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Prospect of central bank stimulus providing most of energy behind initial direction for 2013

Posted in Currencies

By Sam Coxhead*:

The financial markets continue to see increased risk appetite boosting stock markets, albeit with waning momentum.

The prospect of central bank stimulus has provided most of the energy behind the initial direction for 2013. The stubbornly slow recovery of economic health in western economies remains a concern.

Increasing activity in China provides some hope to the closely connected Asian economy. This week sees the Bank of Japan in the spotlight, with the much anticipated monetary policy decision to be announced.

The structural risks in Europe have continued to recede for the most part, with Spain having a good ability to borrow funds throughout last week.

The US debt ceiling issue will likely be averted with wide spread recognition that an early compromise to delay a decision is a logical decision.

Globally the low levels of inflation continue to exist, with the latest Australian number expected to mirror New Zealand’s low score from last week.

Major Announcements last week:

·  UK Inflation 2.7% as expected

·  US Retail Sales +.5% vs +.2% expected

·  US Inflation +.1% vs +.2% expected

·  Australian Unemployment rate 5.4% as expected

·  US Phila. Fed Manufacturing -5.8 vs +7.1 expected

·  NZ Inflation -.2% vs +.1% expected

·  Chinese GDP 7.9% vs 7.8% expected

·  UK Retail Sales -.1% vs +.2% expected

NZD/USD 

This pair remains stuck in a relatively tight range. The lower than expected inflation number last week saw the NZD sell off to the lows before recovering and consolidating around current levels. The fact that stock markets have risen to fresh five year highs and the NZ dollar is struggling to forge higher ground, points toward waning momentum and increasing odds of a corrective move lower. In an absence of local New Zealand economic news this week, the focus will come from the US. Housing numbers later today, and on Friday provide the focus as we build into next week and the respective central bank monetary policy announcements.

  Current level Support Resistance Last wk range
NZD / USD 0.8370 0.8250 0.8450 0.8341 - 0.8431

NZD/AUD (AUD/NZD)

This pair continues to trade a very small and familiar range. The .7900 - .8000  (1.2500 - 1.2660) range will likely contain the action again this week as the pair consolidates around what can be considered as fair value levels. Short term expectations from the central banks have not altered materially in the last few weeks, even after the low NZ inflation number last week. This week’s focus is squarely placed on Wednesday’s Australian inflation number. Anything above the +.4% expectation would likely see the AUD outperform, as unlikely as it is. The RBNZ monetary policy announcement on Thursday next week will garner attention, but likely be of limited impact to the price action.

  Current level Support Resistance Last wk range
NZD / AUD 0.7962 0.7850 0.8050 0.7928 - 0.7988
AUD / NZD 1.2560 1.2420 1.2740 1.2614 - 1.2677

NZD/GBP (GBP/NZD)

The Great British Pound remains under pressure across the board and against the NZD is no exception. Once the pair broke and consolidated through resistance at .5250 (1.9050 support) the way was opened for further NZD appreciation. The GBP under performance has been driven by an overflow of  GBP selling against buying of EUR (related to lower structural risk in Europe). This may continue in the short term, and the current levels certainly constitute good value buying of GBP with NZD from a historical perspective. The focus this week is all in the UK with employment data, BOE monetary policy meeting minutes, and the preliminary 4th quarter GDP numbers due for release.

  Current level Support Resistance Last wk range
NZD / GBP 0.5285 0.5100 0.5300 0.5212 - 0.5290
GBP / NZD 1.8920 1.8870 1.9600 1.8904 - 1.9186

 NZD/CAD

This pair has traded a very tight range over the last week. The lows were set following the sharp fall after the lower than expected NZ inflation number. However, the weakness was short lived as latent demand for NZD saw the pair bounce quickly back before consolidating around the current levels. This week the focus is dominated by Canadian news. Retail sales later on today (Tuesday) is followed by the BOC monetary policy statement on Wednesday and inflation numbers Friday. Expect further consolidation around current levels in the short term. This will extend the opportunity to buy good value CAD with NZ dollars.

  Current level Support Resistance Last wk range
NZD / CAD 0.8310 0.8150 0.8350 0.8241 - 0.8311

NZD/EURO (EURO/NZD)

It has been a relatively uneventful week for this pair. Last week's lower than expected NZ inflation numbers saw the NZD give up some ground to press its lows for the week, before it recovered to the current mid-range levels. Certainly the renewed EURO demand over the last couple of weeks has not relented as yet, and the ability of the likes of Spain to borrow is currently backing this up. European focus will dominate this week in the absence of any NZ economic news. German economic sentiment, manufacturing and business climate numbers will be closely watched by the market. Expect the price action to continue to rumble around within the recent and increasingly familiar range.

