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US Federal Reserve Chairman Bernanke reiterated his support for the FED's current quantitative easing initiative

Posted in Currencies

By Sam Coxhead*:

Markets have seen a continuation of muddled sentiment over the last week.

Stock markets have remained reasonably close to their recent highs, but uncertainty in Europe has tempered enthusiasm for further gains.

The issues over the Cyprus bailout agreement have caused consternation. The proposal will see those with bank deposits of over 100,000 EURO's, forced to swap some debt for equity, in the beleaguered institutions.

This proposal has far reaching implications, if it was extended to other member states.

There has also been a lack of clarity from officials, and this has added further unneeded uncertainly into markets overnight.

Next week's BOJ monetary policy meeting under the new leadership has also started to offer influence.

Overnight, US Federal Reserve Chairman Bernanke reiterated his support for the FED's current quantitative easing initiative, and stated that the FED's policies have benefited US trading partners, as well as providing domestic economic support.

Many exporters in Australia and New Zealand may not agree with Mr Bernanke, as a combination of factors including the easy US monetary policy, have continued to push the Australian and New Zealand dollars to resistance levels on a number of different currency pairings.

Major Announcements last week:

·  Mixed response to Cyprus bailout proposal

·  UK Inflation 2.8% as expected

·  Canadian Manufacturing -.2% vs +.7% expected

·  UK Unemployment claims -1.5 vs -5.2k expected

·  US FED leaves monetary policy unchanged

·  NZ GDP +1.5% vs +.9% expected

·  HSBC Chinese manufacturing 51.7 vs 51.2 expected

·  UK Retail Sales +2.1% vs +.5% expected

·  Canadian Retail Sales +.5% vs +.4% expected

·  US Phila. FED Manufacturing 2.0 vs -1.6 expected

·  German Business Sentiment 106.7 vs 107.8 expected

NZD/USD 

The NZ dollar saw some strong appreciation over the US dollar last week. Strong Fonterra GDT auction results, the bonanza NZ GDP and a higher Australian dollar, all helped the NZ dollar appreciate. The pair remains stalled around .8350 resistance. This level is the upper end of the recent range and whether or not the pair can consolidate through this level will dictate direction in the short term. Current levels offer good value buying of US dollars from a risk reward perspective. With only the ANZ business confidence survey in NZ this week, the lead will likely come from the US influence. Durable good sales, consumer confidence, and home sales numbers will provide focus. If resistance at .8350 does break, further appreciation from current levels should prove hard fought for the NZ dollar.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.8342 0.8150 0.8350 0.8218 - 0.8367

NZD/AUD (AUD/NZD)

The New Zealand dollar saw appreciation against the Australian dollar last week. This performance came following the much stronger than expected 4th quarter NZ GDP number. However, after the initial leap the pair has settled down to trade a very contained range and this looks likely to continue this week. There is little in the way of material economic data in either economy, so expect the recent range to remain intact. Next week sees a return of focus in Australia with the RBA monetary policy announcement, building approval numbers and retail sales data. Current levels offer fair value for this pair, being towards the middle of the recent range.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.7980 0.7880 0.8080 0.7914 - 0.8001
AUD / NZD 1.2531 1.2375 1.2700 1.2498 - 1.2636

NZD/GBP (GBP/NZD)

The NZ dollar outperformed the Pound Sterling last week. The strong 4th quarter NZ GDP number provided much of the boost after the GBP initially placed some pressure on the NZD. So this pair finds itself back up towards levels that offer great value buying of GBP with NZ dollars. This week will see limited focus in either economy in the absence of any data of note. This means the wider market risk appetite will provide the lead. Any further appreciation for the NZ dollar will prove harder fought from current levels. Next week sees the focus provided by UK news. Manufacturing, services and construction data are joined by the BOE monetary policy announcement.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5496 0.5350 0.5550 0.5423 - 0.5511
GBP / NZD 1.8195 1.8020 1.8700 1.8146 - 1.8440

 NZD/CAD

Following the strong NZ 4th quarter GDP numbers last week, the NZ dollar appreciated against the Canadian dollar. Initial resistance at .8550 has tempered further appreciation so far this week, and this will again offer the first real resistance should the NZD see further increased demand. Overall the pair remains contained within recent ranges, albeit at levels that should prove to have offered great value buying of CAD with NZ dollars over time. A Canadian focus will provide the lead this week for this pair. Inflation numbers on Wednesday come ahead of the latest GDP numbers Thursday.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8515 0.8400 0.8600 0.8423 - 0.8551

NZD/EURO (EURO/NZD)

