Markets now really concerned about US debt situation

By Sam Coxhead*:

The financial markets have continued to see increased levels of uncertainty over the last week. The primary focus has been the ongoing debt situations in Europe and the United States.

The EU summit has produced positive results in terms of a plan for Greece. The EURO has finally found support since the details were laid out, and has rallied significantly against the beleaguered US dollar.

Of larger concern remains the inability of President Obama to find common ground on the raising of the US debt ceiling, in a timely manner. With this uncertainly, the US dollar has been under considerable strain. The ratings agencies have placed the US on negative watch, with Standard and Poor’s stating that there is a fifty percent chance of a downgrade, in the next 90 days.

The Australasian currencies remain well supported across the board. The New Zealand dollar has continued its stellar performance, as the interest rate market increasingly brings forward expectations of cash rate increases, from the Reserve Bank of New Zealand (RBNZ).

Major Announcements last week:

· NZ Inflation Q/Q 1.0% vs .8% expected
· Bank of Canada leaves the cash rate unchanged at 1.0%
· BOE Monetary Policy Meeting minutes more “hawkish” than expected, GBP supportive
· RBA Monetary Policy Meeting Minutes more “dovish” than expected, AUD negative
· UK Retail Sales +.7% vs +.5% expected
· EU Summit of Greek bailout package positive, EURO supportive
· US Philadelphia Fed Manufacturing Index 3.2 vs 2.7expected
· Canadian Inflation M/M -.6% vs 0.0% expected
· Canadian Retail Sales +.5% vs +.2% expected
· US debt ceiling negotiations unsuccessful leading to weaker USD across the board
· South African Inflation Y/Y 5.0%
· South African Retail Sales for May 0.0%
· South African Reserve Bank leaves cash rate unchanged at 5.5%

NZD/USD 
The NZ dollar set another post float high against the US dollar last week. The move has been driven by the two factors of the US debt ceiling situation and prospect of a tightening cycle in the cash rate from the RBNZ. These two themes will continue this week. The RBNZ gets to make a statement on Thursday accompanying its cash rate decision for July, and this will be very closely watched. The NBNZ Business Confidence survey will be released on Wednesday.  The high levels of uncertainty in the US will see the USD remain under pressure, until some kind of resolution is reached. Given the rapid gains we have seen from the NZD, there is a possibility that we may see some investor profit taking ahead of the announcement from the RBNZ. Should an agreement be reached on the debt ceiling in the US, the chances of the NZD giving up ground would be further increased.  Friday sees the release of the advanced US GDP numbers for the 2nd quarter, with the market expecting expansion of 1.6%.

NZD/AUD (AUD/NZD)
The NZ and Australian dollars traded a relatively tight range throughout last week. Given the interest rate markets moves to increase the likelihood of earlier than expected hikes from the RBNZ, the AUD did well to contain the NZD. The focus for the week starts on Wednesday with the NBNZ Business Confidence Survey ahead of the Australian inflation numbers. The RBNZ cash rate review on Thursday provides the balance of the focus and remains the key for direction on this pair from current levels. Given the proposition of contracting interest rate differentials, there is a likelihood of further NZD appreciation back towards historically average levels over the medium term.

NZD/GBP (GBP/NZD)
The NZD again posted new post float highs against the pound sterling last week. BOE MPC meeting minutes revealing a smaller chance of further monetary easing measures, has given the GBP some support. Tuesday’s UK GDP number provides the initial focus, ahead of NBNZ Business Confidence Survey results on Wednesday. Thursday sees the much anticipated RBNZ cash rate review meeting and the accompanying statement will be closely watched. Friday rounds out the week with NZ construction numbers and housing numbers in the UK. With the prospect of widening interest rate differentials, further NZD appreciation cannot be ruled out in the short term, but expect more hard fought gains should this eventuate.

 
NZD/CAD
The New Zealand dollar continued its recent good run against the Canadian dollar throughout last week. Fuelled by increasing expectations of an earlier than expect cash rate rise from the RBNZ and the CAD’s correlation with the downtrodden USD, moves high from current levels should be harder fought. Chipping away at support for the CAD was also a much less than expected monthly CPI number, which reduces pressure on the BOC to hike their cash rate. In the back drop of the inability of US law makers to agree on raising the US debt ceiling, this week’s focus starts Wednesday with the NBNZ Business Confidence Survey results. Thursday is the much anticipated RBNZ cash rate review and accompanying statement, before Canadian GDP on Friday.

