Neurotic markets bounce back

By Sam Coxhead*:

The sometimes neurotic nature of sentiment in the financial markets was well evidenced through the course of the last week.

The Greek debt legislation was focus early in the week. As it became evident that it was likely that the required austerity measures would be passed, there was a rush to cover sold euro positions and the single currency was in hot demand. While this debt issue is far from over, the markets have reacted with renewed enthusiasm for risk.

The NZD reached post float highs against the pound sterling and US dollar, as equity markets pushed higher, with the S&P500 posting its best weekly performances in two years.

Major Announcements last week:

· UK GDP (final) +.5% vs +.5% expected
· US Consumer Confidence 58.5 vs 60.8 expected
· Canadian CPI (inflation) +.5% vs +.2% expected
· Greek parliament passes austerity and implementation legislation
· US Pending Home Sales 8.2% vs 2.4% expected
· NBNZ NZ Business Confidence Survey 46.5 vs 38.3 previous
· UK House Price Index 0.0% vs .1% expected
· Canadian GDP 0.0% vs -.1% expected
· US Chicago PMI 61.1 vs 54.1 expected
· Chinese Manufacturing PMI 50.9 vs 51.6 expected
· UK Manufacturing PMI 51.3 vs 52.2 expected
· US ISM Manufacturing PMI 55.3 vs 51.9 expected

NZD/USD 
The NZD remains within touch of the interbank post float high of .8318, set against the US dollar last week. Progress higher from here will be more difficult, as the relief from the passing of the Greek austerity legislation dissipates. NZ GDP on Thursday will be closely watched ahead of the crucial US employment numbers due Friday. Softening commodity prices should see the US dollar stablise and control enthusiasm for further NZD topside moves.

NZD/AUD (AUD/NZD)
This pair remained in its expected range through the course of last week, with most moves being driven by the general market appetite for risk. The range could well be tested this week, with a more domestic data focus present. Today’s weaker than expected Australian building approvals and retail sales numbers, saw the AUD under some pressure against the NZD, with a slide in value of over half a percent on release. Tomorrow, the NZIER Business Opinion Survey comes in before the Australian Trade Balance, and the RBA cash rate statement. Thursday will provide interest also with NZ GDP and Australian employment data. A push through of the resistance at .7800 (support AUD/NZD 1.2820), would open up the way for another round of NZD appreciation, back towards more historically average levels.

NZD/GBP (GBP/NZD)
The NZD outperformed the pound sterling to set a post float of .5187 last week. The across the board pressure on the GBP has continued as BoE discussions continue with regards to new QE initiatives. In the absence of any positive economic news in the UK, expect the pressure to remain ahead of the BoE Monetary Policy announcement on Thursday. In New Zealand, the NZIER Business Opinion Survey Tuesday, and first quarter GDP number on Thursday will hold focus. If global risk appetite drops dramatically, we may see the NZD give up some ground, but a test of support levels remains unlikely.

 
NZD/CAD
The NZD remains within its recent range against the Canadian dollar. The CAD did see a rise in demand towards the end of the week, and this looks likely to continue as a cash rate move from the BoC comes into play, due to the higher than expected inflationary pressure. The focus will start tomorrow with the NZIER Business Opinion Survey. Thursday sees NZ first quarter GDP, followed by Canadian employment numbers on Friday. Given the elevated level of the NZD against the CAD, current levels represent great value buying of CAD with NZD for money transfers.

NZD/RAND
This pair was relatively stable last week, with the NZD initially outperforming, before the RAND strengthened into the end of the week. In the absence of significant South African data this week, expect the focus to be on the New Zealand Institute of Economic Research’s Business Opinion survey tomorrow, ahead of first quarter GDP on Thursday. Expect the pair to remain in its recent 5.45 - 5.65 range in the short term. With similar inflationary pressures in New Zealand and South Africa, the focus on the central bank activities will be closely watched in the coming months.

NZD/EURO (EURO/NZD)
The New Zealand dollar last week closely matched moves higher by the EURO, as the relief hit the market that the Greek austerity legislation had been passed by the Greek parliament. With the extended bailout funds all but assured for Greece, the focus moves back to the ECB in the short term. Ahead of the Thursday’s expected lift in the cash rate from the ECB, we have the NZIER Business Opinion Survey on Tuesday and first quarter GDP on Thursday in New Zealand. Expect the recent .5620 - .5750 range to hold in the short term. Current levels offer good value buying of EURO with New Zealand dollars from a historical perspective.

