Likelihood of QE III falls dramatically following Bernanke's speech

By Sam Coxhead*:

The distinctly choppy price action that has been a feature of markets in 2012 continued last week.

The big focus for the week was the European Central Bank’s (ECB) three year funding offer to European banks.

The update on the discounted funds was healthy, with the 529.5 billion EURO result at the upper end of the market’s expectations.

The reaction was to by US dollars on this release and the US dollar saw good demand throughout the week.

Helping drive demand was US FED Chairman Bernanke’s semi-annual monetary policy testimony. The likelihood of further quantitative easing (QE) fell dramatically as he all but ruled it out in the short term.

Certainly the economic data has improved in the last few months, even if it is rebounding from low levels. Interestingly sentiment was similar in the UK from the Bank of England, where further QE is now very much data dependent.

This raises the question, have we seen the end of the loosening of monetary policy in this cycle? And are we at the pivotal stage where the focus changes from financial stability, back to performance and growth?

 
Major Announcements last week:

· US Pending Home Sales 2.0% vs 1.1% expected
· US Durable Goods Sales -3.2% vs 0.0% expected
· US CB Consumer Confidence 70.8 vs 63.1 expected
· Australian Retail Sales .3% as expected
· ECB 3yr LTRO 529.5 billion
· US Preliminary GDP 3.0% vs 2.8% expected
· Australian Building Approvals .9% vs 2.1% expected
· Australian Private Capital Expenditure -.3% vs 3.5% expected
· Chinese Manufacturing PMI 51.0 vs 50.9 expected
· UK Construction PMI 54.3 vs 51.3 expected
· Canadian GDP .4% as expected

NZD/USD 

This pairing remains in recently familiar territory. The NZD attempt to break higher was short lived as it failed to consolidate through resistance. If US interest rates continue to push higher the NZD will struggle and support levels will be tested. The RBNZ monetary policy meeting should not have too much impact, but there is likely to be some positioning before the number to produce some movement. Employment numbers in the US on Friday will be very closely followed.  Given a level of uncertainty presides in Europe, it is unlikely that the EURO will drag the NZD higher this week.

NZD/AUD (AUD/NZD)

The NZD has been unable to push through the .7830 level ( AUDNZD1.2770) and is now coming under some pressure. Both the RBA and RBNZ will most likely leave their cash rates unchanged this week, but any movement in bias towards future moves will translate into immediate currency movement. Australia remains the focus for the week with GDP Wednesday and employment numbers Thursday. The NZD weakness late last week looks like some position squaring up ahead of this week. The inability of the NZD to make further progress against the AUD has disappointed impatient investors.

NZD/GBP (GBP/NZD)

This pair remains in its recent range, albeit the NZD under some pressure from the potentially resurgent GBP. Expect both central banks to leave monetary policy unchanged at their respective meetings this week. Even at current levels, which are close to five week NZD lows, the GBP remains good value buying. Services and housing numbers in the UK on Monday and Tuesday will also be watched, as the economic data becomes very important to the BOE decisions going forward. Positive numbers will push the pair to investigate the .5175 levels (GBPNZD 1.9325).

 NZD/CAD

The Canadian dollar finally saw a resurgence in demand last week. The continued elevation of the oil price helped CAD demand. The poor performance of the EURO also dragged the NZD lower. Expect no change from either central bank at their monetary policy meetings on Thursday. Canadian employment numbers on Friday will also provide a focus. Current levels still represent good value buying of CAD with NZD. Those looking to transfer money from CAD to NZD, should benefit from patience.

NZD/EURO (EURO/NZD)

This pair remains in what has become familiar territory over the last eight weeks. The EUR was unable to push further with its gains last week, after the ECB longer term lending numbers were at the upper end of expectations. This week will likely see both respective central banks announce unchanged cash rates at their meetings. The primary focus will likely be the progress of the Greek debt swap proposal, and the interest rates on Portuguese debt.

 NZD/YEN (NZD/YEN)

The NZD remains at elevated levels against the YEN. Strong resistance is now in place at 68.30, having repelled the pair on three occasions last week. The RBNZ will be the focus for the week on Thursday. If the Greek debt swap proposal looks like failing this week, the YEN will see demand and this would push the pair back from the current elevated levels. Towards the upper end of this range represents good value buying of YEN with NZ dollars.

AUD/USD

The Australian dollar remains range bound against the US dollar. Again the resistance at 1.0830 proved too hard to consolidate above for the AUD. The paring back of expectations of further QE from the FED pushed the pair lower to finish the week. In the US the focus comes on Friday when the all important employment numbers are released. Before then we have a busy week in Australia. Tuesday will see the RBA likely leave the cash rate unchanged at 4.25%, but the accompanying statement will be closely monitored by the market. Wednesday sees the release of the GDP numbers, ahead of the employment numbers on Thursday. If interest rates in the US continue to rise, expect the USD to see further demand. Again the current range represents good value buying of USD with Australian dollars.

AUD/GBP (GBP/AUD)                            

The Australian dollar remained within its familiar range with the Pound Sterling last week. BOE comments with regards to the status of further QE has provided the GBP with periodic demand. Expect both central banks to leave monetary policy unchanged at their meetings this week. Australian GDP on Wednesday, and employment numbers Thursday will be closely watched. Expect the recent .6650 - .6850 range (GBPAUD 1.4600 - 1.5040) to contain the pairing this week.

