Issue of "currency wars" brewing over the last few months prompted by Japanese authorities devaluing the YEN

By Sam Coxhead*:

The wider financial markets have seen choppy and indecisive price action over the last week.

The somewhat neurotic nature of the markets should continue this week with the Chinese New Year celebrations bringing Asia's input to a standstill.

The lower levels of liquidity see movements accentuated for the most part, and characterised by continuing choppy and directionless trade.

The turn of the year enthusiasm for the EURO has waned, as the implications on the economy of a higher value currency are digested.

The issue of "currency wars" has been brewing over the last few months, prompted in no small part by the actions of Japanese authorities to devalue the YEN.

The currency war debate has gathered momentum to a point where the G7 are expected to make a collaborated comment this week.

Whilst globally, inflation remains low for the time being, the risk of inflation quickly returning cannot be discounted in those economies where exchange rates have been low for an extended period of time, and this is where Japan's situation is considerably different to other major economies.

Major Announcements last week:

·  AU Building Approvals -4.4% vs +1.1% expected

·  UK Construction 48.7 vs 49.7 expected

·  RBA leaves the cash rate unchanged at 3.00%

·  UK Services 51.5 vs 49.8 expected

·  US Services 55.2 vs 55.2 expected

·  AU Retail Sales -.2% vs +.3% expected

·  NZ Employment -1.0% vs +.4% growth expected

·  AU Employment +10.4k vs 5.8K expected (part time up and full lost ground-weak number)

·  UK Manufactruting +1.6% vs +.7% expected

·  BOE leaves monetary policy unchanged

·  ECB leaves monetary policy unchanged

·  CAD Employment change -21.9k vs +4.5k expected

NZD/USD 

Last week saw the pair continue to trade within it's recently familiar  .8300 - .85000 range. The NZD did look vulnerable for most of the week, and the lows were seen following the weak NZ employment numbers. However, as has been the theme so far in 2013, the NZD saw latent demand emerge into the softness and this has again pushed the pair back from the .8300 support. This level remains the target in the near term, expecially with lower demand for AUD and EUR wieghing on the NZD.

NZD/AUD (AUD/NZD)

The NZD remains in demand against the recent beleagurered AUD. However, the demand was not all one way last week, with the NZD under considerable pressure immediately following the weak NZ employment numbers. The pair remains right on the NZD resistance (AUD support ) levels, and a consolidated break of this would open up the way for further NZD appreciation. This would appear to be a step too far this week in the absence of any major Australian economic news, and just the NZ retail sales numbers on thursday to provide a focus. Whilst the RBA leave the option open for further easing to the cash rate, the NZ dollar is likely to see demand against the AUD. Further appreciation from current levels should prove harder fought than its previous gains.

NZD/GBP (GBP/NZD)

The GBP finally saw a reasonable period of demand against the NZ dollar last week. The demand was aided by the weak 4th quarter NZ employment numbers and the GBP saw over two percent appreciation from the highs to the lows towards the end of the week. Unfortunately this GBP gains were not to be maitained as sentiment again moved against the GBP in yesterdays European session. This week sees the focus predominantly based in the UK with the latest inflation and retail sales numbers due. The sole focus in NZ will be on Thursday's 4th quarter retail sales number. Until we get improved economic growth numbers in the UK, the NZD will likely remained in the current elevated range by default.

 NZD/CAD

The strong Canadian manufacturing numbers gave the CAD a kick start last week. This momentum was added to by the very weak NZ employment number which resulted in the pair hitting the lows for the week. Unfortunately for the CAD, the Canadian employment numbers were materially weak also, and this saw the NZ dollar take back a good portion of its lost ground. So the pair remains in what has become familiar territory, with the NZD dollar at historically elevated levels. A speech by outgoing BOC Governor Carney provides the focus later on today, ahead of the NZ retail sales number on Friday.

NZD/EURO (EURO/NZD)

This pair sits at levels which are broadly unchanged from this time last week. The NZD saw pressure from the EURO following last week’s NZ employment numbers, however the bounce was sharp and impressive from the NZD, as the EURO demand gyrated following the ECB monetary policy announcement and statement. So the pair finds itself settling into the more comfortable range back from the EURO lows, seen in late 2012. Further EURO demand could take time to play out as the economic fundamentals are likely to remain subdued for quite some time yet. Expect further range trading for this pair in the short term at least.

