Can unelected technocrats in Greece and Italy do what politicians couldn't?

Can unelected technocrats in Greece and Italy do what politicians couldn't?

By Sam Coxhead*:

The heightened level of uncertainty continued in the wider financial markets last week as was expected.

Early in the week there was relatively stable price action, before the Italian bond market came under intense pressure.

The cost of funding for Italy pushed out to completely unsustainable levels.

This caused PM Berlusconi to push for almost immediate passing of an austerity budget for 2012. The price he paid for this was his job, once the legislation was passed.

Greek PM Papandreou was another victim on the week, and now both governments are being led by unelected technocrats.

Expect focus to remain on the European debt markets in the short term, although things should be more settled this week, following the required actions being taken by Greece and Italy.

Meanwhile the economic data in the US continued its recent improvement for the most part. Interestingly the news in Australasia was also a little more encouraging.

Major Announcements last week:

· UK Manufacturing Production .2% vs .2% expected
· Canadian Housing Starts 208k vs 198k Expected
· Australian Home Loans 2.2% vs 1.7% expected
· Chinese Inflation 5.5% vs 5.4% expected
· Australian Unemployment rate 5.2% vs 5.3% expected
· Bank of England leaves monetary policy unchanged
· US UOM Consumer Sentiment 64.2 vs 61.3 expected
· Greece passes austerity budget and PM Papandreou replaced
· Italy passes austerity budget and Berlusconi replaced
· NZ Retail Sales 2.2% vs .6% expected
· Japanese Q3 GDP +1.5% as expected

 

NZD/USD 
This pair was reasonably stable for the first half of last week. The turning point came when Italian bond yields soared and the wider market risk aversion rose accordingly, and the NZD pushed down towards the lows for the week. The incredibly quick changes to the political landscapes in both Greece and Italy, should now sooth market nerves somewhat. This has seen the NZD today take back some of the lost ground. Better than expected NZ retail sales number out this morning, should also help sentiment. For the remainder of the week, the data focus is almost entirely in the US, with retail sales Tuesday, inflation on Wednesday, and manufacturing numbers Thursday.

  Current level Support Resistance Last wk range
NZD / USD 0.7880 0.7750 0.8050 0.7729 - 0.7998 


NZD/AUD (AUD/NZD)
This pair remains in familiar territory having traded a fairly small range last week. The bias has to be to the upside for the NZ dollar. The closing up of the differential between the interest rates of NZ and Australia, should support NZD appreciation from current levels. With today’s positive NZ retail sales number out of the way, the focus for the remainder of the week is entirely Australian based. Tuesday sees the release of the meeting minutes from the last RBA monetary policy meeting and RBA Governor makes an on the record speech on the economy on Thursday. A consolidation break through the resistance at .7800 (AUDNZD support at 1.2820), is needed to open up the way for a move back towards more historically average levels.

  Current level Support Resistance Last wk range
NZD / AUD 0.7647 0.7600 0.7800 0.7619 - 0.7714
AUD / NZD 1.3077 1.2820 1.3150 1.2963 - 1.3134


NZD/GBP (GBP/NZD)
The Pound Sterling continued its recent pressure on the NZ dollar last week. The GBP appreciation was grinding in nature and most of the ground it made was on Wednesday,  when the wider market risk aversion hit its peak. Following the weekends leadership change in Italy, and today’s better than expected NZ retail sales numbers, the NZ dollar has managed to take back a little of the lost ground. For the remainder of the week the focus will be UK based for this pair. Tuesday sees the monthly inflation numbers released, the BOE inflation report Wednesday and retail sales on Thursday. Consolidation below .5000 (above GBPNZD 2.0000), is probably needed for a time, before investigation’s higher by the GBP can be made.

  Current level Support Resistance Last wk range
NZD / GBP 0.4905 0.4800 0.5000 0.4859 - 0.4981
GBP / NZD 2.0387 2.0000 2.0830 2.0076 - 2.0580

 
NZD/CAD
The CAD put constant pressure on the NZD through the course of the last week. Steady CAD appreciation was seen as the oil price increased, underpinned demand for CAD. Obviously not helping the appetite for NZD was the increase in the wider market risk aversion, as concerns about the funding issues in Italy hit their peak. The NZD opened up strong this week, after the leadership change in Italy and this morning’s positive NZ retail sales numbers were announced. Consolidation down through support at .7900 is needed, before this pair will be able to move back lower towards more historical averages.

  Current level Support Resistance Last wk range
NZD / CAD 0.7987 0.7900 0.8100 0.7883 - 0.8093


NZD/EURO (EURO/NZD)
This pair stayed within the expected range last week, even in the face of spiraling debt concerns in Europe. The NZD lost ground as the risk aversion hit its peak, but has bounced back over the weekend with the change of leadership in Italy and Greece. Positive NZ retail sales numbers here this morning have also helped sentiment. The focus now is again on Europe for the remainder of the week. Not just on the debt markets, but also with the GDP and inflation numbers, which are due for release on Tuesday and Wednesday respectively. Expect further range trading from this pair this week.

