Continued European nervousness and doubts around US growth to dominate markets

By Sam Coxhead*:

Through the duration of the last week the somewhat gloomy outlook for global economic growth continued. The International Monetary Fund trimmed its forecasts for global growth in 2011 and 2012 to 4.2% and 4.3% respectively.

In the US there were a few more positive numbers released with factory and manufacturing numbers beating expectations. However, the worse than expected US employment report will maintain the pressure on both the Federal Reserve and Obama’s administration to inject some life into the moribund labour market.

In Europe there was little positive news on the week, with tensions around the Greek bailout extension escalating amongst news the Greek economy is likely to shrink by more than 5% in 2011. Growing general populace opposition amongst contributing nations are adding to the tensions.

In Australasia the NZD and AUD saw demand early in the week, before tapering off as risk aversion increased. The week on balance produced a stronger US dollar, lower long term interest rates and reasonably flat equity and commodity markets.

In New Zealand the economic outlook remains fairly solid for the time being. Business confidence has consolidated at rebounded levels following the earthquakes in Christchurch and Fonterra’s estimated payout for the coming year remains at elevated levels. The lowering of global growth prospects has seen the interest rate market pare back expectations that the Reserve Bank of New Zealand (RBNZ) will start to raise the cash rate from its emergency levels, much before the end of the year. Expect no change from the RBNZ at next week’s cash rate review. With little on the economic calendar in the coming week, expect moves to be driven by external leads.

In Australia last week we saw better than expected results in both private capital expenditure and retail sales numbers, and building approvals numbers slightly disappointing. Interestingly moves in the interest rate markets have been to pare back expectations of easing from the Reserve Bank of Australia (RBA) a little, which is more in line with RBA rhetoric. With the possibility of further QE not ruled out at this stage, the AUD saw solid demand at times. This coming week is action packed for the Australian market with the RBA Monetary Policy Meeting on Tuesday(no change expected to the current 4.75% cash rate). Second quarter GDP numbers are due on Wednesday with a rebound in activity to 1.0% expected. Employment numbers are released on Thursday with 10.4k jobs expected to be added and an unchanged unemployment rate of 5.1%. Demand for the AUD should remain fairly solid in the absence of an escalation of credit fears in Europe.
 

Major Announcements last week:

·         Australian Building Approvals +1.0% vs +2.1% expected
·         US Conference Board Consumer Confidence 44.5 vs 52.1 expected
·         FOMC meeting minutes reveal discussions on further monetary stimulus, in line with Bernanke speech
·         NBNZ Business Confidence 34.4 vs 47.6 previous
·         NZ Building Consents 13% vs -1% previous
·         US Factory Orders 2.4% vs 1.8%
·         Australia Private Capital Expenditure 4.9% vs 4.1%
·         Australian Retail Sales .5% vs .3% expected
·         US ISM Manufacturing PMI 50.6 vs 48.7 expected
·         US non-farm Employment change 0.0 vs 74k expected
·         US Unemployment rate 9.1% vs 9.1% expected
·         CAD GDP .4% vs .4% QoQ
·         South Africa GDP Q2 1.3% vs 1.6% expected

NZD/USD 
The NZD saw appreciation over the US dollar for the first half of last week, with demand apparently being driven by “sold” NZD investors exiting positions. As the momentum waned and the general market risk aversion increased, the NZD again came under pressure and this continued after the release of the worse than expected US employment numbers. Given the debt concerns in Europe and the downward revisions of the global growth profile, expect appreciation from the NZD to be hard fought. Having said that, any sell offs towards support levels finds demand for NZD and this points towards range trading in the short term. There is an absence of NZ economic data this week, so US Services numbers on Tuesday, the “Beige Book”(FED economic sentiment survey) Wednesday and US Trade Balance on Thursday will be the focus.

NZD/AUD (AUD/NZD)
The NZ and Australian dollars remain locked in their broader .7800 - .8000 (AUD/NZD 1.2500 - 1.2820) range. There is little on the NZ economic data front this week, so the focus will very much be on Australia. Tuesday sees the RBA release their cash rate decision, which is likely to be unchanged at 4.75%. But pivotal to direction from here will be the outlook going forward as portrayed in their accompanying statement. Wednesday sees the release of Australian second quarter GDP numbers and Thursday the employment numbers. The interest rate market has around 110 points of easing from the RBA priced in over the coming year, but the RBA are expected to leave the cash rate unchanged this week.

