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Moderately better data out of Europe points to a very mild recovery, however structural problems remain and it is going to be a very bumpy road ahead

Posted in Currencies

By Ian Dobbs*:

Last week saw the wider markets broadly impacted by a weakening US dollar.

The move was interesting in that there was an absence of any single primary driver. Strangely, the prospect of tapering to the quantitative easing (QE) program by the FED was a factor.

Investors look to be exiting the US government bond market ahead of the largest buyer stepping down activity. This has seen the currencies benefit, enabling the recently beleaguered AUD in particular to relieve some pressure.

More positive numbers from China, the UK and Europe were also a factor as the global economy slowly starts to improve after what has been a very difficult last five years.

One thing is certain, the transition out of the stimulatory environment will be volatile.

With opposing factors at play, it seems likely that the remainder of 2013 will see broad ranges start to be established in many markets.

With a quiet global economic calendar this week, expect the positioning in the US dollar to provide the market lead.

Major Announcements last week:

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

·  UK Services PMI 60.2 vs 57.4 expected

·  US Non-Manufacturing PMI 56.0 vs 53.2 expected

·  RBA eases cash rate to 2.50% as expected

·  UK Manufacturing +1.9% vs +.9% expected

·  US Trade Balance -34.2B vs -43.1B expected

·  NZ Unemployment rate 6.4$ vs 6.3% expected

·  Canadian PMI 48.4 vs 56.3 expected

·  Australian Unemployment rate 5.7% vs 5.8% expected

·  BOJ leaves monetary policy unchanged as expected

·  Canadian Unemployment rate 7.2% vs 7.1% expected

·  Japanese prelim. GDP +.6% vs +.9% expected

NZD/USD 

After gaining through much of last week on the back of broad based USD weakness, the New Zealand dollar ran out of steam around 0.8050. The currency has spent a couple of days now ranging between 0.8000 - 0.8050. Any move up through 0.8050 will run into stronger resistance around 0.8100, which should cap it in the near term. The downside finds support coming in around 0.7900 and these to levels should contain trade for much of the week. NZ retail sales data tomorrow will draw focus, as will US data this week in the form of retail sales, inflation, building permits, and consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7996 0.7900 0.8100 0.7831 - 0.8057

NZD/AUD (AUD/NZD)

The New Zealand dollar seems content for now to consolidate recent gains against the Australian dollar, and seeing the pair trade within the broad 0.8700 - 0.8900 (1.1236 - 1.1494) range. After solid gains over the past few weeks, this consolidation can only be healthy. We could even see a pullback to around 0.8600 without troubling the border uptrend. I would however expect to find plenty of buyers around that level and would be very surprised to a move below there. Focus for this week comes from NZ retail sales out tomorrow, while from Australia we get consumer sentiment, wage price index, and inflation expectations.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8758 0.8700 0.8900 0.8727 - 0.8872
AUD / NZD 1.1418 1.1236 1.1494 1.1271 - 1.1459

NZD/GBP (GBP/NZD)

The last week has seen this pair easily contained by its recent and increasingly familiar range. The NZ dollar steadily recovered from the opening pressure following the Fonterra whey powder issue. The UK economic news continues its recent run of form, with services and manufacturing numbers the latest to impress. These two opposing forces meant the price action for the pair was relatively benign. This sees just the 2nd quarter retail sales numbers offer a material focus in NZ. In the UK, the inflation, employment and retail sales numbers will hold attention. Expect the recent range .5050 - .5250 (1.9050 - 1.9780) to again contain the price action, assuming no major surprises come to light.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5170 0.5050 0.5250 0.5055 - 0.5201
GBP / NZD 1.9342 1.9050 1.9782 1.9227 - 1.9268

 NZD/CAD

It has been an interesting last week for this pair. After starting the week under some intense pressure following the Fonterra whey powder issue, the NZD staged a grinding recovery. This increased demand was aided by the weaker than expected economic data in Canada. The resistance at .8350 contained the NZD resurgence, and the pair has settled down to trade comfortably within the range it has seen for the majority of the last six weeks. This week sees the NZ focus come in the form of the 2nds quarter retail sales numbers on Wednesday. In Canada the week is quiet for economic news, with just manufacturing sales numbers due for release on Friday. It seems likely the price action will again be contained within the broader .8150 .8350 this week.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8240 0.8150 0.8350 0.8042 - 0.8342

