Geo-political risks in Middle East and Asia flare up; US$ demand stabilises NZ and Aussie markets

By Sam Coxhead*:

The improvement in sentiment seen in the wider market continued for the most part last week.

The recent significant programs from the European Central Bank (ECB) and US Federal Reserve (FED) were joined by re-energised stimulatory efforts from the Bank of Japan (BOJ).

The competitive debasement of currencies has not been uncommon since the onset of the global financial crisis and can be expected to continue as the global economy continues to stagger towards a sustainable recovery.

The US dollar pared back some of its recent losses last week, as geo-political risks in the Middle East and Asia flared. In Europe the stablisation of the debt markets remains in place for the most part, although further questions about the fiscal positions of Spain and Italy are likely to re-emerge overtime.

Major Announcements last week:

·  Fonterra dairy auctions sees a 2.4% boost, on traded weighted basis

·  NZ GDP +.6% vs +.4% expected

·  RBA Minutes reveal an openness to further easing of the 3.50% cash rate

·  UK Inflation 2.5% as expected

·  German Economic Sentiment -18.2 vs -19.2 expected

·  BOJ adds to QE program

·  US Existing Homes sales 4.82m vs 4.57m expected

·  HSBC Chinese Manufacturing 47.8 vs 47.6 previous

·  European Manufacturing 46.0 vs 45.6 expected

·  Canadian Inflation +.3% as expected

NZD/USD 

This pair remained locked within a contained range  throughout the course of last week. The lows were set following the BOJ monetary policy announcement that saw a sharp wave of USD demand across all markets. However, the solid NZ GDP number boosted demand for the NZ dollar and this pushed the pair close to topside resistance at .8350. This week has started with renewed risk aversion, and a subsequently lower NZ dollar. The two opposing forces of weak global growth and the increased demand from quantitative easing point towards further range bound trading this week. However if we see the support at .8150 broken, the way is opened to investigations lower to .8050.

NZD/AUD (AUD/NZD)

The NZ dollar continued its recent pressure on the AUD last week. With the RBA monetary policy meeting minutes confirming the openness to further easing from the RBA, the way was opened for some further NZ dollar appreciation. The driver came in the form of the NZ GDP result. The pair has opened the week with the NZD under a little pressure as the wider market sees increased risk aversion once again. Expect the pair to likely trade within the relatively contained .7850 - .7950  (1.2580 - 1.2740) range this week. With little in the way of top tier news in either economy this week, there seems little to push the pair outside of this recent range.

NZD/GBP (GBP/NZD)

This pair traded a very contained range last week. The NZD GDP number managed to drag the NZ dollar from last week’s lows, but once again increased risk aversion sees the NZD under pressure to start the week. Initial support comes in at the .5050 level (1.9800 resistance), and reasonable resistance comes in at .5120 (1.9530 support). It is relatively quiet in both economies this week, so expect the lead to come from the wider markets appetite to risk for the most part. The NBNZ business confidence number on Thursday will be watched and comes ahead of the UK focus in the form of the current account data. It would surprise to see the pair break out of the recent familiar .5020 - .5120 ( 1.9530 - 1.9920) during the week ahead.

 NZD/CAD

After long periods of quiet trade last week, the NZ dollar finally found its legs against the CAD following the solid NZ GDP on Thursday. This followed through to this week, before increased risk aversion today saw the NZ dollar under renewed pressure. If this pressure continues the initial support will likely come in around the last weeks lows at .8020. Most of the lead comes from Canada this week with retail sales on Wednesday and the monthly GDP numbers on Friday. In New Zealand the NBNZ  Business Confidence number on Wednesday will be watched but is unlikely to impact materially on the price action.  If the geo-political tensions continue to increase the NZD will remain vulnerable as the CAD is dragged higher by safe haven buying of the US dollar.

NZD/EURO (EURO/NZD)

Last week saw the NZ dollar again show some resistance to the recent EURO resurgence. The initial support and resistance levels of .6300 - .6400 (1.5625 – 12875) contained the bulk of the trading with the pair unable to consolidate through the extreme of either level. Look for more of the same this week, especially if the geo-political tensions continue to be elevated in Asia and the Middle East. European data will provide the economic lead this week with inflation, employment and retail sales all due for release in Europe. The NBNZ business confidence data in NZ will be watched but will be of little material impact.

