China and Japan make the big announcements, but Europe stays in the headlines

By Sam Coxhead*:

Last week the financial markets saw further intraday volatility, while mostly within contained broader ranges.

Generally the sentiment within markets remains positive, but there is an underlying vulnerability to shocks that it easily exposed.

The uncertainty surrounding progress towards a Greek debt resolution remains the focus. Daily swings in the likelihood of success were seen last week. Most contention seems to surround EU Finance Ministers trust that Greek politicians will carry out the austerity measures they have pledged to make.

Current expectations are of a positive announcement to be made at some stage in Europe on Monday, but delays have been numerous and certainly would not surprise.

Elsewhere in the markets, the focus came in Asia late last week. Japan surprised with a 10 trillion YEN quantitative easing (QE) initiative to help stimulate the Japanese economy, and provide a reason to lower demand for the YEN.

In China authorities again lowered the reserve ratios on the banking sector. This has the effect of boosting lending and sustains economic growth. A cooling property sector and gloomy outlook for the export sector has prompted the move.

Markets start the week with a positive tone, in expectation of progress in Europe, and increased appetite for risk assets following the stimulus added in China.

Major Announcements last week:

· Japanese prelim. GDP -.6% vs -.3% expected
· Australian Home Loans 2.3% vs 1.9% expected
· BOJ announce 10 Trillion YEN QE program
· UK Inflation 3.6% YoY as expected
· German Economic Sentiment 5.4 vs -11.8 expected
· US Retail Sales +.7% vs .6% expected
· NZ Retail Sales 2.9% vs 1.1% expected
· European GDP -.3% as expected
· Australian Unemployment rate 5.1% vs 5.3% expected
· US Philadelphia Fed Manufacturing Index 10.2 vs 9.0 expected
· UK Retail Sales .9% vs -.3% expected
· Canadian Inflation .2% vs .1% expected
· US Inflation .2% as expected

NZD/USD 
The New Zealand dollar maintains its pressure on the US dollar. Last week’s range  was very similar to the week prior, but we start this week knocking right at the upper resistance level. This comes as sentiment builds towards a positive outcome for the extension of bailout funds from the Euro-group to Greece. For the most part expect this pairing to take this week’s lead from the wider market appetite for risk, in the absence of top tier economic data in either economy. A consolidated break through the resistance at .8420, opens up the way for investigations to .8550, but ground from current levels will be a lot harder fought, as evidenced from previous attempts.

NZD/AUD (AUD/NZD)
This pairing remains in what has become very familiar territory over the last couple of weeks. Stronger than expected data in both economies provided the stimulus last week, for the week’s movement, within the range. The NZ dollar did look poised to try and move higher against the AUD, but the release of strong employment numbers in Australia ended that push. With the prospect of the respective cash rates remaining unchanged in the coming months, recent ranges may continue to rule for some time yet. Economic data watching remains the key to direction, with the main risk being that weaker Australian numbers would open the way for a cash rate cut from the RBA, leading to the NZD outperforming. The minutes from the previous RBA monetary policy meeting on Tuesday, are the focus for this week.

NZD/GBP (GBP/NZD)
The NZD continues to remain at elevated levels against the GBP. Both economies saw much better than expected retail sales data last week, which is encouraging for the coming quarters. Should the likelihood of further QE from the BOE decrease in the coming weeks, the GBP may see a pickup in demand. A pickup in demand would see the GBP take back some of its recently lost ground against the NZD. The spike higher from the NZD was short lived and pairing is back in more familiar territory to start this week. The focus for the pair this week will be based in the UK, with the BOE monetary policy meeting minutes on Wednesday, ahead of revised GDP numbers on Friday. As last week proved, further ground higher from the NZD will prove to be hard fought from current levels.

 
NZD/CAD
This pairing remains in recently familiar territory. Further appreciation from the NZ dollar from the lofty current levels, looks like being hard work for the NZD in the short term. Canadian retail sales data on Tuesday is the focus for the pair for the week, although it is unlikely it will have a major bearing on the overall price action. Global risk appetite will provide the bulk of the lead, and will no doubt be driven by the progress of potential Greek debt swap as the week unfolds.