NZD/EURO (EURO/NZD)

After briefly trading down to fresh cycle lows in the wake of the Fonterra news early last week, the New Zealand dollar spent the rest of the week grinding its way back higher against the Euro. The recovery looks to have run out of steam around the 0.6050 (1.6529) level and the pair has now pulled back to trade near 0.6000 (1.6667). Recent data out of Europe has been largely supportive of the view that a mild recovery is underway. This should limit further gains for the pair in the near term. I expect the NZD to lose a little more ground to the Euro and the pair to test 0.5950 (1.6807) over the coming days. Reaction at that level will be key. If the pair can hold above there, then it could well attempt a test of stronger resistance near 0.6100 (1.6393). New Zealand has retail sales out tomorrow, while out of Europe we get German economic sentiment tonight, then GDP and inflation for both France and Germany later in the week.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6009 0.5840 0.6040 0.5901 - 0.5052
EUR / NZD 1.6642 1.6556 1.7123 1.6523 - 1.6946

 NZD/YEN

The last week has seen grinding recovery from the NZD following pressure generated on it following the Fonterra whey powder news. For the most part the price action has been contained, as the YEN saw increased demand on the back of a weaker US dollar. Yesterday’s weaker than expect preliminary Japanese GDP number has seen the NZD outperform, albeit the pair contained by the initial resistance at 77.80 for the time being. The BOJ monetary policy meeting minutes released earlier today were of limited impact. Focus now turns to the NZ 2nd quarter retail sales numbers tomorrow. It would not surprise to see the price action this week contained by the 76.50 - 78.50 range that has established itself over the last two weeks. This is because limited economic data in the wider should mean lower levels of volatility for this pair.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 77.73 76.50 78.50 76.25 - 77.81

AUD/USD

The Australian dollar put in a decent recovery over the past week from lows near 0.8850. These gains came on the back of broad based US dollar weakness and some better data out of China. This improved Chinese data has been a welcome relief for the currency, and has caused some commentators to temper their expectations of a hard landing in China. The AUD also found some support from the RBA’s statement after their 25 point cut last week. The tone of that statement was a little more neutral in terms of the outlook for future cuts. The gains for the AUD have peaked in the last two days just over the 0.9200 level. The currency has drifted lower in the last 12 hours to trade around 0.9130. Further weakness is possible but as long as the currency holds above 0.9000 the outlook remains largely neutral and further consolidation is likely. Key topside resistance comes in around 0.9300 and any move through there would likely see an acceleration, as medium term stop-loss buy orders get triggered. This week there is a raft of second tier data out of Australia that should be of limited impact, while from the US we get retail sales, inflation, building permits, and consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9128 0.9050 0.9250 0.8908 - 0.9220

AUD/GBP (GBP/AUD)                            

The recent recovery in the Australian dollar has been mirrored in the cross rate to the UK Pound Sterling. After bouncing from cycle lows at 0.5768 (1.7337) mid last week, the AUD made gains against the GBP that peaked at 0.5949 (1.6810) yesterday. Better Chinese data aided these gains in the second half of last week. The United Kingdom however has also had a good recent run of data, and if this continues there is plenty of room for the GBP to appreciate. To that extent we get inflation data out of the UK tonight, while later in the week we have the Bank of England (BOE) minutes, unemployment rate, and retail sales. From Australia consumer sentiment tomorrow, then later in the week we get wage price index and inflation expectations.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5904 0.5750 0.5950 0.5768 - 0.5949
GBP / AUD 1.6938 1.6807 1.7391 1.6810 - 1.7337

AUD/EURO (EURO/AUD)

