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Japan escapes major criticism for recent efforts to end their deflationary cycle

Posted in Currencies

By Sam Coxhead*:

Last week saw patchy markets as most of Asia had annual holidays of some kind for varying duration's.

Lower levels of participation leads to lower levels of liquidity, and at times accentuates moves.

Generally markets were mixed with stock markets ending close to starting levels, interest rates consolidating at higher levels and gold prices easing as the US dollar saw demand late in the week.

The Australasian currencies were both in demand, with the NZ dollar seeing notable periods of strength.

Interestingly, its gains were not to be maintained as the US dollar bounced on better news to finish the week.

The much anticipated G-20 meeting of Finance Ministers produced little of note.

Japan escaped any major criticism for its recent efforts to end is deflationary cycle, and members simply agreed to not to target their exchange rates in search of a competitive edge.

This week's focus will be central bank based with minutes from previous monetary policy meetings expected from the Bank of Japan, Reserve Bank of Australia, Bank of England and the US Federal Reserve.

Major Announcements last week:

·  UK Inflation 2.7% as expected

·  AU Consumer Sentiment 7.7% vs .6% previous

·  BOE promises further stimulus if required

·  Japanese GDP -.1% vs +.1% expected

·  BOJ leave monetary policy unchanged

·  European GDP -.6% vs -.5% expected

·  NZ Retial Sales +2.1% vs +1.3% expected

·  UK Retail Sales -.6% vs +.5% expected

·  Canadian Manufacturing -3.1% vs -.4% expected

NZD/USD 

The NZ dollar broke through to make brief 18 months highs against the US dollar last week. At times the demand for the NZD was significant, especially following the materially stronger than expected 4th quarter NZ retail sales numbers. However, the economic data was buoyant in the US also, and with longer term interest rates consolidating at higher levels, the US dollar ground back to push the NZD back into more familiar territory to finish the week. This week sees the NZD remain towards the upper end of recent ranges. Tomorrow’s speech from RBNZ Governor Wheeler provides the highlight for the week in NZ. In the US the FED's meeting minutes will garner attention, alongside the usual host of other releases. Potentially this pair could become a little range bound around the current levels, with the NZD likely to find further gains through last week's highs more hard fought than its previous appreciation.

  Current level Support Resistance Last wk range
NZD / USD 0.8420 0.8330 0.8530 0.8337 - 0.8530

NZD/AUD (AUD/NZD)

The NZ dollar remains close to its two and half year highs against the Australian dollar. Last week's strong NZ retail sales number provided the latest impetus for the NZD to outperform. This week will likely see the pair start to consolidate at these new levels in the absence of top tier economic data in either economy. With respective central bank governors both speaking, the chance of "verbal" intervention remains a prospect on both sides of the Tasman. Given the significant gains the NZD has made against its trading partners in the last couple of months, the effects on the export sector are likely to emerge in the coming months. Today's RBA monetary policy meeting minutes show the RBA remained poised to ease the 3.00% cash rate lower if required, but it by no means is a foregone conclusion. Current levels therefore offer good value buying of AUD with NZ dollars, albeit the opportunity maybe on going in the coming months.

  Current level Support Resistance Last wk range
NZD / AUD 0.8160 0.8030 0.8230 0.8126 - 0.8229
AUD / NZD 1.2255 1.2050 1.2420 1.2152 - 1.2306

NZD/GBP (GBP/NZD)

The New Zealand dollar made steady gains against the pressured GBP last week. The new all time highs were reached following the bonanza NZ retail sales number. However, the gains were not maintained and Friday's offshore session saw the GBP take back some of its lost ground, even in the face of the weak UK retail sales number. This week is a little more quiet for economic news in both economies. In NZ the speech by RBNZ Governor Wheeler will be closely watched tomorrow. The UK focus comes from Wednesday's employment numbers, and BOE monetary policy meeting minutes. The current levels offer great value buying of GBP with NZD, albeit the prospect maybe on offer for sometime yet. Those looking to move funds from the UK to NZD should consider staggering transfers overtime to opportune better levels at which to enter NZ dollars.

