Intense focus remains on Europe, but Asia slowing too; US mostly positive

By Sam Coxhead*:

Over the last week the wider financial markets made for interesting observation. The intense focus on Europe remains in place, and a feeling of expectation is brewing for the EU summit later this week.

Global concerns over the lack of a clear path in Europe remain high.

The coordinated action of seven of the world’s leading central banks to provide US dollar funding to banks under stress, gave some relief to markets.

This saw the US dollar give up some of its recently gained ground, especially to the Australasian growth currencies.

Further signs of slowing Asian economies are of concern, and this saw the Peoples Bank of China reduce their 'RRR' by 50pts, in an effort to provide support.

Encouragingly US economic data continues to be mostly positive, therefore further quantitative easing (QE) should be all but ruled out in the short term. Over time this should benefit the US dollar.

This week there is a flora of central bank monetary policy announcements to add further spice.

Overall the market remains rightfully nervous, and with lower levels of liquidity evident as we head towards Christmas, there is potential for larger than usual moves, if dramatic news comes to hand.

Major Announcements last week:

· NBNZ Business Confidence Survey 18.3 vs 13.2 previous
· Japanese retail Sales 1.9% vs .7% expected
· UK House Price Index +.4% vs -.1%
· US Consumer Confidence 56.0 vs 43.9 expected
· Australian Private Sector Credit 12.3% vs 8.2%
· Canadian GDP +.2% vs +.3% expected
· US Pending Home Sales 10.4% vs 1.4% expected
· Australian Retail Sales +.2% vs +.4% expected
· Chinese Manufacturing PMI 49.0 vs 49.8 expected
· UK Manufacturing PMI 47.6 vs 47.1 expected
· US ISM Manufacturing PMI 52.6 vs 51.6
· US Unemployment rate drops to 8.6% as 120,000 jobs added.
· Canadian Employment change -18.6k and unemployment rate of 7.4%
· Peoples Bank of China lower Bank RRR by 50pts
· Coordinated central bank action to halve costs of US dollar emergency funding for banks 

NZD/USD 
The NZD outperformed the US dollar last week. There was initial strength from the NZD that saw stop-loss buying from “sold” NZD investors. The second driving factor came from the coordinated central bank action to extend the US dollar funding programs to stressed banks. This positive news saw the risk appetite again increase, although progress since the move has been slow. With further QE from the US Federal Reserve now unlikely, expect further gains for the NZD to be much harder fought. Expect the volatility to continue this week with talks in Europe and central bank meetings providing the focus. Thursdays RBNZ announcement should not surprise, with the decision likely to leave the cash rate unchanged at 2.5%.

NZD/AUD (AUD/NZD)
The NZD remained under pressure from the AUD throughout the course of last week. Both the RBA and RBNZ make their cash rate announcements this week, with only a 25pt cut from the RBA expected on Tuesday. This should see the NZD start to take back some of its recently lost ground. Australian 3^rd quarter GDP comes out on Wednesday, and then the all important employment numbers Thursday. The RBNZ will most likely not change the cash rate on Thursday, but its accompanying monetary policy statement will be closely watched. The level of .7700 (AUDNZD 1.2990) provides the initial target for this pair, before a move back towards more historically average levels. 

NZD/GBP (GBP/NZD)
The NZD outperformed the Pound Sterling throughout the course of last week. The return of the risk appetite was initially provided by an ill founded rumour that the IMF would provide funding to Italy. Adding to the risk appetite was the BOE inspired central bank coordination to provide increased US dollar funding lines to stressed banks. This week sees the pair start close to significant GBP support levels, and progress from here should be more hard fought for the NZ dollar. Both central banks meet to announce monetary policy on Thursday, but expect no change from either. The RBNZ starts proceedings, and their monetary policy statement will be closely watched.

 
NZD/CAD
The NZD saw continued appreciation against the CAD last week as the risk appetite increased. The coordinated central bank action on the USD funding helped push the NZD to its highs before it settled down. Both central banks make their monetary policy announcements this week. Expect both to be unchanged, but closely watched. Tuesday sees the Bank of Canada start things off, ahead of the RBNZ on Thursday. If the wider market risk appetite tapers off, the NZD will give up ground against the CAD.

