Market confident Aussies will cut rates but all depends on inflation numbers

By Sam Coxhead*:

As expected most markets have seen sideways price action over the last week.

The one stand out performance in the foreign exchange market has been the increased demand for the Pound Sterling.

This increased demand has been driven by an apparent about turn from the Bank of England(BOE) monetary policy committee on their inflation outlook.

In Europe the debt markets remain under pressure for the peripheral member states. The French elections provided a little more uncertainty with Prime Minister Sarkozy behind in the current polls.

In the US the data has become a little more mixed with weekly jobless claims numbers pushing a little higher. The Reserve Bank of Australia look poised to cut the cash rate in Australia, as long as tomorrows inflation number is appropriately subdued.

Major Announcements last week:

·  US Retail Sales +.8% vs +.6% expected

·  RBA Monetary Policy Meeting point towards lower cash rate

·  UK Inflation +3.5% as expected

·  German Economic Sentiment 23.4 vs 19.7 expected

·  European Inflation +2.7% vs +2.6% expected

·  BOC leaves monetary policy unchanged

·  BOE minutes point towards no further QE

·  NZ Inflation +.5% vs +.6% expected

·  NZ Fonterra Auction results see prices fall 10% on the month

·  UK Retail Sales +1.8% vs +.4% expected

·  CAD Inflation .3% as expected

NZD/USD 

This pairing continues the directionless sideways price action that we have seen over the last six weeks or so. This could well change this week with some significant economic information due for release in the US. In the absence of major surprises, expect the wider .8050/.8350 range to contain the price action. The RBNZ are likely to be of limited impact on Thursday, so expect the US data flow to be the primary driver for direction. In the absence of dramatically weaker stock markets, any investigations of lower support levels for the NZD will likely be aided by a weaker Australian dollar.

NZD/AUD (AUD/NZD)

The AUD saw grinding appreciation against the NZD dollar through much of last week. Lower Fonterra auction prices and benign NZ inflation data led the move lower from the NZD, which was added to by profit taking from its recent appreciation over the AUD. It has however stayed within its expected range, and likely will again this week. The focus is undoubtedly the Australian inflation number on Tuesday. A stronger  that the expected number .8% number could lead to some AUD appreciation, as the probability of a cash rate cut next week would potentially fall.

NZD/GBP (GBP/NZD)

The GBP outperformed the NZD in what was almost one way appreciation for the entire last week. An apparent turn around on the inflation outlook in the UK from the BOE was quite a revelation, and will lead to some interesting periods over the coming months. Low Fonterra auction prices and benign NZ inflation data added to the weak NZD bias. Further gains from the current levels will no doubt be harder fought for the GBP. With little impact expected from the RBNZ at their monetary policy meeting on Thursday, the lead will more likely come from the UK. Preliminary GDP data is the primary focus on Tuesday with the market expecting a return to growth with a +.1% increase in activity.

 NZD/CAD

The CAD outperformed the NZD  dollar throughout the course of last week. A decrease in Fonterra monthly auction prices and benign NZ inflation numbers eased the way for NZD underperformance. This coupled with an upbeat economic assessment from the BOC and the pressure was all one way for the pair. Gains from current levels may prove to be harder fought for the CAD as the pair is close to some substantial support levels. Canadian retail sales numbers on Tuesday, and BOC head Carney speech on Tuesday night are the focus in Canada. Whilst the local focus in New Zealand come from the RBNZ monetary policy decision on Thursday, although the unchanged decision should not garner too much reaction.

NZD/EURO (EURO/NZD)

The NZD dollar saw periods of sustained pressure from the EURO last week. Whilst the EURO was also under pressure at times, the lower Fonterra auction numbers and benign NZ inflation number put the NZD under pressure. As we approach the lower levels of an almost four month old .6100/.6350 (1.5750/1.6400) range, expect gains for the EURO to be harder fought from the current levels. The RBNZ monetary policy decision on Thursday will likely be unchanged and garner little reaction from the market. In Europe the debt markets will be under constant review, as will the polling in France and the various manufacturing numbers as released.

 NZD/YEN

The NZ dollar saw initial weakness against the YEN at the start of last week. Then the BOJ officials started to issue statements to the news agencies. Seemingly the comments point towards further easing of monetary policy at Fridays monetary policy meeting. The YEN weakened across the board and will likely move around within current ranges ahead of the BOJ meeting on Friday. The RBNZ meeting on Thursday will likely be of limited significance to the price action.

AUD/USD

This pair had a relatively contained range throughout the course of last week. This week is a big week of data for this pair. The Australian influence comes in the form of the inflation numbers on Tuesday. In the US consumer confidence, new homes sales and durable goods sales numbers all come before the FED’s monetary policy decision and statement on Wednesday. The decision will likely be unchanged monetary policy, but the outlook and accompanying statement will be closely watched. Advanced GDP numbers on Friday round out the interesting week.

AUD/GBP (GBP/AUD)                            

The GBP saw solid demand against the AUD last week, and pushed pack through some solid levels. Prospect of further quantitative easing from the BOE was always going to provide support for the GBP, and the retail sales number to end the week helped to further consolidate its gains. Gains from the current levels will be harder fought however, and the next test for the GBP strength is close by at .6380 (1.5675). The Australian focus for the week comes in the form of the inflation number on Tuesday. Only an upside surprise likely to stop the RBA cutting the cash rate to 4.0% next week. In the UK, preliminary GDP numbers on Wednesday provide the focus, with a +.1% number expected by the market.

