Low growth and persistent inflation are now the market's expectations

By Sam Coxhead*:

Market volatility continued throughout last week, albeit contained mostly within expected ranges. The intra-day volatility highlights the uncertain nature of the present outlook, and the general lack of depth within most markets.

For the most part, investors spent the week waiting for US Federal Reserve (FED) Chairman Ben Bernanke’s speech at the central bankers symposium at Jackson Hole. As the week wore on the expectations of further monetary policy announcement from Bernanke diminished.

Stronger than expected US durable goods numbers added to this paring back of expectations. Bernanke did not deliver terribly much insight, but did state that the September Federal Reserve Open Market Committee (FOMC) meeting would be held over two days instead of the standard one. This would appear to give the committee plenty of time to discuss the tools, and policy initiatives at their disposal.

The markets have seen limited reaction to Bernanke’s address, and this will be viewed as a success from the FED’s perspective.

Ahead of the FOMC meeting on the 20th - 21st September, it can be expected the USD will remain under pressure, in the absence of a further escalation in fears about global growth. Elsewhere in markets the themes remain very much the same, with the overall prospect of a lowered global growth outlook and reasonably persistent inflationary pressures. 

Major Announcements last week:

· RBNZ Inflation Expectations Survey 2.9% vs 3.0% previous
· German ZEW economic Sentiment  -37.6 vs -24.8 expected
· Canadian Retail Sales -.1% vs +.3% expected
· US New Home Sales 298k vs 313k expected
· German IFO Business Climate 108.7 vs 111.2 expected
· US Durable Goods Orders .7% vs -.3% expected
· NZ Retail Sales 1.0% vs .7% expected
· UK revised GDP .2% vs .2% expected
· US prelim. GDP 1.0% vs 1.1% expected

NZD/USD 
The NZ dollar saw mostly grinding appreciation against the US dollar over the course of the last week. Stronger than expect Chinese and US data helped pave the way higher, as growth assets benefitted from the positive sentiment. US FED Chairman Bernanke has kept the possibility of further quantitative easing on the table and this has eased the way for further potential upside in the NZD. This week is reasonably light on economic data in NZ, with just building statistics on Tuesday and NBNZ Business Confidence numbers on Wednesday. In the US there is a raft of economic data, but most importantly the minutes from the last FED monetary policy meeting are released Tuesday and then unemployment numbers on Friday. Expect upside progress from current levels to be harder to make from the NZD, as further resistance levels come into play.

NZD/AUD (AUD/NZD)
The NZ and Australian dollars remain locked in familiar territory. Economic data remains the key as important central bank meeting loom. This week in NZ sees building and business confidence numbers released on Tuesday and Wednesday respectively. In Australia we have building numbers Tuesday and private capital expenditure and retail sales numbers on Thursday. The Australian interest rate market remains the key to this pair with the RBA cash rate review Tuesday next week. If we see a reduction of easing expectations throughout the week, the NZD should come under some pressure. In the meantime expect the broader range of .7800 - .8050 (1.2420 -1.2820), to remain in place with initial resistance at .8000 (1.2500  support).

NZD/GBP (GBP/NZD)
The NZD saw grinding appreciation against the Pound Sterling throughout last week in what was a reversal of the previous week’s move. The appreciation was driven by a couple of factors. The better than expected Chinese and US economic data helped lift sentiment for the growth assets. Also the GBP was heavy against almost all currencies as it gave up ground after a couple of weeks of relative strength. There was also reported heavy selling of GBP against buying of EUR. This was rumoured to be early “end of month flows”, and affected GBP performance across the board. Early focus will be on NZ with building numbers Tuesday and business confidence on Wednesday. Thursday sees house price, and manufacturing numbers in the UK, with monthly construction statistics released on Friday.

 
NZD/CAD
This pair saw further volatility last week with sharp intra-day moves within the range. The NZD outperformed on the balance and took back ground given up the previous week. The stronger than expected HSBC Chinese PMI numbers gave the NZD the initial upper hand. Apart from NZ building and business confidence numbers on Tuesday and Wednesday in New Zealand, the focus will be the Canadian GDP numbers late Wednesday. Expect progress from current levels to be harder fought for the NZD, as we get closer the recent highs. If current volatility remains in place, the benefits of placing orders at targeted levels will be of value.

NZD/RAND
The NZD outperformed the RAND throughout the course of the last week. Increased Asian demand for NZD after the stronger than expected Chinese data gave the NZD the initial boost, adding to the momentum was better than expected US data boosting appetite for growth assets. Expect progress from current levels to be harder fought for the NZ dollar. South African inflation and producer price numbers have helped curb further strength from the NZD, as the higher than expected number reduces the likelihood of interest rate easing’s from the South African Reserve Bank. In NZ, building numbers Tuesday and business confidence on Wednesday will be closely followed. In South Africa on Tuesday we get the all important 2Q GDP numbers released. With current levels at last seen in 2008, we can expect further volatility from this pair in the short term.