  Current level Support Resistance Last wk range
NZD / EUR 0.6288 0.6250 0.6450 0.6239 - 0.6332
EUR / NZD 1.5903 1.5500 1.6000 1.5793 - 1.6028

 NZD/YEN

The momentum for this pair has finally started to wane as the BOJ announcement lurks for later on today (Tuesday).  Direction from current levels remains unclear in the short term. Anything less than complete action from the BOJ will likely see a rush back into YEN, after such YEN depreciation in the last month. Loading orders at targeted levels on this pair is encouraged for this pairing as it seems likely that the increased volatility will continue in the coming months at least. The BOJ and new initiatives from the Japanese Ministry of Finance will dominate the lead for this pairing in the short to medium term.

  Current level Support Resistance Last wk range
NZD / YEN 74.80 73.50 75.50 73.61 - 75.70

AUD/USD

This remains stuck within what has become a familiar 1.0480 - 1.0580 range. Certainly the momentum wanes each time the pair approaches the 1.0600 level. Given the inability to surge higher amid the duo of five year highs in the equity markets and solid Chinese growth numbers, it looks increasingly likely that the pair will be capped by resistance at 1.0600 in the short term at least. Wednesdays inflation numbers in Australia provide the local focus, whilst the latest housing numbers in the US will be closely watched. Current levels could well prove to have offered good value buying of US dollars over time.

  Current level Support Resistance Last wk range
AUD / USD 1.0518 1.0400 1.0600 1.0490 - 1.0573

AUD/GBP (GBP/AUD)                            

The continued pressure on the GBP has provided a great opportunity to buy good value GBP with Australian dollars. How long the GBP weakness continues for remains to be seen, but certainly the AUD demand is starting to look laboured. With equity markets at, or close to, five year highs, the AUD is struggling to make new ground. This week’s focus starts with Wednesday’s Australian inflation number. Next comes the UK employment and BOE monetary policy meeting minutes, before the preliminary UK 4th quarter GDP numbers on Friday.

  Current level Support Resistance Last wk range
AUD / GBP 0.6635 0.6450 0.6650 0.6555 - 0.6650
GBP / AUD 1.5071 1.5040 1.5500 1.5038 - 1.5255

AUD/EURO (EURO/AUD)

This pair saw indecisive price action last week and starts this week at very similar levels to last week. The AUD initially took back some of its recently lost ground, but this move proved unsustainable, especially once the NZ inflation numbers were released. Direction from current levels remains unclear, but probably will be contingent on the outcome from Wednesday’s Australian inflation numbers. European news is dominated by German data this week. Economic sentiment, manufacturing and business climate numbers provide the focus. ECB head Mario Draghi will also speak late today (Tuesday), and as usual, his words will be closely monitored. If he further intimates a limited chance of a lower European cash rate, then the EURO demand will likely increase.

  Current level Support Resistance Last wk range
AUD / EUR 0.7895 0.7800 0.8000 0.7855 - 0.7959
EUR / AUD 1.2665 1.2500 1.2820 1.2564 - 1.2731

AUD/YEN

The big focus for this week is the BOJ and the release of their much anticipated monetary policy initiatives that have been telegraphed over the last few weeks. These changes will likely provide the direction for the pair in the near term. Any kind of under delivery on expectations will likely lead to a scramble to buy YEN in the very short term, however unlikely this may be. The Australian inflation numbers on Wednesday provide the Australian focus and will be very closely watched after the low number that came from the New Zealand release last week. Any flight into YEN following the BOJ may provide opportunities to buy relatively cheap AUD  with YEN when looked at over the medium term.

  Current level Support Resistance Last wk range
AUD / YEN 93.95 92.50 94.50 92.62 - 94.93

AUD/CAD

This pair remains at elevated levels that offer good value buying of CAD with Australian dollars. The AUD saw initial pressure from the CAD last week as the better than expected BOC business outlook numbers boosted CAD demand. But as equity markets pressed higher last week the AUD saw slightly higher demand than the CAD, and this again has pushed the pair to test resistance at 1.0450. Apart from Wednesday’s Australian inflation number, the focus will come from Canadian news this week. Retail sales later today (Tuesday), comes ahead of the BOC monetary policy announcement Wednesday (expected unchanged cash rate), and the latest inflation numbers on Friday.

