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Political instability in Italy pushes debt funding rates higher for the non Franco-German governments

Posted in Currencies

By Sam Coxhead*:

Last week saw a continuation of the major themes that have dominated the wider financial markets for 2012.

Uncertainty in Europe looks to be re-emerging as political instability in Italy pushes debt funding rates higher for the non Franco-German governments.

The major central banks look to continue their efforts to debase the value of their currencies.

Expect further quantitative easing (QE: essentially the electronic printing of money, to stimulate economic growth) from the US FED this week, the Bank of Japan (BOJ) next week, the Bank of England (BOE) next year, and a lower cash rate from the European Central Bank (ECB) in the coming months.

The fiscal negotiations are on going in the US. The lack of progress is starting to impact in the economy as evidence of lower investment and falling consumer sentiment emerges.

The improved outlook in China has continued and this bodes well for intra Asian trade in particular.

The Australian and New Zealand dollars remain in demand as they look like finishing 2012 towards the upper end of their well established ranges.

Conceivably the direction less nature of the foreign exchange markets will continue into the opening months of 2013, as the opposing forces of European/US uncertainty and the massive stimulatory efforts from the central banks, continue to battle for the upper hand.

Major Announcements last week:

·  Australian Retail Sales 0.0% vs +.4% expected

·  UK Manufacturing 49.1 vs 48.1 expected

·  US Manufacturing 49.5 vs 51.5 expected

·  RBA cuts cash rate to 3.00% as expected

·  BOC leaves cash rate unchanged as expected

·  Australian GDP +.5% as expected

·  RBNZ leaves cash rate unchanged as expected

·  Australian Unemployment rate 5.2% vs 5.4% expected

·  BOE leaves monetary policy unchanged

·  ECB leaves monetary policy unchanged

·  Canadian Unemployment rate 7.2% vs 7.4% expected

·  US Unemployment rate 7.7% vs 7.9% expected

·  US Consumer Sentiment 74.5 vs 81.2 expected

NZD/USD 

The NZ dollar outperformed the US dollar last week. Following the balanced RBNZ monetary policy statement, investors positioned for a statement with an interest rate easing bias scrambled to cover their “sold NZD” positions. This boosted demand and saw the pair break the initial resistance at .8250 and flirt with the close by .8350 level. This .8350 remains the key level for immediate direction. A break of this level would indicate a continuation of the NZ dollar appreciation. Whatever the eventuality, further gains for the NZ dollar should be harder fought from the current levels. Uncertainty remains high in the wider market, but the prospect of further US FED policy accommodation is subduing US dollar demand for the time being.

  Current level Support Resistance Last wk range
NZD / USD 0.8346 0.8150 0.8350 0.8208 - 0.8351

NZD/AUD (AUD/NZD)

The NZ dollar gained value against the Australian dollar last week. The balanced RBNZ monetary policy statement provided the driving force as offshore investors scrambled to exit “sold NZD” positions. This eased the NZD up towards the higher end of its recent trading range. Further appreciation for the NZD is not guaranteed, and certainly the resistance at .8000 (AUD 1.2500 support) should cap any further demand. The pair looks  good value buying of AUD with NZD at current levels.

  Current level Support Resistance Last wk range
NZD / AUD 0.7972 0.7800 0.8000 0.7866 - 0.7960
AUD / NZD 1.2544 1.2500 1.2820 1.2563 - 1.2713

NZD/GBP (GBP/NZD)

The NZD outperformed the GBP last week as investors scrambled to cover “sold NZD” positions following the balanced RBNZ monetary policy statement. The pair hit the NZD resistance at .5200 (GBP support 1.9230), and that level has curbed further NZD demand for the time being. Current levels just below that level look to offer good value buying of GBP with NZD. Expect less volatility this week, with just UK employment numbers providing a domestic focus for the pair.

