Positive sentiment continued to flow through the markets last week and the extent of the turnaround is surprising

By Sam Coxhead*:

The recent positive sentiment continued to flow through the markets last week. The extent of the turnaround is surprising but can be attributed to a number of different factors.

Positive economic news continues to flow from the United States and any worries about a fall back into negative growth have now been all but extinguished.

The European debt situation also looks to be improving.

While German and French officials are yet to announce details of their plan, Greek debt reprieve, bank capitalisation backstops and further debt market support are on their agenda.

Further buoying sentiment is the momentum building internationally for wider use of the IMF to support Europe. Further IMF contributions are politically palatable, and a seemingly ideal way for non-European nations to contribute to the stability in the region, that benefits the global economy.

With sentiment more positive, the markets have been driven further by large positional changes. Notably has been the exiting of US dollar bought positions, with the commodity currencies (e.g. AUD and NZD), being significant beneficiaries of this change.

However, the outlook is not without risk.

The complexity of the Euro-zone situation remains the same, and there are signs in China that certain parts of their economy remain fragile. Chinese state investment companies have reportedly been active in buying Chinese banking stocks, in an effort to stabilize this sector, as it is under pressure due to its exposure to  falling property values.

Major Announcements last week:

- UK Manufacturing Production -.3% vs -.1% expected
- Australian Home Loans +1.2% vs 1.1% expected
- UK Unemployment Claimant change 17.5k vs 24.7k expected
- Australian monthly Unemployment Rate 5.2% vs 5.3% expected (previous revised from 5.3 to 5.2%)
- Chinese CPI 6.1% as expected
- US Retail Sales (core) +.6% vs +.2% expected (previous revised from .1% to .5%)
- US Consumer Sentiment 57.5 vs 60.2 expected
- Credit downgrades for Spain and various European banks

NZD/USD 
The New Zealand dollar completely outperformed the US dollar last week, as the risk appetite continued to improve. Various topside levels of resistance were no match for the NZD demand. This week again sees a bare New Zealand economic calendar, so the focus will come from the US and the wider market sentiment.  Further upward progress from current levels should be harder to make for the NZ dollar. There is the usual slurry of economic data releases in the US this week. Of note will be the inflation numbers on Wednesday, and the manufacturing numbers on Thursday.

NZD/AUD (AUD/NZD)
The New Zealand dollar continued to give up ground to the Australian dollar throughout the course of last week. The relentless swing back towards risk assets, has seen the AUD in greater demand. Not even a more mixed view of the Chinese economy has dented the AUD. Having broken through various technical levels, further downside for the NZD cannot be ruled out, but progress for the AUD should prove harder to make from current levels. Therefore current levels constitute reasonably good value buying of NZ dollars with Australian dollars. On the data front, the RBA monetary policy meeting minutes on Tuesday will be closely watched.

NZD/GBP (GBP/NZD)
The NZ dollar continued its recent bounce back against the GBP last week. Buoyed by better global appetite for risk, its progress was almost one way. Further topside appreciation for the NZ dollar should prove harder fought from current levels. The lead will most likely come from the wider market risk appetite, in the absence of NZ economic data. In the UK this week, we have inflation, BOE meeting minutes and retail sales. These will be closely watched. Rumours of a pending UK credit downgrade have not helped appetite for the GBP.

 
NZD/CAD
The NZ dollar outperformed the Canadian dollar throughout the course of last week. The improved sentiment towards risk assets has driven the NZD appreciation. Progress from current levels should prove to be harder to make for the NZ dollar. In the absence of NZ economic data this week, the focus will come from Canada. A business outlook survey on Tuesday and inflation numbers Friday will be closely watched. Initial support comes in at .8050 and then .7950 below that.

NZD/EURO (EURO/NZD)
The NZ dollar saw a little appreciation against the EURO last week. The lead for the move was provided be the overall market increase in risk appetite. There was no top tier economic data in NZ last week, and this week is much the same. In Europe the focus continues to be on the French/German plan to stablise the debt markets and the banking sector. Details are expected to be released on the 23rd October in Brussels. Any reemergence of risk aversion would likely see the NZD given up ground it made last week.

