Markets coming to accept lower growth and lower rates

By Sam Coxhead*:

The first half of last week’s trade in the global financial markets saw limited volatility, as investors took a welcomed breather from the previous week's volatility.

The acceptance of a lower global growth profile for the remainder of 2011 and 2012, saw growth assets drift, and interest rates look to establish themselves at new lower levels.

Thursday and Fridays trade again saw nervousness increase.

The European Central Bank (ECB) was again active in supporting European debt prices, by purchasing Italian debt to somewhat quell investor fears. But an article in the Wall Street Journal describing the close monitoring of US arms of several European banks and their funding situations, caused major ripples on equity markets.

Banking stocks saw renewed selling pressure and the downside momentum for growth assets once again accelerated. Weaker economic data releases in Europe and the US, coupled with the prospect of central bank intervention by the Swiss and Japanese, helped the uncertainty continue.

The Australian and New Zealand dollars remained under pressure on most cross rates, and this trend should continue in the short term, until equity markets stablise.

The coming week’s have the added spice of the earning’s reporting season for publically listed corporate entities, and these will no doubt provide a little movement on a daily basis.

The Japanese Yen reached a post war high against the US dollar on Friday, and this keeps the prospect of further Bank of Japan (BOJ) intervention in play this week.

Major Announcements last week:

· Japanese Preliminary GDP -.3% vs -.6% expected
· RBA Monetary Policy Meeting minutes remain mildly “hawkish”, divergent with market pricing
· German Preliminary GDP +.1% vs +.5% expected
· UK Inflation 4.4% vs 4.3% expected
· UK Retail Sales +.2% vs +.3% expected
· UK Bank of England MPC minutes more “dovish” then expected, cash rate hike from BoE unlikely in 2011
· US Inflation .2% as expected
· US Philadelphia Fed Manufacturing Index -30.7 vs +4.0 expected
· Canadian Inflation .2% as expected
· Ratings Agency Fitch maintains US credit rating of AAA and outlook of stable

NZD/USD 
Expect the NZ dollar to remain under pressure from the US dollar this week coming. The release of the RBNZ quarterly Inflation Expectations Survey on Tuesday will be the key, ahead of the retail sales number on Thursday. In the US the monthly release of the durable goods number on Wednesday will be closely watched, ahead of the preliminary GDP number on Friday. Fed Chairman Bernanke’s speech at the central bankers symposium in Jackson Hole late Friday will also be closely watched. Any comments by Bernanke which allude to any further potential monetary policy direction will be acted upon. Whilst this is unlikely, it does provide upside risk potential for the NZD. Weaker stock markets and lower enthusiasm should prevail throughout the week, with the NZD looking likely to continue its recent trend lower against the US dollar. A sustained break of the initial support at .8080, would open the way for another leg lower.

NZD/AUD (AUD/NZD)
The NZD gave up ground against the AUD last week, as the global growth appetite continued to reduce. In the absence of Australian economic data of note this week, the focus with be on Tuesday’s RBNZ quarterly Inflations Expectations Survey and Thursday’s NZ retail sales data. With a lower likely hood now of an early removal of the RBNZ emergency 50pt cut to the cash rate, expect a slightly lower NZD range against the AUD. RBA Governor Stevens is due to speak to the house’s Standing Committee on Economics on Friday, and this will be closely monitored by the market.

NZD/GBP (GBP/NZD)
The NZ dollar continued its recent trend of giving up ground against the GBP last week. The lower global growth profile, and therefore appetite for risk, being the main contributor. In the UK Friday’s revised GDP number will be closely watched this week. In NZ, Tuesday’s RBNZ quarterly Inflations Expectations Survey and Thursday’s NZ retail sales data will be the focus. A break through the .4900 level (GBPNZD 2.0410), opens the way for investigations lower, although expect further GBP appreciation to be harder fought from current levels. Further diversification of EUR funds into GBP, will certainly help the GBP continue its recent appreciation.