  Current level Support Resistance Last wk range
NZD / GBP 0.5192 0.5000 0.5200 0.5102 - 0.5203
GBP / NZD 1.9260 1.9320 2.0000 1.9220 - 1.9600

 NZD/CAD

The NZ dollar saw periods of solid demand against the CAD last week. The primary driver was the release of the balanced RBNZ monetary policy statement. After hitting resistance at .8250, the pair lost momentum. The positive news from the Nexen deal approval in Canada increased demand for the CAD to start this week. The pair remains at somewhat elevated levels, but well within the .8050 - .8250 recent wider trading range. Current levels look to offer good value buying of CAD with New Zealand dollars.

  Current level Support Resistance Last wk range
NZD / CAD 0.8238 0.8050 0.8250 0.8168 - 0.8260

NZD/EURO (EURO/NZD)

The New Zealand dollar outperformed the EURO throughout the course of the last week. The balanced RBNZ monetary policy statement was coupled with a bias towards easing the Euro-zone cash rate from the ECB. The re-emergence of debt market concerns in Europe will also soften EURO demand. The pair currently sits right on the resistance at .6450 (support 1.5500). Immediate direction from here will likely be driven by the wider market risk appetite and moves in the short term are uncertain. But given the NZ dollars strong performance of late, further gains would likely be hard fought.

  Current level Support Resistance Last wk range
NZD / EUR 0.6450 0.6250 0.6450 0.6289 - 0.6462
EUR / NZD 1.5504 1.5500 1.6130 1.5475 - 1.5900

 NZD/YEN

It is going to be a very interesting week for this pair. The last week has seen the pair reach the highs for the year as the dual forces of weak YEN ahead of the election and BOJ next week, teams with a scramble to cover “sold NZD” positions by investors following the RBNZ monetary policy statement. The focus this week and next will almost entirely be on the situation in Japan. Expect the YEN to remain weak as the pressure builds on the BOJ to dramatically add to the already large stimulus package (read : weaken the YEN at all costs). This trend will likely continue in the short term at least. But given the nature of the recent moves, sharp corrective moves may provide opportunities for the patient with limit orders in the market.

  Current level Support Resistance Last wk range
NZD / YEN 68.75 67.00 69.00 67.37 - 68.81

AUD/USD

The AUD pushed higher against the embattled US dollar last week. The expected easing of the cash rate from the RBA would have softened the pressure on the USD, but the strong Australian employment numbers reignited AUD demand in the short term. The resistance at 1.0520 has contained the appreciation so far. This week sees a majority of the focus come from the US economy, FED and fiscal negotiations. There are expectations of further policy accommodation from the FED on Wednesday in the US. Any progress on the fiscal situation will be welcomed by the market. Further appreciation from the current levels for this pair should prove hard fought. And current levels could well prove to have offered good value buying of USD with Australian dollars over time.

  Current level Support Resistance Last wk range
AUD / USD 1.0470 1.0320 1.0520 1.0418 - 1.0504

AUD/GBP (GBP/AUD)                            

The Australian dollar saw grinding appreciation against the Pound Sterling last week. However the increased uncertainty following the political tensions in Italy have undermined risk appetite and the AUD has ceded ground so far this week. The pair looks increasingly comfortable in its wider range. With the AUD up towards the upper end of the range, current levels offer reasonably good value buying of GBP with AUD. This week sees a relatively quiet economic calendar in both countries, and the primary focus will come from UK employment numbers on Wednesday.

  Current level Support Resistance Last wk range
AUD / GBP 0.6513 0.6420 0.6620 0.6475 - 0.6546
GBP / AUD 1.5354 1.5100 1.5575 1.5277 - 1.5444

AUD/EURO (EURO/AUD)

The Australian dollar made some good gains against the EURO last week. The expected cash rate reduction in Australia was countered by ECB discussions on a lower European cash rate in the coming months. The Australian employment numbers also delivered some solid AUD demand. The Italian political uncertainty that came over the weekend has seen risk aversion increase, and this ironically has seen the EURO take back a little of last week’s lost ground. German business sentiment later today, and the European manufacturing numbers Thursday, and inflation on Friday provide the data focus for the week. Any announcement from current PM Monti that he will run in the soon to be announced elections, would be positive for risk appetite.