 AUD/EURO (EURO/AUD)

The Australian dollar lost ground to the EURO across the course of last week, but by no means was the traffic all in the EURO’s favour. The prospect of a lowering cash rate should temper outright demand for Australian dollars to a reasonable extent ahead of the inflation number due in Australia on Tuesday. In Europe there are various manufacturing numbers due for release today, but for the most part the focus will remain of the peripheral member debt markets, and elections in France. Expect further sideways movement within the recent range for this pairing this week in the absence of any upside surprise from the Australian inflation numbers.

 AUD/YEN

This pairing saw mostly sideways trade throughout the course of last week. Undoubtedly the comments with reference to further easing by the BOJ officials moved the pair to its peak. The BOJ meeting on Friday will be the primary focus in Japan. In Australia, tomorrow inflation number sets the scene for the RBA monetary policy decision next week, and is of huge importance. A topside surprise from the inflation number would see strong AUD demand , however unlikely it may be.

AUD/CAD

The CAD put renewed pressure on the AUD last week, as the upbeat assessment from the Bank of Canada was digested by the market. This week the primary Australian focus is the inflation numbers tomorrow. An upside surprise to this number would see renewed AUD demand , however unlikely it maybe. In Canada the focus comes on Tuesday  also, with retail sales ahead of a speech from BOC Governor Carney. Consolidation through the strong support at 1.0200 remains the target for those with interest to buy AUD at cheaper levels with CAD.

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Market commentary:

As expected most markets have seen sideways price action over the last week. The one stand out performance in the foreign exchange market has been the increased demand for the Pound Sterling. This increased demand has been driven by an apparent about turn from the Bank of England(BOE) monetary policy committee on their inflation outlook. In Europe the debt markets remain under pressure for the peripheral member states. The French elections provided a little more uncertainty with Prime Minister Sarkozy behind in the current polls. In the US the data has become a little more mixed with weekly jobless claims numbers pushing a little higher. The Reserve Bank of Australia look poised to cut the cash rate in Australia, as long as tomorrows inflation number is appropriately subdued.

Last weeks monetary policy meeting minutes from the RBA confirmed to the market that there will likely be a cut to the cash rate to 4.0% on May the 1st. Tomorrows inflation number is expected to be around +.8% and would have to be in excess of 1.0% in order to create uncertainty over the RBA decision. This number is the highlight of the week, and pivotal direction for the AUD in the short term.

In New Zealand last week the 1st quarter inflation numbers were the key event. They showed a benign inflation environment, coming in at +.5% against an expected +.6% number. This will keep the pressure off the Reserve Bank of New Zealand (RBNZ) to hike the cash rate in the near future. Any hike from the RBNZ will likely come right at the end of 2012 at the earliest. Lowering demand for the NZ dollar was news from Fonterra that prices at their monthly online auction had fallen by 10% to the lowest level since March 2011. The RBNZ monetary policy decision on Thursday will be watched for the statement accompanying the likely unchanged decision, apart from this the lead for the NZD will again come from the wider market appetite for risk.

Stronger than expected retail sales numbers in the US saw a positive start to the week for the US economy. However the various manufacturing indexes point towards a softening of demand and the pickup in Weekly jobless claims supports this. Recovery from crisis is never easy and it is too early to clearly state a slowing in activity at this stage. Weekly jobless claims numbers will be closely watched in the near term as the labour market is the key to sustained recovery. The FED is back in focus this week with its monetary policy decision on Wednesday. Expect no change, but the accompanying comments will be as closely followed as usual. The advanced GDP numbers on Friday round out what will be a very interesting week for the US economy.

Last week was a significant week for the Pound Sterling as it saw good demand and surged across the board. The BOE minutes proved quite a catalyst and the prospect of no further quantitative easing drove the demand. The strong retail sales numbers to finish the week were the icing on the cake for those who had interest to see the GBP consolidate its gains. Further appreciation from current levels will likely become more hard fought. This week will be the preliminary GDP numbers on Wednesday the focus, with market expectation for a +.1% number.

In Europe the focus on the respective debt markets remains very much in place. Italian and Spanish debt is the primary concern and political tensions are not helping the uncertain situation. One positive eventuality from last week was the confirmation of in excess for 400 billion EURO for further support funds to come via the IMF if needed. The general elections in France of are pivotal importance, as a change from the right wing Sarkozy leadership would have far reaching implications for the Euro-zone dynamic. German numbers remain the shining economic light within Europe, and highlight why it is Germany’s interest for the EURO to survive. The weak EURO certainly contributing to the competitiveness of German exporters.  Wider European manufacturing numbers provide the initial focus ahead of the speech by ECB head Draghi on Wednesday.

In Japan last week the news has all been based around comments from Bank of Japan officials with regards to further monetary easing. Various officials hit the news wires with statements pointing towards further stimulation at this Fridays monetary policy meeting. This lowered demand for YEN, saw the YEN weaken across the board. Expect small ranges on YEN pairings ahead of Fridays announcement. Also of note this week are Japanese inflation and retail sales numbers, albeit it unlikely they will be of material impact ahead of the BOJ announcement.

In Canada last week the Bank of Canada (BOC) left the cash rate unchanged. The accompanying comments were more upbeat than expected and saw speculation about when the hiking cycle would commence from the current record low 1.0% cash rate. This interest sparked demand for the CAD across the board, with some bank analysts calling for hikes in the latter half of 2012.  Later came further comments from the BOC that tamed the enthusiasm a little, but the CAD remained broadly stronger on the week.

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