 
NZD/YEN (NZD/YEN)
The New Zealand dollar outperformed the YEN last week as the markets embraced growth currencies after the positive Greek austerity votes. The move easily swept various resistance levels aside, in a move that caught many off guard. In the absence of any significant Japanese data this week, the lead will be provided by the NZIER Business Opinion survey on Tuesday, and the first quarter GDP numbers on Thursday. Any sharp turnaround in the overall appetite for risk, will see the NZD come under some pressure.

AUD/USD
Today’s weaker than expected building approvals and retail sales numbers saw the AUD under some pressure against the USD. This has reversed a little of the ground made up in the wake of the positive Greek austerity votes last week. Today’s weak data removes even further the pressure on the RBA to hike the cash rate. Tomorrow the focus will be the Australian Trade Balance and statement from the RBA, accompanying what should be an unchanged cash rate decision. There has been a notable increase in negative themes for the AUD of late, and this has started to follow through into the economic numbers.  Last week’s absence of Australian economic data eased the way for the Australian dollar to move higher. The raft of data this week, should make any progress are a lot harder fought.

AUD/GBP (GBP/AUD)                            
The AUD gained ground on the pound sterling last week as further talk of QE from the BoE hit the headlines. Adding to the momentum was the relief rally in the EURO, once it became clear that the Greek austerity votes would pass. Today’s disappointing building approvals and retail sales numbers saw the AUD give up a little ground. Any moves in the GBP’s favour for this pair are likely to be driven by AUD weakness, as opposed to any GBP strength. Tomorrow sees the Australian Trade Balance and RBA cash rate decision and statement as the focus. Thursday sees Australian Employment and the BoE’s Monetary Policy decision.

 
AUD/EURO (EURO/AUD)
The Australian dollar gained against the EURO for much of last week. Today’s less than expected building approvals and retail sales numbers in Australia has seen the AUD give up some of that ground. However it remains at levels which can be regarded as offering great value buying of EURO with AUD. This week sees a central bank focus with both the ECB and RBA making monetary policy decisions. Tomorrow the RBA will undoubtedly leave the cash rate unchanged, but the statement will be closely watched for direction. Thursday sees Australian employment numbers ahead of the ECB cash rate decision, where they are expected to hike by .25% to 1.5%.

GBP/USD
Last week the pound sterling managed to make up a little ground against the US dollar, in the relief rally that came for currencies as the positive Greek austerity votes unfolded. The increased speculation about further QE initiatives from the BoE should ensure that further progress from current levels is hard fought. Along with the usual myriad of economic data to absorb in both the UK and US this week, the BoE Monetary Policy decision on Thursday, and US employment numbers on Friday will be closely watched.

GBP/EURO (EURO/GBP)
The EURO outperformed the pound sterling last week. The move was accentuated by a relief rally in the EURO, following the Greek austerity vote, and GBP weakness following further comments about QE from the BoE. This week’s lead will come from the respective central banks. Thursday is the focus when first we have the BoE making their monetary policy announcement, followed by the ECB. The ECB are expected to lift the cash rate from .25% to 1.5%. Concerns about European debt remain, but for the most part these should not be the focus this week. Current levels represent good value buying of GBP with EUR’s.

GBP/RAND
The pound sterling gave up ground to the RAND last week, as further comments about QE measures from the BoE weighed on the GBP. There is little in the way of significant South African data this week, so the focus will be on the UK side of the equation. Along with the usual host of construction, housing, services and manufacturing data, the BoE Monetary Policy decision on Thursday will be closely followed. A break down through the support level at 10.75, should open the way for re-investigation of the lows seen over the New Year at the 10.20 level, and would constitute very good value buying of GBP with RAND.

Market commentary:

The sometimes neurotic nature of sentiment in the financial markets was well evidenced through the course of the last week.

The Greek debt legislation was focus early in the week. As it became evident that it was likely that the required austerity measures would be passed, there was a rush to cover sold euro positions and the single currency was in hot demand. While this debt issue is far from over, the markets have reacted with renewed enthusiasm for risk.

