Markets applaud the setting of an EU deadline

By Sam Coxhead*:

The last week has been a very interesting one in financial markets. Growth assets such as the New Zealand and Australian dollars initially pushed lower, before turning around, on the news France and Germany were committing to make a plan, to stablise the European banking sector.

This move signals the issue has moved beyond whether or not Greece will go through a managed default at some point, to making sure the banking sector is able to absorb the negative effects, when it occurs.

The market seems more comfortable with this coming to a head, with both France and Germany committed to having a plan in place, by the time the G20 meet on November 3rd.

Chances of a return to negative growth in the US have eased, as a second week of mildly positive data shows a less gloomy than expected picture.

The European Central Bank (ECB) and Bank of England (BOE) both under took non-conventional monetary policy to help stimulate their economies last week.

And the credit agencies remain active, with Italy and Spain joining European and British banks, in having their credit ratings downgraded. 

Major Announcements last week:

·         UK Manufacturing PMI 51.1 vs 48.9 expected
·         US ISM Manufacturing PMI 51.6 vs 50.5 expected
·         NZ NZIER Business Opinion Survey 25 vs 27 previously
·         Australian cash rate unchanged at 4.75%, but cuts likely in the coming months
·         Australian Retail Sales .6% vs .3% expected
·         UK Services PMI 52.9 vs 50.6 expected
·         UK BOE expands QE by 75biliion GBP and cash rate unchanged
·         ECB leaves cash rate unchanged but offers increased fixed rate term funding to banks
·         Bank of Japan leaves monetary policy unchanged
·         Canadian employment growth +60.9k vs 15.2k expected, Unemployment rate drops to 7.1% from 7.3%
·         US Non-Farm Payrolls +103k vs +55k expected - and two previous months revised higher, unemployment rate stable at 9.1%
·         Moody’s downgrades Italian credit rating and leaves on negative watch
·         Fitch downgrades Italian and Spanish credit ratings and leaves them on negative watch
·         Moody’s makes widespread UK financial institution downgrades, including Lloyds and RBS
·         Germany and France commit to plan to ensure capitalization of European banks 

NZD/USD 
After starting the week under some pressure from the US dollar, the New Zealand dollar recovered after European authorities committed to some form of bank aid package, if required. From that turning point it saw grinding appreciation, as risk aversion abated. The credit downgrades of Italy and Spain gave the NZD another knock at the end of the week, illustrating the NZ dollars reliance on global sentiment for the lead. The focus now comes from the US towards the end of the week, with the FED monetary policy meeting minutes on Wednesday, retail sales and consumer sentiment numbers on Friday. In the absence of further fears in Europe, expect this pair to see the establishment of a new range at these recently lower levels.

NZD/AUD (AUD/NZD)
This pair remains very much in familiar territory. The NZD saw gains to reach its week highs in the wake of the RBA acknowledgement that cash rate easings’ are on the horizon. But as the global sentiment improved following the positive remarks by European officials about a bank aid plan, the AUD outperformed the NZD. With no top tier NZ economic data due this week, the focus will be in Australia. This starts on Wednesday with homes loans data, but the real lead will come from employment data on Thursday. In the absence of anything well away from the expected 10k jobs growth, the familiar .7850 - .8050 (1.2425 - 1.2740) range should continue.

NZD/GBP (GBP/NZD)
Last week the NZD took back a little of its recently lost ground against the GBP. Following the BOE increase to its quantitative easing program and the fall in risk aversion mid week, the NZD rose steadily. It finally gave back a little ground on Friday, in the wake of the credit downgrades for Italy and Spain. For the most part in the coming week, the lead will come from the wider market appetite for risk. Economic data of note in the UK comes in the form of manufacturing numbers on Tuesday, then unemployment benefit claim numbers Wednesday. If we again see risk aversion increase, investigations lower  through the initial support at .4850 (2.0620 resistance) are likely.

 
NZD/CAD
This pair was relatively stable throughout the course of last week. Fridays stronger than expected Canadian employment numbers gave the NZD a push lower from the highs. The pair looks comfortable in its .7850 - .8050 range. This week the relative stability should continue, in the absence of any top tier economic data in either economy. Current levels represent relatively good value buying of NZD with CAD.

