Focus now moves to Italy's debt reduction program

Focus now moves to Italy's debt reduction program

By Sam Coxhead*:

The wider financial markets had a general theme of risk aversion last week. This was almost entirely bought on by the intense focus on the European debt crisis, and with particular focus on Greece.

Greek PM Papandreou threw the markets into a tail spin when he spontaneously announced that not only would he hold a confidence vote on the Friday, but also hold a referendum on the latest bailout in December. Amid talk that the referendum would be a proxy for Greek membership in the Euro (and bond default), Papandreou came under intense pressure both internally within Greece, and from other European leaders.

The subsequent cancelling of the referendum, and passing of the confidence vote, has seen a plan to form a national unity interim government to pass the necessary legislation to secure the EU/IMF aid package.

This will come as a relief to markets in the short term.

To compound matters in Europe, Italy is now under intense pressure in the debt markets as its cost of raising funds sky rockets.

Make no mistake this European debt crisis will not end soon, and will ensure a certain level of volatility remains in place for the start of 2012 at least.

Elsewhere around the globe the economic data remains mixed.

The European Central Bank (ECB) and Reserve Bank of Australia (RBA) cut their respective cash rates by 0.25%. The softer global growth outlook for 2012 and 2013 illustrates again how deeply the events of 2008/09 have affected the global economy.

Major Announcements last week:

· Canadian GDP .3% vs .2% expected
· NZ Labour Cost Index +.5% vs +.8% expected
· RBA cuts Australian cash rate from 4.75% to 4.5% as expected.
· UK Manufacturing PMI 47.4 vs 50.0 expected
· UK GDP +.5% vs +.4% expected
· US ISM Manufacturing PMI 50.8 vs 52.1 expected
· US FED leaves monetary policy unchanged as expected
· NZ Employment 6.6% vs 6.4% expected
· Australian Retail Sales +.4% vs +.5% expected
· ECB cuts EZ cash rate from 1.50% to 1.25% unexpectedly
· US ISM Non-manufacturing PMI 52.9 vs 53.7 expected
· Canadian Unemployment rate 7.3% vs 7.2% expected
· US Unemployment rate 9.0% vs 9.1% expected

NZD/USD 
From the outset last week the NZD was under pressure from the US dollar following the back track in risk appetite from the week prior. Not helping the cause was the anti-inflationary labour numbers released on Tuesday and Thursday. After the initial selloff the pair spent most of the week in the tight .7900 - .7980 range. The positive result from the Greek politicians this morning has seen the NZD pushing towards resistance at .7980 once again. A push back through this level would see the next target be .8100 for the NZD believers. On the downside .7800 will provide the first significant support. Again look to Europe for the lead on the wider market risk appetite, in the absence of significant economic data in either economy this week.

  Current level Support Resistance Last wk range
NZD / USD 0.7950 0.7800 0.8000 0.7803 - 0.8154


NZD/AUD (AUD/NZD)
This pair remained in the recently familiar range last week. Even with the RBA cutting the cash rate in Australia the NZ dollar was unable to break back through the initial resistance at .7720. The weaker than expected data in NZ would not have helped the NZ dollars cause. After the initial sell off from the highs at the start of the week, the pair spent most of the time in the .7630 - .7700 range. This week sees the primary focus the Australian employment numbers on Thursday. The prospect of a closing of the interest rate differentials between the two economies indicates that the NZD is good value buying at current levels with Australian dollars.

  Current level Support Resistance Last wk range
NZD / AUD 0.7672 0.7600 0.7800 0.7600 - 0.7776
AUD / NZD 1.3034 1.2820 1.3150 1.2860 - 1.3158


NZD/GBP (GBP/NZD)
The NZD was under pressure from the Pound Sterling from the outset last week. With the Greek headlines causing significant risk aversion, it was not surprising to see the NZD being pushed down to test support levels. Progress from current levels will be harder fought for the GBP, with positive action finally being taken by Greek politicians. This coupled with the BOE monetary policy meeting this week, should see the NZD quietly take back some of the lost ground this week, as long as the wider market risk appetite does actually improve. Italy remains a significant risk in Europe, and may attract increasing attention.

