Market sentiment struggling to deal with softer economic indicators

By Sam Coxhead*:

The wider financial markets have suffered from gaining risk aversion over the past week.

Market sentiment has been struggling to deal with softer economic indicators, but coupled with the political environment in Europe and fiscal hurdles in the US, the increased uncertainty has pushed growth assets lower.

Today’s indecisive election result in Italy has further pressured markets, with irrational moves seen in some cases.

The Japanese YEN has seen a large bounce in demand against the EURO, and this has spilt across into other pairings.

Interest rate markets have been in demand as stock markets slump, and bond interest rate yields are materially lower.

The Australasian currencies remain resilient, especially the NZ dollar.

The theme of  “relative economic health” provides the underlying support for both the NZ and Australian economies, and this should provide a buffer for material moves lower that would ordinarily be seen when general market risk aversion increases.

This insulation should continue to be a theme in 2013, and points towards further contained ranges for the NZ and Australian dollar’s on most pairings.

Major Announcements last week:

·  German Investor Sentiment 48.2 vs 35.3 expected

·  UK Unemployment rate 7.8% vs 7.7% expected

·  European Manufacturing 47.8 vs 48.4 expected

·  European Services 54.1 vs 55.5 expected

·  US Inflation 0.0 vs +.1% expected

·  US Philly FED Manufacturing -12.5 vs +1.1 expected

·  Canadian Retail Sales -.9% vs +.1% expected

·  Italian elections inconclusive

NZD/USD 

After a brief attempt through resistance at .8450 last week, the NZD saw renewed pressure from the US dollar. This came as comments from RBNZ Governor Wheeler about the high level of the NZ dollar rattled NZD investor confidence. However, the pull bank has not been sharp, but the pair looks more comfortable than it did as it approached .8500. Wider market sentiment remains soft as the Italian elections undermines the markets confidence. Further investigations towards the lower end of the range cannot be ruled out in the current environment. Expect initial support around the current levels, ahead of more robust support at the .8250 level.

NZD/AUD (AUD/NZD)

This pair had traded a relatively contained range in the last week. The NZD was tipped from its highs following a warning from RBNZ Governor Wheeler about its elevated levels. This contrasted rhetoric from RBA Governor Stevens and has been enough to push the pair back to seemingly more comfortable levels. The AUD weakness that followed yesterday’s weak Chinese manufacturing numbers could not be sustained, and the pair looks likely to trade a relatively narrow range as the focus returns to issues external to Australasia in the short term at least.

NZD/GBP (GBP/NZD)

The recent pressure on the GBP has continued throughout the last week. Yet again, the NZD recorded fresh highs against the GBP. At the current extended levels, any further gains from the NZD seem unlikely, with a very negative economic picture already priced into the GBP. Expect the focus to come predominantly from the UK this week, with the BOE inflation report offering another opportunity for comments maintaining pressure on the GBP. In NZ, Thursday’s business confidence number will be watched, but should be of limited impact to the price action.

 NZD/CAD

The last week has seen further NZD strength against the beleaguered Canadian dollar. However the pull back from the highs earlier on today will encourage those waiting for some kind of NZ dollar softening. Certainly the pair looks to have established solid resistance above the current levels and the NZD would have to see sustained demand to forge new highs for this move. With little in the way of top tier economic data in NZ this week, the focus is provided by the Canadian GDP numbers on Friday.

NZD/EURO (EURO/NZD)

For the most part the last week has been one of mixed fortunes for this pair. After suffering from initial pressure following the Wheeler comments, the NZ dollar ground back to regain lost ground in the run up to the Italian elections over the last few days. The inconclusive result is certainly EURO negative, and until a clear path forward is worked out the NZD should remain up towards this higher end of the recent range. The last thing Europe needs is loose leadership in Italy at this vulnerable stage of the recovery in sentiment. The .6400 (1.5625) level has provided EURO support for the time being, but any further concerns in Italy would see pressure on this level.

 NZD/YEN

It was again an interesting week for this pair, with the increased uncertainly continuing in Japan, and  RBNZ Governor Wheeler making verbal intervention against the elevated level of the NZ dollar. However, the weeks price action was passive compared to the markets demand for YEN following the inconclusive election results in Italy. The knee jerk reaction to buy the safe haven YEN saw investors scramble to cover “sold YEN” positions. This pair saw a move higher from the YEN in excess of 3% in a very short space of time. There has been a subsequent bounce from the NZD as the market settled, to the tune of around 1%. Direction from the current levels remains unclear, but it potentially may see the NZD grind higher to take back further lost ground. The former support at 77.50 will be the initial target for NZD moves higher.

