Impatient investors exit 'Armageddon' positions; fx markets meander

By Sam Coxhead*:

The last weeks trade was one of relatively small ranges for the most part. Consolidation around new levels comes as the market is generally lacking clear direction from current levels.

The main focus has remained on Europe and its debt issues.

There is a feeling that the market will see uncertainty resume at some point soon, but with many potential triggers at play, timing of market moves are almost impossible to predict.

In the absence of a trigger in the meantime, it could be expected we may see a gradual climb in growth assets, as 'Armageddon' speculative positions are exited by impatient investors.

The Euro group finance ministers meeting during the weekend failed to deliver any clear direction and this has seen the US dollar open strongly for the week. The lack of leadership is becoming a central issue for Europe and its navigation through its debt contagion issues. Last week’s central bank co-ordination from the Bank of Japan(BOJ), Bank of England (BOE), Swiss National Bank (SNB), European Central Bank (ECB) and the US Federal reserve (FED), to  secure US dollar funding for European banks was positive, and lent support to banking stocks and credit markets.

This week the focus will turn back to the US and the deliberations of the FED following its two day monetary policy committee meeting on Thursday. Further quantitative easing can all but be ruled out at this juncture, but there will be some policy initiatives announced.

The Australasian currencies remain vulnerable to selling pressure, as the global economic data remains patchy at best.

Major Announcements last week:

·         UK Inflation 4.5% as expected
·         US Retail Sales .1% vs .2% expected
·         US Producer Prices 0.0% vs -.1% expected
·         RBNZ leaves the cash rate unchanged as expected, lower cash rate projections going forward
·         UK Retail Sales +.2% as expected
·         European Inflation 2.5% YoY as expected
·         US Inflation .2% as expected
·         US Philadelphia Fed Manufacturing Index -17.5 vs -14.7 expected
·         US UoM Consumer Sentiment 57.8 vs 56.4 expected
·         ECB,BOE,BOJ

NZD/USD 
This pair was relatively stable through most of last week. Only in Friday’s session did the NZD really outperform to reach the highs, as the equity markets posted their 5th straight day of gains. A lack of progress at the Euro-group meetings over the weekend saw it open lower this week. The focus will certainly come in the form of the US FED Open Market Committee announcement on monetary policy on Wednesday, ahead of the NZ GDP number on Thursday. The recent range should remain in place, barring surprises from the FED.

NZD/AUD (AUD/NZD)
The NZD made reasonable gains against the AUD for much of last week and opened this week close to the recent highs. The AUD has been under a little pressure as the global growth outlook weakens. Expect any further gains from the NZD to be harder to make from current levels. In Australia the RBA monetary policy meeting minutes release on Tuesday will be closely watched, followed by the 2nd quarter NZ GDP numbers on Thursday. A sustained move through the .8050 (AUDNZD 1.2425) level could herald a new range for this pair, as we head back toward more historically average levels.

NZD/GBP (GBP/NZD)
The NZD was relatively stable against the GBP for most of last week. The main move came on Friday as the US equity market posted its 5th straight day of gains and dragged the NZD to set highs for the week. Expect the NZD to keep the pressure on in the absence of a trigger back to general market risk aversion. The focus for the week will start with the release of the BOE monetary policy meeting minutes on Wednesday, ahead of the 2nd quarter NZ GDP numbers on Thursday. Given we are close to record highs for the NZD over the Pound Sterling, expect gains from current levels to be harder fought for the NZ dollar.

 
NZD/CAD
This pair remained within its expected range last week. In the absence of Canadian economic, data the downbeat global economic assessment from the RBNZ gave the market reason to cap any NZD gains. Canadian inflation numbers on Wednesday will be closely watched ahead of NZ 2nd quarter GDP on Thursday. Canadian retail sales late Thursday will offer further insight to the state of the Canadian consumer. In the absence of another market move towards risk aversion, expect this pair to remain in its broader .8050 - .8250 range.

NZD/RAND
This pair spent most of last week well contained within the expected range. Only on Friday as the NZD was boosted by the 5th day of gains in equity markets in the US did the NZD rise through resistance. Tuesday and Wednesday feature employment and inflation numbers in South Africa and these will be closely watched. The Rand has struggled with other emerging market currencies of late, but if inflation pressures continue to rise, a cash rate hike from the South African Reserve Bank would certainly provide some support. Thursday the focus turns to NZ when the 2nd quarter GDP number is due for release.