  Current level Support Resistance Last wk range
NZD / GBP 0.4965 0.4900 0.5100 0.4911 - 0.5094
GBP / NZD 2.0141 1.9600 2.0400 1.9631 - 2.0362

 
NZD/CAD
This pair remains in the broader .7900 - .8200 range that has been in place for the last two months or so. Risk aversion saw the CAD with the upper hand for the first half of last week, before the NZD recovered. There is no top tier economic data due for release in either economy this week, so expect the broader range to continue and the lead to come from the wider market appetite for risk. The market risk appetite will be most likely driven by developments in Europe. With Greece starting to look organized enough to be given their bailout aid, expect the focus to narrow on Italy, as their debt and political leaders come under increasing pressure.

  Current level Support Resistance Last wk range
NZD / CAD 0.8095 0.7950 0.8150 0.7951 - 0.8169


NZD/EURO (EURO/NZD)
This pair has been interesting over the last few weeks. Obviously events in Europe have been the focus for the wider market and directly affecting overall market appetite for risk. Expect this to continue this week, but potentially with the focus moving from Greece to Italy now that Greek politicians have agreed to progress the bailout aid legislation. The NZD saw its highs against the EURO last week before the Greek referendum debacle played itself out, and pushed the NZD to the lows. However the pair remains in very familiar territory at current levels, within the .5650 - .5850 range it has seen for the last six weeks. Europe will continue to provide the lead for this pair as we head into the end of 2011.

  Current level Support Resistance Last wk range
NZD / EUR 0.5775 0.5650 0.5850 0.5701 - 0.5848
EUR / NZD 1.7316 1.7100 1.7700 1.7100 - 1.7541

 
NZD/YEN (NZD/YEN)
This pair was volatile last week as the BOJ market intervention and Greek debt debacle each played on the market pricing. Following the BOJ stand  in the market to sell YEN, the pair jumped from 62.02 to 64.57 within 30 minutes. From there as the Greek issues played out the NZD came under increasing pressure and the pair hit the lows before the NZD recovered once the proposed Greek referendum as call off (refer to “Market Overview”). This week sees little economic data of significance in either economy. The driver will come from progress in Europe. Positive news will see the NZD outperform, and if the news is negative, the opposite will be true.

  Current level Support Resistance Last wk range
NZD / YEN 62.15 61.00 63.00 60.91 - 64.57


AUD/USD
This pair was extremely volatile last week. The AUD opened at the highs and saw waves of selling pressure hit the market all the way through to Thursday. After the news that the proposed Greek referendum had been cancelled the AUD bounced back. Tuesday’s RBA cutting of the cash rate to 4.25% may have contributed to the softer price action, but this was pretty well priced already by the interest rate market and so was not too much of a surprise. Along with the European debt crisis, this week’s focus will come in Australia with the employment numbers on Thursday. With the Greek debt issues seemingly organized for the time being, this pair maybe a little more stable this week. Global economic fundamentals point to a lower Australian dollar, but with the potential for the FED to embark on yet another round of quantitative easing, nothing can be assured. The splitting up and staggering of larger transfer in the current environment should be considered.

  Current level Support Resistance Last wk range
AUD / USD 1.0368 1.0240 1.0440 1.0198 - 1.0716


AUD/GBP (GBP/AUD)                            
The AUD was outperformed by the Pound Sterling for the duration of last week. The pair opened with the AUD on its highs and as the risk aversion increased the AUD sold off accordingly. The 25pt cut to the cash rate from the RBA would not have helped the AUD’s plight. This coming week sees Thursday’s Australian employment numbers the initial focus. In the UK on Thursday the BOE will announce their latest monetary policy decision and this will also be closely watched. Of note is the fact Citibank have just released a note saying they think the amount of quantitative easing from the BOE will be increased. Whilst this is unlikely, if it eventuates the GBP will give up some of its recent gains.