  Current level Support Resistance Last wk range
NZD / EUR 0.5723 0.5650 0.5850 0.5684 - 0.5792
EUR / NZD 1.7473 1.7100 1.7700 1.7265 - 1.7593

 
NZD/YEN (NZD/YEN)
Initially last week this pair was very stable. However as the wider market risk aversion increased, after the stress in the Italian debt markets, the NZD saw increasing pressure from the YEN. Over the week the risk aversion tapered off, with the confirmation of action in both Italy and Greece. This coupled with the positive NZ retail sales numbers released this morning, has seen the NZ dollar bounce back from the lows seen on Friday. Today saw the Japanese GDP number released as expected at 1.5% for the quarter. This healthy growth rate is expected to continue, as the earthquake recovery efforts gather pace.

  Current level Support Resistance Last wk range
NZD / YEN 60.79 60.00 62.00 59.96 - 62.38


AUD/USD
The Australian dollar saw some steady pressure from the US dollar last week, as the wider market risk aversion increased. The more positive news from Italy over the weekend has seen a bounce from the AUD, to recover a portion of the lost ground. With retail sales, inflation and manufacturing data due for release in the US this week, there is potential for movement throughout. In Australia the RBA monetary policy meeting minutes release on Tuesday will be closely watched. RBA Governor Stevens also speaks on Thursday, which will draw attention. Topside resistance will remain in place initially just above the 1.0400 level. The European debt situation remains an ongoing concern and any escalation of uncertainties, will see further pressure on the AUD from the US dollar.

  Current level Support Resistance Last wk range
AUD / USD 1.0304 1.0100 1.0400 1.0048 - 1.0426


AUD/GBP (GBP/AUD)                            
This pair saw grinding appreciation from the GBP for the most part last week. Being driven by wider market sentiment, not even the better than expected Australian employment numbers last week could halt the AUD slide. Into the end of the week and over the weekend, the news has been more positive in both Italy and Greece. This has seen the AUD bounce from its lows. This week sees the UK inflation numbers released on Tuesday, ahead of the BOE inflation report Wednesday and then UK retail sales on Thursday. In Australia the RBA monetary policy meeting minutes will be released on Tuesday and RBA Governor Stevens makes an on record speech on Thursday and this will be closely watched. A consolidated break of support at .6350 is needed, to herald another leg lower from the AUD.

  Current level Support Resistance Last wk range
AUD / GBP 0.6413 0.6350 0.6550 0.6321 - 0.6492
GBP / AUD 1.5593 1.5270 1.5570 1.5404 - 1.5820

 
AUD/EURO (EURO/AUD)
This pair stayed within the expected range last week, albeit with the AUD under some pressure from the EURO. The wider market risk aversion seen when the Italian debt markets were imploding, affected the sentiment towards the AUD. The recovery late Friday and over the weekend has seen the AUD gap higher from the lows. The positive reaction to the Italian austerity budget vote and subsequent change in leadership, should see a little more stability this week. The RBA monetary policy meeting minutes release on Tuesday will be watched, as will RBA Governor Stevens speech on Thursday. In Europe the GDP numbers Wednesday and inflation data Thursday, will be the focus.

  Current level Support Resistance Last wk range
AUD / EUR 0.7481 0.7400 0.7600 0.7423 - 0.7546
EUR / AUD 1.3367 1.3160 1.3510 1.3252 - 1.3472


GBP/USD
This pair saw further volatility last week, but within what is now a familiar range. Given the wider market risk aversion, the GBP performance was a good one overall. In what was some bizarre price action at times, the GBP has seen periods of heavy demand. This can be partially explained by the advent of increased demand for GBP denominated debt, following the escalating issues apparent in Europe. The week coming sees a flora of economic data on both sides of the Atlantic, so there is a high possibility volatile price action will continue. For those looking to transfer funds, it would be advisable to load “limit orders” to make use of the dynamic price action. 

  Current level Support Resistance Last wk range
GBP / USD 1.6069 1.5850 1.6150 1.5864 - 1.6130


GBP/EURO (EURO/GBP)

The recent trend of GBP appreciation over the EURO slowed a little last week. The EURO has taken back a little of the lost ground, as the Italian austerity budget was passed, and the subsequent leadership change played out. UK debt markets have benefitted through increased demand over the last couple of weeks, and this is an obvious externality of the issues in Europe. If this trend continues, the trend of GBP appreciation will continue in the short term. To put this in perspective, last week’s highs of the GBP were levels the GBP has not seen since early March.

