Investors chase AUD and NZD despite soft commodity outlook

By Sam Coxhead*:

A barrage of economic data and central bank announcements ensured the recent volatility continued through the course of week.

The re-ignition of European debt fears again saw the EURO under pressure.

The shifting in focus from Greece to other peripheral member states, ensured that concerns remained elevated and the banking sector remains under pressure.

A Moody’s downgrade of Portuguese debt added to the pressures.

With much weaker than expected jobs data in the US and benign prospects in the UK, the major currencies all face negative outlooks.

The European Central Bank (ECB) raised the cash rate .25% to 1.50% as widely expected, but this did little to support the euro.

The domestic picture for the Australasian currencies remains somewhat mixed, but the growth currencies remain surprisingly sort after, as global investors chase higher interest rates. This flies in the face of what should be an increasingly softer outlook for commodity prices in the short term, as can be seen in the 6.7% fall in the Fonterra Diary auction prices last month.

Major Announcements last week:

- Australian Building Approvals -7.9% vs -.5% expected
- Australian Retail Sales -.6% vs +.3% expected
- NZIER Business Opinion +27 vs -27 Previous
- Australian Trade Balance 2.33B vs 1.91B expected
- RBA leaves cash rate unchanged at 4.75% and likely to remain on hold in coming months
- Canadian Building Permits +20.9% vs +5.1% expected
- Australian Employment growth 23.4K vs 15.2k expected and unemployment rate unchanged at 4.9%
- UK Manufacturing Production +1.8% vs +1.1% expected
- UK cash rate unchanged at .5% as expected
- European cash rate +.25% to 1.50% as expected
- Canadian employment growth 28.4k vs 13.8k expected and unemployment rate unchanged at 7.4%
- US Employment growth +18k vs +97k expected and unemployment rate rises to 9.2%
- Chinese bank interest rate +.25% (5th time since Oct 2010)
- Chinese inflation reaches 3year high at 6.4%
- Chinese Trade Balance 22.3B vs 14.2B expected as import growth falls
- Australia PM Gillard outlines proposed carbon tax guidelines

NZD/USD 
The New Zealand dollar again set all time highs against the US dollar late last week at .8385, in the wake of disappointing US Employment figures. The weaker global growth outlook should weigh on the NZD this week. The NZ focus will be the delayed release of the first quarter GDP number on Thursday. In the US the trade balance and Federal Reserve Open Market Committee meeting minutes on Wednesday will be watched. While further investigations of the topside cannot be ruled out, expect resistance at the .8400 level initially. The focus on yield is outweighing a softer commodity outlook, until this changes, expect the NZD to remain at elevated levels against the US dollar.

NZD/AUD (AUD/NZD)
The New Zealand continued its grinding appreciation over the Australian dollar last week. The pair is approaching significant technical levels on AUD support around .7810 - .7820 (1.2800). A sustained break of this level opens the way for further NZD appreciation. There is little in the way of economic data to focus on this week, with just delayed first quarter NZ GDP to focus on. The stubbornly high Chinese inflationary pressures may weigh on the AUD, more so than the NZD, as it will likely see further Chinese measures to contain growth. Given the Australian economy has a greater exposure to Chinese consumption than the NZ one, any Chinese slowdown will impact the Australian economy harder. 

NZD/GBP (GBP/NZD)
The NZD continued its grinding appreciation against the beleaguered pound sterling last week, to set new post float highs. Expect further appreciation from current levels to be harder fought, as the GBP finds a little more favour across the board, especially against the USD and EURO. Of focus will be UK inflation numbers on Tuesday, followed by unemployment benefit claims on Wednesday. Thursday sees the delayed release of first quarter NZ GDP, and this will be of interest. Expect support at .5080 to hold this week, if any NZD weakness is encountered.

 
NZD/CAD
The NZD outperformed the Canadian dollar last week in a mostly grinding fashion. Weak US employment numbers on Friday opened the way for the weeks highs to be reached. Expect headway from current levels to be harder fought for the NZD, as increasing global growth fears take hold. Tuesday sees Canadian housing numbers and the BoC Business Outlook survey released, before Canadian Trade Balance on Wednesday. The NZ focus will come from the delayed first quarter GDP numbers due on Thursday.

