Japanese current account deficit and surprise QE program sees continued pressure on YEN

By Sam Coxhead*:

Sentiment in the foreign exchange markets proved to be as interesting last week as expected.

Whilst the upshot has been further range trading for most pairings, a sense of change is apparent.

The US dollar saw a distinct period of strength, before giving up its gains.

The week saw continued optimism for the US outlook for the first half of 2012, being balanced by a move back into European debt markets, as fears subside for the time being around Greece.

The interest rate gap between periphery Euro-zone members and that of benchmark Germany narrowed as the fears subsided.

This lends its self towards EURO demand in the short term, and tamed the resurgent demand for the US dollar.

As long as indicators remain positive in the US, demand for the US dollar will return.

Uncertainty around Asian growth remain, and this should undermine any real further demand for the Australasian currencies in the short term.
 
Major Announcements last week:

·  Australian Home Loans -1.2% vs -.5% expected

·  German Economic Sentiment 22.3 vs 10.6 expected

·  European Inflation 1.5% on an annual basis

·  US Retail Sales .9% vs .8% expected

·  US Federal Reserve laves monetary policy unchanged as expected

·  UK Unemployment rate 8.4% as expected

·  US Philadelphia FED Manufacturing Index 12.5 vs 11.9 expected

·  US Inflation .4% as expected

·  US preliminary Consumer Sentiment 74.3 vs 75.8 expected

NZD/USD 

Whilst the US dollar could not consolidate its gains against the NZ dollar last week, it remains a threat. It is likely that we will see further range trading this week for the most part, with the initial support again coming in at .8220. NZ economic data should dominate the focus, in particular the GDP number on Thursday. US FED comments will also garner attention, with Bernanke in particular on Tuesday one to watch.

NZD/AUD (AUD/NZD)

As expected this pairing remained in its somewhat tight and familiar range. Again the chance of any kind of breakout of this .7700 - .7830 (1.2770 - 1.2990) range is likely to come from an increased chance of an RBA easing of the cash rate. With this in mind the latest RBA monetary policy meeting minutes will be closely watched when released on Tuesday. Obviously the NZ GDP numbers on Thursday will be closely watched, but are unlikely to push a consolidated break from this established range.

NZD/GBP (GBP/NZD)

This pairing also remains in its recently familiar range. The NZD managed to recover from what was some intense pressure at times, but breaking new ground from the current lofty levels remains a hard task. Support at .5150 (resistance 1.9325) remains the key level in the short term. It is a busy week for economic data for this pair. UK inflation on Tuesday will be closely watched, as will the BOE monetary policy meeting minutes and annual Budget release on Wednesday. In NZ, current account numbers Wednesday and GDP on Thursday are the key, but the NZ data is unlikely to push the pair to any new range.

 NZD/CAD

The NZ dollar saw some intense pressure from the CAD in the middle of last week, but has since recovered strongly. From current levels further moves high should be far harder fought. Further range trading seems likely until the CAD can again apply pressure but consolidate its gains through .8050 support. NZ current account and GDP data on Wednesday and Thursday will be closely watched. In Canada the retail sales and inflation numbers on Thursday and Friday will be the focus.

NZD/EURO (EURO/NZD)

This pairing continued to trade in its recent range throughout the course of last week. At times moves within the range were rapid. Most of this was driven by moves in the EURO on other pairings. It is likely that the familiar range will continue this week. Current levels continue to offer good value buying of EUR with NZD. European focus has moved from Greece for the time being, and manufacturing numbers and ECB head Draghi’s speech on Friday will be closely watched. In New Zealand the current account and GDP numbers on Wednesday and Thursday will be the highlight, but are unlikely to pushing the pairing into any new range.

 NZD/YEN (NZD/YEN)

The NZD has consolidated at elevated levels against the YEN. It will be an interesting couple of weeks for this pairing, as it edges up towards levels not seen since before the start of the global financial crisis in 2008. Given the scale of the NZD appreciation over the last 12 weeks, further ground from the current levels should prove to be harder fought. Of interest will be the actions of Japanese exporters as the end of March approaches. Repatriation of funds can be of significant influence when it occurs on masse. In the absence of any Japanese data this week, the NZ current account and GDP numbers on Wednesday and Thursday will be closely watched.

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)                            

This pairing was contained within a relatively small, but familiar range last week. Support at .6650 (resistance 1.5040) held after the AUD came under pressure, and that level remains the key for any renewed Pound Sterling strength in the short term. The latest RBA monetary policy meeting minutes release on Tuesday will be the Australian focus for the week. In the UK inflation numbers on Tuesday, and BOE monetary policy meeting minutes and the annual budget releases on Thursday will also be watched. Expect limited upside from the current lofty levels for the AUD, which represent good value buying of GBP.

 AUD/EURO (EURO/AUD)

For the most part this pairing traded a relatively narrow range throughout last week. The AUD saw some intense early pressure from the EURO, but the EURO strength was not sustained and ground was quickly given back up. Again initial support will come around the .8020 level (resistance 1.2470). Consolidation through this level opens the way for further EURO strength. In Europe this week we have various manufacturing data releases and a speech by ECB head Draghi on Friday. In Australia the focus comes from the latest RBA monetary policy meeting minutes as they are released on Tuesday. If Euro-zone peripheral member state interest rates continue to fall, the EURO should apply further pressure on the AUD.