AUD/USD

This pair remains contained by its recent range. The last week’s price action has seen volatility within the range. The increased risk aversion in the last few days has seen the AUD vulnerability re-emerge and the coming sessions will be key for direction in the short term. Certainly the theme of US dollar strength looks to be in place, but its gains against the AUD have been somewhat limited for the time being. Not even yesterday’s weaker than expected Chinese manufacturing numbers saw sustained pressure on the AUD, and this is likely to be because expectations of near term cuts to the cash rate from the RBA have been pared back. Expect the range trading to continue this week, with the host of US data to dominate the focus alongside Thursday’s private capital expenditure numbers in Australia.

AUD/GBP (GBP/AUD)                            

The GBP remains under intense pressure from the AUD. The credit downgrade from Moody’s late on Friday was final icing on the cake for what was difficult week for the Pound Sterling. There remains little negative news to emerge in the short term and this should ensure that further gains by the AUD over the GBP are far harder fought in the near term. After starting this week at new highs, the AUD has seen pressure from the GBP as the wider market risk aversion has increased. Focus this week will come from the release of the BOE inflation report, second release of UK GDP numbers, Australian private capital expenditure numbers and finally the UK manufacturing data on Friday.

AUD/EURO (EURO/AUD)

The AUD saw grinding appreciation against the EURO throughout much of last week. The RBA rhetoric coupled itself with increasing uncertainty around the Italian elections to drive the move. The inconclusive election result this morning drove the pair steeply in the AUD’s favour and the pair has managed to consolidate through the .7800 (1.2820) EURO support level. This week will likely see the volatility remain in place as the frailties of the Italian political system are likely to be exposed. Expect the Australian private capital expenditure numbers, alongside the European unemployment number and inflation numbers to provide the “non Italian” focus for the week. Albeit, they should be of limited impact.

AUD/YEN

The volatility for this pair continued throughout the course of the last week. The establishment of the Japanese PM’s choices to lead the BOJ is a positive development in Japan, ratification of these choices will have to be made in due course, but the market can take assurance from the choices made. What has developed over the last 12 hours has been of some surprise. The inconclusive election result in Italy saw a monumental shift back towards YEN demand. This saw the AUD give around 3% to the YEN in a small time frame to set the lows for the week. There has been a material bounce back above 95.00 and consolidation above this levels remains the key for the direction in the near term.

AUD/CAD

The AUD forged further ground against the beleaguered Canadian dollar last week. Dual forces of increased AUD demand, and a lower CAD demand enabled the move. The AUD saw demand buoyed by rhetoric from the RBA that pointed towards monetary policy being on hold in the near term. In Canada the soft run of economic news continued and this was reiterated overnight by the comments from outgoing BOC Governor Carney. This week sees Thursday’s private capital expenditure number in Australia provide focus ahead of Fridays Canadian GDP release. Current levels again offer great value buying of CAD with AUD.

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Market commentary:

The wider financial markets have suffered from gaining risk aversion over the past week. Market sentiment has been struggling to deal with softer economic indicators, but coupled with the political environment in Europe and fiscal hurdles in the US, the increased uncertainty has pushed growth assets lower. Today’s indecisive election result in Italy has further pressured markets, with irrational moves seen in some cases. The Japanese YEN has seen a large bounce in demand against the EURO, and this has spilt across into other pairings. Interest rate markets have been in demand as stock markets slump, and bond interest rate yields are materially lower. The Australasian currencies remain resilient, especially the NZ dollar. The theme of  “relative economic health” provides the underlying support for both the NZ and Australian economies, and this should provide a buffer for material moves lower that would ordinarily be seen when general market risk aversion increases. This insulation should continue to be a theme in 2013, and points towards further contained ranges for the NZ and Australian dollar’s on most pairings.