 NZD/YEN

The YEN is finally starting to look like the weakening momentum maybe waning. A decent scramble to cover sold YEN positions was seen following politically motivated comments from the Japanese Finance Minister that the YEN weakness had happened too quickly. Expect this type of clean out to continue to happen from time to time before the market again corrects itself. The lows for the week were brief to say the least. The YEN saw further pressure overnight as "jaw-boning" from potential BOJ Governors undermined the YEN once again. The BOJ monetary policy announcement comes ahead of the NZ retail sales number on Thursday to provide increased focus.

AUD/USD

Over the last week this pair has seen grinding appreciation from the US dollar. The AUD under performance has hardly been of surprise given the downbeat nature of the economic news. With various support levels broken, there appears to be room for further AUD under performance in the near term at least. The RBA continue to subtlety undermine AUD demand with the door widely left open for further monetary policy easing (lower interest rates). This week is light on economic news in Australia, so the focus will come from the retail sales and consumer sentiment numbers in the US.

AUD/GBP (GBP/AUD)                            

The GBP ground higher against the Australian dollar for much of last week. The RBA enabled this relatively smooth ride as they left the door open for further easing in monetary policy in the future. The downbeat employment numbers further paved the way for the GBP appreciation, but the momentum was eased as AUD support levels approached. This week sees the pair back towards the middle of the recent range. An empty Australian news calendar points towards the GBP providing the lead. UK inflation and retail sales reports will dominate the focus for this pair.

AUD/EURO (EURO/AUD)

This pair continues to consolidate in the range it has seen for the last week or so. Both currencies have seen periods of underperformance to maintain the relatively contained range. With both economies producing soft economic numbers, there remains a possibility of further range trading in the short term at least. The focus for this week coming will come from Europe in the absence of any material Australian economic news. This focus is provided by industrial production, preliminary GDP numbers and the monthly bulletin from the ECB.

AUD/YEN

This pair was interesting last week. After setting new highs for the recent move, the YEN finally saw a scramble by investors to cover sold positions and this saw the pair move back by almost two percent in the latter half of the week. However, this YEN weakness has been short lived and the various comments from incoming BOJ Governor contenders again materially weakened the YEN overnight, and the pair looks poised to against push the resistance at 97.00. In the absence of any top tier Australian data this week, expect the focus to come from the preliminary GDP numbers, and BOJ monetary policy announcement on Thursday.

AUD/CAD

The Canadian dollar finally started to place some pressure back on the AUD last week. It managed to push through the support at 1.035 and that level now represents initial resistance for the pairing. The pressure looked likely to continue into the end of the week, but the soft Canadian employment numbers stemmed the CAD demand for the time being. With the RBA leaving the door open for further monetary easing in Australia, the way is eased for further CAD appreciation. There is little in the way of top tier economic data in either economy this week, but outgoing BOC Governor Carney speaks later today and that will provide a focus.

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Market commentary:

The wider financial markets have seen choppy and indecisive price action over the last week. The somewhat neurotic nature of the markets should continue this week with the Chinese New Year celebrations bringing Asia's input to a standstill. The lower levels of liquidity see movements accentuated for the most part, and characterised by continuing choppy and directionless trade. The turn of the year enthusiasm for the EURO has waned, as the implications on the economy of a higher value currency are digested. The issue of "currency wars" has been brewing over the last few months, prompted in no small part by the actions of Japanese authorities to devalue the YEN. The currency war debate has gathered momentum to a point where the G7 are expected to make a collaborated comment this week. Whilst globally, inflation remains low for the time being, the risk of inflation quickly returning cannot be discounted in those economies where exchange rates have been low for an extended period of time, and this is where Japan's situation is considerably different to other major economies.