NZD/EURO (EURO/NZD)
Last week the NZD reversed the losses against the EUR that it made in the duration of the week previous. In illiquid and uncertain markets, the surprisingly strong Chinese and US economic numbers saw the growth assets in demand, and this obviously helped the NZD outperform. From the European perspective, debt concerns remain the focus and the bank capitalization is the recent focus. Expect this theme to remain in place for the coming week, in the absence of top tier data in the Euro-zone. In New Zealand we have building numbers due Tuesday and business confidence numbers on Wednesday.

 
NZD/YEN (NZD/YEN)
Like many other NZ dollar cross rates, the NZD/JPY reversed the previous weeks moves by gaining throughout the week. The better Chinese and US data added to the risk appetite and this positive sentiment looks to be feeding into the start of this week as well. This pair is approaching significant resistance at 65.20, so progress from here should be harder to make for the NZD. The real risk factor in this pair is that of the Bank of Japan (BOJ). With the Swiss National Bank making head roads into weakening the CHF, the BOJ has been left exposed for funds seeking a safe haven. This may push them into intervention of their own, and even short term effectiveness would see the NZD well higher should they enter the market. So along with this great unknown, drivers of the market will be NZ building data on Tuesday and the NBNZ Business Confidence survey on Wednesday. Given the fact that a Japanese Govt credit downgrade did not directly affect the exchange rate last week, lets assume that Japanese data will be overlooked for the most part. If initial resistance around 65.20 is taken out, expect further resistance at the 66.20 level.

AUD/USD
The Australian dollar outperformed the US dollar last week as the better than expected Chinese and US data encouraged the appetite for risk in general. Interestingly, the divergence between RBA rhetoric and the interest rate market pricing has started to close a little with the market starting to price in less easing from the RBA, before the end of the year. The interest rate market has been stubborn in its resilience of late, but its late move will assist the AUD in appreciation from current levels, should the general market optimism continue. Amongst a slurry of economic data releases this week, the focus in the US will be on the minutes from the last FED monetary policy meeting are released Tuesday, and the all important unemployment numbers are on Friday. In Australia, building numbers Tuesday, and private capital expenditure and retail sales numbers on Thursday will provide the lead. Progress from current levels should be harder to make for the AUD, with initial resistance at 1.0700, before the lofty level of 1.0800. On the downside, a resurgence from the US dollar may see a little more support for the AUD than in the previous sell off, thanks to the interest rate market in the short term.

AUD/GBP (GBP/AUD)                            
This pair saw the AUD outperform, whilst it stayed within the expected range. The price action was driven by a couple of different factors. The positive economic data in the US and China gave investors renewed enthusiasm for the AUD, and this has even feed through to the interest rate market, where price action has supported the move. This coupled with an across the board heavy Pound Sterling, enabled the relatively easy outperformance by the AUD. The GBP was heavy as it gave up ground gained over the previous two weeks. Heavy end of month selling against the EURO apparently adding to the broad based GBP weakness. This coming week the focus in Australia will be building numbers on Tuesday, and private sector capital expenditure and retail sales data on Thursday. In the UK the focus comes with housing and manufacturing data on Thursday, ahead of construction numbers Friday. Current levels again represent good value buying of GBP with AUD.

 
AUD/EURO (EURO/AUD)
The AUD outperformed the EURO last week as the appetite for risk returned as Chinese and US economic numbers beat expectations. Whilst the week’s trade was contained within the expected range, the appreciation of the AUD accelerated as the week wore on, and expect this to feed into this week. The focus on the capitalization of the European banking sector should see the EURO underperform in the short term. The focus in Europe for the week will be the Trichet speech due late Monday, and from there the economic data lead comes from Australia. Tuesday sees building numbers released. Thursday sees the double header of private capital expenditure and retail sales numbers. These will add colour to the domestic picture ahead of the RBA monetary policy decision next week. If the interest rate markets continue to pare back the expectations on the amounts of easing from the RBA before the end of the year, then the AUD should find support on dips. If initial resistance at .7450 is broken, around .7525 will be the next target.

GBP/USD
The GBP/USD continued its volatile price action whilst remaining in its broader range. The GBP fell from favour mid week, and once it broke lower, the selling pressure gained momentum. Since the lows we have seen a healthy bounce, and the week has started on a relatively positive note for the GBP. Amongst a full economic calendar in the US this week, the focus will come from Tuesdays release of the meeting minutes from the last monetary policy decision. From there the focus will be squarely on the all important employment numbers on Friday. In the UK housing and manufacturing numbers come on Thursday, ahead of construction numbers on Friday. Expect the volatility to continue and the broader 1.61 - 1.66 range to remain in play ahead for the FED meeting on the 20 - 21st September.

