Fed's failure to announce QE III saw NZ dollar come under immediate pressure

By Sam Coxhead*:

Last week proved to be as interesting as expected. As we move towards another critical time in the EURO’s history, it was announced the EU are to initiate a 130 billion stimulus plan to boost growth.

Accompanying this positive news is the not so surprising news that the European Central Bank (ECB) is to loosen its collateral rules to enable banks to gain further access to funding. This week’s EU summit provides further room for the pushing of initiatives to help stablise the EURO.

Global growth is looking sluggish and further downward adjustments to forecast can be expected. Market conditions have been difficult in the last week or so.

Heightened uncertainty pushing levels of liquidity lower. Lower levels of liquidity often mean sharper than usual moves can frequently happen, and we expect these conditions to continue this week.

Major Announcements last week:

·  UK Inflation 2.8% vs 3.0% expected

·  German Economic Sentiment -16.9 vs +3.8 expected

·  US Building Permits .78m vs .73m expected

·  US FED’s OMC leaves QE unchanged, but extend “Operation Twist”

·  NZ 1st QTR GDP +1.1% vs +.4% expected

·  Chinese HSBC Manufacturing Survey 48.1 vs 48.4 previous

·  Euro-zone Manufacturing Index 44.8 vs 44.9 expected

·  UK Retail Sales +1.4% vs +1.1% expected

·  Canadian Retail Sales -.3% vs +.2% expected

·  US Philly Fed manufacturing Index -16.6 vs +.7 expected

·  German Business Climate Index 105.3 vs 106.1 expected

·  Canadian Inflation +.2 vs .3% expected

·  EU announce 130billion stimulus plan

NZD/USD 

The NZD saw grinding appreciation against the US dollar for a good portion of last week. The lack of an extension of its QE program by the FED at its monetary policy meeting saw the NZ dollar come under immediate pressure. This pressure was in line with reduced demand in other growth assets. Resistance up around the .8000 level is firmly in place and will present a reasonable hurdle for investigations higher by the NZD. With just the NBNZ Business Confidence survey to focus on this week, expect the primary driver to come from the wider market risk appetite. Lower levels of liquidity than usual means the market will be vulnerable to sharp moves on light volume.

NZD/AUD (AUD/NZD)

The NZD saw consolidation at recently elevated levels against the AUD last week. The NZ GDP number was the driving force of the break through the .7830 level. Whether it can sustain the gains now becomes the question. The RBA minutes last week point towards a slightly higher cash rate track throughout 2012, this is AUD supportive and certainly helped the AUD halt any further gains by the NZ dollar. Expect range trading this week, with a lack of top tier economic in either economy. Any further evidence of central bank diversification into AUD , with obviously see the AUD outperform, at least in the short term. The .7830 (1.2770) will present the initial target for any AUD strength.

NZD/GBP (GBP/NZD)

This pairing was volatile within a reasonably contained range last week. Both currencies saw periods of weakness, which drove the somewhat choppy price action. The .5000 (GBPNZD 2.000) level provides the initial hurdle for the GBP, if we see increased risk aversion soften the demand for the NZD this week. The UK economy will be the bulk of the focus this week with current account, final GDP readings and a speech by BOE Governor King on Friday. Waves of capital flight out of Europe have been providing the GBP will periods of support of late, and expect this to continue in the short term. This has been balanced by further QE expectations from the BOE. These are the tensions that should see the contained trading range continue this week.

 NZD/CAD

This pairing was relatively contained in its trade last week. It spent the majority of the week between .8080 - .8130. The NZD has opened this week under a little pressure as the wider market US dollar demand has carried the CAD higher. This week’s focus starts with the NBNZ Business Confidence survey on Wednesday, ahead of the monthly Canadian GDP numbers on Friday. Expect further gains from currents levels to be hard fought for the NZD, with the initial resistance at .8130. Initial support on NZD weakness will likely come in at .8000.

NZD/EURO (EURO/NZD)

The NZ dollar saw initial strength last week as the EURO was under pressure across the board. After the initial NZD outperformance, the trading was choppy within what was a relatively tight range. This week’s EU summit provides the core focus for the pairing. The NBNZ Business Confidence survey on Wednesday provides an NZD focus, but will be of limited impact on price action. Certainly from a historical perspective current levels offer very good buying of EURO with NZ dollars.

 NZD/YEN

The NZD saw some good appreciation against the YEN at times last week. The strong NZ GDP number was coupled with further verbal intervention from various Japanese officials about the unsustainable strength of the YEN. The NZD momentum was halted when the market reacted to the FED’s lack of action with regards to further QE at this time. The NBNZ Business Confidence survey is the focus for the NZ economy this week, but will be of limited impact. In Japan the retail sales number on Thursday and household spending and industrial production numbers on Friday will be closely watched.

AUD/USD

The Australian dollar saw reasonably demand leading up to, and following the RBA monetary policy meeting minutes last week. But the momentum turned completely when the FED decided to hold of increasing its QE program. The market reacted by aggressively selling the AUD. It has bounced off support at the 1.0000 level twice so far but remains under pressure and close to that support level. In the absence of any top tier Australian data the lead will likely come from developments at the EU summit this week. There is the usual array of economic data in the US this week. Given the softening nature of the recent releases in the US, any demonstrably weaker than expected data will likely lead to the largest reaction.

AUD/GBP (GBP/AUD)                            

This pairing traded within a relatively contained range throughout the course of last week. The AUD saw demand initially and the pair pushed towards the .6500 (1.5385) level where the GBP halted the momentum. The AUD saw immediate selling pressure following the FED’s decision to hold off increasing its QE measures at it monetary policy meeting. This week is a quiet one for the Australian economic calendar, so expect the focus to come from the UK economy. UK retail sales numbers on Wednesday are followed by final Q1 GDP numbers Thursday and BOE Governor King speaking on Financial stability on Friday.