Australia

Last week saw further soft economic data released in Australia. Retail sales, building approvals and the employment numbers were all on the lower side of expectations. Undoubtedly, pressure remains in the Australian economy, both in mining and non-mining sectors. The Reserve Bank of Australia (RBA) left the cash rate unchanged at 3.00%, but left the door open for further easing of the cash rate if required. This is a luxury for the RBA, and certainly the threat of a lower cash rate helps undermine the Australian dollar and they will be very aware of this. This week sees mainly second tier economic data up for release. Of note was today's NAB business confidence survey saw sentiment slightly improved at +3 which will be important for the RBA when assessing their next monetary policy decision.

New Zealand

Last week in New Zealand the focus was solely on the labour market. The employment numbers revealed the lowest participation in the labour market in over a decade. The quarterly fall in employment was a significant 1%, as the young headed towards further study, and the elderly opted for retirement. The NZ economy has a back stop in the Christchurch rebuild, and the economic outlook would be considerably different if that was not providing a cushion for activity. Expectations for monetary policy from the RBNZ are for the cash rate to remain unchanged for all of this year and for increases to be coming at some stage in the first half of 2014. This stable monetary policy outlook appears to be providing investors with confidence in the NZ dollar. This week sees the domestic focus come in the form of the 4th quarter retail sales numbers on Thursday.

United States

It was a relatively quiet week for economic news in the US last week. Factory orders were slightly lower than expected and the latest services survey numbers were right on the expected growth levels. Interestingly, the latest unit labour costs posted their highest increase since Q1 2003, and this points towards increasing consumer prices and labour costs are usually passed straight through to the consumer. Friday saw the trade balance numbers reveal a smaller than expected trade deficit. This week’s focus will come from the latest retail sales numbers and consumer sentiment numbers.

Europe

Last week started in Europe with lower than expected retail sales numbers for December. The European Central Bank (ECB) left monetary policy unchanged as expected. The increased value of the EURO has caused all kinds of consternation in Europe, and increasing friction between member nations. Germany appreciate the lower inflationary pressure that comes with a higher currency, while the remaining members simply see it as a hand brake on growth. From an international stand point, the concept of currency valuations is likely to be increasingly discussed and will likely continue to be a point of contention throughout 2013. This week sees the quarterly GDP numbers as a focus on Thursday, and the G20 meetings starting on Friday will be closely watched.

United Kingdom

Last week was a mixed one for UK economic news. Strong services numbers were balanced by a pullback in construction early in the week. The latest manufacturing numbers were also strong and this number came ahead of BOE Governor designate Carny's testimony where he warned of inflation pressures. This gave the GBP some demand that continued for a number of sessions until yesterday when the GBP again reverted to a weakening bias on the back of very little news. The Bank of England (BOE) left monetary policy unchanged as expected, but issued a rare accompanying statement that stated they were willing to look through temporarily elevated inflation if it was forecast to come back into line over the medium term. So the picture remains mixed for the GBP, and with little prospect of a sustained recovery in demand until the economies vital signs improve on a more consistent basis. This week sees the focus provided by the latest inflation numbers and subsequent BOE report, followed by the retail sales figures at the end of the week.

Japan

Political posturing ahead of the upcoming G20 meeting from Japanese authorities has started in earnest. Increasing international pressure on Japanese authorities about YEN devaluation has increased in recent weeks and expect this debate to continue in the coming months. Interestingly, the burst of YEN strength caused by Japanese Finance Minister Aso's comments that the YEN weakening had been too fast, were quickly reversed overnight. Low levels of liquidity thanks to various holidays in Asia will likely see this kind of price action continue this week. Adding to the noise will be the preliminary 4th quarter GDP numbers on Thursday, which come just ahead of the BOJ's monetary policy announcement. Japan remains in a unique economic situation, and should be viewed as such. The G20 meetings this coming weekend may provide some interesting insight for the coming months.

Canada

The mixed economic picture continues in Canada. Materially strong manufacturing numbers were tempered by softer than expected building and employment data. The employment data proved crucial to sentiment, with the CAD seeing real pressure following that release. A fall in the "participation rate" is of particular concern and will be a focused on in subsequent employment market releases. This week sees a light economic news calendar in Canada, with the bulk of the lead likely to come from the wider market sentiment.

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