GBP/EURO (EURO/GBP)
The GBP gave up ground against the EURO, in what was a steady progression throughout the last week. There was talk of large end of month sell GBP buy EUR flows being executed early, making use of the previous good performance of the GBP. This remains to be seen, but with increasing focus on the capitalization of European banks, there is potential for the resistance at .8875 (1.1265 support) to hold. Should the EURO continue to test higher levels on this move, expect strong GBP support at the .8950 (1.1175) level. In Europe this week the ECB head Trichet’s speech late on Monday will be closely watched. In the UK housing and manufacturing numbers come on Thursday, ahead of construction numbers on Friday, and these will be closely watched.

GBP/RAND
Both the GBP and RAND were under pressure last week on most cross rates and this led to relatively stable GBP/RAND price action, with the GBP giving up some ground in the latter end of the week. Higher than expected inflation and producer price numbers in South Africa would have been a factor. The likelihood of easing from the South African Reserve Bank, have been all but erased now, and this is obviously a little Rand supportive in the current environment. Most of the focus will be on South Africa this week with GDP numbers for the 2nd quarter on Wednesday. In the UK, less important housing and manufacturing numbers come on Thursday, ahead of construction numbers Friday.

Market commentary:

Market volatility continued throughout last week, albeit contained mostly within expected ranges. The intra-day volatility highlights the uncertain nature of the present outlook, and the general lack of depth within most markets.

For the most part, investors spent the week waiting for US Federal Reserve (FED) Chairman Ben Bernanke’s speech at the central bankers symposium at Jackson Hole. As the week wore on the expectations of further monetary policy announcement from Bernanke diminished.

Stronger than expected US durable goods numbers added to this paring back of expectations. Bernanke did not deliver terribly much insight, but did state that the September Federal Reserve Open Market Committee (FOMC) meeting would be held over two days instead of the standard one. This would appear to give the committee plenty of time to discuss the tools, and policy initiatives at their disposal.

The markets have seen limited reaction to Bernanke’s address, and this will be viewed as a success from the FED’s perspective.

Ahead of the FOMC meeting on the 20th - 21st September, it can be expected the USD will remain under pressure, in the absence of a further escalation in fears about global growth. Elsewhere in markets the themes remain very much the same, with the overall prospect of a lowered global growth outlook and reasonably persistent inflationary pressures.

In Europe the debt issues remain topical, not only at the sovereign level, but also around bank capitalization and the general stability of the sector.

In Australia last week the focus was mainly on a speeches from the deputy governor, and governor of the Reserve Bank of Australia (RBA). The interest rate market remains a little divergent from their rhetoric, still pricing around 100pts of easing in the cash rate before the end of the year. The RBA focus on the trading partners in Asia should not be underestimated. Last week’s stronger than expected HSBC Chinese PMI number had little effect on the interest rate market, but certainly gave demand for the AUD a boost. This coming week sees the focus move back to the economic data. Tuesday sees the latest building approvals released, before private capital expenditure and retail sales data on Thursday.

The stronger than expected retail sales numbers and Chinese PMI data last week should keep the focus on the Reserve Bank of New Zealand, as we approach the next cash rate decision on the 15th of September. Along with the Australian dollar the NZD saw renewed demand last week, even in the absence of a definite commitment of further stimulus from the FED. This coming week will see direction mostly be driven by offshore sentiment. Local data comes in the form of building consents on Tuesday and the NBNZ Business Confidence Survey on Wednesday.

The Great British Pound fell out of favour a little again last week. After a couple of weeks of renewed demand, apparent end of months sell flows weighed on the GBP, almost across the board. There was an absence of economic data for the bulk of the week, before the revised GDP number on Friday was released at .2%, as expected.  This week sees housing and manufacturing numbers on Thursday, ahead of construction numbers on Friday. With little expectation from the Bank of England monetary policy meeting next week, reported end of month sell flows may well continue to provide the tone in the short term.

The market’s resilience with regards to the European debt issues, appears to have grown in the short term. What must be kept in mind with regards to the EURO, is the fact that the negotiations with regards to the Greek bailout package are ongoing. With this in mind expect the EURO to continue to see periods of pressure, and broader ranges to remain in place on most cross rates. The focus for the week will be a speech by European Central Bank head Trichet, as he testifies on the debt crisis to the European Parliaments Economic Committee late on Monday.

In Canada the economic data flow has been light. Last week saw just the release of a disappointing retail sales number, that was -.1%, against an expectation +.3%. This week sees the focus move to the monthly GDP figure. Market expectations are of a modest .2% rise, which is a bounce back from last month’s .3% decline. The Canadian economy remains quite reliant on the tepid economy of its largest trading partner and neighbor the US. The Bank of Canada is likely to leave its cash rate unchanged in the short term and this should maintain its reasonably close correlation to the US dollar.

In South Africa there has been debate building around the possibility of a cut to the cash rate from the South African Reserve Bank (SARB). This debate came to a grinding holt last week, as the latest inflation and producer prices index numbers were released. The inflation number was 5.3% vs an expectation of 5.0% and will no doubt mean the SARB are forced to maintain their current interest rate status. The persistent inflationary pressure, coupled with sluggish growth, is not isolated to South Africa and it will be interesting to see how the situation plays out over the medium term.

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