 AUD/YEN

The AUD has continued its rise against the recently weaker YEN, albeit with slowing momentum. Further ground from current levels should prove a harder task for the AUD. Tomorrow the RBA release their latest monetary policy meeting minutes and these will be closely followed by the market. There is an absence of economic data due for release in Japan this week. Potentially helping increase YEN demand will be the approach of the end of financial year for Japanese corporations. Often the repatriation of offshore earnings provide a boost for the YEN in the final weeks of March. What role this plays remains to be seen, but at the least it will be taken into consideration by those with interest to push the pairing higher. Current levels represent good value buying of YEN with Australian dollars.

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Market commentary:

Sentiment in the foreign exchange markets proved to be as interesting last week as expected. Whilst the upshot has been further range trading for most pairings, a sense of change is apparent. The US dollar saw a distinct period of strength, before giving up its gains. The week saw continued optimism for the US outlook for the first half of 2012, being balanced by a move back into European debt markets, as fears subside for the time being around Greece. The interest rate gap between periphery Euro-zone members and that of benchmark Germany narrowed as the fears subsided. This lends its self towards EURO demand in the short term, and tamed the resurgent demand for the US dollar. As long as indicators remain positive in the US, demand for the US dollar will return. Uncertainty around Asian growth remain, and this should undermine any real further demand for the Australasian currencies in the short term.
 
In New Zealand the calendar was free of top tier economic data last week. Residential property in New Zealand is starting to see a pick up in the number of sales, albeit price increases remain small. This will no doubt be in line with the increased understanding that the Reserve Bank of New Zealand (RBNZ) are unlikely to be raising the cash rate in 2012. This week sees the current account data released on Wednesday. The long awaited 4th quarter GDP number will be released on Thursday and will be the domestic focus of the week.
 
In Australia last week home loans numbers again pointed towards a tepid property market. This week has a distinct central bank focus with Reserve Bank of Australia (RBA) Governor Stevens making a speech today, and the release of the latest monetary policy meeting minutes tomorrow. The RBA have made it clear that moves in the cash rate from the current level of 4.25%, remain squarely placed on the economic data flow in the short term. If the data points towards a further reduction in the cash rate, there would likely be a fall in AUD demand. The domestic economy in Australia became more mixed over the last couple of quarters, and the outlook for Asian growth remains pivotal for the short term outlook in Australia. Chinese manufacturing numbers on Thursday will be closely watched by people with Australian dollar interests.
 
The US dollar saw some strong demand at times last week. Whilst it was unable to consolidate its move to higher levels, fundamentals are pointing toward further demand over time. A move higher in interest rates, and relatively solid economic data, should see demand become more consistent as the likelihood of further full blown quantitative easing (QE) is discounted. At the FED monetary policy meeting last week they noted the beleaguered US housing remained depressed, but for the most part they were more upbeat than expected. This week sees the focus on the housing market with building permit, existing, and new homes sales numbers due for release. A number of FED board members are also due to make on the record speeches, including chief decision maker Ben Bernanke.
 
The interesting move in European markets last week was the contraction of the gap in interest rates between the peripheral member states and that of the core of France and Germany. It indicates investors have more confidence to chase the higher yield and is provided some strong EURO support at times. On Friday there was clear evidence of speculative investors who had sold Euro, scrambling to buy EURO to stem their losses. German economic sentiment numbers were stronger than expected and is an encouraging sign. Inflation remains under control as last week’s reading was just 1.5% on an annual basis. This week various manufacturing numbers due for release and a speech by European Central Bank (ECB) chief Draghi on Thursday. Any material change in peripheral member interest rates will impact on EURO demand.
 
Last week in the UK there was little in the way of economic news, apart from the unemployment rate being confirmed at 8.4% as expected. Interestingly in tandem with the EURO, there were times of strong demand for GBP, as investors scrambled buy back GBP they had sold. This week will prove to be an interesting one, with an array of economic data due for release. Tuesday’s inflation numbers start the week. These are followed by Bank of England (BOE) monetary policy meeting minutes, and the annual budget release on Wednesday. Thursday sees the latest retail sale figures due. The inflation numbers are likely to be the key for the week, as low numbers enable the BOE to maintain the option of further QE if required.
 
The economic pressure on Japan continues with machinery orders and manufacturing numbers coming in below expectations. The Japanese current account deficit and surprise QE program from the Bank of Japan (BOJ) has seen continued pressure on the YEN. This week sees very little in the way of economic data from Japan. Of note is the approach to the financial year end for Japanese corporate, 31 March. This can see repatriation of off shore earnings ahead of the date, and could be of particular significance this year considering the Yen’s rampant strength.  
 
In Canada last week the second tier capacity utilisation and manufacturing numbers were both slightly weaker than expected. The CAD did however see periods of strength against the Australasian currencies, albeit the gains were not able to be maintained. This week sees retail sales numbers released on Thursday and the inflation numbers Friday.

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