The Australian dollar recovered from cycle lows last week against the Euro. That recovery was helped by better economic data out of China and the pair managed to test key downtrend resistance at 0.6910 (support 1.4472) on Friday evening. That resistance level held firm and the pair has since drifted lower to trade near 0.6850 (1.4599). Further downside toward 0.6800 (upside towards 1.4706) is the favoured scenario in the very near term, although a AUD bounce from there could once again put key downtrend resistance under threat. There is plenty of European data out this week, the highlight of which will be German economic sentiment released tonight. From Australia we have consumer sentiment tomorrow then later in the week we get wage price index and inflation expectations.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6860 0.6700 0.6900 0.6712 - 0.6914
EUR / AUD 1.4577 1.4493 1.4925 1.4463 - 1.4899

AUD/YEN

The Australian dollar has continued to stabilize against the YEN over the last week. The inability of the pair to consolidate its break of support at 87.00 has seen it recover to test resistance at 89.00. The grinding recovery from the weeks lows was in no small part attributable to some better economic news from China. Its has been a relatively quiet start to the week, even with the weaker than expected preliminary Japanese 2nd quarter GDP numbers. Todays BOJ monetary policy meeting minutes offered little in the way of new insight. Australian business confidence was again a touch weak. Tomorrow sees the weeks focus rounded out by the Australian consumer sentiment and wage price data. A consolidated break of the 89.00 resistance this week would open up the way for further recovery for the AUD from the recent lows.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 88.76 87.00 89.00 86.43 - 89.08

AUD/CAD

The Australian dollar spent much of last week recovering off recent lows to the Canadian dollar near 0.9200. That recovery was helped by a slightly more neutral statement from the RBA after their 25 point rate cut, as well as by better economic data coming out of China. At the same time the Canadian dollar was on the back foot thanks to some less than spectacular economic news. The negative news culminated in a big miss for employment data released on Friday. The high for the week at 0.9487 traded in the hours after those employment numbers hit the wires. Since then we have seen the pair drift lower to currently trade near 0.9390. Support comes in around 0.9330 and as long as the pair holds above there a period of consolidation can be expected. The topside should be capped by resistance at 0.9530 in the near term. There is very little out of Canada until the end of the week when we get the Bank of Canada (BOC) review and manufacturing sales. From Australia we have consumer sentiment tomorrow, then later in the week we get wage price index and inflation expectations.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9410 0.9330 0.9530 0.9224 - 0.9487

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Market commentary:

Last week saw the wider markets broadly impacted by a weakening US dollar. The move was interesting in that there was an absence of any single primary driver. Strangely, the prospect of tapering to the quantitative easing (QE) program by the FED was a factor. Investors look to be exiting the US government bond market ahead of the largest buyer stepping down activity. This has seen the currencies benefit, enabling the recently beleaguered AUD in particular to relieve some pressure. More positive numbers from China, the UK and Europe were also a factor as the global economy slowly starts to improve after what has been a very difficult last five years. One thing is certain, the transition out of the stimulatory environment will be volatile. With opposing factors at play, it seems likely that the remainder of 2013 will see broad ranges start to be established in many markets. With a quiet global economic calendar this week, expect the positioning in the US dollar to provide the market lead.

Australia

Last week was an interesting one for the Australian economy and dollar. Weaker than expected Australian retail sales numbers came ahead of the highly anticipated RBA monetary policy decision. The RBA gave the markets its expected 25pt easing to a cash rate of 2.50%. The accompanying statement did not have a strong bias towards further easing and the Australian dollar actually reacted positively to the announcement. Thursdays weak employment numbers muddied the outlook further, but the negative reaction was very short lived as buoyant Chinese trade data again improved sentiment. This week sees a host of second tier data on offer, albeit the bulk of the news should be of limited impact.

New Zealand

There has been very little economic news on the domestic front for New Zealand since last Wednesday’s employment figures. We did get the REINZ house price index out yesterday, and although the index fell 0.5% from June, it still stands 8.6% higher than a year ago. The volume of sales was also notably stronger than June. Tomorrow we get retail sales data and on Thursday there is the manufacturing index. Aside from those releases the market will have to look offshore to gain any inspiration.

