With patchy global growth and increased geopolitical tensions, expect further volatility in currency markets

By Sam Coxhead*:

The patchy nature of the global growth profile was again exposed last week. In the US we saw softer durable goods and home sales numbers balance by materially better than expected 2nd quarter GDP figures.

The UK data remains positive and there were better signs coming from Europe.

The political risks associated with the Syrian debacle saw the wider market suffer from widespread risk aversion for much of the last week.

The risk aversion saw the Australasian currencies under considerable pressure at times.

The lower than expected numbers in NZ saw the NZ dollar underperform its counterpart from across the Tasman.

Respite finally came over the weekend in the form of better than expected Chinese manufacturing numbers. These numbers coupled with the de-pressurising of the Syrian situation from the UK and US.

Whilst a strike remains likely, a measured approach has lowered risk aversion in the markets for the time being.

With the patchy emergence of global growth, and increased geopolitical tensions, expect further volatile trading within the established broader ranges for most markets in the short term.

Major Announcements last week:

·  NZ Trade Balance -774m vs -18m expected

·  US Durable Goods Orders -.6% vs +.6% expected

·  German Business Climate 107.5 vs 107.1 expected

·  IS Consumer Confidence 81.5 vs 79.6 expected

·  US Pending Home  Sales -1.3% vs +.2% expected

·  ANZ NZ Business Confidence 48.1 vs 52.8 previous

·  AU Private Cap. Ex 4.0% vs .5% expected

·  US Prelim. GDP 2.5% vs 2.2% expected

·  CAD GDP (month) +.5% vs -.4% expected

·  Chinese Manufacturing (official) 51.0 vs 50.6 expected

·  HSBC China Manuf. 50.1 vs 50.2 expected

·  UK Manufacturing 57.2 vs 55.2 expected

·  Spanish and Italian Manufacturing both stronger than expected

·  AU Retail Sales +.1% vs +.4% expected

NZD/USD

Last week was all about risk aversion on the back of volatility in emerging markets and the threat of a military strike on Syria. This kept the New Zealand dollar under pressure for much of the week, as the USD benefited from safe haven flows. The NZD closed the week near its lows of 0.7722, but news over the weekend that president Obama will seek a vote from congress before any military action has taken the pressure off the currency. The NZD opened on Monday morning around 40 points higher and since then has continued to recover. The potential for a strike on Syria is still there but the time horizon has now taken it off the immediate radar. With little economic data out in NZ this week, the focus turns to offshore with a number of central bank meetings (including the RBA today) and the US employment report on Friday. The NZD looks like it may drift higher to test initial resistance around 0.7865 in the short term.

NZD/AUD (AUD/NZD)

This pair lacked any real direction last week as both the NZD and AUD were under pressure due to wider market risk aversion. The cross has maintained a tight range between 0.8660 and 0.8740 (1.1442 and 1.1547) and these parameters have defined trade into the early part of this week as well. The broader trend is for the NZD to continue to move up and I expect another test of 0.8900 (1.1236) over the coming weeks. However momentum for such a move seems lacking at the moment. There is little out of NZ this week to drive the pair so attention will turn to Australian data, and in particular the RBA rate decision this afternoon. In the last hour we have seen Australian retail sales figures that came in below expectation and have weight on the AUD a touch. Later in the week we get GDP and trade balance followed by the general election this weekend.

NZD/GBP (GBP/NZD)

This pair has lacked any real direction recently trading mostly in a tight range above the 0.5000 (2.0000) level. There have been a few dips below there, but all have been quickly reversed, while the topside has been contained by minor resistance near 0.5050 (1.9802). The UK has continued to release very supportive data, the most recent of which last night showed the manufacturing sector is performing very well. This has helped to support the GBP. But with the NZD also stronger in the early part of this week as risk aversion wanes somewhat, the pair has remained range bound. Looking over the medium to long term I do expect the 0.5000 (2.0000) level to give way at which point the pair will target 0.4750 (2.1053). However, it seems there is a lack of momentum for that to happen in the near term and while the cross holds above this key level the risk remains for a move back up toward 0.5100 (1.9608). There is plenty more to come from the UK this week with readings from the construction and service sectors ahead of the Bank of England (BOE) rate announcement on Thursday night.