NZD/GBP (GBP/NZD)
The NZ dollar saw grinding appreciation against the Pound Sterling throughout last week, although it retreated from the highs in the wake of the US employment numbers on Friday night. The economic data in the UK remains soft and the prospect of this week’s BOE Monetary Policy announcement appears to have loomed large. Not helping the situation is the relatively close economic links between the UK and Europe, and the debt issues at play in Europe. In the absence of NZ economic data this week, the lead will come from the UK for the most part. The BOE takes center stage, and whilst no change is expected to the cash rate, there is a possibility that additional QE may come into play as the risks to the economy have increased of late. Expect the GBP to remain under pressure for the time being, albeit gains for the NZD from current levels look to be harder fought.

 
NZD/CAD
The NZD again saw a week of appreciation against the Canadian dollar. With a lower growth profile for Canada’s major trading partner the US, expectations for the near term removal of the emergency stimulus from the Bank of Canada (BOC) have been pared back. With an absence of domestic economic data in NZ this week, the bulk of the focus will be on Canada. Thursday starts the week off with the BOC cash rate decision and statement. Whilst no change is expected, the statement will be closely followed for future direction. Friday sees the monthly employment numbers and these to could provide some movement. Obviously the current levels are reasonably high from a historical perspective, so expect gains to be harder to make for the NZD from here.

NZD/RAND
The NZD traded a relatively small range against the RAND throughout the course of the last week. The disappointing GDP numbers in South Africa mean that there is renewed pressure on the South African Reserve Bank (SARB) to keep the cash rate low for an extended period of time. Expect gains from the NZD to be harder fought from the current high levels. There is little in way of economic data for either countries this week, so expect the current wider range of 5.85 - 6.15 to limit the movement. The next SARB cash rate announcement on 22 September will now be very closely watched, and should give a good guide to interest rate direction in South Africa in the short term.

NZD/EURO (EURO/NZD)
The NZD has seen grinding appreciation against the EURO as the widespread focus on the regions debt issues continues. At the Government level, there is ongoing resistance from the contributing member states with regards to the Greek bailout  extension. The European Central Bank (ECB) also remain active in the debt markets by buying Government bonds to reassure investors. At the bank level there are ever increasing reports of funding issues between various European banks. New IMF head Lagarde even went to the lengths to publically state that Governments may have to step in and support banks if recapitalization is required. Meanwhile the economic data remains weak almost across the board. In the absence of local NZ data of importance, expect the focus to remain in Europe. Further investigations to the upside for the NZ dollar cannot be ruled out, even with the softer global growth profile, that would normally see NZD demand fall. Interestingly there has been less noted central bank buying of EURO of late, and this has certainly eased the way for the progress of the NZD.

 
NZD/YEN (NZD/YEN)
The NZD appreciated against the YEN at the start of last week. Demand for both NZD and AUD against YEN was reportedly driven by exiting of sold positions by large hedge fund accounts. The pair spend the bulk of the week range trading close to the week’s highs, before the safe haven demand following the disappointing US employment numbers once again saw the NZD under a little pressure. With little in the way of domestic economic news in NZ this week, expect the lead for this pair come from the overall market appetite for risk and movement to closely follow the equity markets.

AUD/USD
The Australian dollar outperformed the US dollar for most of last week, seeing grinding appreciation up towards the week’s highs before the disappointing US employment numbers on Friday. Since that release the US dollar has seen solid demand. Benefitting the US dollar currently is the notion that the FED will not undertake further QE at this juncture(USD positive). Instead maybe looking to extend the maturity of their Treasury holdings, and therefore lowering the cost of long term debt for the consumer and business alike. Much of this week’s focus will be AUD based, with Tuesday’s RBA meeting starting off the focus. No change to the 4.75% cash rate is expected, but the accompanying statement could well hold the key to policy timing throughout the remainder of the year. Wednesday sees second quarter Australian GDP data released and Thursday the employment numbers. Given the current global outlook, expect AUD gains to be hard fought. Any US dollar strength will draw out AUD demand at technical support levels.