  Current level Support Resistance Last wk range
AUD / EUR 0.8092 0.7950 0.8150 0.7985 - 0.8144
EUR / AUD 1.2358 1.2270 1.2580 1.2279 - 1.2523

AUD/YEN

The AUD saw steady appreciation against the YEN for the majority of last week. However, the momentum has stopped for the time being with the pair unable to consolidate through the resistance at 86.50. This level remains the target in the near term. The next couple of week will prove to be very interesting, with almost the entire focus being provided by the Japanese election and BOJ monetary policy meeting next week. If the current polls prove accurate, the LDP policy to stimulate the economy through undermining the value of the YEN should see a dramatic continuation of the trend for a weaker YEN.

  Current level Support Resistance Last wk range
AUD / YEN 86.25 84.50 86.50 85.54 - 86.62

AUD/CAD

The Canadian dollar saw grinding appreciation over the Australian dollar last week. The BOC reiterated their position that the next cash rate move will be an increase, and the corresponding RBA cut to their cash rate provided the drive for the move. The current levels are at the lows for the week. The pair remains somewhat comfortable in the month old 1.0325 – 1.0425 range. A breakdown through of the initial support at 1.0320, would enable further moves lower to test 1.0250. There is little of notable economic data in either economy this week, with just the Canadian trade balance later on today to provide any real focus. This means the lead will come from the wider market appetite for risk, with the likely drivers being news of European debt markets and the US fiscal cliff.

  Current level Support Resistance Last wk range
AUD / CAD 1.0333 1.0250 1.0450 1.0339 - 1.0422

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Market commentary:

Last week saw a continuation of the major themes that have dominated the wider financial markets for 2012. Uncertainty in Europe looks to be re-emerging as political instability in Italy pushes debt funding rates higher for the non Franco-German governments. The major central banks look to continue their efforts to debase the value of their currencies. Expect further quantitative easing (QE: essentially the electronic printing of money, to stimulate economic growth) from the US FED this week, the Bank of Japan (BOJ) next week, the Bank of England (BOE) next year, and a lower cash rate from the European Central Bank (ECB) in the coming months. The fiscal negotiations are on going in the US. The lack of progress is starting to impact  in the economy as evidence of lower investment and falling consumer sentiment emerges. The improved outlook in China has continued and this bodes well for intra Asian trade in particular. The Australian and New Zealand dollars remain in demand as they look like finishing 2012 towards the upper end of their well established ranges. Conceivably the direction less nature of the foreign exchange markets will continue into the opening months of 2013, as the opposing forces of European/US uncertainty and the massive stimulatory efforts from the central banks, continue to battle for the upper hand.

Australia

The last week has been a very busy and interesting one for the Australian economy. Building approval and retail sales numbers came in below analyst’s expectations. But the more important numbers of GDP and employment did not disappoint. GDP was close to expectation at a relatively healthy .5%, and the Australian employment market continued to show its strength with the unemployment rate falling from 5.4 to 5.2%. The Reserve Bank of Australia (RBA) matched expectations with a .25% cut to a new cash rate of 3.00%. However further policy accommodation is not guaranteed and the market will have to digest the future economic data as it comes to light, to create expectations of direction from the RBA. Adding to positive sentiment will be the latest monthly data from China over the weekend showing industrial production and retail sales both ahead of forecasts in November. This week little in the way of domestic focus in Australia, so expect the wider markets sentiment to provide the lead into the end of 2012. Next week the RBA monetary policy meeting minutes will be released on Tuesday, but should not be of material impact.