 NZD/YEN

Last week saw volatile trade within a contained range for this pair. The highs were set following the BOJ announcement of further QE, albeit those highs were short lived. The solid NZ GDP numbers dragged the pair off the lows and it finished the week close to being unchanged. However to start this week the increased political tensions between Japan and China have seen the pair under renewed pressure as the YEN sees increased safe haven demand. Today’s BOJ monetary policy meeting minutes reiterate the BOJ’s intent not to be outdone when trying to undermining demand for their currency. On Thursday we have the NBNZ business confidence number in New Zealand and Friday sees Japanese inflation, industrial production and retails sales numbers due and these will all be closely watched.

AUD/USD

The Australian dollar saw further pressure from the resurgent US dollar last week, albeit the AUD managed to climb back from the lows. The pair has started this week with the US dollar seeing renewed demand as political tensions increase between Japan and China over disputed territories. Further downward pressure would see the support at 1.0350 the initial target. From an economic data perspective this week is undeniably US focused, as there is little of note due for release in Australia. Consumer confidence, home sales, durable goods and final Q2 GDP numbers will be the focus in the US. For the most part expect the wider market sentiment to provide the lead, with the geo-political tensions taking center stage first up. Further sideways trade within the broader 1.0350 - 1.0550 range looks likely in the absence of any major escalation in tensions from current levels.

AUD/GBP (GBP/AUD)                            

After some initial Australian dollar weakness last week, this pair has traded in a small and contained range. Certainly the support at .6400 (1.5625 resistance) provides an initial target should we see any further pressure on the AUD. Increasing geo-political tensions may see the AUD under some pressure, but this seems reasonably unlikely at this stage. With little news of note in either economy, the current account and final Q2 UK GDP numbers on Thursday will be closely watched. Private sector credit in Australia will also be watched, but should be of very limited impact to the price action for the pair.

 AUD/EURO (EURO/AUD)

After some initial weakness the Australian dollar put in a grinding performance against the EURO last week. The vulnerability in the EURO crept back in and profit taking from its recent large appreciation. However the EURO finished the week off its lows and it opens this week with geo-political tensions leaning on the Australian dollar. The nearby .8080 resistance (1.2380 support) looms large and remains the near term target should these tensions diffuse in the short term. This week sees a busy economic calendar in Europe. Inflation, employment and retail sales numbers come throughout the week and provide the focus. In Australia there is an absence of top level economic data this week, so for the lead for the most the pair will rely on Europe for the lead.

 AUD/YEN

This pair remains in what has become familiar territory. Last week the AUD saw subtle early pressure and in strange price action this accelerated to push to the lows of the week following the BOJ announcement of aggressive QE. These surprise lows did not last long as the AUD put in a solid recovery before the risk aversion again increased into the end of the week. This week sees the geo-political risk in Asia and the Middle East increase and this has seen the YEN benefit and the AUD under some renewed pressure. The 81.00 remains the target in the short term and a sustained break of this level would open up the way for investigation lower to deeper support at 79.50. Japan remains the focus for a second week running. Friday sees the release of the latest inflation, industrial production and retail sales numbers and these will be closely watched.

AUD/CAD

This pair remains trapped within its recently contained range. Support at 1.0150 held last week and the AUD saw some demand on Friday in the run up to the Canadian inflation numbers. These were as expected, and the escalating geo-political tensions over the weekend have seen the AUD come back under some renewed pressure to start the week. This weeks sees a Canadian focus in the economic data sense. Retail sales and GDP in Tuesday and Friday respectively will be closely watched. Expect for large portions of the week the price action to be driven by the wider market’s appetite for risk. If the risk aversions keeps pressure on the AUD, the 1.0150 should provide reasonable initial support.

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Market commentary:

The improvement in sentiment seen in the wider market continued for the most part last week. The recent significant programs from the European Central Bank (ECB) and US Federal Reserve (FED) were joined by re-energised stimulatory efforts from the Bank of Japan (BOJ). The competitive debasement of currencies has not been uncommon since the onset of the global financial crisis and can be expected to continue as the global economy continues to stagger towards a sustainable recovery. The US dollar pared back some of its recent losses last week, as geo-political risks in the Middle East and Asia flared. In Europe the stablisation of the debt markets remains in place for the most part, although further questions about the fiscal positions of Spain and Italy are likely to re-emerge overtime.

