Lower growth prospects in Asia will hurt demand for both AUD and NZD

By Sam Coxhead*:

Last week in the financial markets proved to be as interesting as expected.

Price action remains volatile across most markets, but within contained ranges.

The Greek debt swap process reached 95% acceptance, once the collective action clause was activated. The Greek debt is now considered to be in managed default. This was expected and the announcement has had a limited effect on the market.

While volatility remains surrounding other peripheral Euro-zone member debt, issues have been contained for the time being.

Economic data numbers from the US continue to improve on a relative basis.

Whilst there is still talk of further quantitative easing (QE), it seems highly unlikely this would occur if the improved outlook continues.

The emerging markets are showing continued signs of slowing growth. South Korea and Brazil both cut interest rates last week, in an effort to stimulate their economies. Chinese officials announced that inflation expectations were being reduced, along with growth for 2012.

Lower growth prospects in Asia will affect the Australasian export sector materially, and should be evidenced in lower demand for both the Australian and New Zealand dollars in the coming months.
 
Major Announcements last week:

· Greece completes debt swap with 95% participation (CAC included) in controlled default
· UK Services PMI 53.8 vs 55.0 expected
· US Non-manufacturing PMI 57.3 vs 56.1 expected
· RBA, RBNZ, BOE, ECB, BOC all leave cash rates unchanged
· Canadian Manufacturing PMI 66.5 vs 62.1 expected
· Australian GDP +.4% vs +.8% expected
· Brazil and Korea cut their cash rates
· Chinese Inflation 3.2% vs 3.5% expected
· Chinese Growth Expectations reduced to 7.5%
· Canadian Unemployment rate 7.4% vs 7.6% expected
· US Unemployment rate 8.3% as expected

NZD/USD 

The NZ dollar was pushed down through support levels by the US dollar last week, to the lowest levels in five weeks. The RBNZ looks poised to continue with the record low 2.50% cash rate throughout 2012 at least. This coupled with the slowing Asian economies, China in particular, point towards further underperformance by the NZD. The US dollar has also been buoyed by the dilution of expectations of further QE from the FED. If the EURO sees further selling pressure, this will also undermine NZ dollar demand.

NZD/AUD (AUD/NZD)

It was an interesting week for this pair last week. Following the Chinese authorities downgrading the China’s growth expectations, both currencies were aggressively sold. Liquidity in the NZD is lower and as a consequence we saw it under relatively more pressure. This saw the pairing briefly push through extremes to set the NZD lows (AUD highs), before the NZD bounced back. The lower than expected Australian GDP number eased the NZD higher as well, and the pair now remains firmly back in its recent and familiar range. Expect the pair to remain within its recent range in the absence of significant economic data in either economy this week.

NZD/GBP (GBP/NZD)

The NZD initially gave up ground against the Pound Sterling last week. The NZD under performance came on the back of Chinese officials making a downward revision of growth expectations for 2012. The NZD weakness proved to be short lived, as the global risk aversion subsided, the NZD took back much of its lost ground. But having consolidated below recent support at .5250 (above resistance 1.9050), the way is still open for further NZD weakness. UK employment numbers on Wednesday will be the focus for the week’s economic data.

 NZD/CAD

The Canadian dollar managed to maintain its recent pressure on the NZD for much of last week. There was a fight back from the NZD as stock markets rallied midweek, but the risk appetite was short lived. There is little in the way of economic data for either economy this week, so expect the lead to again come from the wider market appetite for risk. A break of the .8050 support level would open the way for investigations lower for this pair, to more historically average levels.

NZD/EURO (EURO/NZD)

This pairing remains within the recently familiar range. The NZ dollar suffered from aggressive selling pressure early in week after the Chinese growth expectations were downgraded for 2012. The NZD fight back was less dramatic and it saw grinding appreciation over the EURO. Interestingly, the EURO did not see dramatic price action following the release of the Greek debt swap progress. The focus will again be in Europe this week, in the absence of any NZ economic news. German economic sentiment on Tuesday, and inflation number Wednesday will be closely watched. Both currencies seem vulnerable in the current environment, but do not expect a break out of the range either way this week.

 NZD/YEN (NZD/YEN)

Last week proved to be a dramatic game of two halves for this pairing. The NZ came under intense pressure to start the week after the Chinese downgrade of its 2012 growth expectations to 7.5%. The pairing sold off from what was the weeks high to its low in two days, before rallying almost all the way back to its starting point. The resurgence came as the global risk appetite improved for a period, and the YEN came under renewed pressure from the US dollar, which helped the NZD take back lost ground. The focus this week comes from Japan, with the BOJ monetary policy decision on Tuesday. Expect the pairing to remain volatile in the short term, with the current range offering reasonable buying of YEN with NZ dollars from a historical view.

AUD/USD

The Australian dollar has been under renewed pressure from the US dollar over the last week. The pair starts the week close to substantial support around the 1.0500 level. The initial pressure last week came after the Chinese authorities downgraded their growth expectation for 2012 to 7.5%. Then came the much weaker than expected Australian GDP numbers. Subsequently the interest rate market moved to increase the chances of a  cut to the cash from the RBA in the coming months, and again this is AUD negative. Apart from home loan data in Australia tomorrow, the focus will entirely come from the US. Do not expect the FED to make any changes to monetary policy at their meeting on Tuesday. The bias for this pair remains to the downside as the interest rate differential look to contract.

AUD/GBP (GBP/AUD)                            

The Australian dollar came under initial pressure from the GBP last week as the Chinese downgraded their 2012 growth forecast to 7.5%. After this initial selloff the AUD found demand, and even absorbed the pressure of the weak GDP numbers to make grinding appreciation over the GBP to finish the week. With only home loans data due for release tomorrow in Australia this week, the bulk of the focus will come from the wider market appetite for risk. In the UK employment numbers on Wednesday will be the sole focus. The AUD does feel vulnerable in the current environment, but until the EURO stabilizes, the GBP will also struggle to make up any decent ground.

