Simmering Ukranian tensions and almost daily reports of Chinese credit defaults worries investors

By Ian Dobbs*:

The last week has been an interesting one for the financial markets. Apart from the usual influence of economic news, the Ukrainian tensions continued to simmer and coupling with increasing credit bubble fears in China, led to periods of risk aversion.

The Reserve Bank of New Zealand (RBNZ) became the first developed nation central bank to raise the cash rate, with others not expected to do the same until well into 2015.

The Reserve Bank of Australia reiterated their neutral monetary policy stance and this looks to have been cemented as the latest employment statistics were materially stronger than expected.

The Australasian situation contrast that of Europe, whose lower than expected inflation numbers now firmly open the door for further policy accommodation from the European Central Bank (ECB).

Widespread concern over corporate credit default in China seems to be intensifying, with almost daily reports of default in a wide spread of sectors.

Major Announcements last week:

·  The BOJ leave monetary policy unchanged

·  The RBNZ hike cash rate 25pts to 2.75%

·  Australian Employment growth +43.7k

·  US Retail Sales +.3% vs +.2% expected

·  US Consumer Sentiment Index 79.9 vs 82.0 expected

·  European Industrial Production 2.1% vs 1.9% expected

·  UK Industrial Production 2.9%vs 3.0% expected

·  Chinese Industrial Production 8.6% vs 9.5% expected

NZD/USD

The New Zealand dollar surged higher on Thursday last week, helped by the RBNZ rate announcement and then a surprisingly strong result from Australian employment. The currency briefly traded over 0.8600, however this was short lived as a wave of profit taking ensued triggered by reports of shots fired in the Ukraine and weakness in European stocks. These two events saw an increase in risk aversion and quickly pushed the pair back down towards 0.8520. With the Ukraine referendum out of the way peacefully, and the realisation that the only action the west is likely to take comes in the form of sanctions, we have seen risk trades back in favour this week. This has helped the NZD regain some ground and it now trades around 0.8560. I still believe levels over 0.8600 are a step too far for the currency at this point and favour selling into strength. 0.8400 to 0.8600 seems like a likely range for the coming week. Thursday’s NZ GDP data will draw focus, as will the Federal Reserve meeting in the US.

NZD/AUD (AUD/NZD)

There hasn’t been a lot of direction for this pair over the past week. Gains were made in the lead up to, and immediately after, the RBNZ rate hike on Thursday morning, but these were completely undone in the wake of Australian employment data later that afternoon. Those strong employment numbers have combined with other recent data from Australia to suggest the economy may not get much worse from here. Should that prove to be the case there may not be a lot of topside action left in this pairing. For the time being it looks like the broad range of 0.9300 to 0.9500 (1.0753 to 1.0526) will dominate. NZ GDP data on Thursday will be the primary focus with little else set for release from either country.

NZD/GBP (GBP/NZD)

The New Zealand dollar burst higher against the UK Pound after last Thursday’s RBNZ rate hike. Pressure to the topside intensified after Australian employment data surprised many coming in much stronger than expected. That helped drag the NZD up towards 0.5150 (down towards 1.9417) where it currently trades. The NZD has remained supported in the early stages of this week as tensions in the Ukraine have eased. With the Ukraine referendum now out of the way peacefully and the realisation that the only action the west is likely to take comes in the form of sanctions, risk trades have again found favour. The consolidation of NZD gains through 0.5100 (1.9608) for this pair brings into doubt the medium term negative outlook. A move towards the next resistance level just over 0.5200 (just under 1.9231) could eventuate. That being said, the NZD is now trading at elevated levels on a number of crosses and this should see further gains much harder fought. Focus now turns to the BOE monetary policy meeting minutes on Wednesday, and NZ GDP data on Thursday.

 NZD/CAD

The only notable price action in this pair over the past week came late last week after the RBNZ rate hike. This saw demand for New Zealand dollars increase and the cross to the CAD jump to 0.9520. However, most of those gains were reversed heading into the weekend as a wave of risk aversion swept the market thanks to concerns around the Ukrainian situation. Since then price action has been subdued and the pair has traded quietly around 0.9470. The pair has been in a strong uptrend since the beginning of the year and it would be foolish to try and call a top. That being said these are very elevated levels for the pair which represent good selling on a historical basis. From NZ this week we get GDP data on Thursday. While from Canada attention will turn to the key release of inflation, retail sales, and manufacturing sales.

NZD/EURO (EURO/NZD)

The past week’s price action has been dominated by NZD gains made last Thursday after the RBNZ rate hike. Further topside pressure was seen a few hours later after Australian employment data surprised on the strong side. This helped to drag the New Zealand dollar up towards 0.6160 (down towards 1.6234), near where it currently trades. The highs for the pair traded last night after tensions in the Ukraine eased following a peaceful referendum. This saw a return of risk appetite which supported the NZD. The Euro was also weighed on by last night’s downward revision to inflation data. While the immediate focus remains on the NZD topside and a potential test of 0.6200 (1.6129), we should be mindful of the fact the NZD is at very elevated levels on a number of crosses. This will make further gains much harder fought and increases the potential for a sharp turnaround. In focus this week will be NZ GDP data on Thursday, while from Europe we get German economic sentiment, the current account, and consumer confidence.