NZD/EURO (EURO/NZD)
The NZ dollar saw sharp appreciation against the EURO last week. A reversal of the risk appetite caught many speculative investors off guard. The subsequent stop-loss NZD buying saw the move accentuated. This was carried on by positive reaction to the coordinated central bank efforts to supply US dollar funding to stressed banks. This week sees the return of the focus back to monetary policy. The RBNZ are first of the two central banks to make announcements on Thursday. Expect no change from the RBNZ, but their statement will be closely watched.  It is increasingly likely that the ECB will cut the European cash rate by 25pts, in an effort to stimulate the ailing economy.

 
NZD/YEN (NZD/YEN)
The NZD saw appreciation again the YEN last week and the risk appetite in the wider market increased. Initially the improved sentiment was driven by  an ill founded rumour of an IMF funding package for Italy. After the subsequent IMF denial, the NZD saw further demand after the coordinated effort from the central banks  to increase US dollar funding to stressed banks. The pair has stalled around resistance at 61.20, and the ground from here will likely be harder to make for the NZD. There is little in the way of Japanese data this week. In NZ the focus will be on the accompanying statement to the expected unchanged cash rate from the RBNZ on Thursday. 

AUD/USD
The Australian dollar saw sharp appreciation against the US dollar last week. The initial risk appetite was driven by an ill founded rumour that the IMF was to provide Italy with funding. By the time the denial came from the IMF, the move was under way and there was evidence of stop-loss buying of AUD. The coordinated central bank action on US dollars sent the AUD to the high for the week, and since then the AUD has consolidated around current levels. The focus is very much in Australia for this pair this week. The RBA kicks it off on Tuesday with their cash rate announcement. It is likely that they will deliver a 25pt cut to have a cash rate at 4.25%. Third quarter GDP follows on Wednesday, and then employment on Thursday. Headlines from Europe will also be of influence, affecting the wider market appetite for risk.

AUD/GBP (GBP/AUD)                            
The Australian dollar saw grinding appreciation over the Pound Sterling at the start of the last week. The appreciation accelerated as the coordinated central bank US dollar funding program was announced. The AUD looks to have run out of steam at current levels for the time being. The focus this week will mostly be in Australia for this pair. The RBA is set to announce its cash rate on Tuesday, and odds on that they will cut the cash rate by 25pts to 4.25%. Wednesday sees the release of Australian GDP numbers and Thursday it’s Australian employment numbers. On Thursday in the UK the BOE also announce monetary policy, but no change is expected. Current levels represent good value buying of GBP with AUD.

 
AUD/EURO (EURO/AUD)
The Australian dollar saw steady appreciation over the EURO at the start of last week, that really accelerated once the coordinated central bank action on US dollar funding was announced. The pair has now consolidated  at the current elevated levels, which represent great value buying of EUR with AUD. Tuesday sees the RBA announce the cash rate, and a 25pt cut to 4.25% can be expected. Wednesday sees the 3rd quarter Australian GDP number announced. Thursday sees the Australian employment numbers released ahead of the ECB cash rate decision. The ECB are also expected to cuts their cash rate by 25pts to 1.0%, in an effort to support the ailing European economy.

GBP/USD
This pair saw waves of strength from the GBP last week as the appetite for risk oscillated. The largest push higher for the GBP came with the news of the coordinated central bank action to provide US dollar funding to stressed banks. Fridays healthy US employment numbers saw the US dollar regain some of its lost ground as it becomes clear there is not much chance of further QE from the US Federal Reserve in the short term. This week sentiment will likely to be driven by proceedings in Europe. If we see some progress made, the GBP will outperform. Alternatively, if the ongoing talks struggle to make progress, the safe haven demand for the US dollar will see the GBP under pressure.

GBP/EURO (EURO/GBP)
This pair continues to move around within very familiar ranges. The focus will almost entirely be on Europe for the lead this week. Both respective central banks will announce monetary policy decisions on Thursday, with just the ECB expected to make a change to its current stance. Expect a 25pt reduction in the cash rate from the ECB in an effort to aid the ailing economy. The BOE will most likely leave monetary policy unchanged, as all rhetoric points towards an increase in QE actively at some stage in the new year. The EU summit starting on Friday will no doubt produce many headlines, and any progress made will be just another step in the process, as opposed to a final solution to the debt woes.

