Rumours of a IMF funding offer to Italy; strong US retail sales

By Sam Coxhead*:

Throughout the course of last week the market’s primary focus remained on the debt crisis in Europe.

Credit downgrades for Portugal and Belgium, an undersubscribed auction of German bonds, and continued pressure on Spanish and Italian debt markets, saw risk aversion remain elevated. In an effort to speed reforms, French and German officials are now looking at a range of bi-lateral agreements.

These would enable fiscal reforms to be activated without the lengthy process of adjusting the EU Treaty to be undertaken.

Rumours of a IMF funding offer to Italy has seen this week open positively, as risk aversion is pared back.

In the US, sentiment picked up on the news that the “black Friday” retail sales activity was back at pre-financial crisis levels. This backed up the better than expected Durable Goods report earlier in the week.

The preliminary 3rd quarter US GDP data was lower than expected, but with the focus more on Europe, this piece of data had limited impact.

In New Zealand the centre right National party Government easily held onto power, winning by the largest margin in over fifty years.

Overall the US dollar maintained its recent momentum, even if it has given back some ground, after the positive start to the week. 

Major Announcements last week:

· RBNZ Inflations Expectations Survey 2.8% vs. 2.9% previous
· US Existing Home sales 4.97m vs. 4.82M expected
· Preliminary US GDP 3rd QTR 2.0% vs. 2.4% expected
· US core Durable Goods Orders .7% vs. .1% expected
· German IFO Business Climate index 106.6 vs. 105.3 expected
· UK revised GDP 3rd QTR +.5% as expected
· US retail sales activity for “black Friday” reportedly back at 2007 levels
· Bank of Japan canvasses bank sector for assistance in curbing YEN strength
· The National Party wins NZ election by largest margin on over 50 years
· Credit downgrades for Portugal and Belgium, German bond auction weak.
· Speculation that the IMF will provide Italy with up to 600 billion EUR of funding is very unlikely 

NZD/USD 
The price action for this pair last week what somewhat subdued, with the NZD a little weaker in line with a stronger US dollar across the board. Even with the current high levels of uncertainty, the progress was more of grinding appreciation from the US dollar. The speculation surrounding the rumoured IMF funding facility for Italy has seen a return of risk appetite to open the week. The US dollar is lower across the board today and the NZ dollar appreciation is broadly in line with the moves on other currency pairs. The expected NZ election result has had little overall effect on the NZD. The main focus for the pair will likely come towards the end of the week when US manufacturing numbers are released on Thursday and employment numbers on Friday. If we see further easing in conditions in Europe, the NZ dollar will react positively. 

NZD/AUD (AUD/NZD)
The NZ dollar outperformed the Australian dollar throughout the course of the last week. The grinding appreciation from the NZ dollar reflects the contracting interest rate differentials as the market prices further easing from the Reserve Bank of Australia (RBA). This week the focus will mainly be on Australia. Wednesday sees private capital expenditure numbers ahead of retail sales and building approvals on Thursday. Current levels still represent good value buying of NZD with Australian dollars. Further NZ dollar appreciation from current levels is to be expected, and would move the pairing back towards more historically average levels.

NZD/GBP (GBP/NZD)
This pair was relative stable last week, spending the majority of the time in the .4750 - .4790 (GBPNZD 2.0877 - 2.1053) range. The pair opened higher today, as speculation of an IMF funding package for Italy sooths investor concerns and the risk aversion wanes. There is an absence of top tier NZ economic data this week, so the primary driver will probably be the wider market sentiment, driven by events in Europe. In the UK we have various second tier data releases, but nothing that will dictate price action for the week. Whilst the focus remains on Europe, expect the GBP to perform reasonably well. UK debt was in high demand last week, which is ironic as talk of further QE from the BOE sees increasing momentum.

 
NZD/CAD
This pairing was relatively stable throughout the course of last week. The positive start to the week has seen the NZD open higher against the CAD, driven by wider market risk appetite following the rumours of the IMF funding package for Italy. Expect the wider market sentiment to provide the lead ahead of the Canadian GDP and employment numbers on Wednesday and Friday respectively.

NZD/EURO (EURO/NZD)
This pairing saw initial NZD weakness at the start of last week before stablising. The pairing has started this week with the NZD taking back a chunk of its lost ground, as rumours of an IMF funding package for Italy circulate. Should the rumours be correct, a sharp rally in risk assets is to be expected in the short term. Today’s slight increase in the NBNZ Business Confidence survey had little reaction. European inflation and employment numbers on Wednesday will be the focus, aside from the wider debt issues in the market.

 
NZD/YEN (NZD/YEN)
The YEN maintained its pressure on the NZD throughout the course of last week. The wider market risk aversion was the primary driver, and was driven by the increasing unease in the European debt markets. The rumoured Italian funding package from the IMF has seen the market open this week in the NZ dollars favour. Indeed a package would calm investor nerves in the short term, easing the way for the NZD to take back some of its recently lost ground. There is limited economic data of impact in either economy this week, so expect the lead to again come from the headlines coming from Europe. A break of the resistance at 59.00 would open up the way for another leg higher to test 60.60.

AUD/USD
The Australian dollar was outperformed by the resurgent US dollar again last week. However the weekends rumour of an IMF funding package for Italy has seen the AUD open stronger this week, almost reversing last week’s losses. In Australia the week’s primary focus will be on the retail sales number on Thursday. In the US the manufacturing data on Thursday, and employment report on Friday will be closely watched. Obviously the intense focus on Europe will continue, and this will continue to be a major driver of price action for the pair. Because many investors have “sold AUD” positions, a short term spike higher from the AUD remains a real possibility.