 NZD/YEN

The NZ dollar remains at elevated levels against the YEN. Attempts to consolidate through the resistance 88.00 proved ultimately unsuccessful, and expect that level to contain the price action this week. Look for the pair to continue to establish its range at these elevated levels. Any NZD softness will be caused by wider market risk aversion, and dips will be relatively shallow as yield chasers underpin demand for the NZD in the coming months. The quarterly NZ GDP numbers will provide the primary data focus for the week. These numbers come ahead of a speech from BOJ Governor Kuroda on Thursday.

AUD/USD

Last Thursday’s surprisingly strong employment data helped the Australian dollar recover substantial ground. The currency surged to 0.9103 in the hours after the release and the gains were only undone on the back of heightened tensions in the Ukraine. These combined with European stocks falling 1-2% on Thursday evening to see an increase in risk aversion and this weighed on the pair into the weekend. With the Ukraine referendum now out of the way peacefully and the realisation that the only action the west is likely to take comes in the form of sanctions, we have seen risk trades back in favour this week. This has seen the AUD recover back towards 0.9100. There is little else out this week from Australia to drive the market so focus will turn to offshore factors. To that extent this week from the US we have building permits and inflation data to be followed by the latest Fed meeting.

AUD/GBP (GBP/AUD)                            

The past week has seen the Australian dollar make good gains against the GBP. The pair snapped higher on Thursday in the wake of Australian employment data that surprised many with a very strong reading. But then gave up some of those gains heading into the weekend as tensions in the Ukraine increased causing some risk aversion through markets. Since then however, after a peaceful referendum and lack of any strong action from the west, we have seen a notable increase in risk appetite again. The AUD could well see further gains toward resistance just above 0.5500 (support below 1.8182), although that level should cap in the near term. With little set for release from Australia this week, the focus turns to the BOR monetary policy meeting minutes on Wednesday.

AUD/EURO (EURO/AUD)

Last Thursday’s Australian employment data saw the AUD surge against most other currencies. The much stronger than expected result saw the rate against the Euro jump to 0.6520. Some of those gains were reversed heading into the weekend as the Ukrainian situations caused a round of risk aversion. But after a peaceful referendum and lack of any strong action from the west, we have seen a notable increase in risk appetite again in the early stages of this week. This has supported the AUD and seen the cross to the Euro trade up to 0.6540. Last night’s downward revision to Euro area inflation has also helped by putting some pressure on the EUR. There is certainly plenty of room on the topside before this pair runs into any real resistance. 0.6600 would be that level, although that seems a long way off for the AUD at the moment. With little else in the way of domestic data this week the focus turns to Europe and the release of German economic sentiment, the current account, and consumer confidence.

AUD/YEN

The past week has seen notable periods of risk aversion that have weighed on this pair overall. We have also seen periods of strength, the sharpest of which came after much stronger than expected Australian employment data last Thursday. However, this was short lived as concerns around the Ukrainian situation saw those gains reversed heading into the weekend. In the early stages of this week we have seen a return of risk appetite as the market comes to realise the west will do little to intervene in the Ukraine. There is little else set for release from Australia this week and from Japan we only have the trade balance and a speech by BOJ Governor Kuroda of any note.  A range of 91.50 to 93.50 looks likely to dominate trading over the coming days.

AUD/CAD

The Australian dollar made strong gains against the CAD in the wake of last Thursday’s employment data. The pair surged up to 1.0086, however the gains didn’t last long. Risk aversion heading into the weekend and the Ukrainian referendum saw most of those gains retraced. However, in the early stages of this week, with no sign of strong action from the west, risk appetite has returned and the AUDCAD has had another attempt higher. There seems to be plenty of resistance between 1.0060 and 1.0100 and this continues to cap the topside for now. With little to focus on domestically this week, attention will turn to the important Canadian releases of inflation, retail sales, and manufacturing sales.

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Market commentary:

The last week has been an interesting one for the financial markets. Apart from the usual influence of economic news, the Ukrainian tensions continued to simmer and coupling with increasing credit bubble fears in China, led to periods of risk aversion. The Reserve Bank of New Zealand (RBNZ) became the first developed nation central bank to raise the cash rate, with others not expected to do the same until well into 2015. The Reserve Bank of Australia reiterated their neutral monetary policy stance and this looks to have been cemented as the latest employment statistics were materially stronger than expected. The Australasian situation contrast that of Europe, whose lower than expected inflation numbers now firmly open the door for further policy accommodation from the European Central Bank (ECB). Widespread concern over corporate credit default in China seems to be intensifying, with almost daily reports of default in a wide spread of sectors.