AUD/GBP (GBP/AUD)                            
The AUD saw grinding appreciation against the Pound Sterling  for the bulk of last week. As risk aversion gained momentum ahead of the US employment numbers the AUD gave up a little of its ground and this continued as the disappointing number was released. Gains from the current high levels should be harder to make this week, but with both respective central banks in action, nothing can be discounted. The focus for the week starts with the RBA on Tuesday. Expect no change to the 4.75% cash rate, but the accompanying statement will be closely watched for hints of timing of the future policy moves. Wednesday sees the release of Australian second quarter GDP figures and there is an expectation of 1.0% growth against the previous slump of -1.2%. Thursday sees Australian employment numbers followed by the BOE monetary policy announcement. No change is expected from the BOE, but their recent change in bias towards the possibility of additional QE, means the announcement will be closely watched. Expect gains for the AUD to be harder to make from current levels, but support to come in on any significant softness in price action.

 
AUD/EURO (EURO/AUD)
The AUD saw almost straight line appreciation against the EURO for the bulk of last week. The respite for the EURO came as the general market risk aversion increased towards the end of the week. The debt situation in Europe is a constantly evolving beast and authorities have certainly not found an answer to the issues at play. This week may prove to be a pivotal point as the German constitutional court delivers a decision on the legality of  the extension of German bailout funds. With civil disharmony on the increase amongst contributing nations, it would appear that a clear path needs to be organized as soon as possible. To complicate matters for this pair is the busy Australian economic calendar this week. Tuesday starts it off with the RBA monetary policy decision and statement. Widely expected to leave the cash rate unchanged, the statement from Governor Stevens will be closely followed for hints on the timing of future policy changes. Wednesday sees the much anticipated second quarter GDP numbers released, and Thursday the monthly employment figures.

GBP/USD
The US dollar saw appreciation against the Pound Sterling last week. Some better than expected economic numbers seem to have pared back expectations of an extension of QE from the FED, and this has helped with demand for US dollars. This move has come as a recent perceived change in bias from the BOE has increased the chances of further QE in the UK. The BOE release their interest rate policy decision on Thursday and this will be closely watched. US data is relatively light this week, with services PMI numbers due on Wednesday and the trade balance on Friday. FED chairman Bernanke is also due to speak on Thursday and as usual he will be closely watched. We are approaching support levels at the lower end of the broad 1.5950 - 1.6550 range in which this pair has spent most of the year. Expect these wider support levels to hold for the time being.

GBP/EURO (EURO/GBP)
This pair remains well within its broader 1.1235 – 1.1560 (EURO/GBP .8650 - .8900) range of the last two months. With little positive news in either economy likely to emerge in the near term, expect the range to continue in the near term in the absence of additional QE at the BOE monetary policy announcement on Thursday, that would see the GBP weaken. A further escalation in Europe in either the bank funding or government debt markets would see the GBP outperform, and cannot be ruled out. So the battle of these two underperforming currencies remains finely balanced at this time. Of particular note this week will be the German constitution court’s decision on the legality of an extension of bailout funds by the German Government. Whilst not expected to be blocked, timeliness and ease at which funds are able to be committed could become an issue as the opposition within the German populace increases.

GBP/RAND
The RAND outperformed the GBP in the face of weaker than expected South African GDP numbers throughout the course of last week as investors spurned the Pound Sterling along with the closely correlated EURO. The focus this week will almost solely be on the BOE monetary policy decision on Thursday. No change is expected, but with the recent change in bias towards further monetary stimulus, there remains a chance there will be additional QE announced. On the off chance this comes to pass, the effect would certainly be GBP negative. Meanwhile the 22nd September monetary policy meeting of the South African Reserve Bank (SARB) will be a focus for the coming weeks, as the economic picture remains weak for Africa’s largest economy.

Market commentary:

Through the duration of the last week the somewhat gloomy outlook for global economic growth continued. The International Monetary Fund (IMF) trimmed its forecasts for global growth in 2011 and 2012 to 4.2% and 4.3% respectively. In the US there were a few more positive numbers released with factory and manufacturing numbers beating expectations. However, the worse than expected US employment report will maintain the pressure on both the Federal Reserve (FED) and Obama’s administration to inject some life into the moribund labour market. In Europe there was little positive news on the week, with tensions around the Greek bailout extension escalating amongst news the Greek economy is likely to shrink by more than 5% in 2011. Growing general populace opposition amongst contributing nations are adding to the tensions. In Australasia the NZD and AUD saw demand early in the week, before tapering off as risk aversion increased. The week on balance produced a stronger US dollar, lower long term interest rates and reasonably flat equity and commodity markets.