Market commentary:

Over the last week the wider financial markets made for interesting observation. The intense focus on Europe remains in place, and a feeling of expectation is brewing for the EU summit later this week. Global concerns over the lack of a clear path in Europe remain high. The coordinated action of seven of the world’s leading central banks to provide US dollar funding to banks under stress, gave some relief to markets. This saw the US dollar give up some of its recently gained ground, especially to the Australasian growth currencies. Further signs of slowing Asian economies are of concern, and this saw the Peoples Bank of China reduce their “RRR“ by 50pts, in an effort to provide support. Encouragingly US economic data continues to be mostly positive, therefore further quantitative easing (QE) should be all but ruled out in the short term. Over time this should benefit the US dollar. This week there is a flora of central bank monetary policy announcements to add further spice. Overall the market remains rightfully nervous, and with lower levels of liquidity evident as we head towards Christmas, there is potential for larger than usual moves, if dramatic news comes to hand.

There was little in the way of top tier economic data in New Zealand last week. This week sees the focus primarily on the Reserve Bank of New Zealand’s (RBNZ) monetary policy statement on Thursday. No change to the current cash rate of 2.50% is expected, but as usual the monetary policy statement will be closely watched by market participants. The NZ dollar saw periods of stop-loss buying throughout last week, as investors reversed “sold “ NZD positions, especially against the US dollar. A periodic cleanout of speculative positions is healthy for the market, and given the significant global growth risks still at play, the bias remains to the downside for the NZ dollar in the short term.

In Australia last week the most significant news was the much better than expected private capital expenditure numbers. Whilst the mining component remains dominant, but vulnerable to shock, the numbers were particularly strong. This coupled with the coordinated central bank US dollar funding announcement, gave the AUD a good boost almost across the board. This week is packed with action in Australia. The Reserve Bank of Australia (RBA) make their monetary policy decision tomorrow, with odds on for a further 25pt cut to the cash rate to a level of 4.25%. Wednesday sees the release of the 3rd quarter GDP numbers with 1.2% growth expected for the quarter. Thursday we get the monthly employment numbers with 10.6k jobs expected to have been added in November. Given the significant global growth risks currently at play, the bias for the AUD remains to the downside. Last week’s sharp appreciation was of some surprise and provides opportunities for those looking to sell Australian dollars.

In the US the economic data remains on track to avoid seeing the economy dip back into recession. Along with the improved data, the lowering of expectations of further QE should see the US dollar in demand in the coming months. This coming week sees a relatively quiet economic calendar. Non manufacturing activity numbers will come Tuesday, and preliminary consumer sentiment numbers Friday. For the most part expect the lead to come from developments in Europe. Interestingly, if the trend from Friday entrenches itself, we could see both stock markets and the US dollar gaining ground in unison.

Europe this week is going to be very interesting. Germany and France are trying to put together an agreement that will see closer fiscal integration accompanying and further funding packages on offer, with ECB participation. Expect headlines to dominate the run up to the EU summit on Friday. Adding to the mix is the ECB monetary policy decision on Thursday. There is an increasing chance of a 25pt cut to the cash rate to help stimulate the stalling economy. Various Spanish and Italian debt auctions have been successful in the last week, albeit at far higher cost to the borrowers. Sustainability is the key, and any program put together by France and Germany this week will be just part of a larger overall solution. There is no quick fix for structural issues that have to be sorted out. This means heightened levels of uncertainty for a prolonged period.

Deep concerns over growth continue in the UK. The Bank of England (BOE) is now expected to further increase the QE program, in early 2012 in an effort to stimulate the economy. Inflation is expected to fall sharply in 2012 and the European crisis is weighing heavily on already meager growth prospects, with forecast for 2012 now reduced to just .7%. This week is fairly busy with data in the UK, but most should be of limited impact. The BOE monetary policy announcement on Thursday will be closely watched for any clues about the timing of further QE.

In Canada the recent good run from the Canadian dollar came to an end with the disappointing Canadian employment numbers. The numbers showed job losses were the most since the 2009 recession. The Bank of Canada meet on Tuesday to announce monetary policy. No change is expected to the cash rate, but there statement will give valuable insight into their assessment of the economy. Also on Tuesday are the latest manufacturing numbers and these will be closely watched.

In Japan last week the news was mixed. The jobless rate unexpectedly increased to 4.5% , but this was balanced out by better than expected retail sales numbers. The YEN saw some pressure following the coordinated reserve bank action on US dollar funding to banks. This week sees a fairly quiet week for economic data in Japan. The primary focus will come on the final GDP numbers released on Friday. The YEN’s performance will be dictated by progress made in Europe this week. If some decent progress is made, the YEN could see further pressure, and this would be much to the relief if the Bank of Japan.

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