 AUD/EURO (EURO/AUD)

The AUD bounced back last week, as the EURO was not able to consolidate its gains from the previous week. With the ECB lending at the upper end of the expected range, the EURO easily succumbed to the selling pressure. This week sees both central banks announce monetary policy decisions. Both are expected to leave their cash rates unchanged. In Australia we also have GDP on Wednesday and employment numbers Thursday to provide the focus. As further details emerge with regards to the progress on the Greek debt swap, the EURO will react accordingly. A positive result will see EURO demand, if it looks unlikely the debt swap will succeed, the AUD will outperform.

 AUD/YEN

The Australian dollar continued its appreciation over the YEN last week, albeit at a slow pace than in weeks previous. The momentum of YEN weakness appears to be waning. Given the probability of increasing uncertainty surrounding the Greek debt swap this week, it would not be surprising if the YEN took back a little lost ground. The direct focus for the pairing will almost be entirely Australian based. The RBA announce their monetary policy decision on Tuesday, ahead of GDP Wednesday, and employment numbers Thursday. Current levels provide good value buying of YEN with AUD for those looking to transfer funds from Australia to Japan.

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Market commentary:

The distinctly choppy price action that has been a feature of markets in 2012 continued last week. The big focus for the week was the European Central Bank’s (ECB) three year funding offer to European banks. The update on the discounted funds was healthy, with the 529.5 billion EURO result at the upper end of the market’s expectations. The reaction was to by US dollars on this release and the US dollar saw good demand throughout the week. Helping drive demand was US FED Chairman Bernanke’s semi-annual monetary policy testimony. The likelihood of further quantitative easing (QE) fell dramatically as he all but ruled it out in the short term. Certainly the economic data has improved in the last few months, even if it is rebounding from low levels. Interestingly sentiment was similar in the UK from the Bank of England, where further QE is now very much data dependent. This raises the question, have we seen the end of the loosening of monetary policy in this cycle? And are we at the pivotal stage where the focus changes from financial stability, back to performance and growth?

 In what was a quiet week for economic data in New Zealand, the NBNZ Business Confidence numbers showed a bounce from the previous low levels. This week coming sees the focus very much on the RBNZ and their monetary policy announcement on Thursday. No change to the record low 2.50% cash rate is expected, but as usual the statement and subsequent press conference will give Governor Bollard a good opportunity to explain their thoughts on the domestic and international economies. The NZD remains somewhat elevated on most pairings, although it saw some downside pressure in the offshore session on Friday.

In Australia data was weaker than expected almost across the board last week. This week will prove insightful, as we have the Reserve Bank of Australia RBA) monetary policy statement Tuesday, ahead of GDP on Wednesday, and employment numbers on Thursday. It is likely we will see no change in the cash rate from the RBA on Tuesday. The RBA consider their current cash rate to be neutral, and given the more positive tone of most offshore indicators of late, there will be a reluctance to ease further (reduce interest rates), unless the outlook darkens considerably.

In the US the more positive sentiment continues to permeate through the market. The FED’s taming of expectations for further QE will push the longer term interest higher and this is US dollar positive. The big focus for the week in the US are the employment numbers on Friday. A continued improvement in the employment market will eventually flow through to the housing sector, which continues to be the main cause of consternation in the economy.

In Europe the chances of further debt trouble contagion have reduced over the last couple of months. Financial stability has been enhanced through the ECB’s bank funding operations, but risks remain. Greece is obviously still an issue, and it remains uncertain of the uptake of the debt swap proposal. Portuguese debt also remains under pressure and a possible source of trouble in the coming months. The ECB announces its monetary policy decision on Thursday. No change is expected, and the chances of a cut to the 1% cash rate have greatly reduced in the last few months. News of progress on the debt swap in Greece is expected this week, and will remain the focus. In the event of an involuntary default, expect further pressure to come on the EURO.

The Bank of England’s (BOE) comments last week provided the Pound Sterling with some demand, to take back a little of its recently lost ground on various pairings. Last week’s economic data was mixed but a healthy bounce in construction numbers buoyed the market somewhat. Expect no change from the BOE at their monetary policy decision this week. The rest of the focus will come from services activity data on Monday, and housing numbers Tuesday. Until we get a sustained recovery in Europe, the UK economy is going to have to work had for its growth. In the meantime the Australasian currencies will remain at elevated levels against the GBP.

Japanese economic data was mostly better than expected last week. Importantly for the Japanese economy the trend of a weakening YEN continued last week. The USD is leading the charge against the YEN, having broken a number of significant resistance levels in the last week. This week personal earnings numbers on Tuesday and final GDP numbers on Thursday will be closely watched.

The Canadian dollar saw good demand last week. It posted its best weekly performance in two months, and finally took back some ground against the Australasian currencies. The elevated oil price seems to be finally leading towards increased demand for the CAD. This week is busy for economic data in Canada. Manufacturing numbers on Tuesday are followed by building permit numbers on Wednesday. The Bank of Canada will announce no change to the cash rate at their meeting on Thursday, but as usual their comments will be closely followed. Employment numbers on Friday round out what will be an interesting week. Also of note is the prospect of Iceland adopting the Canadian dollar as their currency. The idea is in its infancy, but would cause CAD demand if it becomes more likely that the idea would be progressed.
 

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