NZD/RAND
The NZD remains in demand against the RAND, although it has come back from its highs. The anticipation of an earlier than expected beginning to the cash rate hiking cycle in New Zealand, should underpin the strength in the NZD over the RAND in the short term. Lower than expected retail sales activity in South Africa will give the SARB breathing space in terms of having to raise its cash rate, while food and transport pricing pressure remain at elevated levels. This week coming sees the focus start on Wednesday with NBNZ Business Confidence survey results. Thursday sees the cash rate review in NZ, and public capital expenditure and producer price data in South Africa. Gains for current levels will be harder for the NZD to make from current levels over the coming week.

NZD/EURO (EURO/NZD)
This pair traded within the expected range over the last week. The EUR found demand as the Greek bailout package hit the headlines, but its move was countered by further demand for NZD in anticipation of an earlier than expected move in the cash rate from the RBNZ. With much of the detail and execution of the bailout package yet to take place, it is a fair assumption that there will be ongoing issues and concerns from time to time in Europe. Much of the focus for this pair this week will be New Zealand orientated with NBNZ Business Confidence Survey results on Wednesday, before the much anticipated RBNZ cash rate review on Thursday. Expect any further appreciation from the NZD to be harder fought in the short term.

 
NZD/YEN (NZD/YEN)
The NZD outperformed the YEN again last week as investor enthusiasm for earlier than expected cash rate hikes from the RBNZ continued. The focus this week is all about the NZ side of the equation. Wednesday sees the NBNZ Business Confidence survey released. On Thursday the RBNZ cash rate review and statement will be very closely watched. Given the elevated levels of the NZD, progress from current levels should be harder to make. Should initial resistance at 68.50 be broken, expect further resistance at 69.50 above.

AUD/USD
The Australian dollar outperformed the US dollar over the last week, as US law makers continue to lack agreement in the raising of the debt ceiling in the US. With time of the essence, the price action for the week will be driven by these US developments, or lack of. The break of the 1.0800 resistance level last week saw the pair quickly investigate the 1.0875 highs and this level will provide initial resistance this week. The Australian focus for the week will be the inflation numbers on Wednesday. For the US, consumer confidence on Wednesday, durable good numbers Thursday and advanced GDP numbers of Friday will hold the key. There is a possibility of a relief rally in the US dollar should an agreement be reached. The detail provides the real focus as the ratings agencies already have the US on negative watch, and a cut would once again be US dollar negative.

AUD/GBP (GBP/AUD)                            
The AUD remains at elevated levels again the pound sterling, being driven by interest rate differentials. The AUD has performed rather well considering the interest rate market  now has a fifty percent chance of the cut to the cash rate priced in for September. If we continue to see some pick up in the numbers in the UK, we may start to see this pair correct in the favour of the GBP, although it is bound to take time. The focus for the coming week starts with the UK GDP number on Tuesday. Wednesday sees the release of the Australian quarterly inflation numbers, before monthly UK housing numbers on Friday.

 
AUD/EURO (EURO/AUD)
This pair saw a relatively tight range of trade over the last week, and the EUR did not dramatically appreciate even with the positive result  following the EU summit on Greece. This coming week sees no significant European economic data due for release, so the focus will be on Australia, and predominantly on the quarterly inflation number on Wednesday. The interest rate market now has over fifty percent chance of a cash rate cut in September from the RBA. If the European debt crisis remains on the back burner in the short term, there is likely to be room for a move back towards more historical averages, in the favour of the EURO, for this pair. 

GBP/USD
The pound sterling has outperformed the US dollar over the last week as the debate over the raising of the US debt ceiling intensifies. The BOE Monetary Policy Committee meeting minutes were also less “dovish” than expected and have reduced the chances of further British quantitative easing initiatives, and this is GBP positive. Also helping the positive price action were much better than expect retail sales numbers. This week will see the focus remain on the debt ceiling talks primarily, ahead of the economic data. But in the UK, preliminary GDP numbers are due on Tuesday. US consumer confidence numbers are due Wednesday, before durable goods sales numbers on Thursday and the advanced GDP numbers on Friday.

GBP/EURO (EURO/GBP)
This pair saw grinding appreciation from the EURO, after it started the week on the lows. As the week progressed it became more apparent that some kind of resolution would be reached and this enabled the EURO to continue its subtle appreciation. This week will see less European debt focus and more on the economic fundamentals. The UK dominate the economic data calendar, with preliminary GDP on Tuesday ahead of the monthly housing numbers on Friday. Until the Greek bailout is completely ratified, risks remain and this should stop any sharp appreciation from the EURO in the shorter term.

GBP/RAND
After some initial strength from the GBP last week, the RAND saw grinding appreciation over the GBP to stay within the expected range for the week. This coming week sees the focus start in the UK on Wednesday with preliminary GDP figures. Thursday in South Africa sees the release of public sector capital expenditure and producer price figures released, before the monthly UK housing statistics on Friday. If topside resistance is broken at 11.2500, further investigation up towards 11.5000.