 
NZD/CAD
The NZ dollar gave up ground to the Canadian dollar through the course of the last week. The lower global growth profile has enabling this recent trend to remain in place, and this should continue this week. Whilst global equity markets will provide the bulk of the lead, Tuesday’s RBNZ quarterly Inflations Expectations Survey and Thursday’s NZ retail sales data will be watched. In Canada, we have just Wednesday’s monthly retail sales data of interest. Any US dollar negative comments on monetary policy from US Fed Chairman Bernanke at the Jackson Hole central bankers symposium, would see the NZD take back some against the CAD.

NZD/RAND
The NZ dollar and Rand were relatively stable over the last week, and stayed within the expected range. With both currencies struggling in the current environment of risk aversion, expect the small ranges to continue in the short term. In NZ, Tuesday’s RBNZ quarterly Inflations Expectations Survey and Thursday’s NZ retail sales data will be closely followed, as will be the South African inflation number on Thursday. With little in the way of cash rate hikes now expected from the South African Reserve Bank in the coming 12 months, a gradual outperformance by the NZD is a distinct possibility, throughout the remainder of 2011.

NZD/EURO (EURO/NZD)
The NZD continued to give up ground against the EURO over the last week. Ironically as the debt issues spread in the Euro-zone, the global outlook falls and the NZD fortunes suffer as a consequence. The week coming should prove to be very interesting, with Tuesday’s RBNZ quarterly Inflations Expectations Survey and Thursday’s NZ retail sales data. In Europe the focus will be on the cornerstone economy of Germany with economic sentiment and business climate surveys on Tuesday and Wednesday respectively. In the short term there is a distinct possibility the NZD continues to underperform, assuming the US Fed does not embark on a third round of quantitative easing in the interim.

 
NZD/YEN (NZD/YEN)
The YEN continued to strengthen across the board and against the NZD was no exception. The safe haven status of the YEN enabling this further appreciation. The BOJ remain poised to intervene and sell YEN, when they deem the time to be right . For those looking to sell YEN and buy NZ dollars, it would be prudent to pick levels of comfort and not try and pick where the bottom of this move will be. There is an absence of Japanese economic data this week, so Tuesday’s RBNZ quarterly Inflations Expectations Survey and Thursday’s NZ retail sales data will remain the focus, in the absence of action from the BOJ.

AUD/USD
While the AUD remains volatile against the US dollar, it was broadly unchanged over the course of last week. This was a fairly good performance by the AUD, given the general market risk aversion. Two explanations may account for this. Firstly, the market reacted by buying AUD in the wake of the RBA Monetary Policy Meeting minutes being released. This was due to the dislocation between the rhetoric from the RBA and the market pricing of interest rates. Secondly, there has been talk of a takeover deal of the Australian Fosters Group, by the US company SAB Miller. Given the potential size of the transaction, this would certainly lend weight towards supporting the AUD. In terms of economic data this week coming, the main focus is again in the US with durable goods data on Thursday and US preliminary GDP figures on Friday. Testimony by RBA head Stevens to the house’s Standing Committee on Economics on Friday with be closely watched, as will US Fed Chairman Bernanke’s speech to the central bankers symposium in Jackson Hole at the end of the week. Any hint of further quantitative easing from Bernanke would be US dollar negative, albeit an unlikely scenario.

AUD/GBP (GBP/AUD)                            
The AUD was weaker against the GBP last week, although it stayed within the expected range. The weakness all came as the risk aversion intensified in the latter half of the week, as equity markets sold off. With little in way of top economic data for either economy until UK revised GDP numbers on Friday, the lead will most likely come from the general market risk appetite, with the AUD following any swings in the equity markets. Testimony by RBA head Stevens to the house’s Standing Committee on Economics on Friday will also be a focus. Current levels offer those looking to make money transfers from GBP to AUD, far better value than just a few weeks ago.