 
NZD/YEN (NZD/YEN)
The NZ dollar steadily rallied higher against the Yen throughout the course of last week. The rise was simply a function of the wider market increase in risk appetite. There was little in the way of economic data in NZ last week and this continues this week.  Last week Japan saw some solid machinery manufacturing numbers, but this week there are no releases of note. The market remains alert for any action from the BOJ with regards to some kind of cap to the level of the YEN. To my mind this remains unlikely, as I think they would have acted before this point, if they were going to act in this way. Current levels still represent good value buying of NZD with YEN.

AUD/USD
The Austrian dollar saw further sharp appreciation over the US dollar last week. The return to risk appetite coupled with the better than expected Australian and US economic numbers ensured an easy road higher for the AUD. Further positive news will be required to see further appreciation from current levels, and any gains for the AUD should be harder to make from current levels. Along with the usual slurry of US economic data this week, the RBA monetary policy meeting minutes will be closely watched on Tuesday.

AUD/GBP (GBP/AUD)                            
The Australian dollar saw constant appreciation against the Pound Sterling through the course of last week. The return of the markets appetite for risk, coupled with the better than expected Australian employments numbers provided the lead. Progress from current levels will be harder fought for the AUD. Current levels represent good value buying of GBP with AUD. The focus for this week starts in Australia with the RBA monetary policy meeting minutes on Tuesday. UK inflation numbers follow on Tuesday, before the BOE monetary policy meeting minutes on Wednesday, and retail sales on Thursday.

 
AUD/EURO (EURO/AUD)
The AUD saw mostly grinding appreciation against the Euro throughout the course of last week. The increased market appetite for risk couple with the better than expected Australian employment numbers provided the impetus for the move. This week sees the RBA monetary policy meeting minutes released on Tuesday. The European focus will remain on the debt crisis and the French/German plans to provide financial stability going forward. Detail of their plan is likely to start coming from the summit meeting in Brussels on the 23rd Oct. Initial topside resistance comes in at the .7480 level (EUROAUD 1.3370 support), should the risk appetite continue.

GBP/USD
After initial weakness early in the week, the GBP saw steady appreciation against the US dollar, as the latter end of the week progressed. The GBP appreciation was driven by the increased appetite for risk in the market. Potentially weighing on further appreciation were persistent rumours of a pending UK credit downgrade. The concept of a downgrade should hardly be of surprise. This week sees the usual slurry of US economic data, but of note is inflation numbers on Thursday and manufacturing numbers Friday. In the UK inflation numbers on Tuesday and BOE monetary policy meeting minutes on Wednesday will be closely watched.

GBP/EURO (EURO/GBP)
The Euro initially outperformed the GBP last week, before stablising towards the upper end of its recent range. The market seems reasonably content that the French/German plan to provide stability to the European debt markets and banking sectors will finally prove significant enough to stem the issues. Details will most likely start to be released at the summit in Brussels on the 23rd October. No doubt fierce negotiations are underway on the exact structure of the plan. Progress will be the main driver from the European perspective for the week. Focus in the UK starts with the inflation numbers on Tuesday. Then comes the BOE monetary policy meeting minutes on Wednesday, before the monthly retail sales numbers on Thursday. Expect the EURO to run into substantial resistance at the 1.1360 support level (EUROGBP .8800 topside resistance).

Market commentary:

The recent positive sentiment continued to flow through the markets last week. The extent of the turnaround is surprising but can be attributed to a number of different factors.

Positive economic news continues to flow from the United States and any worries about a fall back into negative growth have now been all but extinguished.

The European debt situation also looks to be improving.

While German and French officials are yet to announce details of their plan, Greek debt reprieve, bank capitalisation backstops and further debt market support are on their agenda.

Further buoying sentiment is the momentum building internationally for wider use of the IMF to support Europe. Further IMF contributions are politically palatable, and a seemingly ideal way for non-European nations to contribute to the stability in the region, that benefits the global economy.