 NZD/CAD

This pair continues to establish the range it has been trading in for the last two weeks. Late week saw the NZD under period of considerable pressure, as geopolitical concerns increased risk aversion and the NZD was driven lower. However, these concerns abated a little over the weekend, and along with the better than expected Chinese manufacturing numbers, the demand for NZD has increased this week. This week sees the focus almost entirely based around Canadian data. The trade balance, BOC monetary policy meeting and employment numbers offer ample focus. Expect the rangy nature of the price action to continue in the short term at least.

NZD/EURO (EURO/NZD)

Last week saw the combination of weak NZ data and wider market risk aversion push the NZD to low levels not seen for around 18 months. However, the lowering of geopolitical tensions over the weekend, and the positive Chinese manufacturing numbers has seen the NZD regain much of the ground its lost over the previous two weeks. The NZ dollar gained further ground overnight, against stronger manufacturing numbers in Spain and Italy. With little in the way of NZ data expected for the remainder of the week, the focus will come from Europe, and in particular the ECB’s monetary policy decision on Thursday. No change to monetary policy is expected, but the accompanying statement will be closely watched.

 NZD/YEN

This pair spent most of last week entrenched in a relatively tight range, albeit the risk aversion pressure on the NZD saw the pair close at the weeks lows on Friday. However, the sentiment changed over the weekend, as the positive Chinese manufacturing numbers coupled with a delay on the UK and US strike on Syria. The focus this week will come from the statement accompanying the unchanged monetary policy decision from the Bank of Japan (BOJ) on Thursday. The immediate target for further NZD appreciation has to be the 78.00 resistance. A consolidated break of this level would open up the way for another leg higher by the NZD over the YEN.

AUD/USD

The Australian dollar was under pressure for much of last week on the back of wider market risk aversion. Volatility in emerging markets and the threat of a strike on Syria saw safe haven flows out of the AUD and into the USD. Some poor Australian construction output data added to the negativity, although later in the week we did get some decent figures on private capital expenditure. These had little lasting influence though as a ‘risk off’ sentiment prevailed and the AUD ended the week near its lows. Over the weekend however two factors have helped to turn the AUD around. Firstly was a decision by President Obama seek a vote from congress before any military action on Syria. This pushes the likely date for any strike out around 10 days or so. Secondly, we had some better data from China on manufacturing which supports other recent releases and the view that the slowdown there may be abating. These factors combined to see the AUD open 40 points higher on Monday morning and since then the recovery has continued. The AUD was helped on its way yesterday by building approvals and manufacturing data that both showed better than expected improvements. In the last hour we have seen retail sales numbers that came in below expectation and have weight on the currency a touch bringing it down off its highs. Later this afternoon we have the RBA rate announcement and accompanying statement that will be closely watched. No change is expected to the cash rate although we can expect more talk with regard to the currency still been overvalued.

AUD/GBP (GBP/AUD)                            

Although the broader trend for the AUD against the GBP is down, the last week has seen mostly sideways directionless trading. Recent cycle lows of 0.5720 (highs 1.7483) have not been tested and the AUD is currently headed toward the top of its recent range against the GBP. This comes even as manufacturing data from the UK last night points to growing momentum in their economy. The Australian dollar is benefiting in the early part of this week from reduced risk aversion and improving data out of China. There is however a lot more to come from both countries this week starting with the RBA rate decision later today. Then from the UK this week we get readings on the construction and service sectors ahead of the Bank of England rate announcement on Thursday night.