  Current level Support Resistance Last wk range
AUD / GBP 0.6472 0.6350 0.6550 0.6420 - 0.6640
GBP / AUD 1.5451 1.5270 1.5570 1.5060 - 1.5576

 
AUD/EURO (EURO/AUD)
Whilst off its highs, the AUD remains at somewhat elevated levels against the EURO. The pair was volatile last week as one would expect with the Greek debt debacle running its course. With both respective central banks cutting their cash rates, the EURO was softer after the ECB’s meeting as the move was largely unexpected. This week coming sees little in the way of economic data due for release in Europe. The focus will move from the Greek debt issues to the increasing funding pressures on Italy. In Australia the focus is provided by Thursdays employment numbers. Current levels still represent good value buying of EURO with AUD.

  Current level Support Resistance Last wk range
AUD / EUR 0.7527 0.7400 0.7600 0.7463 - 0.7622
EUR / AUD 1.3285 1.3160 1.3510 1.3120 - 1.3399


GBP/USD
This pair spent the week moving around within the familiar 1.5850 - 1.6150 range. With the risk aversion midway through last week the GBP was pushed to its lows, before recovering as the proposed Greek referendum was canceled. Current levels feel reasonably comfortable for this pair for the time being. The BOE will be the focus for this week, with the possibility of additional quantitative easing being muted by Citibank in a paper released today. Should this eventuate, expect the GBP to see some downward pressure. US consumer sentiment numbers will be watched on Friday, but should be of limited direct impact.

  Current level Support Resistance Last wk range
GBP / USD 1.6022 1.5850 1.6150 1.5875 - 1.6166


GBP/EURO (EURO/GBP)

The EUR was initially pushed lower last week after the short lived Greek bailout referendum was announced. Subsequently, its never recovered and the remainder of the week saw sideways price action within a relatively tight .8550-.8650 (1.1560 - 1.1700) range. Expect the European debt situation to provide primary focus for the pair this week ahead of the BOE monetary policy decision announcement on Thursday. Obviously no change is expected to the .5% cash rate, but today Citibank released a paper calling for an increase to the amount of quantitative easing. Should this unlikely prospect eventuate, the GBP would give up some of the ground it made against the EURO last week.

  Current level Support Resistance Last wk range
GBP / EUR 1.1630 1.1430 1.1700 1.1385 - 1.1701
EUR / GBP 0.8798 0.8550 0.8750 0.8546 - 0.8785

 

Market commentary:

The wider financial markets had a general theme of risk aversion last week. This was almost entirely bought on by the intense focus on the European debt crisis, and with particular focus on Greece.

Greek PM Papandreou threw the markets into a tail spin when he spontaneously announced that not only would he hold a confidence vote on the Friday, but also hold a referendum on the latest bailout in December. Amid talk that the referendum would be a proxy for Greek membership in the Euro (and bond default), Papandreou came under intense pressure both internally within Greece, and from other European leaders.

The subsequent cancelling of the referendum, and passing of the confidence vote, has seen a plan to form a national unity interim government to pass the necessary legislation to secure the EU/IMF aid package.

This will come as a relief to markets in the short term.

To compound matters in Europe, Italy is now under intense pressure in the debt markets as its cost of raising funds sky rockets.

Make no mistake this European debt crisis will not end soon, and will ensure a certain level of volatility remains in place for the start of 2012 at least.

Elsewhere around the globe the economic data remains mixed.

The European Central Bank (ECB) and Reserve Bank of Australia (RBA) cut their respective cash rates by 0.25%. The softer global growth outlook for 2012 and 2013 illustrates again how deeply the events of 2008/09 have affected the global economy.

In New Zealand it was an interesting week where further signs of easing inflationary pressure were seen in lower than expected labour cost  and employment numbers. Diary prices remain under downward pressure albeit they are still at historically healthy levels. Certainly the pressure has come off the Reserve Bank of New Zealand (RBNZ) to lift the cash rate in the coming months, with the first hike now likely to come in the second quarter of 2012. There is little in the way of domestic economic data for the NZ economy this week, so direction for the NZ dollar will come from external leads.