  Current level Support Resistance Last wk range
NZD / GBP 0.5446 0.5300 0.5500 0.5336 - 0.5505
GBP / NZD 1.8362 1.8181 1.8870 1.8165 - 1.8741

 NZD/CAD

The Canadian dollar remains under pressure from the NZD. To start this week the pair saw levels not seen since 2005, as USD renewed pressure on the CAD, and dragged the NZD higher for the ride. With little in the way of economic news, lower levels of liquidity in what was a US banking holiday look to be behind the move. Needless to say, current levels offer great value buying of CAD with NZ dollars. With just the speech from RBNZ Governor Wheeler to provide focus in NZ this week, the Canadian inflation and retail sales numbers on Friday will be closely watched. The CAD seems to be suffering from capital flows back into the US from Canada, as the economy in the US slowly recovers, so further weakness cannot be discounted for the CAD in the coming months.

  Current level Support Resistance Last wk range
NZD / CAD 0.8512 0.8350 0.8550 0.8400 - 0.8553

NZD/EURO (EURO/NZD)

Last week saw the NZ dollar make a strong bounce higher against the EURO. The strong NZ retail sales number provided the impetus, with the weak European GDP figure aiding the move. Certainly the markets refocusing on the economic fundamentals will continue to work in the favour of the NZD for the time being. Apart from RBNZ Governor Wheeler's speech in NZ tomorrow, European news will dominate the focus this week. European manufacturing and services numbers will be closely watched, as will the economic sentiment, and business confidence numbers coming from Germany. Certainly early in 2013 looks to see a continuation of a weak economy in Europe, but the third and fourth quarters are looking more promising at this stage. Expect the pair to be contained within last week’s range this week.

  Current level Support Resistance Last wk range
NZD / EUR 0.6308 0.6200 0.6400 0.6203 - 0.6385
EUR / NZD 1.5853 1.5625 1.6130 1.5662 - 1.6121

 NZD/YEN

This pair continued its volatile recent trend last week. The choppy price action is driven mostly by uncertainty on the Japanese side of the equation. Certainly the positive NZD retail sales numbers provided increased demand for the NZD, but there were other influences at play also. The prospect of a new Governor at the BOJ is seeing the prospective Governor candidates dominate the news wires. Free flowing comments from officials and the G20 meeting added to the mix. The upshot of which is that new PM Abe will be able to pick a candidate that will ensure his stimulatory plans are certainly progressed. Expect the YEN to remain weak in the coming months, but to what extent we see further weakness is uncertain. This week sees the RBNZ Governor Wheelers speech tomorrow dominate the NZ focus. In Japan, tomorrow trade balance numbers provide the soul data focus, but further statements from officials are more than likely.

  Current level Support Resistance Last wk range
NZD / YEN 79.01 77.50 79.50 78.22 - 79.58

AUD/USD

After seeing initial demand against the USD last week, the AUD was contained by resistance at the 1.0370 level. The stronger than expected US data towards the end of last week saw the US dollar take back some lost ground and the pair has started the week gyrating around the 1.0300 level. Today's RBA monetary policy meeting minutes were of no surprise, albeit the AUD has seen some demand following the release. The RBA will ease the official interest rate if required, but certainly is not pre-committing to any course of action at this stage. The remainder of the week’s focus comes from the US with the FED meeting minutes, inflation and manufacturing numbers. The US dollar demand does look like its is gaining a little momentum, but as recent history suggests, the FED will go to any lengths to ensure some kind of recovery continues, and this may mean undermining the USD at times throughout the year.

