily give back gained ground before the pair stabilised just on the initial support at 1.0320. The recovery this week has been somewhat muted, and the reiteration by the RBA today, that lowering the cash rate remains on the agenda “if appropriate”, should temper demand any rampant demand in the short term at least. Retail sales and inflation numbers in Canada later this week provide the remainder of the focus, and healthy numbers would see the pair renew pressure on the initial support at 1.0320 at the very least.

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Market commentary:

Last week asset markets of all kinds saw reasonably volatile price action as both economic data and macro factors influenced sentiment. The dominant factors of the Greek funding package and the US “fiscal cliff” continued to exert their influence.  Adding to the complex mix were escalating tensions in the Middle East, and the calling of a snap election in Japan. Australasian news was comparatively docile, with just the continued run of down beat 3rd quarter NZ economic data to provide interest. The themes remain similar this week, though the markets uncertainty seems to have dissipated somewhat. Friday saw surprising early progress in the US, and this has seen the positive sentiment extend into the start of this week’s trade. Risk appetite increased further on trade overnight, driven by higher expectation of a solution for Greece, and an absence of negative news on the US fiscal situation. This has seen investors scrambling to cover recent risk aversion trades, best illustrated by the NZ Dollar’s strong performance in offshore markets.

Explanation of the “Fiscal Cliff” – The “fiscal cliff” is a term used to describe the situation the US face come Jan 1st 2013. Current legislation sees the end of last year’s temporary payrolls tax, the end of certain tax breaks for businesses, the end of tax cuts from 2001/03 and the beginning of increased taxes related to Obama’s health care reform. At the same time spending cuts are to come into action as part of the agreement when last year’s debt ceiling agreement was struck. So in a nutshell the “fiscal cliff” currently starts Jan 1st 2013, and means increased taxes and lower Government spending. The  dramatic combined effect would be a fall in US economic activity, that would likely push the flailing US economy back into recession with harsh consequences for a vulnerable US, and global economies.  Compromise is needed, and this is where President Obama  and the Republican led Congress to agree on changes to the legislation to mitigate the serious situation.

Australia

Last week was a quiet one for Australian economic news. Credit agency Moody’s re-affirmed the AAA credit rating and left Australia’s outlook as stable. Australia remains in the enviable position of maintaining a strong Government financial position, having a stable political system and having the likelihood of seeing continued demand for its exports through Asian development and growth. This week sees the focus provided by today’s release of the most recent Reserve Bank of Australia (RBA) monetary policy meeting minutes. The minutes were unsurprising and leaves the way open for an easing of the cash rate to 3.00% at the next meeting on December 6th if deemed “appropriate”.

New Zealand

The news last week in New Zealand was the continuation of the awful 3rd quarter economic numbers in the form of the latest retail sales data. The .3% contraction saw a steady flow of NZD supply come to the markets in the following sessions. This number has increased conjecture about the RBNZ easing the cash rate from 2.50%. Certainly the pressure seems to be mounting for an easing in the early months of 2013. To my mind it still seems a reach to see the RBNZ hit the panic button and ease from the current emergency low levels. Interestingly, a BNZ Services survey released yesterday points towards a strong rebound in activity in the services sector in October. The Global Dairy Trade auction results overnight will also be closely watched by investors. Next week is again quiet for news with just the (ANZ) NBNZ Business Confidence survey results to be released.

United States

Last week was a curious one for the US markets. The economic data was downbeat for the most part and promoted negative sentiment for most of the week. Surprisingly the turnaround came on Friday and was driven in no small part by encouraging words from Republican congressmen with regards to the negotiations with President Obama over the “fiscal cliff”. The devil is in the detail in these instances, but it is positive all the same to have an encouraging start to such important events. Overnight saw the release of a home builder sentiment survey that shows after seven straight months of rises, that sentiment is at levels not seen for six years. This comes as this week sees the focus back on the housing market for the most part. In addition to the survey overnight, existing sales, building permits and housing starts all feature.

Europe

It has been an interesting last week for Europe. Growth numbers show the wider economy has just slipped back into recession, albeit growth in France and Germany was better than expected. Positive news is expected from the discussions on the Greek funding tranche due to be paid. Speculation has increased of an extension to the life of the loans and a reduction in interest rates to make the debt load more manageable. Certainly taking the pressure off Greece is seen as positive, as time is one of the key ingredients for economic recovery. This week’s focus is dominated by the EU meetings on Greece funding and manufacturing numbers due out on Thursday. Also of note is the just released confirmation from credit rating agency Moody's that they have downgraded France from AAA to AA1.

United Kingdom

Monthly inflation numbers in the UK show stubborn inflationary pressure still at play. An annual rate of 2.7% is uncomfortably high when growth levels are close to zero. There was also an increase in unemployment claims and a disappointing retail sales number for October. In the Bank of England’s (BOE) inflation report the growth forecasts have been  downgraded and near term inflation forecasts increased. In an apparent effort to maintain pressure on the value the GBP, the BOE continue to point pout discussion on the value of further quantitative easing. Tomorrow’s BOE monetary policy meeting minutes are the focus this week and we can expect this the lip service to further QE actions to continue as a theme. The GBP has been relatively stable with the improved expectations for the Greek funding package, and this should continue through into next week at least.

Japan

In Japan the news has continued to be all about the upcoming snap election and the likely outcomes from this. It is increasingly obvious that further aggressive policy initiatives will be undertaken by whoever forms the new leadership. Last week’s confirmed contraction in Q3 GDP of -.9% will have provided plenty of motivation for politicians to campaign on. LDP leader Shinzo Abe who is the favourite to win the Dec 16th election, is promoting the idea of a massive infrastructure plan to stimulate the economy. An essential part of this would be the Bank of Japan (BOJ) buying the “construction bond”, which is the printing of YEN to fund the projects. This will likely see the YEN vulnerable in the run up to the election at the very least. Today’s BOJ meeting unsurprisingly produced no change in monetary policy. Tomorrow’s trade balance numbers will be closely watched, but should be of limited impact in the current environment.

Canada

It has been quiet for Canadian economic news over the last week. Second tier manufacturing numbers were slightly stronger than expected and retail sales and inflation numbers later this week provide the focus in the near term. Of interest also were comments from Canadian PM with regards to foreign investment. He commented that state owned enterprises represent a “different kind of player” in foreign investment. This is of note because of Canadian Government approval is needed for the massive Petronas (Malaysian target) and Nexen (Chinese target) takeovers. Should these takeovers be turned down by the Government, there would be a material fall in demand for Canadian dollars in the short term. Some kind of decision is expected before the end of the year, and should be monitored by those with interest in Canadian dollars.

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