NZD/RAND
This pair has been relatively stable over the last week. The lead was almost entirely being driven by external leads. This week the sole economic data focus is the delayed release of NZ first quarter GDP on Thursday. Expect the current broader range of 5.50 - 5.70 to remain in place.

NZD/EURO (EURO/NZD)
The New Zealand dollar outperformed the EURO last week, in what was almost one way traffic. Increasing fears about the spread of the debt contagion in Europe, continues to undermine the EURO performance. EU meetings this week will be closely monitored by the market, along with NZ first quarter GDP on Thursday. Short term risk for the EURO is to the downside and this should mean the NZD remains at elevated levels for the time being. Current levels are within striking distance of .5906 high set in the early New Year, a break of this level opens the way for investigation of decade old highs at .6119.

 
NZD/YEN (NZD/YEN)
This pair was volatile through the course of the last week. The NZD saw grinding appreciation early on before better than expect Australian Employment numbers saw the NZD dragged aggressively higher against the YEN, only to have the move partially removed in the wake of the US Employment numbers. If global fears continue throughout this week, expect the NZD to give up further ground against the YEN. The Bank of Japan Monetary Policy Statement on Tuesday will be watched, although no change to their cash rate is expected. Thursday sees the delayed release of the first quarter NZ GDP figures and this is the only NZ focus on the week. Expect initial support at 66.80, and topside resistance at 68.00 remain.

AUD/USD
This pair traded a relatively small range last week, especially given the overall market volatility. Friday’s weak US Jobs data, along with the high Chinese inflation numbers and falling demand for imports, means the Australian dollar starts the week on the back foot. Increasing fears about the spread of the European debt issues also provide another headwind for the AUD, which is widely seen as a barometer for global growth. In the absence of top tier Australian economic numbers, the lead will come from the US. Tuesday sees the release of trade balance numbers ahead of the Federal Reserve Open Markets Committee meeting minutes. Thursday sees the retail sales numbers released, ahead of inflation numbers on Friday. If the heavy start to the week continues, expect initial support at 1.0620.

AUD/GBP (GBP/AUD)                            
The Australian dollar set new post float highs against the pound sterling last week. Weak US Employment numbers gave the GBP a boost as the AUD suffered at the hands of a lower global growth outlook. The weekend’s Chinese data confirming stubborn inflationary pressure and declining import demand, has added a little further pressure to the AUD. In the absence of top tier Australian economic numbers this week, the focus will be on the UK. Tuesday sees the release of the important inflation numbers, followed by unemployment benefit claim numbers on Wednesday. Given the clouded global outlook currently, downside tests for the AUD would not surprise this week.

 
AUD/EURO (EURO/AUD)
The AUD outperformed the EURO last week as the European debt fears once again intensified. Expect pressure on the EURO to continue this week, as the EU meetings unfold. Global growth fears should make appreciation from the AUD more hard fought, as the commodity outlook softens. A lack of meaningful Australian data this week means the focus will be squarely on the European data, with the inflation numbers on Thursday being the main focus. Expect volatility to be amplified as we approach the summer holiday season in the northern hemisphere, due to the lower levels of market liquidity that accompany the holiday period.

GBP/USD
The pound sterling was under pressure from the US dollar for most of last week. Weak US Employment numbers on Friday saw the GBP bounce from its lows to finish the week close to the middle of the weeks range. UK Inflation numbers on Tuesday will provide the initial UK focus, before unemployment benefit claims numbers on Wednesday. In the US, Tuesday sees the release of the trade balance and meeting minutes from the latest Federal Open Market Committee meetings. Thursdays sees the monthly retail sales numbers, along with the producer price index. Also of note will be the Federal Chairman Bernanke’s semi-annual testimony before the House Financial Services Committee in Washington.

GBP/EURO (EURO/GBP)
The EURO underperformed the pound sterling through the course of the last week. Intensifying European debt issues saw the EURO give up ground against the recently beleaguered GBP. This week the focus will likely remain on the European debt situation, as the high level EU meetings unfold. UK and Euro-zone inflation numbers are due on Tuesday and Thursday respectively, and will be closely watched. If the initial support level of .8830 (1.1325-resistance) gives way, expect further investigations of the substantial support at .8750(1.1430).