New Zealand

There was singular focus for the NZ economy last week. The first monetary policy statement from new RBNZ Governor Wheeler provided the expected unchanged cash rate. However, the very neutral and balanced statement certainly caught some of the market unaware. The scramble to buy NZ dollars following the statement was somewhat surprising. Investors looking for the RBNZ to signal a bias towards an interest rate easing, provided much of the initial demand.  Current RBNZ projections see an unchanged cash rate of 2.50% for all of 2013. This week sees limited focus coming from the domestic economy. Next week finally sees the release of the 3rd quarter current account and GDP numbers on Wednesday and Thursday respectively. These provide the remaining focus for the year. Also of note has been Fonterra increased pay out forecast. The 2012/13 season expectations are now lifted to the 5.50 NZD farm gate pay out. This pay out lift has been on the cards since the improved Global Dairy Trade auctions over the past few months, but should provide an increased boost to the economy none the less.

United States

The mixed outlook continued in the US economy last week. With a dark back drop of stagnating fiscal cliff negotiations the data flow was decidedly mixed. Employment, services and factory orders numbers beat expectations, while consumer sentiment and manufacturing numbers underperformed. The FED look likely to roll over to a new program of monetary easing at this week’s monetary policy announcement. Also of interest this week will be retail sales numbers, inflation and industrial production numbers. The fiscal negotiations will also remain at the very fore front of market focus. Last week’s plummet in the consumer sentiment is just an indication of the destructive nature of the uncertainty this situation promotes. Expect further brinkmanship from all parties on this issue, to the detriment of the wider US, and global economies.

Europe

It has been an intense last week in Europe. The economic data was again mixed with reasonable manufacturing numbers being tempered by worse than expected retail sales data. Spanish efforts to meet deficit targets look to be have been in vain, and this saw bond yield increase. The ECB left monetary policy unchanged for the time being, but the prospect of lower interest rates remains real as serious debate was had on this subject. The flair up in Italian politics over the weekend has further increased uncertainty. Anti-austerity policy backers are gaining momentum in the polls and interim PM Monti has vowed to resign and cause early elections once his budget policies are passed early in the new year. Should Monti decide not to run for office, the increased uncertainty about the austerity program would likely see increasing bond yields for Italy, at a time that these could cause some major damage. It is reasonable to expect this to be major theme in 2013. Economic sentiment numbers, inflation and further manufacturing data provide the data focus for this week.

United Kingdom

The mixture of good and bad news for the UK economy continued last week. Manufacturing numbers were positive, but the construction and services sector remain under pressure. Finance Minister Osbourne released the latest Treasury forecasts for growth. 2012 growth expectations have been lowered to -.1% from the previous +.8% forecast, and expectation for 2013 and 2014 have been revised down also. As expected the BOE left monetary policy unchanged at their meeting last week, although further stimulation cannot be ruled out in the first half of 2013. The BOE monetary policy meeting minutes next week will likely shed further light on this. This week sees a relatively quiet economic calendar with the employment numbers on Wednesday providing the primary focus.

Japan

The build up to the 16 December elections remains intense in Japan. The YEN has remained under pressure for the most part as the LDP continue to lead the polls. Adding to the YEN weakness is speculation the BOJ will again add further stimulation to the economy at next week’s meeting. Reuters have anticipated the stimulation will be to the tune of ten trillion YEN. Yesterday saw the final GDP numbers for the 3rd quarter confirmed at -.9%, and interestingly with the second quarter revised down also, the economy finds itself in its fifth recession in the last 15 years. The remainder of the week sees the monthly core-machinery and manufacturing results provide the focus, albeit limited market reaction expected ahead of the election in the weekend.

Canada

The BOC left monetary policy unchanged as expected last week. It maintains a mild hiking bias with language such as “some modest withdrawal of stimulus will likely be required”. The economic data was mixed with construction numbers jumping, but the manufacturing index under performing. Of note has been the Government giving the green light for the Chinese investment funds to make a circa 15 billion investment in the Nexen iron sands company. This decision is undoubtedly positive for the CAD, as it removes a significant uncertainty for CAD demand. Next week is a busy one for Canadian economic news with retail sales, inflation and GDP all due for release.

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

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