 AUD/EURO (EURO/AUD)

The AUD saw sharp appreciation over the EURO at the start of last week. The EURO was under pressure across the board and this eased the way for the AUD move to set the highs. The remainder of the week was more contained and the AUD ceded ground following the FED’s decision to leave its QE program unchanged. Expect further sideways trading ahead of the EU summit later in the week. Again the bulk of the focus will come from Europe in the absence of top tier economic data in Australia. Historically, even current levels represent good value buying of EURO with Australian dollars.

 AUD/YEN

The Australian dollar saw solid demand against the YEN for the majority of last week. The ongoing threat of BOJ intervention to weaken the YEN was helped along by the less “dovish” than expected monetary policy meeting minutes from the RBA. The AUD demand dried up following the FED’s decision to hold off increasing its QE program at their monetary policy meeting on Wednesday in the US. Direction this week will likely come from the wider market appetite for risk, with that lead undeniably coming from Europe and the EU summit for the most part.

AUD/CAD

The AUD saw good demand to start the week, with help coming from the less “dovish” than expected RBA monetary policy meeting minutes. The pair ran into solid resistance at the 1.0400 level and when the FED announced an unchanged QE program the AUD saw immediate pressure from the CAD. This week’s focus will come from the wider market risk appetite for the most part. But of note will be the Canadian monthly GDP number on Friday.

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Market commentary:

Last week proved to be as interesting as expected. As we move towards another critical time in the EURO’s history, it was announced the EU are to initiate a 130 billion stimulus plan to boost growth. Accompanying this positive news is the not so surprising news that the European Central Bank (ECB) is to loosen its collateral rules to enable banks to gain further access to funding. This week’s EU summit provides further room for the pushing of initiatives to help stablise the EURO. Global growth is looking sluggish and further downward adjustments to forecast can be expected. Market conditions have been difficult in the last week or so. Heightened uncertainty pushing levels of liquidity lower. Lower levels of liquidity often mean sharper than usual moves can frequently happen, and we expect these conditions to continue this week.

Australia
Last week the latest Reserve Bank of Australia (RBA) monetary policy meeting minutes revealed a less “dovish” tone than the market expected. Further easing to the cash rate is less certain than the market had priced, albeit moves will be reliant on the economic data flow in the short term. Of interest is further evidence of central bank diversification into the AUD and Australian bonds. Reuters sight Russia as the latest to be buying Australian Government bonds. With little in the way of top tier economic data in Australia this week, expect the lead to again come from the wider market appetite for risk, which will be predominantly driven by progress in Europe.

New Zealand
The top news in New Zealand last week was the surprisingly strong 1st quarter GDP number. The strength in the number was reasonably broad based and saw many economists scrambling to explain it. This week is relatively quiet on the NZ economic data calendar, the focus will be the monthly release of the NBNZ Business Confidence Survey on Wednesday. The overriding lead will no doubt come from events in Europe and any progress made at the EU summit.

United States
The US economy has certainly hit a soft patch of economic data recently. Although housing numbers are holding up, labour market indicators have softened and manufacturing seems to have weakened also in the 2nd quarter. The FED extended their initiative keep long term interest rates low, but resisted further full blown quantitative easing (QE) for the time being. This week sees consumer confidence, durable goods sales, home sales and the final GDP numbers for the 1st quarter due for release. Europe will also continue to be a primary driver of sentiment for the wider market, and will certainly affect demand for US dollars. Any surprising progress at the EU summit should see the USD under a little pressure, much to the pleasure of the US export sector.

Europe
It has been an interesting last week or so in Europe. The indicators have improved, but the EURO remains under pressure. The introduction of the 130 billion EURO stimulation program is positive, but will not be of immediate impact. The ECB loosening of collateral rules for banks borrowing from the ECB had been flagged, but was well received by the market none the less. It is interesting that the EURO has not seen any material gains on this news. Adding to the intrigue is the move in the Spanish debt markets back towards less dire funding levels. This should also be EURO positive. It appears the EURO is going to continue to see material gains and capital flight from Europe continues at breakneck speed. The EU summit is undoubtedly the focus for this week. Expect the emanating headlines to drive sharp moves with the lower levels of liquidity currently being seen across most markets.

United Kingdom
Inflationary pressure is finally starting to ease in the UK. This will be reassuring to policy makers, who will now be more happy to provide further monetary easing if required. The latest Bank of England (BOE) monetary policy meeting minutes illustrate how close they came to acting at their latest meeting. It is highly likely we will see further QE in the coming months and this may hamper any material Pound Sterling strength in the short term. This week sees the latest current account data, final Q1 GDP reading and a speech from BOE Governor King as the focus.

Japan
The Japanese Yen market remains tense as the threat of further intervention from Japanese finance officials remains real. The YEN has softened a little of late, but further weakness will have to be seen to take the “bold action” intervention risk out of the market. Unsurprisingly last week’s trade deficit was wider than forecast reiterating what officials have been saying about the harmful effect of the strong YEN. This week sees the focus on the release of the retail sales, inflation and industrial production numbers.

Canada
Canadian officials continue to voice their concern at the hot residential property market in parts of Canada. Bank of Canada (BOC) staff have started to talk of alternative strategies aimed at cooling the property sector without curbing growth in other parts of the economy. Interestingly the BOC growth forecast will be likely revised down, as the economic recovery in the US slows. Softer inflationary pressure mirrors lower activity in the retail sector than what was expected. This week’s focus comes in the form of the monthly GDP number, which will be released on Friday.

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