NZD/RAND
This pair was relatively stable last week. With little in the way of domestic economic data in either economy continuing this week, expect this less volatile period to continue. Current levels represent good value buying of RAND with NZD, from a historical perspective. The 6.000 support level remains the key, with a sustained break lower through that level likely opening up the way for another leg lower from the NZ dollar.

NZD/EURO (EURO/NZD)
This pair was relatively stable throughout the course of last week, with the NZD just taking back a little of its recently lost ground, as the wider market risk aversion abated as the week progressed. Expect the focus to remain very much on the debt situation in Europe. Whilst this has been a seemingly unending debacle, expect clarification of a path forward to come from officials in the coming month or so. Until then the whippy nature of the price action should continue. Current levels still represent good value buying of EURO with NZD, from a historical perspective.

 
NZD/YEN (NZD/YEN)
The NZD initially gave up ground against the YEN last week. The bounce from the lows was prompted by the commitment from European officials to put together a bank aid package, to ensure appropriate capitalisation of the European banks. The lack of important domestic economic data releases this week means the lead will be provided by the general market appetite for risk. Current levels represent good value buying of NZD with YEN.

AUD/USD
The Australian dollar started the week under intense pressure from the US dollar, as market risk aversion escalated. The turning point was provided by news that European authorities had committed to a bank aid package for ailing European banks. This saw the sentiment turn quickly and the AUD saw strong demand, as investors quickly exited “sold” AUD positions. The RBA acknowledgement that cuts to the cash rate are likely in the coming months, only provided a brief pull back in the AUD before the buying again resumed. The news that Spain and Italy  had been given credit downgrades by ratings Agency Fitch saw the AUD pushed lower from the highs. This week the main Australian focus will come in the form of the employment numbers on Thursday. In the US Wednesdays FED monetary policy meeting minutes will be watched, ahead of retail sales and consumer sentiment numbers on Friday.

AUD/GBP (GBP/AUD)                            
The AUD started last week under a little pressure and this continued initially. The pair then turned around, in line with the wider improvement in market sentiment. This was driven by the commitment of European authorities to plan a bank aid program for European banks. The pair has run into resistance at the .6350 (support 1.5750) and has drifted back since the announcement from rating agency Fitch, that it had downgraded both Italy and Spain. This week will see most of the focus continue to come from the wider market risk appetite. In Australia, the employment numbers on Thursday will be keenly watched. In the UK, manufacturing numbers Tuesday, and unemployment benefit claim numbers Wednesday, will be followed.

 
AUD/EURO (EURO/AUD)
After some initial weakness against the EURO, the AUD saw some steady gains throughout the second half of last week. Ironically the move by European authorities to commit to a bank aid plan drove the change in sentiment, that saw the heightened risk aversion abate. This week sees the pair close to the .7350 resistance level (1.3600 support). The positive sentiment will have to continue on global markets, for the AUD to push through these levels. Initial Australian focus comes from the home loans data on Wednesday, ahead of the employment data on Thursday. In Europe the speech by outgoing ECB President Trichet will be watched on Tuesday, as will the inflation numbers on Friday.

GBP/USD
The last week proved to be very volatile for this pair. Initially the GBP saw some pressure from the US dollar, before the market risk aversion abated after commitment by European officials to create a bank aid plan. Then came the news from the BOE that they were to increase their quantitative easing program, and the GBP saw a sharp 200 point drop, before recovering almost immediately and pushing up to the weeks high. Much of this buying pressure came from investors being squeezed out of “sold GBP” positions against both the USD and EURO. The UK focus this week comes in the form of manufacturing numbers on Tuesday and unemployment benefit claim numbers on Wednesday. In the US the focus is provided by the FED monetary policy meeting minutes release on Wednesday, followed by retail sales and consumer sentiment numbers on Friday.

GBP/EURO (EURO/GBP)
This pair was volatile within its range last week. After seeing some initial pressure from the GBP, the EURO bounced back from the lows following news European authorities had committed to a bank aid plan. The combined effects of the BOE increase in its quantitative easing program, and the lack of an easing from the ECB, then saw the EUR move higher again, and set the weeks highs. The EUR saw some selling pressure when Spain and Italy had their credit ratings downgraded by Fitch and the pair finished the week close to the middle of its traded range. This week should see this pair remain in its familiar range, with little in the way of top tier data due for release.