Market commentary:

The financial markets have continued to see increased levels of uncertainty over the last week. The primary focus has been the ongoing debt situations in Europe and the United States.

The EU summit has produced positive results in terms of a plan for Greece. The EURO has finally found support since the details were laid out, and has rallied significantly against the beleaguered US dollar.

Of larger concern remains the inability of President Obama to find common ground on the raising of the US debt ceiling, in a timely manner. With this uncertainly, the US dollar has been under considerable strain. The ratings agencies have placed the US on negative watch, with Standard and Poor’s stating that there is a fifty percent chance of a downgrade, in the next 90 days.

The Australasian currencies remain well supported across the board. The New Zealand dollar has continued its stellar performance, as the interest rate market increasingly brings forward expectations of cash rate increases, from the Reserve Bank of New Zealand (RBNZ).

The pound sterling has found some support, thanks to some better economic data, and Bank of England (BOE) Monetary Policy Committee (MPC) meeting minutes, that showed a smaller chance of further monetary easing than had been expected.

This Thursday’s RBNZ cash rate review will be very closely watched. While an unchanged cash rate is expected, the brief accompanying statement will be the key. The market will be looking for direction on the timing of the cash rate hikes, to remove the emergency stimulus put in place after the September earthquake in Christchurch. The rapid rise of the NZ dollar will of course be of central concern to the RBNZ, and places them in an unenviable position. The NZD again set post float highs versus the USD and GBP.  Current market pricing puts the odds on at least 50pts of cash rate hikes before the end of the year. The strength of the economic data is undeniable of late, but the current outlook for the global economy remains soft at best.

In Australia there was an absence of top tier economic data last week. Of central focus was the Reserve Bank of Australia (RBA) Monetary Policy meeting minutes. These were not as positive as the market had anticipated and saw the AUD under some pressure immediately after the release. Australian economic data has been soft of late, and given the global outlook and uncertainty, the position of the RBA looks to be logical. Of primary focus in the coming week will be inflation numbers due for release on Wednesday.

In Europe the positive resolution of a plan for Greece was well accepted by the markets. The difference in funding costs between peripheral member states and those of pillars Germany and France, have contracted significantly. The EURO has stablised as a result, although it saw good gains against the US dollar. This coming week, more detail will be revealed on the plan and this will mean the volatility should continue. From here the focus will move towards the execution of these plans, and the painful emergence back towards balanced books, that this entails.

In the US the focus obviously remains squarely on the resolution of the debt ceiling issue. The August 2nd cut off for a deal may actually be extended, as reported tax takes have been better than expected, so another week’s grace may play out. In the background of this the economic data remains patchy. Some housing numbers are showing strength. There have also been a number of positive corporate earnings results that show there are positive signs in the market. Employment growth remains the primary lagging factor in any significant US economic recovery, and until we start to positive signs on that front, expect no movement from the Federal Reserve in terms of the cash rate. We should see some kind of bounce in the US dollar when a debt agreement is found, but until that time, the USD will remain under pressure.

In the UK last week the less 'dovish' BOE minutes gave the GBP some much needed support. Adding to this support was the retail sales number, giving sign that the British consumer maybe starting to feel a little more upbeat at last. This saw the GBP make ground up against both the EUR and US dollar. This week sees the preliminary GDP number due for release on Tuesday and monthly housing numbers on Friday. 

In Canada the outlook remains mixed. The Bank of Canada left the cash rate unchanged at 1% and stated that rate hikes would have to be carefully considered taking into account the soft nature of the economy of its neighbor the US, and the debt situation in Europe. Then came the monthly inflation number which showed a large drop. This saw the CAD under pressure and not even a good retail sales number could provide much of a recovery. This week is light on focus, ahead of the monthly GDP number on Friday.

In Japan the YEN has remained in demand as the uncertainty surrounding the EURO and US debt situations plays out. With little on the economic data to focus on, developments in the US will be the likely driver of price action. Speculation remains around the Bank of Japan and the prospect of intervention, should the YEN continue to strengthen. However given the current level of global uncertainty, intervention looks unlikely in the short term, as a coordinated approach would be necessary in order to be effective.

In South Africa the economic recovery remains patchy. Yearly inflation is at 5% ,but is mainly being driven by food and energy components, and the South African Reserve Bank left the cash rate unchanged last week. The consumer remains under pressure with retail sales numbers showing flat growth on the month. Thursday’s release of public sector capital expenditure and producer price numbers will be the focus for the RAND, and outside this, it should maintain its strong correlation with the EURO. 

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