  Current level Support Resistance Last wk range
AUD / USD 1.0319 1.0170 1.0370 1.0231 - 1.0368

AUD/GBP (GBP/AUD)                            

The Australian dollar saw periods of strong demand against the Pound Sterling last week. Again the pair finds itself right back up at the AUD resistance (GBP support), which for the time being has held. The just released RBA monetary policy meeting minutes are mostly unsurprising, although the market may see them as leaning less towards an easing than expected. If this plays out over the coming sessions, the AUD will consolidate through the resistance at .6680 (support 1.4970). The remainder of the week will see the focus come from the UK, in the form of the BOE meeting minutes and employment numbers. With the pair back up at the upper AUD end of the recent range, current levels offer good value buying of GBP with AUD.

  Current level Support Resistance Last wk range
AUD / GBP 0.6674 0.6480 0.6680 0.6544 - 0.6691
GBP / AUD 1.4984 1.4970 1.5430 1.4945 - 1.5281

AUD/EURO (EURO/AUD)

This pair remains contained by its recent familiar range, albeit towards the upper AUD end of it. Last week saw the EURO vulnerability come back to the fore, as the economic realities playing out in Europe came back into focus via the 4th quarter GDP number. Today's RBA meeting minutes were mostly unsurprising, but the market may feel the RBA are a little less committed towards further easing to the cash rate then it has previously had priced. Focus from here shifts to Europe and the various top tier German sentiment numbers, as well as European wide manufacturing and services data. If the AUD sees a little further demand in the coming sessions, it will again hit levels offering very good value buying of EUR.

  Current level Support Resistance Last wk range
AUD / EUR 0.7735 0.7600 0.7800 0.7615 - 0.7771
EUR / AUD 1.2928 1.2820 1.3160 1.2868 - 1.3132

AUD/YEN

Last week this pair continued the volatility it has endured in the last few months. The choppy price action was mostly driven through changes in YEN demand as speculation increased about the selection of the next BOJ Governor, and the weekend's G20 meeting approached. With the G20 passing by an opportunity to censor the recent Japanese policy promoting YEN weakness, we can expect this trend to continue in the coming months. For the time being the resistance at 97.00 remains intact. Today's RBA monetary policy meeting minutes were the Australian focus of the week, and a less committal RBA towards further easing of the 3.00% cash rate could see the resistance at 97.00 come under pressure. A sustained break of this level would open up the way for further AUD appreciation, but any further gains would likely be harder fought than the appreciation was from lower levels.

  Current level Support Resistance Last wk range
AUD / YEN 96.86 95.00 97.00 95.64 - 96.91

AUD/CAD

This pair traded a relatively contained range for the most part last week. The CAD saw pressure in yesterday’s US holiday session, and that has pushed the AUD higher. This AUD appreciation has been added to by today's RBA monetary policy meeting minutes that while unsurprising, are slightly less committal to future easing's to the 3.00% cash rate. From here the pair will be led by moves in the wider market ahead of the Canadian inflation and retail sales data on Friday. If the AUD sees further gains, opportunities will again arise for great value buying of CAD with Australian dollars.

  Current level Support Resistance Last wk range
AUD / CAD 1.0437 1.0250 1.0450 1.0308 - 1.0438

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Market commentary:

Last week saw patchy markets as most of Asia had annual holidays of some kind for varying duration's. Lower levels of participation leads to lower levels of liquidity, and at times accentuates moves. Generally markets were mixed with stock markets ending close to starting levels, interest rates consolidating at higher levels and gold prices easing as the US dollar saw demand late in the week. The Australasian currencies were both in demand, with the NZ dollar seeing notable periods of strength. Interestingly, its gains were not to be maintained as the US dollar bounced on better news to finish the week. The much anticipated G-20 meeting of Finance Ministers produced little of note. Japan escaped any major criticism for its recent efforts to end is deflationary cycle, and members simply agreed to not to target their exchange rates in search of a competitive edge. This week's focus will be central bank based with minutes from previous monetary policy meetings expected from the Bank of Japan, Reserve Bank of Australia, Bank of England and the US Federal Reserve.