United States

We have seen largely positive economic data out of the United States recently that is supporting the view of a strengthening recovery. This has helped cement views that the FED will start tapering its quantitative easing (QE) purchases in September (or at the latest October). The question is what sort of impact is this going to have on markets in general. The most obvious impact will be a backup in longer term interest rates as the biggest buyer of US treasuries slowly steps away. Despite recent weakness, the USD should be broadly supported as well. The equity market must be a cause for concern. There is a decent correlation between equity market gains and the FED’s QE purchases over the last couple of years. With stocks near all-time highs, surely a winding down of those purchases leaves equities vulnerable. This is especially true in an environment where interest rates are heading higher. These are the risks/forces that will shape markets over the coming months. Looking at the shorter term, we have a rash of data out this week with the highlights being retail sales, inflation, building permits, and consumer confidence.

Europe

Things have been relatively quiet on the European front lately. Moderately better data points to a very mild recovery over the coming months, however structural problems remain and it is going to be a very bumpy road ahead. Late last week we got data on French industrial production that was well below expectation. The -1.4% figure was well below forecasts of a 0.3% gain, and in stark contrast to the improving trend in other European data. France faces many fiscal challenges and it wouldn’t surprise many economic commentators if the Euro-crisis spotlight was to fall on them at some point in the future. Recent articles in Germany are suggesting that Greece will require another bailout (no surprises there), but that it won’t happen until after the German elections later this year. Key data events this week include German economic sentiment out tonight, then GDP and inflation for both France and Germany later in the week.

United Kingdom

The United Kingdom has had a great run of strong data lately, almost without exception. Friday proved no different with the release of trade balance figures. The trade deficit narrowed by more than expected as exports surged to their highest levels on record. This was a good result, although looking into the detail revealed the export gains weren’t exactly broad based. Most of the gains can be accounted for by the sale of art at a few major auctions held over the period, plus some aircraft sales. A good headline figure nonetheless, and even taking into account the one-offs that boosted the result it was a solid showing. What wasn’t so great were figures released over the weekend. These show British workers have suffered a 5.5% drop in earnings, when inflation is taken into account, since 2010. That’s one of the biggest falls in real wages among European countries over the last three years. You have to wonder just how much the economy can improve when the majority of workers are going backwards in terms of real wages. The economy is coming from a very low base, so there is obviously room to improve still, but in the long run there must be a question mark. Either that’s going to cap potential growth, or workers are going to demand higher wages. I suspect the latter is very likely and that will surely feed through into inflation down the road. We actually get inflation data tonight which will be closely watched as it has been well above target for much of the past five years. Any move higher and it will bring into question the validity of Governors Carney’s new forward guidance.

Japan

At the very end of last week we got the release of the Bank of Japan’s (BOJ) monthly report. There was nothing of surprise in the release with the bank stating they see the economy starting to recover moderately. This had little impact on the currency. We also got the release of consumer confidence and this actually fell for the second month running. It seems higher electricity and energy prices in general, may have negatively impacted on the outcome. Weakness in the Yen over the past few months is starting to feed through into energy prices which is taking the gloss off the recovery for consumers. Yesterday saw the release of Japanese GDP which missed expectations to the downside. This does raise the question of whether the economy is strong enough to withstand the shock of the planned sales tax increase. There will no doubt be more discussion around this over the coming weeks. Today we saw the release core machinery orders and the BOJ minutes. The machinery orders were less weak than expected. The BOJ minutes saw limited impact, with the economy tipped to pick up, and inflation to continue its gentle rise.

Canada

Last week was a tough one for Canadian economic data with some surprisingly soft results for building permits and business activity. However, the end of the week provided a chance to turn things around and finish on a better note with key employment data released. Unfortunately that was not the case. Once again the data was a big miss from expectations of a 6.2k gain of jobs. It came in at -39.4k and the unemployment rate ticked up a notch as well. So overall a week best put behind Canada in terms of economic data. This week is very light on the data front with only the Bank of Canada (BOC) review and manufacturing sales on Thursday and Friday respectively.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »

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1 Comments

Well done good sold data in

Well done good sold data in this news story i like it keep up the good work !! nice and filled with good facts on what's happening out there in the world lets hope that the guys managing our futures get it all right in the next 3 to 5  years.