  Current level Support Resistance Last wk range
GBP / EUR 1.1667 1.1500 1.1770 1.1614 - 1.1790
EUR / GBP 0.8571 0.8500 0.8700 0.8482 - 0.8610

 

Market commentary:

The heightened level of uncertainty continued in the wider financial markets last week as was expected. Early in the week there was relatively stable price action, before the Italian bond market came under intense pressure. The cost of funding for Italy pushed out to completely unsustainable levels. This caused PM Berlusconi to push for almost immediate passing of an austerity budget for 2012. The price he paid for this was his job, once the legislation was passed. Greek PM Papandreou was another victim on the week, and now both governments are being led by unelected technocrats. Expect focus to remain on the European debt markets in the short term, although things should be more settled this week, following the required actions being taken by Greece and Italy. Meanwhile the economic data in the US continued its recent improvement for the most part. Interestingly the news in Australasia was also a little more encouraging.

Last week there was a complete absence of economic data releases of note in the NZ economy. The lead for the NZ dollar was purely driven by external influences. This morning saw the release of the 3rd quarter NZ retail sales numbers. The 2.2% increase was much better than the .7% that was expected. The increased activity was put down to the activity surrounding the rugby world cup. Now focus moves to Thursdays release of the quarterly producer price data. The European situation will continue to drive sentiment in the short term. Given there are still significant concerns about the state of the global economy, the NZ dollar, along with the Australian dollar, has held up reasonably well.

In Australia the main news last week was the strength of the employment numbers. The unemployment rate impressively fell back to 5.2% and is the envy of other western economies. Inflation expectations remain subdued in Australia, so further cuts to the cash rate can be expected in the near term. Tomorrow sees the release of the meeting minutes from the last Reserve Bank of Australia (RBA)monetary policy meeting. Thursday sees an on the record speech from RBA Governor Stevens, with any further remarks about monetary policy certain to garner a reaction from the market.

In Europe the market will be hoping for a slightly less eventful time this week coming. With newly appointed interim leaders in Italy and Greece to oversee the implementation of what will be very unpopular austerity measures, periods of volatility are to be expected. This week sees some significant economic data due for release. The data has been of secondary importance of late, but at some stage the focus will return to the real economy. Tuesday and Wednesday see the release of the European GDP and inflation numbers respectively. Growth is at low levels currently with just .2% expected for the quarter, and with the austerity drives to kick in, it will no doubt prove to be elusive in the coming quarters also, if not years. The EURO has actually performed reasonably well considering the situation. This can be put down to a couple of factors. Firstly, European banks are currently selling offshore assets and repatriating funds to bolster their balance sheets ahead of the debt write downs. Secondly, while the sovereign wealth funds have been exiting southern European debt, they have been buying northern European bonds. Until we see an exit from the fixed income markets in Europe by these funds, the EURO will struggle to be pushed too much lower. Credit ratings will remain important, and the French rating in particular is being closely monitored.

The US economic data continues to steady itself. Friday’s better than expected consumer sentiment number helped inject much needed life to equity markets. This week is a busy one on the economic data calendar. Tuesday sees the retail sales numbers due for release. Wednesday comes the inflation numbers and Thursday the important manufacturing numbers. If the numbers continue to point to a further pickup in demand, the possibility of further US weakening quantitative easing (QE) lessens.

In the UK economic activity remains underwhelming to say the least. However the Pound Sterling performed reasonably well last week, thanks to a pick up in the investor interest for British debt. Against both the New Zealand and Australian dollars, the GBP has put on some reasonable ground over the last week or so. Consolidation around current levels is crucial for the building of pressure for another move higher for the GBP. The week coming sees the release of inflation numbers on Tuesday. Inflationary pressure is due to ease back significantly over the coming months, easing the way for the increased QE measures. Thursdays retail sales number is expected to come in at -.3%, and is a reasonable indicator of where things are at currently in the UK.

In Canada there was little in the way of top tier economic data last week. The Canadian dollar did however make some reasonable gains. The elevated level of the oil price has buoyed demand for the CAD, and this may well continue this week. Aside from the oil price, the focus will be Fridays inflation data, with the number expected to be .2% for the month.

In Japan last week PM Noda asked for support of tax increases to help fund the recovery from March’s devastating earthquake. A number of state asset sales are also being mooted to help raise funds. The debacle in Europe has not helped the Bank of Japan (BOJ) and their efforts to weaken the YEN. The BOJ have not officially been back in the market since their initial intervention a couple of weeks ago. The YEN saw grinding appreciation last week, and given events in Italy and Greece, should settle down a bit this week. There remains a chance once again of further intervention. Today’s 3rd quarter GDP number was as expected at 1.5%, as the recovery rebuild stimulation starts to become evident in the statistics.

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

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