 
AUD/EURO (EURO/AUD)
The AUD moved slightly lower against the EURO last week, as general market risk aversion increased. The main economic data focus for this week will be on the German economic sentiment and business climate surveys due for release on Tuesday and Thursday respectively. The testimony of RBA head Stevens to the house’s Standing Committee on Economics on Friday, will also be closely followed for any comments regarding monetary policy. The main driver of price action will likely be the performance of equity markets, with the Australian dollars fortunes closely matching those of stocks, in the current environment.

GBP/USD
The Pound Sterling outperformed the US dollar over the last week, in what was a solid performance. Rumours of merger and acquisition flows may have contributed to demand. With the UK austerity measures already in place, it looks like investors are more confident buying GBP, as opposed to EUR and USD for the time being. In a week of light economic data releases in the UK, Friday’s revised GDP number will be the focus. In the US the monthly durable goods number on Thursday will be closely watched ahead preliminary GDP numbers on Friday. US Fed Chairman Bernanke’s address to the central bankers symposium in Jackson Hole will also be closely watched. Any reference to future monetary policy will be acted upon. Initial topside resistance comes in at the previous highs around 1.6620 ahead of more significant resistance at 1.6680.

GBP/EURO (EURO/GBP)
The GBP saw grinding appreciation against the EURO last week. A sustained break of the 1.1560 (EURO/GBP .8650) level is needed to clarify further GBP appreciation from the current levels. European debt concerns remain high, but the UK banking sector have significant exposure in Europe also, and the economic ties between the two economies are obviously closely linked also. The coming week is reasonably light on top tier economic data. In Europe the German surveys of economic sentiment and business climate on Tuesday and Wednesday respectively, will be closely watched. In the UK the revised 2nd quarter GDP number will hold the most attention. Any resumption of pressure to push out European debt spreads between the price of German and other Euro-zone members debt, will cause the EURO to underperform.

GBP/RAND
The UK Pound saw further appreciation against the Rand over the last week. The Rand position as a growth currency should see this pressure remain over the coming weeks. South African inflation numbers on Thursday will be closely watched, but with the South African Reserve bank now expected to leave the cash rate unchanged in the coming 12 months, expect its impact to be limited. Revised UK 2nd quarter GDP numbers on Friday will be closely watched. With a lowering global growth profile looking to play out over the coming 12 to 18 months, expect the GBP to maintain pressure on the RAND in the medium term

Market commentary:

The first half of last week’s trade in the global financial markets saw limited volatility, as investors took a welcomed breather from the previous weeks volatility. The acceptance of a lower global growth profile for the remainder of 2011 and 2012, saw growth assets drift, and interest rates look to establish themselves at new lower levels. Thursday and Fridays trade again saw nervousness increase. The European Central Bank (ECB) was again active in supporting European debt prices, by purchasing Italian debt to somewhat quell investor fears. But an article in the Wall Street Journal describing the close monitoring of US arms of several European banks and their funding situations, caused major ripples on equity markets. Banking stocks saw renewed selling pressure and the downside momentum for growth assets once again accelerated. Weaker economic data releases in Europe and the US, coupled with the prospect of central bank intervention by the Swiss and Japanese, helped the uncertainty continue. The Australian and New Zealand dollars remained under pressure on most cross rates, and this trend should continue in the short term, until equity markets stablise. The coming week’s have the added spice of the earning’s reporting season for publically listed corporate entities, and these will no doubt provide a little movement on a daily basis. The Japanese Yen reached a post war high against the US dollar on Friday, and this keeps the prospect of further Bank of Japan (BOJ) intervention in play this week.

The unfolding events in Libya may offer some risk appetite, with the prospect of a lower oil price with the transfer of power away from Gaddafi being a positive for economic growth. Any improvement in the markets collective risk appetite, would be supportive of growth assets such as the AUD and NZD. 

