Global growth slowing, now also in Asia

By Sam Coxhead*:

The financial markets have seen wide spread volatility in the last week. Both the EURO and US dollar saw periods of considerable selling pressure.

Debt pressures in both the US and Europe remain the concern.

The credit rating agencies remain active, with further  downgrades on various European debt instruments and the placement of the US Government credit rating on negative watch.

The gloss has come off the Australian dollar, as further evidence of the two tiered nature of the domestic economy comes to hand.

The New Zealand dollar put in a stellar performance, driven by demand against the Australian dollar and the surprisingly strong first quarter GDP number.

Signs of a slowing global growth picture have become more evident, with various Asian countries seeing softer economic numbers, and consumer sentiment falling around the world.

Major Announcements last week:

· Chinese Trade Balance 22.3b vs 14.1b expected (driven by lower import demand)
· Australian Home Loans 4.4% vs 4.6% expected
· Bank of Canada Business Outlook survey points to positive but cautious outlook
· UK Inflation 1.2% vs 4.5% expected
· US Trade Balance -50.2b vs -44.1b expected
· US Fed meeting minutes show further quantitative easing possible
· Chinese GDP 9.5% as expected
· UK Unemployment Benefit Claims change 24.5k vs 15.1k expected
· NZ Q1 GDP .8% vs .3% expected
· US core Retail Sales 0.0% vs +.1% expected
· US core Inflation +.3% vs +.2% expected
· US UoM Consumer Sentiment 63.8 vs 72.5 expected
· Neilson Global Consumer Sentiment Survey 89 vs 92 previous
· NZ Q2 Inflation 1.0 vs .8% expected

NZD/USD 
The New Zealand dollar set another post float high against the US dollar last week. Driving the move was the very strong Q1 NZ GDP number, along with the US debt ceiling debacle, threats of US credit downgrades and the possibility of further Federal Reserve quantitative easing (albeit small). The latest NZ inflation number this morning showed that inflationary pressure is high in NZ. The interest rate markets have now priced in just over a 50% chance of a interest rate hike in October from the RBNZ, and this is NZD positive. Tempering the upside momentum will be the softening global outlook, especially signs in Asia. Further topside investigations  will be harder fought from current levels, than was witnessed last week.

NZD/AUD (AUD/NZD)
The New Zealand dollar continued its appreciation over the Australian last week. The prospect of diminishing interest rate differentials remains the primary driver, back towards more historically average levels.  With strong NZ inflation numbers out of the way, the focus turns to the RBA Monetary Policy Meeting minutes on Tuesday. This pair has broken  a couple of significant levels over the last week, and further headway from the NZD cannot be ruled out.

NZD/GBP (GBP/NZD)
The New Zealand dollar set new post float highs this morning as the NZ Q2 inflation numbers were higher than forecast. Whilst the momentum remains in the favour of the NZD, ground from current levels should be much harder fought. With so much bad news currently priced into the GBP, any upside surprises in the week’s data in the UK could see a relief rally in the GBP. The primary focus will be the BoE Monetary Policy Committee meeting minutes due on Wednesday. Thursday sees public sector borrowing and retail sales numbers. Expect initial resistance at the post NZ CPI highs around .5260 (1.9010-support).

 
NZD/CAD
The NZD/CAD was volatile over the last week, as the NZD recovered from initial pressure, to rebound to levels not seen since early 2008, on the back of the stellar NZ Q1 GDP numbers. This morning’s CPI inflation number did not manage to push the NZD to much higher against the CAD, and it looks like progress from here will be far harder fought. The focus from here will be the BoC cash rate statement on Tuesday and their Monetary Policy Report on Thursday. Inflation and retail sales numbers on Friday will also be followed for picture building for BoC decisions in the future.

NZD/RAND
The New Zealand dollar appreciated against the RAND last week, in the wake of the strong NZ Q1 GDP data. Once through the resistance at 5.7000, the path was relatively easy for the NZD as the RAND fortunes were closely linked to those of the EURO. This morning’s higher than expected NZ inflation number, will keep the pressure on the RAND. From here the focus is squarely on South African data, with inflation and retail sales on Wednesday, and wholesale trade and building numbers on Thursday.