NZD/EURO (EURO/NZD)
The NZD was relatively stable against the EURO last week. After the RBNZ monetary policy statement, we saw some softness come into the NZD, but this was reversed on Friday as the US equity markets held onto their 5th straight day of gains. The risks on this pair remain similar this week. The European debt crisis remains the primary focus. In New Zealand, Thursday’s 2nd quarter GDP release will be closely watched. Expect the pair to remain in the broader .5900 - .6150 range this week. These levels still represent very good value buying of EURO with NZD.

 
NZD/YEN (NZD/YEN)
In line with lower levels of market volatility, this pair was relatively contained in its range last week. The NZD lows were seen in the aftermath of the RBNZ monetary policy statement on Thursday. This softness was reversed on Friday as the NZD was dragged higher by increased risk appetite as US equity markets managed to stake their 5th straight day of gains. This week should see further range bound trade in the absence of an escalation of fears in Europe. The focus for the week will be Thursdays 2nd quarter NZ GDP number. Expect the broader 62.00 - 65.00 range to remain in place.

AUD/USD
This pair saw mostly sideways trade for much of last week. The US dollar rebound does look entrenched for the time being and this lends this pair to a downside bias. The focus for the week starts in Australia with the RBA monetary policy meeting minutes that due for release on Tuesday. From there the focus will be US based with the main event being the monetary policy announcement by the FED on Wednesday. There appears to be little chance of further quantitative easing programs at this stage, so expect the US dollar to remain supported on periods of weakness, and therefore capping any real AUD gains. A sustained break of the support at the now close 1.0200 level will open the way for another move to the downside for the AUD.

AUD/GBP (GBP/AUD)                            
The AUD saw pressure from the GBP at various times last week. For now the support at .6450 (GBPAUD 1.5500 resistance) remains in place, but it does look vulnerable. There is a distinct central bank focus this week with previous monetary policy meeting minutes due for release in both countries. The RBA comes first on Tuesday before the BOE on Wednesday. Current levels still represent good value buying of GBP with AUD, albeit levels below recent highs. If the support at . 6450 (GBPAUD 1.5500 resistance) gives way, the next firm level comes in at .6330 (GBPAUD 1.5800).

 
AUD/EURO (EURO/AUD)
The AUD was under pressure from the EURO for most of last week. The AUD is widely seen as a barometer for global growth, and this is why it has suffered as the global growth prospects have been pared back in recent weeks. Initial support will come in at .7420 (EUROAUD resistance 1.3480), before the next level at .7380 (EUROAUD 1.3550). Whilst off the highs, current levels still represent good value buying of EURO with AUD. The focus for the week will be on the European debt situation primarily. For the Australian perspective, the RBA monetary meeting minutes on Tuesday will be closely watched.

GBP/USD
This pair did not see dramatic moves for much of last week. The tone is more one of grinding US dollar appreciation over the Pound Sterling. The lack of meaningful resolution from the weekends Euro-group meetings has seen further demand for the USD to start this week. The UK focus for the week is the BOE monetary policy meeting minutes release on Wednesday. Later the same day it is the turn of the US FED to announce their latest moves on monetary policy. With quantitative easing all but ruled out at this stage, the US dollar should remain fairly well supported. This pair is now at levels not seen since the start of the year, as we look to establish a new range at these lower levels. 1.5600 provides the initial support level.

GBP/EURO (EURO/GBP)
Last week the EURO took back much of the ground that it gave up the previous week. Investors were quick to exit “sold” EURO positions on the news of the central bank initiative to provide US dollar funding lines to stressed European Banks. The move has taken this pair back into very familiar ground. Expect any European debt news to be acted as it comes to light. In the UK the BOE monetary policy meeting minutes will be closely watched. Part of the recent GBP weakness is attributable to moves towards further quantitative easing by the BOE. Should these minutes confirm these discussions, there is potential for further GBP weakness. 