AUD/GBP (GBP/AUD)                            
The GBP continued its recent pressure on the Australian dollar last week. The prospect of an IMF funding package for Italy has seen market risk appetite increase and this has seen the AUD in demand to start this week, albeit the pair remains in familiar territory. Whilst the economic data will be watched, the price action will likely be driven by the ongoing events in Europe. The AUD will underperform in periods of risk aversion, and outperform when confidence returns. For those looking to move funds back into AUD from the UK, staggering of transfers is advisable.

 
AUD/EURO (EURO/AUD)
The AUD gave up ground to the EUR last week as the wider market risk aversion gathered momentum. The weekends rumour that the IMF is to offer Italy a large funding package has seen the AUD open up higher against the EURO. With economic data on the back burner for the time being, the lead for this pair will no doubt come from events in Europe this week. Critical will be the confirmation of this package for Italy whose funding costs have ballooned to unsustainable levels. Expect demand for EURO on dips to continue as the European bank repatriation of assets continues.

GBP/USD
The US dollar saw grinding appreciation over the Pound Sterling last week. The economic news in the US has continued its revival in the 3rd quarter which will keep the pressure on. The prospect of further quantitative easing from the BOE will also keep the GBP under pressure. The UK data focus for the week will be on Thursday with the manufacturing and housing data. In the US, the all important employment numbers on Friday will be the primary focus, with a stable unemployment rate of 9.0% expected. 

GBP/EURO (EURO/GBP)
This pairing remains in familiar territory. The EUR made some initial ground early last week before coming under pressure as the yields on European Government debt increased. Expect these familiar ranges to continue in the short term. Rhetoric from the BOE points towards further QE in the coming months. Normally this would see the GBP under pressure, but not in this instance. UK debt is in high demand as investors shy away from debt in Europe, and this is under pinning demand for GBP in the short term.

Market commentary:

Throughout the course of last week the market’s primary focus remained on the debt crisis in Europe. Credit downgrades for Portugal and Belgium, an undersubscribed auction of German bonds, and continued pressure on Spanish and Italian debt markets, saw risk aversion remain elevated. In an effort to speed reforms, French and German officials are now looking at a range of bi-lateral agreements. These would enable fiscal reforms to be activated without the lengthy process of adjusting the EU Treaty to be undertaken. Rumours of a IMF funding offer to Italy has seen this week open positively, as risk aversion is pared back. In the US, sentiment picked up on the news that the “black Friday” retail sales activity was back at pre-financial crisis levels. This backed up the better than expected Durable Goods report earlier in the week. The preliminary 3rd quarter US GDP data was lower than expected, but with the focus more on Europe, this piece of data had limited impact. In New Zealand the centre right National party Government easily held onto power, winning by the largest margin in over fifty years. Overall the US dollar maintained its recent momentum, even if it has given back some ground, after the positive start to the week this morning.

Europe will no doubt continue to dominate the headlines this week. Any progress made by Germany and France towards further fiscal integration may see the wider market risk aversion fall. Italian debt remains the most under pressure, and any unlikely confirmation of a funding solution from the IMF will be well received. This week sees the meeting of Euro-zone finance ministers on Wednesday, and no doubt comments from officials will insight some market reactions. New European Central Bank (ECB) President Draghi is due to make a couple of speeches and these will also be closely followed.

In the US, the more positive run of economic data continues, albeit the numbers coming back from very low bases. A more active consumer is encouraging for the wider economy, but the real sticking point remains the labour market. Monthly employment numbers come on Friday and any unemployment rate below the current 9% will be heralded as a step in the right direction. New homes sales and consumer confidence numbers on Tuesday will garner attention ahead of manufacturing numbers on Thursday.

The John Key led National party easily maintained power in the weekends election in New Zealand. This was the expected result, and is not expected to see much reaction in the currency markets. Today’s NBNZ Business Confidence number shows a rebound from the previous 13.2 to 18.3. Given this was when the rugby world cup was on, a pickup in confidence was expected. For the remainder of the week, we have just monthly building consent numbers on Wednesday to consider. Expect most of the lead to come from offshore, with developments in Europe again taking center stage.

The Australian dollar remained under pressure last week as the wider market risk aversion continued. Not helping sentiment was the news that Chinese manufacturing numbers were lower than expected and the sector contracted last month. This week sees the return of some meaningful economic data for the Australian economy. Private sector credit numbers on Wednesday are followed by building approval and retail sales numbers on Thursday. Expect the bulk of the lead for price action to come from developments in Europe. The market now has fully priced in a further cut of 25pts to the cash rate from the Reserve Bank of Australia as its cash rate announcement next week.

The likelihood of further quantitative easing (QE-electronic printing of money) in the UK increased last week and the European crisis intensified. Activity in the UK remains low, and the Bank of England (BOE) will continue to monitor the impact of a sharply slowing European economy closely. Expect the manufacturing and construction data on Thursday and Friday respectively, to be closely watched. Interestingly UK debt remains in demand, as investors avoid Europe. This has provided the Pound Sterling with demand in the face of further QE. 

In Canada last week the focus was on the retail sales number on Wednesday. This number proved to be better than expected and helped underpin demand for the CAD. The ongoing elevation of the oil price has been the other driver. This week sees the release of both GDP and the employment numbers. GDP is due for release on Thursday, with an expectation of +.2% growth for the month. The employment numbers are due on Friday and are expected to show a stable unemployment rate at 7.3%.

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