NZD/EURO (EURO/NZD)
The NZD again set new highs against the EURO last week. The outcome from the Euro-groups decision on the further Greek bailout funds will likely provide the focus for this week. Surprisingly, a positive result will unlikely see the EURO dramatically outperform on an immediate basis. The position of the NZD as a growth asset, may see it attract demand on a positive result also. More likely would be some kind of steady appreciation over the coming week by the EURO, as details from a finalized debt swap are released. In the meantime, the NZD will maintain its elevated position, but forging further appreciation will probably prove difficult.

 
NZD/YEN (NZD/YEN)
The NZD again saw some sharp appreciation against the YEN throughout the course of last week. First came weaker than expected GDP numbers in Japan, and then the surprise QE program to the tune of 10 trillion YEN. The BOJ will no doubt be very happy with the reaction to their new program. Until recently the YEN has been at record, or close to, levels against most currency pairs. This week will see the lead for the pair provided by the global appetite for risk, in the absence of any significant economic data in either economy. Progress for the NZD will prove harder fought, if it approaches resistance at 68.00.

AUD/USD
This pairing saw its recently familiar range continue last week. Strong employment numbers have lowered the expectations for a cut to the cash rate from the RBA, at its next meeting. Balancing the change in expectations of the RBA, is the move by the markets to discount the chances of further QE from the FED in the coming months. These forces saw this newly established range adhered to last week. There is relatively little economic data due for release in the US this week, so expect the RBA monetary policy meeting minutes to be closely followed on Tuesday. Two speeches by RBA head Glen Stevens on Tuesday and Friday, will also be followed for any inklings on monetary policy over the coming months. The pair is close to topside resistance, and a positive reaction to news from Europe with regards to the Greek bailout funds, could see that level tested. However uncertainty in Europe remains the dominant theme.

AUD/GBP (GBP/AUD)                            
The Australian dollar again hit a record high against the Pound Sterling last week, before seeing some selling momentum into the weekend. The pairing remains in its recently familiar range to start this week. There is a distinct central bank focus again for the pair this week, with monetary policy meeting minutes coming from both the RBA and BOE. On Tuesday the RBA starts of the data flow, ahead of the BOE on Wednesday. RBA head Glen Stevens speaks on Tuesday and Friday and these speeches will be closely watched for references to monetary policy. Revised UK GDP numbers on Friday round out the week. Expect the recent ranges to continue in the short term. Any further appreciation from the AUD will prove hard work above the AUDGBP resistance level of .6850 (GBPAUD 1.4600 support).

 
AUD/EURO (EURO/AUD)
The AUD remains at elevated levels against the EURO. Interestingly there was a sharp move lower in AUD, and higher in EUR on Friday. Market chatter was that this was investors exiting speculative positions ahead of the weekend. The market remains very “bought AUD and sold EUR”, so sharp corrections back in the favour of EUR, are possible at anytime. Expect the bulk of the lead to come from progress on the potential Greek debt swap. From an Australian perspective, the RBA monetary policy meeting minutes on Tuesday, and two RBA Gov. Stevens speeches will get attention. Any inkling of imminent further cuts to the cash rate in Australia, would see the AUD come under some pressure.

GBP/USD
The Pound Sterling regained some of its lost ground against the US dollar late last week. It nears its recent topside resistance level of 1.5920. A consolidation through this level would open the way for further appreciation. This week is relatively light on economic data in both economies, but the BOE monetary policy meeting minutes on Tuesday will be closely followed. A move to a split decision from the previous unanimous decision on QE, will point towards a lower chance of further QE in the coming months, and therefore GBP strength. Revised UK GDP numbers come Friday, ahead of the new home sales data in the US.

GBP/EURO (EURO/GBP)
This pair remains within the range it established over the last eight or so weeks. The wider market remains very “sold EURO”, so a correction higher from the EURO should eventuate at some stage. This week will prove interesting, as the Euro-group decision on the Greek bailout funds is released. Political tensions remain high and increase the uncertainty. In the UK the BOE monetary policy meeting minutes on Wednesday and revised GDP numbers on Friday will be the focus. A break of the initial support level of  1.1800 (EUROGBP topside resistance at .8480), will open up the way for some further EURO appreciation.