The NZD reached post float highs against the pound sterling and US dollar, as equity markets pushed higher, with the S&P posting its best weekly performances in two years.

The safe haven assets of gold, YEN and Swiss Franc all saw selling pressure.

The economic data in the US was relatively strong with the manufacturing numbers much stronger than expected. Interestingly these numbers come as we start to see weaker numbers coming from Europe, the UK and China. The lower than expected growth in Chinese factory output is a sign that their tighter monetary conditions are starting to have an effect, and should see a further tempering of commodity prices in the coming weeks.

The New Zealand dollar remained in short supply, as the risk appetite increased throughout the course of last week. The high demand was backed up by a grinding move higher in the short term interest rates in New Zealand. The focus for this week is tomorrow’s New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion (QSBO), and the first quarter GDP number due on Thursday. Expect a rebound in business confidence from the QSBO. With the manufacturing sector leading the way, a 0.4% expansion is expected by the market for GDP the first quarter.

After a quiet patch for economic data in Australia of late, this week will keep observers busy. Today’s building approvals and retails sales numbers were disappointing with building approvals dropping 7.9% and retail sales -.6%. This caused the AUD to drop across the board this morning. Tomorrow, we have the trade balance and cash rate announcement from the Reserve Bank of Australia (RBA). Expect no change in the cash rate, but the accompanying statement will be closely watched, as per usual. Thursday sees the monthly release of employment numbers, with the unemployment rate expected to be unchanged at 4.9%. The two tiered nature of the Australian economy is increasingly coming under the spotlight. This coupled with the international debate on the sustainability of Australian residential property market prices, should see a tempering of enthusiasm for the Australian dollar.

In the US, negotiations continue about the raising of the Federal debt ceiling by the August 2nd deadline. Last week’s stronger than expected housing and manufacturing numbers were encouraging. This shortened week will see the focus primarily on the all important employment numbers due on Friday. The US dollar was under somewhat renewed pressure for much of the last week. The pressure would certainly have been more, had there not been a dramatic move higher in the longer end yield. The benchmark 10 year bond was over 25 pts higher on the week, ending at 3.19%. Longer end yields generally increase as inflationary pressure build, and this would be in line with the improvement in the economic data, and the scheduled ending of the 2nd quantitative easing program (QE- essentially the printing of money to keep longer end interest rates artificially low, in order to stimulate the economy).

In the UK the economic indicators remain weak. The pound sterling has been underperforming, as various Bank of England Monetary Policy Committee members give lip service to the possibility of further QE. Whilst the prospect of further QE exists, expect the GBP to continue to underperform. There is a raft of economic data in the UK this week, with various construction, housing, services and manufacturing data releases due. The Bank of England (BoE) cash rate decision on Thursday will be watched. Whilst there is little chance of a change in the cash rate, a change to the QE profile will see the GBP under renewed pressure.

In the Euro zone, with the Greek debt situation stablised for the time being, focus could well now move to other peripheral states. The magnitude of the issues in Europe mean some kind of level of default risk will be present for the medium term. Of focus this week will be the European Central Bank (ECB) decision on the cash rate. The market expects the cash rate to increase from 1.25% to 1.5%, as persistent inflationary pressure pushes the ECB into action. Short term price action for the EURO is likely to be driven by sentiment in the equity markets. If the appetite for risk continues, so should that for the EURO.

The Canadian dollar performed relatively well last week, in the face of lowering oil prices. Support for the CAD came in the form of higher than expected inflation numbers, that should see the pressure come back on the Bank of Canada (BoC). The monthly GDP number was flat against an expectation of a +.1% rise. This week has a quiet start, building permits on Thursday and the employment numbers on Friday. If further pressure comes onto the BoC with regards to the cash rate, expect to see further demand for CAD across the board. Current levels represent good value buying of CAD with New Zealand and Australian dollars.

In Japan the picture remains mixed. The YEN gave up ground during last week, which will be welcomed by Japanese exports, as they work through supply chain issues after the earthquake and tsunami. Economic data was mixed with the retails sales number beating expectations, but manufacturing remaining depressed. If last week’s appetite for risk continues, the YEN will test further support levels against a host of currencies.

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