With the debacle playing out in Cyprus last week, it was no surprise that the NZ dollar made some solid gains against the EURO. Interestingly, it has only been in the recent sessions that the pair broke resistance at .6450 (support 1.5500). The EURO is likely to remain under pressure in the short term at least. However, the fact that Cyprus is ready to accept the EU/ECB/IMF proposals in order to remain in the EURO is meaningful, and this kind of commitment should bode well for the EURO overtime. Needless to say that current levels offer great value buying of EURO with NZ dollars. There is little economic news in either economy this week. Expect developments in Cyprus to continue to be a leading force as the market looks forward to the ECB monetary policy announcement next week.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6482 0.6350 0.6550 0.6346 - 0.6500
EUR / NZD 1.5427 1.5270 1.5750 1.5385 - 1.5758

 NZD/YEN

It has been an interesting last week for this pair. Again the resistance at 79.50 has contained the NZ dollar appreciation. The NZD saw increased demand following the strong Q4 NZ GDP numbers. However, the gains have proven hard to  maintain as the general market risk aversion increased and concerns over the Cypriot bailout deal increased. Now the BOJ monetary policy next week will come into focus. There seems to be room for further YEN demand as investors exit sold positions ahead of the first announcement from the BOJ's new leadership team. Any further pull back from this pair is likely to present an opportunity to buy NZD at levels that may look good over the coming months.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 78.69 77.50 79.50 78.09 - 79.45

AUD/USD

The Australian dollar saw periods of strong appreciation against the US dollar last week. The RBA monetary policy meeting minutes reiterated their wait and see stance on monetary policy and the interest rate market has reacted accordingly. Interestingly, the survival of PM Gillard as leader of the Labour party also increased AUD demand. Further appreciation from the current levels looks likely to be harder fought than the recent appreciation as the pair approaches resistance at 1.0500. Current levels look to offer good value buying of US dollars. The bulk of this week's focus will come from the data due for release in the US. Durable good sales, consumer confidence and home sales data will all provide valuable insight to the US economy.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 1.0452 1.0300 1.0500 1.0357 - 1.0477

AUD/GBP (GBP/AUD)                            

This pair has traded a relatively contained range over the last week. Both currencies saw periods of increased demand, and this led to volatility within this contained range. The pair remains at levels that will likely prove to have offered great value buying of GBP overtime. In the absence of any top tier economic news due in either economy, this week's lead will likely come from the wider market's appetite for risk. Next week will prove more interesting as both central banks have monetary policy announcements. These decisions will be accompanied by the Australian trade balance, construction and retail sales numbers, as well as the latest UK manufacturing, services and construction data.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6877 0.6750 0.6950 0.6847 - 0.6902
GBP / AUD 1.4520 1.4390 1.4820 1.4489 - 1.4605

AUD/EURO (EURO/AUD)

The AUD continued to appreciate over the EURO throughout the course of the last week. The current bout of EURO weakness had looked like it had run its course, but ill conceived comments from EU officials overnight once again increased EURO supply and this sent the EURO to its fresh recent lows. This Cypriot backdrop will continue to provide the lead this week in the absence of any material economic data in either economy. Next week sees a return of a central bank focus with both the ECB and RBA making monetary policy statements.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.8123 0.8000 0.8200 0.8010 - 0.8140
EUR / AUD 1.2311 1.2200 1.2500 1.2285 - 1.2485

AUD/YEN

This pair seems to be establishing a new 98.00 - 100.00 range, as it has settled comfortably within this range for the last two weeks. New BOJ head Kuroda, will likely provide the key to direction at next weeks BOJ monetary policy meeting where he will outline a firm course of action to fight deflationary pressure in Japan. With high market expectations, any disappointment will lead quickly to renewed JPY demand as we have seen at times over the last week. Next weeks RBA meeting should offer less in excitement, given that recent events have firmly indicated Australian monetary policy will remain on hold for the time being. Expect the recent range to contain the price action ahead of next weeks monetary policy meetings.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 98.58 98.00 100.00 97.97 - 99.71

AUD/CAD

The Australian dollar forged higher against the Canadian dollar last week. The pair remains at very elevated levels that offer great value buying of Canadian dollars. Certainly further ground from the current levels will be far harder to make for the AUD. The focus this week comes from the Canadian inflation numbers on Wednesday, and GDP numbers on Thursday. Next week sees a busy economic calendar with the RBA monetary policy announcement Tuesday, and construction and retail sales numbers Thursday. A Canadian focus will round out next week with employment and manufacturing numbers late Friday.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 1.0670 1.0520 1.0720 1.0602 - 1.0714

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Market commentary:

Markets have seen a continuation of muddled sentiment over the last week. Stock markets have remained reasonably close to their recent highs, but uncertainty in Europe has tempered enthusiasm for further gains. The issues over the Cyprus bailout agreement have caused consternation. The proposal will see those with bank deposits of over 100,000 EURO's, forced to swap some debt for equity, in the beleaguered institutions. This proposal has far reaching implications, if it was extended to other member states. There has also been a lack of clarity from officials, and this has added further unneeded uncertainly into markets overnight. Next week's BOJ monetary policy meeting under the new leadership has also started to offer influence. Overnight, US Federal Reserve Chairman Bernanke reiterated his support for the FED's current quantitative easing initiative, and stated that the FED's policies have benefited US trading partners, as well as providing domestic economic support. Many exporters in Australia and New Zealand may not agree with Mr Bernanke, as a combination of factors including the easy US monetary policy, have continued to push the Australian and New Zealand dollars to resistance levels on a number of different currency pairings.

