By Mike Jones*
Improved risk appetite appeared the dominant theme for trading across all asset classes last week and that was certainly the case for FX.
The AUD, NZD and the CAD were the best performers over the course of the week as rising investor confidence sent equities and commodities higher.
While the NZD failed to really build on its gains from earlier in the week it still closed the week up 3.20%, 2nd only to the very strong AUD on the performance tables.
An improved attitude toward risk was not necessarily the only factor at play, however.
Some analysts have also noted that the speculative community were heavily short AUD, NZD and CAD, so a lot of the buying seen in these currencies was due to heavy short covering.
Some also contend that the extremely low volumes changing hands in global equity markets indicate the risk rally was less to do with rising risk appetite and more to do with heavy short covering ahead of the US corporate earning season and a lack of data and news out of the US and Europe.
In any case the main focus will be the corporate earnings reports from some of the largest companies in the US and their guidance for the coming quarter.
Alcoa unofficially kick off the reporting season when they report after the close Monday. Tech bellwether Intel reports on Tuesday followed on Thursday by reports from Google and JP Morgan .
On Friday GE, Bank of America and Citigroup will release their results.
On the local data front, Friday’s Q2 CPI will be the most closely watched item, although there are a few other reports to note, including May’s retail sales and June’s Performance of Manufacturing Index.
For this week expect the NZD to find good support towards 0.7050 with any further probes to the topside requiring an improvement in risk appetite across both equities and commodities. Majors As financial markets cautiously preceded with a more positive tone Friday, with tentative gains for stocks and commodities, so the FX market continued to reflect that mood by selling JPY and CHF.
Meanwhile, riskier currencies variously held up. However, the AUD and NZD struggled to build on strong gains made earlier in the week. The EUR and GBP both started the session looking as though they would extend their recent rises against the greenback. EUR/USD popped above 1.2700 amid discussion that ECB President Trichet had put in a more assured performance at Thursday’s ECB press conference, triggering speculation of further short EUR position liquidation.
Our own view has been that EUR/USD should at least stall in the 1.27-1.28 area and we remain very cautious on EUR gains from here. There is much debate that the emerging detail on European bank stress tests is easing concern on the EUR. We remain sceptical of this more positive mood, with many questions on this subject still unanswered. We are thus not surprised by the pullback in EUR/USD, which late-Friday triggered sell-stops below 1.2660 for an intra low session of 1.2608.
The pattern on Friday for the majors appeared to be one of cautious risk appetite but with the EUR and GBP losing out against the USD as the recent position-led squeeze higher fades. Monday’s ECB three month refinancing will be the early week focus. With EUR/USD holding the declining resistance line from December 2009 at 1.2720 EUR/USD will need to hold above 1.2475 if a more aggressive round of sales is to be avoided. China released its trade data on Saturday and it came in stronger than expected. Exports for June rose 43.9% from a year ago against forecast for a rise of 38%.Imports rose 34.1 % which was broadly in line with expectations, with the trade surplus at USD20b.
While the export results were clearly strong, according to some analysts the data point to the beginning of slacker demand in the Chinese economy. Chinese imports grew just 0.9% from May after calendar adjustments. Imports of oil and soybeans managed to hit monthly records, but imports of copper and iron ore slowed. For global news, keep an eye out for Fed Chairman Bernanke speaking on Monday and US CPI, retail sales and Michigan Confidence survey out later in the week.
The key event in Europe will be the Greece T -Bill auction, Tuesday, which will mark the first time Greece has attempted to auction Bills since accepting the EU/IMF bailout in May.
* Mike Jones is part of the BNZ research team. All its research is available here.
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