Australia

The Australian economy is entering an interesting stage. Last week saw second tier business and consumer confidence numbers jump strongly. The RBA remains poised to ease monetary conditions further if needed and they point to the elevated level of the AUD as a reason for the soft economic conditions. The interest rate market has a 30% chance of an easing to the 3.00% cash rate at the RBA's next meeting on the 5th of February. Of increasing influence with be the pending general election marked down for September 14th. Over the weekend the ruling Labor Government initiated the election lolly scramble proceedings. They announced various programs and plans aimed at supporting small to medium sized business, the blue collar labour market and the manufacturing sector. Given Australia's relatively strong fiscal position, there is potential for quite a splurge of spending as the election battle heats up.

New Zealand

The New Zealand dollar saw periods of surprising strength last week. Of most note were the highs against the GBP, and US and Canadian dollars. With only second tier economic news on offer, the market enthused on increased consumer confidence numbers. Unsurprisingly, the boost was driven by increased sentiment in the South Island. The latest services numbers were also slightly higher than expected. This week is also light on economic news with only producer price data and a speech by RBNZ Governor Wheeler on Wednesday to garner attention. Weather conditions across New Zealand remain very dry, and this will certainly impact agricultural earnings over the coming quarters, especially if the current conditions continue.

United States

Economic news was positive in the US last week. Retail sales, consumer sentiment and manufacturing numbers were all stronger than expected and the US dollar saw periods of increased demand on the back of these numbers. This week sees the FED monetary policy meeting minutes, inflation numbers and the latest home sales due for release. Interestingly, longer term US interest rates have consolidated at higher levels and this will offer further US dollar support over time. If the positive economic news continues, the focus on the FED "noise" will be of growing importance. The eventual removal of the monetary stimulus (interest rates will then start to head higher), will no doubt be some way off. But it will require a clearly communicated, and considered approach to ensure market volatility is not unduly increased.

Europe

The main feature for the European economy last week was the 4th quarter GDP number which slightly missed the weak expectations at -.6%. Of note was the weakness of core economies Germany, France and Italy. Various European officials also took time to confirm the already obvious, that whilst the structural risks in Europe had abated, the economic fragility remains real. This week sees a host of data due for release. Of note will be the manufacturing and services numbers, as well as the important German economic and business sentiment numbers. The trend weaker for the EURO seems to have abated for the time being, and it looks at more comfortable levels than in previous week's on most pairings.

United Kingdom

The GBP and UK economy both remain under pressure. Last week saw the inflation number in the UK remain stubbornly high, and in the BOE's subsequent inflation report, it is forecast to remain at elevated levels in the short term at least, whilst growth is expected to under perform. The retail sales numbers reflected that outlook, coming in materially lower than the +.5% expectation, at -.6%. The BOE monetary policy meeting minutes this week offer the BOE another opportunity to actively undermine demand for the GBP, and push it lower. The lower currency will aid efforts to re-balance the economy, and no mater what political promises are made at the G20 level, this remains an intended consequence. The unemployment numbers tomorrow will also be closely watched. With the BOE poised to continue with their stimulatory efforts, do not expect any material rebound from the GBP in the short term.

Japan

It was an interesting last week in the Japanese economy. Tensions were high ahead of the G20 meeting that Japan would come under pressure for its repeated efforts to weaken the value of the YEN. Interestingly, the subsequent statement from the G20 made no mention of Japanese policies, and this can be taken as acknowledgement of their unique economic situation. There was no change in monetary policy from the BOJ as expected, with the upcoming announcement of new BOJ leadership expected in early March, if not before. Today's BOJ minutes were closely watched, but did not surprise and the trade balance tomorrow rounds out the domestic data focus for the week.

Canada

Last week was a quiet one for Canadian economic news. Just the volatile manufacturing numbers offering focus, with a number that was well below expectations at -3.1% for the month. This week holds a little more interest, with inflation and retail sales numbers both due for release on Friday. With the BOC likely to remain on hold for the remainder of 2013, the offshore lead with probably dominate the Canadian dollar price action in the short term at least.

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

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