 AUD/EURO (EURO/AUD)

The Australian dollar came under pressure from the EURO early last week. The Chinese downgrade of expectations for 2012 drove the AUD weakness. Next came weaker than expected Australian GDP number, but the AUD absorbed that without losing much ground. In hindsight, that was a sign of some EURO weakness, which seemed to be bought on through the uncertainty surrounding the Greek debt swap. Now that is out of the way, the market should focus more on the economic numbers that come to hand. In Australia this week there is only home loan numbers tomorrow for focus. In Europe, German economic sentiment numbers Tuesday, and European inflation numbers Wednesday provide the focus. Further range trading looks likely in the short term. If the EURO can find some positive sentiment, the .7980 level (EUROAUD 1.2530), remains the next target for the EURO.

 AUD/YEN

Chinese authorities downgraded their 2012 growth expectations to 7.5% early last week. This downgrade saw the AUD come under large pressure and gave the YEN a boost in demand. The result was a sharp move lower from this pair which resulted in the lows for the week. In the face of the weak Australian GDP numbers, the AUD fought back as the global sentiment picked up and stock markets rallied. The AUD does feel vulnerable in the current environment, and current levels represent good value buying YEN with AUD.

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Market commentary:

Last week in the financial markets proved to be as interesting as expected. Price action remains volatile across most markets, but within contained ranges. The Greek debt swap process reached 95% acceptance, once the collective action clause was activated. The Greek debt is now considered to be in managed default. This was expected and the announcement has had a limited effect on the market. While volatility remains surrounding other peripheral Euro-zone member debt, issues have been contained for the time being. Economic data numbers from the US continue to improve on a relative basis. Whilst there is still talk of further quantitative easing (QE), it seems highly unlikely this would occur if the improved outlook continues. The emerging markets are showing continued signs of slowing growth. South Korea and Brazil both cut interest rates last week, in an effort to stimulate their economies. Chinese officials announced that inflation expectations were being reduced, along with growth for 2012. Lower growth prospects in Asia will affect the Australasian export sector materially, and should be evidenced in lower demand for both the Australian and New Zealand dollars in the coming months.

In New Zealand last week the Reserve Bank of New Zealand (RBNZ) monetary policy announcement was the sole focus. Interestingly the statement, and accompanying comments, point towards the record low cash rate of 2.50% remaining in place for quite some time yet. Do not expect changes to the cash rate in 2012. Over the weekend, massive dairy company Fonterra lowered their earnings forecast on the back of the high level of the NZ dollar, and lower international commodity prices. With slowing growth in many of New Zealand largest export markets, the NZD will be vulnerable to drops in demand in the coming months. This week coming has no significant economic data due for release in New Zealand.

The outlook in Australia looks mixed. The Reserve Bank of Australia (RBA) left the cash rate unchanged as expected at last week’s meeting. They remain poised to react to economic data as it unfolds. GDP numbers that followed the RBA announcement were well below trend levels and have seen the market increase the chances of further cash rate cuts. Employment numbers were more solid, and close to expectation. The slowing outlook for China adds further uncertainly to the outlook. Tomorrows home loan numbers are the sole economic data focus of the week, and should not materially impact on Australian dollar demand.

Looking forward in Europe the focus is likely to change a little going forward. Whilst the sovereign debt issues will remain closely watched, economic data should rightly come back into focus. The European Central Bank (ECB) look increasingly unlikely to cut interest rates lower than the current 1%. Inflationary pressure remains contained for the time being, but this will be watched closely. The weak EURO is obviously fortuitous for the export sector, but also means “imported” inflation, can become a problem. German economic sentiment numbers late Monday, and Euro-zone inflation numbers on Tuesday, will be the focus of the week.

The slow recuperation of the US economy is continuing. Both the non-manufacturing and employment numbers last week confirm progress is being made, albeit at a slow pace. The decreasing chances of further QE  should see the US dollar in demand over time. This week coming is another busy one in the US data wise. The Federal Reserve (FED) should announce no change to monetary policy at their meeting on Tuesday, but the statement will be widely read. Other data includes retail sales numbers on Tuesday, and inflation and consumer sentiment numbers on Friday.

Last week was a relatively uneventful one for the UK economy. Most of the focus was on neighbouring Europe. The Bank of England (BOE) left monetary policy unchanged as expected, and the other data was actually a little weaker than expected. Interestingly the Pound Sterling did see periods of demand, albeit not able to hold its gains against the Australasian currencies. Wednesdays employment numbers will be the focus for the week coming.

In Japan last week there was more mixed news. Average cash earnings numbers were better than expected, but the final GDP number for the 4th quarter 2011 was confirmed at -.2%. The YEN’s recent wild ride continued as it continued to see pressure from the US dollar, but took back some of the recently lost ground to the Australasian currencies. Today we have seen the important machinery orders number beat expectation. We have the Bank of Japan (BOJ) with their monetary policy announcement tomorrow and their monthly report on Wednesday. No change is expected from the BOJ at this meeting.

Last week was a busy one for Canadian economic data releases. Manufacturing numbers were demonstrably stronger than expected. The latest housing figures were close to expectation and the Bank of Canada (BOC) left monetary policy unchanged as expected. The BOC did offer a most positive statement, which is in line with the continuing positive outlook in the US. The BOC also commented that global risks had fallen, and is in reference to Greece’s controlled default. This week is light on Canadian economic data, so expect the general lead to come from the US data.

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