In Australia the RBA did not disappoint the interest rate market with its .25% cut to the cash rate last week. The move was backed up by both building and retail sales numbers being released below market expectations. The RBA’s quarterly Monetary Policy Statement held few surprises, pointing towards the European debt crisis and lower global growth outlook as risks to the Australian economy. This week is reasonably light on economic data with just the trade balance, home loans data and of primary focus, the employment numbers on Thursday. The RBA see the unemployment rate climbing gradually over the coming quarters and this month is expected to rise to 5.3% from 5.2%. The Australian dollar remains volatile, although given global sentiment, the bias has to be to the downside. The risks to this view would be that of relief rallys as was seen two weeks ago, and the possibility for yet another round of quantitative easing from the US Federal Reserve (FED).

In the US the economy was light of the radar, as the global focus was almost entirely on Greece. The data remains patchy, albeit on the rebound from the disappointing numbers seen from the 2nd quarter. The FED remains poised to react to further slowdowns should they eventuate. Encouragingly the employment numbers were positive and this has seen the unemployment rate drop to 9 %. While the drop from the 9.1%  previous number is small, it will be an encouraging outcome for the FED. This coming week is light on economic data in the US, and means the focus will remain on Europe. Of note will be the University Of Michigan Consumer Sentiment Survey results late on Friday.

The ongoing saga in Europe looks to be at a point where the focus will change, if only geographically. Assuming the Greek politicians actually follow through with their latest commitments to form a united nation coalition interim government and pass the require EU/IMF legislation into law, the focus may well move to Italy. PM Berlusconi is under increasing pressure to get their own austerity program into action. He has rightly turned down an offer of IMF assistance at this juncture, but has accepted the IMF “oversee” the austerity programs implementation. This is a necessary attempt to reassure the debt markets that Italy is moving in the right direction with regards to its debt reduction program.

Elsewhere the economic data remains downbeat as consumer sentiment suffers. A return to recession remains a real possibility in Europe and this is why the ECB acted quickly to reduce the cash rate. A further cut to 1.0% is expected at next months’ meeting. In the UK the economic data remains bleak for the most part, albeit a couple of glimpses of encouragement were sent last week. The preliminary 3rdquarter GDP number came out at +.5% against the expectation of +.4%, and the monthly construction figure was demonstrably better than expectation also. Next week is light on economic data but the Bank of England (BOE) do meet to announce their latest monetary policy decision. Interestingly Citibank have just released a note to say they expect the BOE to again increase the amount of quantitative easing in action. This would seem unlikely, but if it eventuates, it would be a negative for the recently stable Pound Sterling.

In Japan the big news of last week was the Bank of Japan (BOJ) and their unilateral intervention in the market to weaken the YEN. The US Dollar vs YEN was trading at all time lows at 75.54 when the BOJ made their initial move. Within half an hour it was pushed to the high of the move at 79.53 before easing back to around the current rate of .78.13. The BOJ made their move as the strength of the YEN was materially impacting their export sector and sucking the life out of their economy. This move comes after a funding program of offshore asset purchases for corporates was seemingly ineffective. There is little in way of economic data this week in Japan, so expect limited change in the YEN as the BOJ Intervention risk remains on any YEN strength.

Last week was a big one for the Canadian economy. It ended as a mixed bag with GDP slightly beating expectations and the employment numbers falling short of the expected mark. Again the Bank of Canada (BOC) remains on the sidelines as they are poised to keep their cash rate steady at 1.0% well into 2012. There is little in the way of Canadian economic data this week, so the lead will come from offshore.

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

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3 Comments

No - Europe’s debt crises will soon become a worldwide problem with many countries running into insolvency and some shocking and unbelievable stupid events trying to solve it in 2012.

Once the dominoes begin to fall the options and derivatives will fall and fail as well and that will bring the whole house of cards down. A great deterioration of debt is taking place worldwide, and continues to be delayed by the creation of money and credit from central banks.

http://theinternationalforecaster.com/International_Forecaster_Weekly/Fe...

And yet still no politicians and bankers behind bars. 

The polical/social elite will reluctantly settle things, because nobody wants to return to the divided scenario in Europe, which saw conflict on a massive scale between countries.  The cost of redeeming the situation will be large, but very minor to the cost of hugely destructive major wars. It's just a matter of getting things into perspective. As Maggie Thatcher would be saying, 'there is no alternative.'

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