GBP/RAND
The RAND continues to underperform the Pound Sterling as the global growth outlook deteriorates further. This week is a pivotal one for South African financial markets with employment and inflation numbers due for release. In the UK the BOE monetary policy meeting minutes are due for release Wednesday and these will be closely watched. Further reference to the timing of increases in the quantitative easing program could see the GBP give up a little of the recently taken ground over the RAND.

Market commentary:

The last weeks trade was one of relatively small ranges for the most part. Consolidation around new levels comes as the market is generally lacking clear direction from current levels.

The main focus has remained on Europe and its debt issues.

There is a feeling that the market will see uncertainty resume at some point soon, but with many potential triggers at play, timing of market moves are almost impossible to predict.

In the absence of a trigger in the meantime, it could be expected we may see a gradual climb in growth assets, as 'Armageddon' speculative positions are exited by impatient investors.

The Euro group finance ministers meeting during the weekend failed to deliver any clear direction and this has seen the US dollar open strongly for the week. The lack of leadership is becoming a central issue for Europe and its navigation through its debt contagion issues. Last week’s central bank co-ordination from the Bank of Japan(BOJ), Bank of England (BOE), Swiss National Bank (SNB), European Central Bank (ECB) and the US Federal reserve (FED), to  secure US dollar funding for European banks was positive, and lent support to banking stocks and credit markets.

This week the focus will turn back to the US and the deliberations of the FED following its two day monetary policy committee meeting on Thursday. Further quantitative easing can all but be ruled out at this juncture, but there will be some policy initiatives announced.

The Australasian currencies remain vulnerable to selling pressure, as the global economic data remains patchy at best.

In New Zealand last week’s Reserve Bank of New Zealand’s monetary policy statement showed that global considerations have resulted in expected cash rate increases being pared back somewhat. This led to a softer NZD, in what was a week lacking any other economic data. The lower projected cash in NZ for the coming few years will be countered by the probable increase in wholesale funding costs for the banks, and ultimately borrowers. This week will see the focus on the current account and growth figures on Wednesday and Thursday respectively. The Growth figures will be of primary focus with GDP expected to be +.5% for the second quarter.

In Australia there was a distinct lack of economic data last week. This left the AUD to be led by sentiment in the wider market. Most of the week was spent in a relatively small range, but given the current climate, a definite downside bias remains in place. This coming week the primary focus will be on the Reserve Bank of Australia (RBA) monetary policy meeting minutes on Tuesday. Once these minutes are out of the way, focus will return to Europe and the US FED meeting for direction.

The European debt situation remains on a knife edge. Credit downgrades of French banks did not come as a surprise to the market. The central bank US dollar funding facility that European banks can access gave the market a much needed boost in confidence. Intense pressure remains on Greece to enforce the required spending cuts to ensure future bailout funds and avoid default. On a positive note, the political will to see Greece helped to a better financial position is encouraging. This week’s focus will remain on the credit markets, and any progress on the Greek situation.

In the UK the rhetoric coming from the BOE continues to point towards more stimulus at some stage. Inflation and retail sales figures last week came in exactly as expected and saw limited impact. The Pound Sterling was relatively stable last week, trading relatively small ranges against most currencies. The monetary policy meeting minutes when released on Wednesday will be closely watched for any information on this issue.

In the US the economic data is largely uninspiring. Inflation was as expected and is at levels that will prevent further quantitative easing from the FED this week. Consumer sentiment numbers were better than expected and offset worse than expected manufacturing numbers. The US dollar is benefitting from the weak EURO and increased demand for US Government debt as the current uncertainty pushes investors towards relative safe haven markets.

In Canada last week there was little in the way of economic data, so price action was driven from external factors. This week sees the release of monthly inflation and retail sales numbers. Inflation will not be of primary concern, so expect the retail sales numbers to be the focus on Thursday. The CAD’s relative correlation to the US dollar should see it continue to put pressure on both the Australian and New Zealand dollars. At current levels, albeit them back from the highs, represent good value buying of Canadian dollars with NZD and AUD.

In South Africa this week there is a raft of economic data. Of most consequence will be the quarterly employment statistics and inflation numbers. With slowing growth and persistent inflationary pressure the South African Reserve Bank remains in an unenviable position. Along with other emerging market currencies, the RAND has been under pressure. Should inflation surprise to the upside, expect the prospect of cash rate hikes to increase and investor interest in the RAND to grow correspondingly.

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