NZD/EURO (EURO/NZD)
The New Zealand dollar outperformed the EURO last week as the intensifying European debt fears were coupled with the very strong NZ Q1 GDP number. This morning’s NZ high CPI inflation numbers have pushed the NZD higher once again, as speculation increases in the interest rate market, of a move higher in the cash rate in October from the RBNZ. The focus now will be Europe for the remainder of the week, with the EU meeting on Thursday to discuss financial stability and Greece on the agenda. With little on the horizon to increase EURO demand in the short term, investigations towards all time extremes can’t be ruled out (.6119 NZD/EUR , EUR/NZD 1.6342).

 
NZD/YEN (NZD/YEN)
This pair was volatile last week with the NZD under initial pressure from the YEN, as investor fears saw safe haven assets bought. The turning point was the release of the NZ Q1 GDP figure, which saw the demand for NZD pick up measurably and the NZD was one of the few currencies able to maintain itself against a strong YEN. With the global outlook looking patchy at best and the debt situations in the US and Europe remaining of intense focus, expect the YEN to remain in demand in the absence of any BoJ intervention in the foreign exchange markets.

AUD/USD
The Australian and US dollars remained in a fairly familiar range last week. Initially the AUD was under pressure, suffering from weak surveys of both consumer and business sentiment. Then it was the turn of the US dollar to see selling pressure, as comments from US Fed Chairman Bernanke with regards to quantitative easing, threats of US credit downgrades and the inability of President Obama to get Congressional agreement on the debt ceiling, weighed heavily on demand. The AUD lost ground late in the week, as Westpac’s economics team released a paper calling for the RBA to cut the cash rate before the end of the year. Expect further range trading from this pair, with the focus on Tuesday’s RBA Monetary Policy Meeting minutes and the debt related issues in the US.

AUD/GBP (GBP/AUD)                            
This pair saw mostly sideways movement over the last week. The AUD finally gave up some ground as Westpac economists made their call that the RBA would cut the cash rate before the end of the year. Closer interest rate differentials would certainly get this pair moving in the pound sterling favour and this is something to be kept in mind, as this second half of 2011 unfolds. The RBA Monetary Policy Meeting minutes are due for release tomorrow and these should shed further light on the position of the RBA. Wednesday is the turn of the BoE to release their minutes and these too will be closely watched ahead of the public sector borrowing and retail sales numbers due on Thursday.

 
AUD/EURO (EURO/AUD)
This pair remained at relatively elevated levels throughout most of last week, as debt concerns in Europe remain intense. The AUD did start to see a little selling pressure on Friday, as the Westpac report calling for a cash rate cut from the RBA hit the wires. The focus this week will be on the RBA Monetary Policy Meeting minutes, due for release tomorrow and the EU meetings to discuss financial stability and Greece on Thursday. If the market starts to price increased chances of a cut from the RBA in 2011, expect the AUD to remain vulnerable to bouts of selling.

GBP/USD
This pair was as volatile as usual over the last week, with the GBP recovering from early weakness, to push high against a beleaguered US dollar under the threat of credit downgrades and Obama’s inability to raise the debt ceiling. The coming week sees it in familiar territory. The focus remains on the Congressional debt ceiling debate, ahead of the BoE Monetary Policy Meeting minutes on Wednesday, and key US manufacturing index, the Philadelphia Fed Manufacturing Index, on Thursday.

GBP/EURO (EURO/GBP)
The pound sterling saw grinding appreciation against the EURO last week as the European debt fears remained the markets focus. The results from the European bank stress tests have done little to calm fears and the European focus will be on the EU meeting on Thursday, to discuss financial stability and Greece. The  various credit downgrades of peripheral member debt and guaranteed debt has done little to the EURO’s tenuous position. In the UK the BoE Monetary Policy meeting minutes on Wednesday will be closely watched.

GBP/RAND
The pound sterling outperformed the RAND in a grinding fashion last week, as the RAND tracked the fate of the EURO. The pair has broken through various resistance levels and a break of further resistance at 11.25 opens up the way for another lunge to the topside at the 11.40 level. Apart from the BoE Monetary Policy Meeting minutes due for release on Wednesday in the UK, the focus will be mostly on South Africa after, an absence of meaningful data of late. This starts with inflation and retails sales numbers on Wednesday, and wholesale trade and building numbers on Thursday.