Australia

Last week was a relatively positive week for the Australian economy. The latest RBA monetary policy meeting minutes confirm the "wait and see" monetary policy stance from the RBA. Stimulation from the previous six cuts to the cash rate still have further to run and their opinion. The current view that the Chinese economy had stablised was backed up by the latest HSBC Chinese manufacturing numbers, that saw the index rise to 51.7 (over 50 indicates growth). A reading of 51.2 was expected. This week sees little of domestic focus in Australia. The RBA financial stability review on Wednesday should be of limited impact, whilst private sector credit numbers on Thursday will garner brief attention ahead of the Easter break.

New Zealand

Last week was a reasonably positive one for the New Zealand economy. The latest GDT auction results saw diary price leap another 14.5% on a trade weighted basis. This scramble to secure dairy product is a direct result of increasing concerns about the impact of the drought in the North Island. Ironically, some rain did eventuate last week, but conditions remain dire for the majority of farmers and the full extent of the impact will be seen later in the year. The bonanza 4th quarter GDP numbers added to the positive sentiment for the NZ dollar. The 1.5% result was materially higher than market expectations, albeit the detail revealed it to be consumer-centric growth at unsustainable levels. The current shortened week offers little in the way of domestic focus, with just the latest business confidence numbers on Wednesday of note.

United States

Last week saw the Federal Reserve release a monetary policy statement almost identical to the one previous. The current quantitative easing program will likely remain in place for all of 2013 and start to be fazed out at some stage in the middle of 2014. This is depending on how the labour market growth plays out. It appears it may have been earlier if it were not for the lower levels of Government spending. The US economy continues to show signs of relative health when compared to the other major developed economies. The latest manufacturing figures continue to show encouraging signs also. This week sees the focus on the latest durable goods sales, consumer confidence, home sales and revised 4th quarter GDP numbers.

Europe

The past week has been untidy for the European economy. The complicated issues in Cyprus have seen uncertainty remain at elevated levels. Not helping matters has been poor communication with media from officials, leading to increased volatility at times. The drama has not been helped by stubbornly weak economic data. Both manufacturing and services sectors continue to contract in Europe. Of concern has been the softening of indicators in the core economic engine room of Germany. Sentiment remains at low levels and forecast growth has again been lower for 2013, this time from .8%, to just a .3% increase in activity. This week will see continued focus on the situation in Cyprus, whist German retail sales and employment numbers will be closely watched. The EURO will likely remain vulnerable in the short term, and this will likely be the case on almost all pairings.

United Kingdom

Last week proved to be a very interesting one for the UK economy. The release of the BOE monetary policy meeting minutes revealed debate over the effectiveness of ongoing quantitative easing, and the risk that weak GBP may reflect the market's concern over the BOE's commitment to price stability (controlling inflation). The release of these minutes saw demand for the GBP materially increase. Adding to the mix were both positive employment and retail sales numbers. Tempering factors were the elevated uncertainty in Europe, and the warning from credit agency Fitch that the UK credit rating had again been placed on "negative watch". If concerns remain elevated in Europe, the prospect of capital flows coming into the UK are likely to support the GBP in the near term, although this is less of a factor on the pairings to the Australasian currencies.

Japan

In the last few weeks the focus in Japan has been around the BOJ, and their change in leadership. This looks set to continue in the short term. Last week as incoming BOJ Governor Kuroda started to speak, the market expectations were for aggressive language. Disappointment was plain to see in the price action as the YEN found support following Kuroda's initial speech. Whilst general market risk aversion has also been YEN supportive, the expectations for the BOJ monetary policy meeting next week are currently being pared back. YEN demand is evident across the board, even against the Australasian currencies. Also of note this week will be the added interest of the latest retail sales, inflation and industrial production numbers.

Canada

Last week was a mixed bag for the Canadian economy. The latest manufacturing survey saw disappointing results with a monthly contraction of .2%, against expected growth of .7%. Fortunately retail sales numbers balanced the ledger with the 1.0% result coming in against an expectation of 0.6% growth. This week top tier data due for release is the latest inflation numbers on Wednesday, ahead of the GDP numbers on Thursday. Also of note will be the release of the annual budget late on Friday.

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Sam Coxhead is a currency analyst with Direct FX You can contact him here »

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