With sentiment more positive, the markets have been driven further by large positional changes. Notably has been the exiting of US dollar bought positions, with the commodity currencies (e.g. AUD and NZD), being significant beneficiaries of this change.

However, the outlook is not without risk.

The complexity of the Euro-zone situation remains the same, and there are signs in China that certain parts of their economy remain fragile. Chinese state investment companies have reportedly been active in buying Chinese banking stocks, in an effort to stabilize this sector, as it is under pressure due to its exposure to  falling property values.

In New Zealand the economy had a quiet period for economic data releases last week, and this continues this week. The Christchurch rebuilding stimulation will be a welcomed edition to the economy as it starts to gather momentum. Manufacturing looks to be slowing down a little after having a good run in the first half of the year. Agriculture remains fairly buoyant, although the kiwifruit industry is under intense pressure, as the full extent of the vine disease PSA starts to be felt. The interest rate market has been surprisingly flat in the last couple of weeks, intimating the repositioning in the foreign exchange markets may have got a little ahead of itself. The New Zealand dollar saw renewed demand almost across the board, as the sentiment change pushed it higher.

In Australia last week the focus was the release of the monthly employment numbers. The release surprised the market with its strength, the 5.2% unemployment rate beating the markets expectation of 5.3%. The prior months numbers also saw positive revisions.  The Australian dollar outperformed almost across the board last week. The change in sentiment saw investors flock to buy back AUD they had sold, and this saw the AUD go through several periods of very strong appreciation. The week ahead sees the focus on the release of the Reserve Bank of Australia (RBA) monetary policy meeting minutes on Tuesday. Also of note are the quarterly Chinese GDP numbers on Tuesday, given the AUD’s high correlation to the Asian economic growth profile.

In the US the economic data continues to improve from its slump in August. Last weeks’ latest retail sales numbers showed a strong rebound, and the strength of the numbers was further added to by the upward revision of the previous number. Consumer sentiment numbers were lower than expected, but the correlation between consumer spending and sentiment if not always high. With the corporate earnings season fully underway, a lot of focus is given to the results as they hit the headlines. The strong results for Google definitely helped the wider market sentiment last week. This week coming sees inflation, producer price, housing and manufacturing sales numbers due for release. Various analysts have increased forecasts for US growth, with Barclays Bank increasing their 2011 growth forecast from 2.0% to 2.5% late last week.

The focus in Europe obviously remains on the French and German plans to stablise the economy. Execution and delivery are going to be very important to the success of the measures that are expected to be released at a summit in Brussels on the 23rd October. There is definitely wider global support emerging for the Euro-zone. The emerging markets are reliant on the health of European and US economies for growth, and talks are underway to increase the IMF activities in Europe. This is seen as a way for these countries to contribute further and is in addition to Russian and Chinese individual pledges to continue to buy Euro-zone debt.

The economic outlook in the UK continues to look mixed at best. Weaker than expected manufacturing data last week highlighted the soft nature of the recovery currently in place. This week coming is a busy one in the UK with inflation numbers on Tuesday, Bank of England (BOE) monetary policy meeting minutes Wednesday, and retail sales numbers on Thursday. Amidst the current environment of credit downgrades, speculation is rife that the UK will soon be downgraded also. This will do little for the performance of the somewhat beleaguered Pound Sterling.

In Japan the high level of the YEN continues to cause consternation. Speculation continues to gather momentum that the Bank of Japan will implement some kind of floor on the USD/YEN rate (capping YEN), in a move similar to what the Swiss National Bank did to stem the appreciation of the Swiss Franc. Reports of elevated radiation levels surrounding the Fukushima power plant saw the YEN a little softer across the board last week. The economic data remains mixed in Japan as the economy emerges from the disasters earlier on in the year.

The Canadian dollar performed reasonably well last week, as the risk appetite continued, although it lost ground to its two commodity currency cousins, the Australian and New Zealand dollars. While the Canadian economy continues its slow growth profile, last week did see positive housing and manufacturing numbers released. The recent improvement in the fortunes of its largest trading partner the US, will be a positive over time. This week coming sees the focus come on Friday, with the monthly inflation numbers.

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