Market commentary:

The financial markets have seen wide spread volatility in the last week. Both the EURO and US dollar saw periods of considerable selling pressure.

Debt pressures in both the US and Europe remain the concern.

The credit rating agencies remain active, with further  downgrades on various European debt instruments and the placement of the US Government credit rating on negative watch.

The gloss has come off the Australian dollar, as further evidence of the two tiered nature of the domestic economy comes to hand.

The New Zealand dollar put in a stellar performance, driven by demand against the Australian dollar and the surprisingly strong first quarter GDP number.

Signs of a slowing global growth picture have become more evident, with various Asian countries seeing softer economic numbers, and consumer sentiment falling around the world.

In the US, the Federal Reserve (FED) Open Market Committee meeting minutes revealed that further quantitative easing measures remain a possibility, although the hurdles would be significantly high. This alone would have seen the US dollar under pressure. However coupled with a prolonged Congressional debate about the raising of the US debt ceiling, and the one in two chance of a US credit downgrade, and any chance of a resurgence in the US dollar remains low in the short term. The full ramifications of a credit downgrade for the US are many and widespread. This issue further increases the global growth fears beyond the short term.

The seemingly ever intensifying European debt crisis saw Italian debt and banking stocks under significant pressure ahead of austerity budget votes in parliament, which were passed successfully. The Spanish Government has taken the risky step of guaranteeing Spanish bank debt, in an effort to stop the peripheral contagion from spreading further. In the weekend European bank stress tests results we released. While these were not great reading, they could have been worse, and the perceived integrity of the process is low. This coming Thursday sees yet another hastily organised EU meeting to discuss financial stability and progress in Greece. It is reasonable to expect concerns about this debt crisis to remained elevated for some time yet, and the potential for a full scale “credit event” remains real.

The New Zealand dollar has been in hot demand. There has been a considerable exit of sold NZD positions against the Australian dollar. Momentum was boosted again by the delayed release of the Q1 GDP numbers. These were robust to say the least and amazing considered in context the February earthquake. This opened the way for a track higher by the NZD against almost all trading partners, with the exception of the Japanese YEN. The NZ Q2 CPI inflation number released today showed a 1.0% increase for the quarter, with the usual suspects of fuel, food and transport leading the increase. With the prospect of higher yield in NZ to provide demand for NZ dollars over the short term, this prospect has to be balanced by the slowing global growth outlook. The interest rate market now indicates around a fifty percent chance of an interest rate hike from the Reserve Bank of New Zealand (RBNZ) in October.

The two tiered nature of the Australian economy continues, as consumer and business sentiment surveys weaken, and non mining export sectors continue to struggle with the high value of the Australian dollar. Interestingly, Westpac has formally made the call that the Reserve Bank of Australia (RBA) will cut the cash rate in 2011. This statement caused quite a move lower in the AUD, and lower in Australian interest rates. So tomorrow the RBA Monetary Policy meeting minutes will be closely watched. Their stance of late has been more cautious, and it is easy to imagine that they are watching the global risks closely.

In the UK the economic news was downbeat, but the inflation number released last week was lower than expected and this will be welcomed. This coming Wednesday sees the release of the Bank of England (BoE) Monetary Policy Committee meeting minutes and these will garner attention. Talk of further quantitative easing would likely see the GBP under renewed pressure, especially against the Australasian currencies, although this remains unlikely. Retail sales numbers on Friday will also be closely watched, for further insight into the state of the British consumer. Inflationary pressure is expected to continue to ease in the UK, and this will be welcomed by the consumer.  Normalisation of the cash rate from its current low of .5%, has to happen at some stage, therefore the BoE has a balancing act on its hands. Ironically as inflationary pressure starts to ease, this may coincide with the cash rate moving higher, and the fortunes of the GBP will increase with it.

The Canadian economy continues to be patchy. This week will focus on the Bank of Canada (BoC) and their Monetary Policy Report. They are expected to keep the cash rate unchanged at 1.0%. Inflation and retail sales number on Friday will also draw attention. In Japan the economy remains slow, but indicators on private consumption and capital spending have picked up.

The YEN remains in demand, as global fears increase and it benefits from its safe haven status. Also helping demand are reports of increased offshore repatriation flows, as the rebuilding of devastated areas start to gather momentum.

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