AUD/EURO (EURO/AUD)

After making fresh AUD cycle lows in the middle of last week at 0.6653 (1.5031), the AUD has put in a decent recovery. The initial move higher came on the back of Euro weakness seen in the wake of soft German inflation and unemployment data. The latest leg higher has come from a stronger AUD in the early stages of this week. The recovery in the AUD is on the back of reduced risk aversion as a military strike on Syria looks to have been pushed out to next week at the earliest, and some better Chinese manufacturing data. Overnight we have seen improved manufacturing data out of Spain and Italy which should help limit further gains for the AUD over the EURO. Resistance around 0.6840 (support 1.4620) should cap the AUD ahead of the RBA rate decision later today. From the Euro-zone this week we get data on the service sector and retail sales, before the ECB rate decision on Thursday night.

AUD/YEN

After seeing initial pressure early last week, the AUD has made a solid recovery against the Japanese YEN. Good numbers in Australia have helped boost demand and the pair is now close to the highs for the week. This week is a big one for news in Australia. The stronger than expected building approvals, and weaker retail sales numbers have balanced each other off. Later on today the RBA will likely leave monetary policy unchanged at their announcement, but the statement will be very closely monitored. Wednesday sees the 2nd quarter GDP number released, and this comes ahead of the trade balance on Thursday. In Japan the primary focus will be the statement from the BOJ as they leave monetary policy settings unchanged at their meeting on Thursday. The pair is close to resistance at 90.00, and this level remains the primary target for further AUD appreciation.

AUD/CAD

The Australian dollar struggled against the CAD at the beginning of last week. Wider market risk aversion was attributable for the weakness, and after setting the lows the pair ground back to partially make up the lost ground. Following the positive weekend Chinese manufacturing numbers, a further recovery has been made. The pair currently sits close to the weeks highs. The focus for the remainder of the week will be intense for this pair. Australian building approval and retail sales numbers have balanced each other out with the building approvals stronger, and the retail sales again underperforming. Later on today the RBA make their latest monetary policy announcement. No change is expected, but look for the statement to leave the door open for further easing to the cash rate if required. In Canada there is a host of data due for release this week. The trade numbers and BOC monetary policy announcements come on Wednesday and employment and purchasing manager’s survey on Friday. The pair is close to resistance at .9530, and this remains the crucial level on the short term.

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Market commentary:

The patchy nature of the global growth profile was again exposed last week. In the US we saw softer durable goods and home sales numbers balance by materially better than expected 2nd quarter GDP figures. The UK data remains positive and there were better signs coming from Europe. The political risks associated with the Syrian debacle saw the wider market suffer from widespread risk aversion for much of the last week. The risk aversion saw the Australasian currencies under considerable pressure at times. The lower than expected numbers in NZ saw the NZ dollar underperform its counterpart from across the Tasman. Respite finally came over the weekend in the form of better than expected Chinese manufacturing numbers. These numbers coupled with the de-pressurising of the Syrian situation from the UK and US. Whilst a strike remains likely, a measured approach has lowered risk aversion in the markets for the time being. With the patchy emergence of global growth, and increased geopolitical tensions, expect further volatile trading within the established broader ranges for most markets in the short term.

Australia

This week has certainly started off better than the previous one for the Australian dollar. Over the week we have seen an easing of the risk aversion that kept the currency under pressure for much of last week. The news that President Obama will look for support from Congress before launching any strike on Syria has meant any potential strike is at least a week or more away. Add to this some better than expected Chinese data on manufacturing and we have seen a positive start to the week for the AUD. The more buoyant tone was aided by Australian building approvals data that hit the wires yesterday. It came in at +10.8% against an expectation of +4.1% and helped to increase demand for the currency. In the last couple of hours we have also had retail sales numbers that came in below expectation and have weighed on the currency a touch. But key for the AUD will be the RBA decision later this afternoon. No change in policy is likely, although the market will be keen to get a feel for what the RBA are thinking going forward from the statement release at the same time. Tomorrow we also have GDP data and on Thursday we get the trade balance. So a big ahead week for the Australian economy.