Australia

It has been a mixed last week for the Australian economy. The RBA monetary policy meeting minutes were mostly unsurprising. Further easing to the 3.00% cash rate will be forth coming, if conditions require it. However, this easing is by no means a forgone conclusion and this has seen the easing expectations pared back for the coming monthly RBA  meetings. The minutes were reinforced by comments from RBA Governor Stevens in a separate speech last week. Early this week saw the latest HSBC Chinese Manufacturing numbers under perform. This release saw the Australian dollar initially come under pressure before recovering in the offshore session. The remainder of the week will see the domestic focus come from Thursday’s capital expenditure number, which the RBA follow closely.

New Zealand

It has been an interesting last week for the NZ economy. The NZ dollar remains broadly in demand, albeit back from its recent highs and comfortably within its recent range. The latest Global Dairy Trade auction results from Fonterra confirm a further increase in average prices of 3.1% to mark the fifth straight month of higher prices. This will somewhat offset the increasingly desperate situation that North Island farmers are facing from the prolonged period of dry weather. Of most impact last week was an on the record speech from RBNZ Governor Wheeler. Wheelers “verbal intervention” served as a warning shot to investors that the high NZ dollar is on the radar of the RBNZ, and they see indirect intervention as a means to tame its appreciation. Whilst the impact was immediate as it pushed the NZD back from its highs, this strategy has to be used sparingly. There is little in the way of top tier data due for release this week, although the trade balance numbers on Thursday will garner attention.

United States

The US dollar has continued to see increasing demand as the market risk aversion increased throughout the last week. This comes after equity markets have seen momentum wane at five year highs. The FED’s monetary policy meeting minutes held little of surprise, but discussions have started about what will need to be a clinical removal of stimulus when required as the economy recovers (think 2014). Housing numbers remain healthy for the most part and the latest inflation numbers confirm that pricing pressure remains a non-issue for the time being. Of note will be the collapse of the Philadelphia FED manufacturing index, and possible implications from this. This week is a busy one for economic news. FED Chairman Bernanke testifies before the Senate Banking Committee, further housing numbers, preliminary GDP numbers and further manufacturing data will dominate the focus.

Europe

It has not been a particularly positive last week in Europe. Apart from a surprise jump in German investor sentiment, the news was underwhelming. Lower than expected manufacturing and services activity reminds us that the economy remains under pressure. Adding to the uncertainly has been the build up to and results of the important Italian elections. The inconclusive result looks like the coming days will offer a messy insight to the Italian political system. This will likely weigh on the wider market sentiment in the short term at least. Expect the European unemployment and inflation numbers to be of secondary interest aside the Italian election drama.

United Kingdom

The Great British Pound has remained under pressure throughout the last week. The rumours of a credit downgrade should not have come as a surprise, as the economy struggles for growth amidst high Government debt and stubborn inflationary pressure. A downgrade Moody’s came late in the week and followed BOE monetary policy meeting minutes that point towards further stimulus to come from the BOE in the coming months. Interestingly, the employment numbers were slightly better than expectations. Given the sustained pressure over the last month or so, the Pound Sterling must be close to establishing a bottom of its range. Certainly against the Australasian pair, the momentum should slow at the very least. This week sees outgoing BOE Governor King speak later today, secondary GDP numbers on Wednesday, and manufacturing data on Friday.

Japan

The drama around the Japanese YEN has continued throughout the last week. The BOJ monetary policy meeting minutes added little to the equation, but the YEN materially weakened on news that Haruhiko Kuroda has been nominated by PM Abe to be the next BOJ Governor. After so much Japanese domestic focus, it was a very interesting offshore session overnight. The old correlation of YEN demand amid risk aversion returned in a big way, as the drama played out in Europe around the inconclusive Italian elections. Whilst the YEN saw the most demand against the EURO, it was materially higher across the board. The move was surprising to say the least, and it remains to be seen if the move will be reversed in the coming days. Expect the volatile price action to continue as the saga in Italy plays out. This week sees Japanese retail sales, industrial production, inflation and capital spending numbers due for release.

Canada

Last week saw a continuation of the recent down turn in Canadian economic data. Inflationary pressure remains a non-issue at just a .1% increase for the month, and retail sales disappointed with a contraction of -2.1%. This has been backed up overnight as outgoing BOC Governor Carney commented that downside risked to the economy have materialised and 4th quarter GDP is likely to be below the BOC forecasts. The GDP numbers are due on Friday and the current expectations for the Dec month is a .2% contraction in activity.

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Sam Coxhead is a currency analyst with DirectFX You can contact him here >>