The release of the Reserve Bank of Australia (RBA) Monetary Policy Meeting minutes last week highlighted the divergence between the interest rate market pricing, and the rhetoric from the RBA. The fact that wholesale funding rates for Australasian banks will be more expensive as credit markets tighten, helps the RBA’s cause, and will ease the inflationary pressure as these higher borrowing rates flow through to the mortgage market. Overall the Australian dollar gave up ground against most of its major trading partners, in the absence of major domestic economic data releases. This week sees another week light on domestic focus, so the lead will once again be provided by the equity markets for the most part.

The New Zealand dollar traded with a softer tone throughout most of last week, in line with wider decrease in market appetite for risk. There was an absence of top tier domestic data, but this changes this week, starting on Tuesday with the quarterly Reserve Bank of New Zealand (RBNZ) Inflation Expectations Survey. Wednesday sees the monthly trade balance numbers released, and Thursday the quarterly retail sales numbers, which will be closely watched. Expect the NZD to remain soft on most cross rates for the most part, as the downward revision of growth projections continue with its major trading partners.

In the US economic conditions remain very subdued. The dramatic fall in the “barometer” Philadelphia Fed Manufacturing Index was alarming. This key index reading is getting down to levels not seen since the depths of the meltdown in 2008/09. Demand remains very much in place for US Government debt, as safe haven plays remain in place and the potential for further quantitative easing (QE: basically the electronic printing of money to stimulate growth) cannot be dismissed. This coming weekends annual central bankers symposium in Jackson Hole in the US, provides a forum for US Federal Reserve (Fed) Chairman Bernanke to communicate future policy initiatives, and will be a focus for the coming week.

The Great British Pound performed relatively well over the last week, even as the Bank of England (BOE) Monetary Policy Committee meeting minutes revealed the voting split had moved for 7-2 in favour of keeping the cash rate steady, to 9-0 in favour. The lower growth prospects mean any interest rate policy changes are far off in the UK. The GBP is benefitting from flows that may otherwise have been going into EUR, finding relative stability in the UK. Also adding to the bid tone may have been merger and acquisition flows from Europe, according to well informed sources. Inflationary pressures seem to be easing as forecast, and the public sector net borrowing numbers were also  lower than expected. This coming week is reasonably light on the economic data front in the UK, with the revised 2nd quarter GDP number on Friday being the focus.

In Europe the outlook remains bleak. Lower than expected growth numbers have added to the overall negative market sentiment, as the debt woes continue unabated. Further speculation about the monetary unions future will remain poignant over the coming years. Increasingly political pressure may dictate the future, as unrest increases. The ECB continues to purchase Italian Government bonds to support the debt markets in the short term. Longer term solutions are far more complex. The data focus for the coming week again rests in Germany, with economic sentiment and business climate surveys due on Tuesday and Wednesday respectively.

The better than expected Japanese GDP data was a good surprise for the Japanese economy, as supply chains continue to recover following their natural disasters. The strength of the YEN remains the primary focus in Japan and will continue to be so in the short term. The BOJ are likely to intervene in some form if this strength continues, and various finance officials are commentating as such on a daily basis. YEN cross rates will see volatility on any such intervention and may provide opportunities for those with interest in YEN money transfers.

In Canada, the strength of the CAD against the USD is compounding the sluggish demand from its largest trading partner. Second quarter growth is expected to be close to flat, before accelerating in the 2nd half of 2011 and then again falling in 2013. Expect interest rates to remain on hold in the meantime, as inflation remains within the Bank of Canada (BOC) forecasts. The focus for the coming week will be the monthly retail sales numbers on Wednesday.

In South Africa the volatility continued in both bond and stock markets and this led to increased pressure on the RAND again most trading partners last week. With the increasingly likely odds that there will be no movement higher in the cash rate from the South African Reserve Bank in the next 12 months, expect the RAND to remain under pressure. Inflation numbers are due for release on Thursday, but these are likely to be of passing interest only, as the global outlook rules sentiment on the RAND.

-----------------------------

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