Market commentary:

Last week the financial markets saw further intraday volatility, whilst mostly within contained broader ranges. Generally the sentiment within markets remains positive, but there is an underlying vulnerability to shocks that it easily exposed. The uncertainty surrounding progress towards a Greek debt resolution remains the focus. Daily swings in the likelihood of success were seen last week. Most contention seems to surround EU Finance Ministers trust that Greek politicians will carry out the austerity measures they have pledged to make. Current expectations are of a positive announcement to be made at some stage in Europe today (Monday), but delays have been numerous and certainly would not surprise. Elsewhere in the markets, the focus came in Asia late last week. Japan surprised with a 10 trillion YEN quantitative easing (QE) initiative to help stimulate the Japanese economy, and provide a reason to lower demand for the YEN. In China authorities again lowered the reserve ratios on the banking sector. This has the effect of boosting lending and sustains economic growth. A cooling property sector and gloomy outlook for the export sector has prompted the move. Markets start the week with a positive tone, in expectation of progress in Europe, and increased appetite for risk assets following the stimulus added in China.

In Australia last week the news was all about the stronger than expected employment numbers. The debate now focuses on the effect of these numbers on the outlook for the cash rate. The Reserve Bank of Australia (RBA) are unlikely to feel further pressure to reduce the cash rate with numbers like these. This week sees the release of the RBA monetary policy meeting minutes on Tuesday, and these will be closely monitored. RBA Governor Stevens also speaks twice this week, first on Tuesday, and then again on Friday. Any comments with regards to monetary policy will see reaction from the market.

In New Zealand the record 4th quarter retail sales figures released last week saw demand for the NZ dollar climb. This week is relatively quiet for NZ economic data, so the lead will come from the wider markets appetite for risk, and will be driven by outcomes in Europe. Tuesday does see the release on the Reserve Bank of New Zealand’s inflation expectations survey, but in the current environment the results will have very limited impact on the foreign exchange market.

In the United States the economic picture continued to brighten last week. Continued signs the labour market is improving will be welcomed by the Federal Reserve (FED). The labour and housing markets remain the primary concern in the US. With numbers showing improvement, the likelihood of further QE from the FED in the short term has been reduced. With a lower chance of further QE, longer term interest rates have continued to grind higher in the US, and this will support the US dollar overtime. 

This week will certainly prove to be very interesting in Europe. The success of the European Central Bank’s (ECB) longer term funding program has reduced the financial vulnerability in Europe somewhat. Ironically, and understandably, as the financial stability has increased, the political gamesmanship has also increased. Greek politicians have seen further pressure from their Euro-zone partners, to provide assurances the spending targets will be met. It is easy to be skeptical of Greek intentions, given the inability to enact commitments to date. Euro-group meetings today (Monday), will hopefully come up with a positive result for Greece and enable the focus to move on to the next step towards the debt swap goal. Economic data will remain of secondary importance to EURO sentiment in the meantime. 

The UK economy continues its slow return to growth. With its imported inflation problems finally starting to work their way through the system, the pressure will come off the consumer. Retail sales numbers on Friday were demonstrably better than expected and maybe a good indicator that the consumer is starting to grow in confidence. This week will see the focus on the Bank of England’s (BOE) monetary policy meeting minutes on Wednesday. A change from the previous unanimous decision to increase the level of QE, would indicate a  lower chance of further increases to the program. Friday sees the release of the revised GDP numbers for the 4th quarter 2011, and this will be closely watched.

There was surprise in Japan last week, when the Bank of Japan (BOJ) announced a new 10 trillion YEN QE program. They will be very happy with the reaction from the foreign exchange market, as the YEN has given up ground almost across the board since the decision. This week coming sees little on the economic calendar in Japan. The Yen’s performance will likely be driven by its efforts against the US dollar, as it continues to move back from its historic highs. The GDP numbers on Monday showed a -.6% reduction in growth for the 4th quarter 2011 and no doubt will have contributed to the BOJ’s decision to move ahead with the QE program.

The news on the Canadian economy was reasonably light last week. The focus was the inflation number released on Friday and at .2% for the month, this was .1% higher than expectation. This week will again see the lead predominantly from offshore, with only retail sales numbers on Wednesday to provide the focus. The Canadian dollar continues to be under pressure from both the Australian and New Zealand dollars, but should see demand pick up if the US economic numbers continue to improve in the coming months.

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