New Zealand

The risk aversion that swept through the market last week and caused the NZD to lose a lot of ground has abated somewhat. This is largely due to the dwindling support for any strike against Syria, and the fact that President Obama has now asked for a vote from congress before any decision is made. This pushes the time horizon for a strike out about 10 days or more and has helped the New Zealand dollar regain some of the lost ground in the early part of the week. This week is very light on the data front domestically however yesterday we did get the terms of trade index which came in better than expected. The focus will now turns to offshore events, with a number of central bank meetings over the coming days and the US employment report on Friday.

United States

The end of last week saw some mixed data from the United States. Weaker than expected figures on personal income and spending were offset by a revision higher of the consumer sentiment numbers for August. Over the weekend the news that President Obama will seek a vote from Congress before any potential strike on Syria has seen the market breathe a sigh of relief. Safe haven flows into the USD last week as the threat of a strike loomed saw it make good gains against the NZD and AUD. Some of this has now been reversed. Aside from that it has been a quiet start to the week with the Labour Day bank holiday in the US on Monday. There is plenty of data out over the coming days with the key releases being manufacturing data tonight, non-manufacturing data on Thursday night, and the employment report on Friday evening.

Europe

Late last week we got readings on inflation and unemployment from the Euro-Zone. Unemployment remained stubbornly high at 12.1% and comes as many other indicators are showing improvement, albeit at a very gradual pace. Inflation across the region is no threat at all coming in below expectation at 1.3%, which is down from the last reading of 1.6%. This is well below the central bank’s target of 2%, and there is some talk that this leaves them plenty of room to cut rates this week should they see fit. I suspect however, that is very unlikely given the improving nature of other indicators, and the need to keep some powder dry should things turn ugly again. Last night we got data on the manufacturing sectors of Spain and Italy, both of which have improved and moved above the 50 level which denotes expansion in the industry. This backs up similar data recently seen for Germany and supports the view that a gradual recovery taking place across most of the region. Although there should be no surprises in the actual rate decision by the ECB, there will however be plenty of attention paid to the statement released and the subsequent press conference. Ahead of that ECB decision we get readings German retail sales and factory orders.

United Kingdom

This week is a big one data wise for the United Kingdom. On Thursday evening we have the Bank of England rate decision, but before that we get data on the construction and services sectors of the economy. Last night we got the latest reading on the manufacturing sector which accounts for around 10% of UK GDP. The trend has been for improving UK numbers and this data didn’t disappoint. It came in at a solid 57.2 against an expectation of 55.0.  Looking into the detail of the report is even better with the subcomponents of output and new orders expanding at their fastest pace in 20 years. Figures like this underline the broad based recovery that is taking place in the UK and should help to support demand for the GBP. The outlook for third quarter GDP could also be revised up. Long term interest rates keep moving higher with the 10 year now at its highest level since July 2011.

Japan

Some patchy data late last week has done little to change the current outlook for a gradual recovery in Japan’s economic situation. That view was highlighted yesterday with the release of capital expenditure data that came in better than expected. Although the result was still only flat at 0.0%, it is the first time it has not declined since the third quarter last year. There is still a lot of focus and discussion on whether the economy is strong enough to withstand the sales tax hike from 5% to 8% planned for April next year. The economy minister recently heard seven days of testimony from a panel of experts who recommended the planned tax hike goes ahead but it’s implemented with some other stimulus measures to help counter the impact. The key event this week will be the Bank of Japan monetary policy statement and press conference on Thursday.

Canada

Friday evening saw the release of GDP data for June and the result was a little weaker than expected. It came in at -0.5% against an expectation of -0.4%, and it caused some volatility around the time of release. Overall however  the Canadian Dollar ended mostly unchanged on the day. The reading was the first negative number in five months, but was largely because of the floods in Alberta and the construction strike in Quebec. The one-off nature of those impacts has allowed the market to mostly look through this figure and concentrate on the slowly improving picture of its neighbour and biggest trading partner, the United States. The second half of this week is jam packed with key releases from both Canada and the US. Canadian trade balance and reserve bank rate decision tomorrow night are followed by employment numbers for both Canada and the US on Friday night.

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