Australia

The key piece of data from Australia recently was the employment numbers released last Thursday. The 47.3k gain was much higher than expected and looking into the detail made even better reading with a big swing from part time to full time employment. When you combine this result with the previous week’s strong data on building approvals, retail sales, and the trade balance, it brings into question some of the more negative forecasts for the economy. We have already seen one major bank revise their forecasts for further interest rate cuts by the RBA. They now see the central bank on hold for the remainder of the year. There are obviously still plenty of headwinds, the least of which is not China and the potential for a credit crises there, but at least at this point it seems the Australian economy has regained some composure as it transitions away from the mining led boom. RBA minutes released this afternoon held little in the way of surprise. The cash rate could ”remain at its current level for some time”.

New Zealand

The New Zealand dollar has continued to perform well in the wake of Thursday’s RBNZ rate hike. Since then we have also seen data on NZ manufacturing which was largely unchanged from the previous months and at healthy levels overall. Consumer confidence rose again to 121.7 from 120.1. It now stands at its best level in nine years. And the latest NZIER forecasts show New Zealand growing strongly over the next couple of years. They believe economic growth will pick up from 2.9% in March 2014 to 3.6% the following year. We get the latest quarterly GDP figures on Thursday which should make good reading. Ahead of that, we have current account data on Wednesday.

United States

The general theme from US economic releases recently, seems to be that we are seeing a gradual recovery from previous weather affected data. There are still some patchy results, but it certainly seems that overall the numbers are improving slowly. Late last week we saw retail sales that printed above expectation at +0.3%, although looking into the breakdown of the data took some of the shine off the release. Weekly jobless claims also fell to 315k from 330k. If this can be sustained it will bode well for next month’s employment report. Import prices rose 0.9% vs 0.4% expected. The main driver of this was petroleum. More positively, export prices also rise by the largest amount in a year. Last night’s release of industrial production was much better than forecast printing at +0.6% vs +0.2% expected. This is the largest gain in six months. On the negative side though we have seen consumer sentiment dip a touch to 79.9 in March from 81.6 in February. What does all this mean for the Fed meeting on Thursday morning? Well it seems almost certain they will continue to taper quantitative easing by another $10 bln which is widely expected. The interesting aspect could come from whether they decided to tweak / clarify the forward guidance threshold of 6.5% unemployment. Somehow the Fed need to back away from that threshold as the unemployment rate is currently not far away from there, yet they are a long way from raising rates. Ahead of the Fed meeting we get data on building permits and inflation.

Europe

Late last week saw some positive releases from the Eurozone in the form of stronger French inflation and much better than expected Spanish retail sales. However, these have been countered by last night downward revision to Euro area inflation for February. It had previously been reported at +0.8% year on year, taking a little heat off the ECB to act at their last meeting, but it has now been revised down to +0.7%. The ECB believe that rate will pick back up towards 1% by mid this year, hence their recent decision not to act. But president Draghi has stressed they stand ready to act if needed. He was quoted late last week as saying the ECB has been preparing non-standard measures to guard against deflation. Any further weakness seen in inflation over the coming months could trigger the implementation of those measures. Key data to watch out for this week comes in the form of German economic sentiment, the current account, and consumer confidence.

United Kingdom

There has been nothing of significance released from the UK over the past week. Friday’s trade balance was a little worse than expected, although its impact was muted. The Bank of England (BOE) warned in its Quarterly Bulletin that the GBP could come under pressure due to the UK current account deficit. However, they did stress there are very mixed views on the subject and it is far from clear if the sizeable deficit is currently a focus of the market. The key release this week comes in the form of minutes from the last BOE meeting. These hit the wires on Wednesday evening and will be followed by the release of the UK budget which is likely to have a limited impact.

Japan

The wave of corporates and large institutions announcing base pay rises in Japan has continued with news Japanese banks are considering hiking base pay 0.5%. This is all good new ahead of April’s sales tax increase. The government expects the impact of that to be limited and for the economy to remain on the recovery path. That positive outlook was supported by core machinery orders data released late last week. The +13.4% result was much higher than expectations of +7.0% and largely reversed the previous months record fall. This week is a quiet one with only the trade balance and a speech by BOJ Governor Kuroda of any note.

Canada

Some positive results from the Canadian housing market over the past few days have been countered by a small drop in the rate of capacity utilization. The new house price index climbed +0.3% in January up from +0.1% previously. Existing home sales were also up +0.3% which was much improved from the previous -3.3% reading. But capacity utilization (which is a leading indicator of inflation) came in at 82.0%, which is a touch below the expected result of 82.3%. The overall impact on the Canadian dollar from these releases has been minimal. We get much more important readings on inflation, retail sales, and manufacturing sales later this week.

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