  Current level Support Resistance Last wk range
AUD / CAD 1.0440 1.0250 1.0450 1.0353 - 1.0356

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Market commentary:

The financial markets continue to see increased risk appetite boosting stock markets, albeit with waning momentum. The prospect of central bank stimulus has provided most of the energy behind the initial direction for 2013. The stubbornly slow recovery of economic health in western economies remains a concern. Increasing activity in China provides some hope to the closely connected Asian economy. This week sees the Bank of Japan in the spotlight, with the much anticipated monetary policy decision to be announced. The structural risks in Europe have continued to recede for the most part, with Spain having a good ability to borrow funds throughout last week. The US debt ceiling issue will likely be averted with wide spread recognition that an early compromise to delay a decision is a logical decision. Globally the low levels of inflation continue to exist, with the latest Australian number expected to mirror New Zealand’s low score from last week.

Australia

Last week saw the Australian employment numbers at center stage. The labour force decreased by a small margin, but the compelling number was the number of part time workers that would like to increase hours. The headline numbers still look relatively healthy with unemployment just easing higher to a very respectable 5.4%. This week sees the focus turn to the 4th quarter inflation number with a .4% rise expected. Given the NZ result from last week was materially weaker than economist expectations, a lower number would not surprise. China numbers continue to show a recovery in activity with the last GDP number at 7.9% growth, and this is directly supportive of the Australian economy. Next week sees a slurry of second tier economic news in Australia, and should be of limited impact in currency markets.

New Zealand

Last week was an interesting one for economic news in New Zealand. The NZ Institute of Economic Research released their quarterly Survey of Business Opinion. The survey revealed a healthy jump in business sentiment, with its core energy coming from increasing momentum of the Christchurch rebuild. The 4th quarter of 2012 inflation numbers were lower than expected with a -.2% number coming in against economist expectations of a +.1% result. Of direct impact is the on going elevated level of the New Zealand dollar. This number should ensure the RBNZ is able to leave the cash rate unchanged for the majority of 2013, and if not beyond. There is an absence of economic data in NZ this week, ahead of what will be an unchanged RBNZ monetary policy decision on Thursday next week.

United States

The patchy run of economic data in the US continued last week. Stronger than expected retail sales numbers were balanced by the underperformance of manufacturing and consumer confidence numbers. Of note will be the decent corporate earnings results and an inflation number that remains well under control at +.1% for the December month. Stock markets are at five year highs as the FED commitment to support asset markets remains firmly in place. This week sees a relatively quiet week for economic news, with various housing data releases likely to dominate the focus. Next week sees a full economic data calendar. Durable goods sales, the FED’s monetary policy announcement, employment and manufacturing numbers all feature, in what will be an informative week.

Europe

The grind back towards economic growth continues in Europe. Not helping the situation will be the demand for EURO driven by the recent fall in perceived structural risk in Europe. Last week saw weaker than expected industrial production numbers, as expected inflation numbers (2.2%) and increased demand for non-core member debt. Expect this mixture of fortune to continue throughout 2013 and the painful and lethargic recovery struggles for momentum. This week sees economic sentiment numbers, manufacturing data, and various member unemployment numbers. Also expect the Eurogroup meetings to produce market moving headlines, along with comments from ECB head Mario Draghi.

United Kingdom

UK economic news remains patchy. Last week’s inflation numbers were as expected at 2.7%. Retail sales numbers confirm consumer spending remains under pressure. Retail sales numbers contracted by .1% , against a +.2% expectation. The Pound Sterling remains vulnerable, especially as funds exit the UK and return to Europe as the structural risks lessen on the continent. This week should prove interesting with the latest employment numbers, BOE monetary policy meeting minutes and 4th quarter preliminary GDP numbers due for release. Next week is relatively quiet with housing and manufacturing numbers to dominate the UK focus.

Japan

Japan has been dominant in international news over the last month or so. The new leadership has committed to making bold steps to stimulate the economy and target higher levels of inflation. The BOJ meeting announcement that will be made later on today should confirm the well telegraphed measures indicated in earlier statements. The main objective appears to be weakening the value of the YEN to increase the value of Japanese exports. The YEN has materially weakened in the last month or so, and whether or not this trend continues in the short term will be reliant on the action at today’s announcement. Inflation numbers and the minutes from today’s meeting will be released on Friday and provide focus to round out this week in Japan. Next week will see the latest retail sales, industrial production and household spending numbers released.

Canada

An air of cautious optimism continues in the Canadian economy. The latest BOC business outlook survey revealed a further increase in sentiment, which is encouraging. This week sees the release of the latest retail sales and inflation data, as well as the monetary policy announcement from the BOC on Wednesday. Next week sees the GDP number for December released and will add further colour to the picture of economic growth. The Canadian dollar remains under valued against its Australasian counterparts, albeit due for a rebound once the US dollar pares its recent losses.

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

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