GBP/RAND
The GBP gave up a little ground to the RAND last week, in the wake of the commitment by European authorities to create a bank aid plan for European banks. The lowered risk aversion saw the RAND benefit. The BOE move to increase its quantitative easing initiatives added to the pressure. If the lower risk aversion continues another push by the RAND could see the support level of 12.0000 tested this week. There is little economic data in South Africa, so expect the lead to come from the UK. Tuesday sees the release of monthly manufacturing numbers and Wednesday sees monthly unemployment benefit claim figures released.

Market commentary:

The last week has been a very interesting one in financial markets. Growth assets such as the New Zealand and Australian dollars initially pushed lower, before turning around, on the news France and Germany were committing to make a plan, to stablise the European banking sector.

This move signals the issue has moved beyond whether or not Greece will go through a managed default at some point, to making sure the banking sector is able to absorb the negative effects, when it occurs.

The market seems more comfortable with this coming to a head, with both France and Germany committed to having a plan in place, by the time the G20 meet on November 3rd.

Chances of a return to negative growth in the US have eased, as a second week of mildly positive data shows a less gloomy than expected picture.

The European Central Bank (ECB) and Bank of England (BOE) both under took non-conventional monetary policy to help stimulate their economies last week.

And the credit agencies remain active, with Italy and Spain joining European and British banks, in having their credit ratings downgraded.

The week was light on economic data in New Zealand with just the NZ Institute of Economic Research quarterly Survey of Business Opinion released. The survey showed business confidence remained steady for the quarter, but the survey did take place prior to the recent financial market meltdown, and sharp fall in the global growth outlook. The NZD stablised after hitting its lows early in the week. With generally weaker commodity prices for NZ’s core exports, the weaker NZ dollar will be sheltering those impacts for the time being.  The coming week is again light on the economic data front, so the lead will come from the wider market sentiment.

In Australia the market was a little buoyed by better than expected building and retail sales numbers last week. The Reserve Bank of Australia (RBA) held the cash rate steady at 4.75%, but have altered their rhetoric now, and this should an easing in the coming months. This week coming sees homes loans data on Wednesday and the all important employment numbers on Thursday. Another move higher from the current 5.3% unemployment rate, would see the interest rate market pushing harder for cash rate easing. A lower cash rate will see the AUD undermined to a certain extent.

In the US the better than expected manufacturing, services and most importantly, employment numbers give reason for the market to pare back the probability of another dip into negative growth. The numbers remain weak, but certainly not at levels that were expected two weeks ago. With Columbus Day today in the US, we are faced with a short week. Wednesday sees the release of the minutes from the last Federal Reserve monetary policy meeting, and these will be closely watched. Friday will see the latest retail sales and consumer sentiment reports, and these will give further evidence as to the state of the US consumer.

The various Italian and Spanish credit downgrades will keep the pressure on the European authorities to action their preliminary plans. The decision on the next tranche of the Greek bailout funds will be made by mid November and this will be after the respective authorities have put together their plan to provide capital to banks, should they need it. Whilst this has proven positive for market sentiment, the length of time means there is ample room for further growth in these issues. The ECB decision to leave the cash rate unchanged was surprising, given the soft nature of the economic numbers recently. They did action a new plan to help longer term funding rates and this indicates they believe that European issues are more financial in nature, than economic. A speech by outgoing ECB President Trichet on Tuesday will be closely watched, as will the inflation numbers released Friday.

In the UK the BOE decision to increase the amount of its quantitative easing (QE) program by 75 billion GBP, was widely expected and this saw the GBP soften just temporarily on the news. Manufacturing and services data was actually quite a bit better than expected, but construction numbers disappointed. This week sees the release of the usual array of second tier data, but the monthly unemployment claim numbers on Wednesday will be the most closely watched.

Canadian employment numbers released were better than expected last week and this will be a welcome result for the Bank of Canada. The Canadian dollar did however remained under pressure for the most part last week. This coming week sees housing numbers released Tuesday, and the trade balance on Thursday. The uptick in the economic data in the US, is also encouraging for the Canadian economy.

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