GBP/RAND
The GBP was under a little pressure from the RAND last week, before recovering in the wake of the awful US Employment numbers. With little in the way of meaningful South African economic data this week, expect the lead to come from the UK. Inflation numbers on Tuesday, before unemployment benefit claim numbers on Wednesday, will provide the focus. If global growth concerns increase, there is potential for the RAND to underperform and the GBP to take back a little of its recently given up ground.

Market commentary:

A barrage of economic data and central bank announcements ensured the recent volatility continued through the course of week. The re-ignition of European debt fears again saw the EURO under pressure. The shifting in focus from Greece to other peripheral member states, ensured that concerns remained elevated and the banking sector remains under pressure. A Moody’s downgrade of Portuguese debt added to the pressures. With much weaker than expected jobs data in the US and benign prospects in the UK, the major currencies all face negative outlooks. The European Central Bank (ECB) raised the cash rate .25% to 1.50% as widely expected, but this did little to support the EURO. The domestic picture for the Australasian currencies remains somewhat mixed, but the growth currencies remain surprisingly sort after, as global investors chase higher interest rates. This flies in the face of what should be an increasingly softer outlook for commodity prices in the short term, as can be seen in the 6.7% fall in the Fonterra Diary auction prices last month.

Weaker Australian construction and retail sector numbers were balanced out by stronger than expected employment figures. The Australian dollar remains supported on any weakness, even though the prospect of any further cash rate increases remains a distant proposition. In New Zealand the bounce back in confidence since the February earthquakes continues, as evidenced in the NZIER Quarterly Survey of Business Opinion results. The New Zealand and Australian dollars may see some headwinds coming from the Chinese influence, as inflationary pressure remains stubbornly high and import demand falls. The New Zealand dollar has consolidated at higher current levels against the Australian dollar, and could potentially push higher again, if the release of first quarter GDP numbers on Thursday surprise to the topside. This week apart from NZ GDP numbers, there is little in the way of Australasian economic data, so for the most part the coming week’s direction will come from offshore influences.

In the US the disappointing monthly employment growth numbers on Friday, were compounded by downward revisions to the previous month. The resulting drop in US Government bond yields was always going to put the US dollar under some pressure. Without any resolution on the raising Federal budget ceiling, expect any real strength from the US dollar to be muted at best. This coming week sees the usual flora of economic data, but the Federal Reserve Open Market Committee meeting minutes on Tuesday will be closely watched. Federal Chairman Bernanke also has a couple of speaking opportunities, and these will be closely monitored also.

In Europe the focus remains on the peripheral member states and their ability to finance their debt. Bank “stress tests” results will be made public at some stage during the week, and these will effect equity markets, if any subsequent capital raising is needed. The tangled web of interests between banks and Government debt means this situation will remain protracted, and topical over the medium term. Credit agencies continue to be active in Europe, with Moody’s downgrade of Portuguese debt last week, leading to weaker bond prices across the peripheral state board. Inflation numbers on Thursday will be of interest. There are high level EU meetings this week, with conjecture that the size of the European Financial Stability Fund will be increased,  to accommodate any increased demands, such as Italy needing funding. EURO sentiment is weak at the moment, and as the northern hemisphere summer begins, liquidity will drop further. In conditions such as these, sharp moves in both directions are likely and should be kept in mind when considering EURO transfers.

In the UK the economic outlook remains downbeat, as the austerity initiatives from the UK Government start to evidence themselves. Sentiment towards the pound sterling has been appropriately weak and the rhetoric from the Bank of England (BoE) justified this sentiment. Of focus this week will be the monthly inflation numbers on Tuesday and unemployment benefit claim figures on Wednesday. If the European debt issues continue to gain pace, the GBP may see some demand from investors diversifying away from the single currency.

In Canada the economic data remains mixed. Employment growth figures released last week are encouraging. Given the continuing softness in the US economy, as Canada’s largest trading partner, we can expect the Bank of Canada (BoC) to remain cautious with regards to the cash rate. Housing numbers and the BoC Business Outlook Survey on Tuesday will be watched, ahead of the trade balance on Wednesday.

The Japanese Yen will see demand if the uncertainty around global growth continues. The domestic outlook remains soft in Japan, but prospects are better as supply chains improve in the manufacturing sector following earthquake and tsunami. There is little on the economic calendar in the coming week. The Bank of Japan does have its Monetary Policy Statement due on Tuesday, but expect little reaction from this.

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