In the US the debate of how to stimulate the economy remains robust. Further quantitative easing (QE) remains a prospect, but in the short term the likelihood is that the FED will move towards a weighting of its treasury holdings. This would involve selling short term treasuries whilst simultaneously buying longer term. This does not increase the size of QE in  place, but will have the effect of lowering the rates for longer term loans across the economy, and is being coined “Operation Twist”. The disappointing zero employment growth in August whilst awful, was not as bad as it would appear. Commentary suggests that 45,000 Verizon workers on strike will be re-added to the payrolls next month. Interestingly pressure is building on politicians to help stimulate the economy, as there is only so much the FED is able to do with monetary policy. This coming week is a relatively quiet one for economic data in the US, with the services purchasing managers index and trade balance data on Tuesday and Thursday respectively the focus.

The debt situation in Europe remains tense, at both the general bank and government level. Interestingly, “Troika” (EU, IMF and ECB) officials leaving meeting in Greece amongst allegations Greek officials are not doing enough to slow debt growth. This comes at a time when Finland are asking for collateral for their part of bailout extension contributions. And the German constitutional court is contemplating a ruling as to whether or not any German contributions to European bailouts are unconstitutional or not. It is expected to say the German Parliament should have much more say in all bailout conditions. Given that up to two thirds of the German populace reportedly oppose any new bailouts, increasing political pressures can be expected. The wholesale funding markets for European banks remain tight and this adds to the pressures on the banking sector in Europe. These factors are certainly going to weigh on EURO sentiment in the short term at least.

In Australia last week we saw better than expected results in both private capital expenditure and retail sales numbers, and building approvals numbers slightly disappointing. Interestingly moves in the interest rate markets have been to pare back expectations of easing from the Reserve Bank of Australia (RBA) a little, which is more in line with RBA rhetoric. With the possibility of further QE not ruled out at this stage, the AUD saw solid demand at times. This coming week is action packed for the Australian market with the RBA Monetary Policy Meeting on Tuesday(no change expected to the current 4.75% cash rate). Second quarter GDP numbers are due on Wednesday with a rebound in activity to 1.0% expected. Employment numbers are released on Thursday with 10.4k jobs expected to be added and an unchanged unemployment rate of 5.1%. Demand for the AUD should remain fairly solid in the absence of an escalation of credit fears in Europe.

In New Zealand the economic outlook remains fairly solid for the time being. Business confidence has consolidated at rebounded levels following the earthquakes in Christchurch and Fonterra’s estimated payout for the coming year remains at elevated levels. The lowering of global growth prospects has seen the interest rate market pare back expectations that the Reserve Bank of New Zealand (RBNZ) will start to raise the cash rate from its emergency levels, much before the end of the year. Expect no change from the RBNZ at next week’s cash rate review. With little on the economic calendar in the coming week, expect moves to be driven by external leads.

In the UK economic data remains soft . The Pound Sterling has been under pressure against most trading partners. The increased unease at the debt situation in closely correlated Europe is also not helping sentiment. This week sees the Bank of England (BOE) Monetary Policy Committee release its latest decision. Certainly no change is expected to the cash rate, but there is a possibility of an increase in their amount of QE. Any additional QE initiatives would be GBP negative in the short term.

In Canada the monthly GDP number was +.2% as expected last week. This coming week sees the Bank of Canada and their monetary policy decision and statement the focus on Thursday.  No change to the 1% cash rate is expected, mainly due to the softer than expected nature of the US economy, being Canada’s largest trading partner. The statement accompanying the unchanged cash rate is likely to be more “dovish” than the previous one, pointing towards a longer period before its emergency stimulus level is likely to be reversed. The pushing out of interest rate hike expectations has been built into the CAD over the last couple of weeks, as it weakened against most trading partners.

In South Africa last week’s GDP numbers showed that the economy has hit another soft patch, with annualised growth at just 1.3% vs 4.5% in the previous quarter. This caused pressure on the RAND, as the prospect of any increase in interest rates from the South African Reserve Bank can be ruled out in the coming year. If the soft economy continues, debate will likely spread to the prospect of further easing to the cash rate. Manufacturing and mining led the fall in growth, exposing how reliant Africa’s largest economy is to the global economy.

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