Australia

The Reserve Bank of Australia (RBA) monetary policy meeting minutes last week confirmed their openness towards further lowering of their cash rate as the economy slows. Expect between 25 to 50 points of easing in the three remaining monetary policy announcements before the end of 2012. A lowering cash rate should undermine demand for the Australian dollar, and balancing this will be the increased demand emerging from the efforts of the major central banks. On a positive note last week,  credit agency Standard and Poor’s re-affirmed Australia’s AAA credit rating. The IMF also issued comments on the Australian economy, stating expected growth for 2013 at 3.25% and a broadly favourable outlook. Of indirect influence were the latest HSBC Chinese Manufacturing  survey numbers that confirmed a 15th straight month of contraction within the sector. But the pace of contraction is slowing, and this points towards a stablisation of conditions. This week is relatively quiet for Australian economic data, with private sector credit numbers on Fridays of note, but likely of limited impact to price action.

New Zealand

A further rebound in global diary prices, coupled with solid NZ 2nd quarter GDP numbers helped boost demand for the New Zealand dollar last week. The increased activity in the second quarter was led by the increased diary revenues and boosted construction activity centered around the Christchurch rebuild. With just Thursday’s NBNZ business confidence numbers due for release in New Zealand, expect the wider market risk appetite to set the tone for the NZ dollar performance this week.

United States

Last week saw a rebound in demand for the US dollar as geo-political tensions increased in Asia and the Middle East. Housing, construction and manufacturing numbers were close to expectations, while a boost in the highly regarded manufacturing indicator, the Philadelphia FED Manufacturing Index saw a smaller contraction than was forecast. Interestingly, various FED officials hit the news wires with debate around latest quantitative easing (QE) program. Next week’s FED monetary policy meeting minutes should be interesting, indications are that not all board members were in favour of increased program. This week lacks top tier data releases, but consumer confidence and durable goods sales numbers will be closely watched. More likely the lead for the US dollar will come from any sentiment changes in Europe, and those effects on EURO demand.

Europe

Business sentiment numbers showed a good rebound from somewhat depressed levels last week. This will be encouraging to the ECB, as it offers encouragement that their efforts to stablise the economy are starting to work. European manufacturing numbers remain patchy. Germany has seen a pickup in activity whilst the rest of Europe remains at somewhat depressed levels. This ties in with news from Germany that tax revenue number are ahead of  forecast, pointing towards increased spending ahead of next year’s elections. ECB rhetoric towards a lower European cash rate seems to be simple jawboning as any further easing of the cash rate is unlikely with inflation remaining at relatively elevated levels. The lastest inflation, employment and consumer spending numbers are due this week and provide the focus.

United Kingdom

UK inflation numbers revealed stubbornly high price pressure last week. This news came as the Bank of England (BOE) monetary policy meeting minutes revealed strong internal debate about the recent policy easing, and the influence in inflation. Retail Sales numbers were surprisingly strong, and encouragingly the detail backed up the headline number. The Government deficit numbers on Friday revealed a record budget deficit for August. Interestingly, last week BOE Governor King stated that increased budget deficit numbers could be tolerated in the short term to help stablise growth prospects. This week is a quiet one for UK economic data, with just current account numbers on Thursday to provide the focus.

Japan

The BOJ went on the offensive last week, increasing their QE program more aggressively that market forecasts. The immediate reaction was a weaker YEN, but unfortunately the weakness was short lived as the tensions with the Chinese over disputed Islands pushed demand for YEN. BOJ Governor Shirakawa commented that the global slowdown was intensifying and this had seen the Japanese economy stall. Uncertainty remains high in the global economy and with such conditions persisting the BOJ would continue with further QE programs when required. Earlier today the minutes from the monetary policy meeting were released. These revealed much of the same rhetoric as recently seen, and reiterates the BOJ commitment to helping stimulate growth, and as a conscious byproduct, trying to undermine demand for the YEN. Household spending, inflation, industrial production and retail sales numbers on Friday round out what is a relatively busy week for news in the Japanese economy.

Canada

Last week was a quiet one for Canadian economic news. Fridays inflation numbers were the sole focus and these came in at +.3% for the month as expected. This week proves to offer more interest with retail sales numbers on Wednesday, ahead of the monthly GDP number on Friday. The Canadian economy continues to just bubble along due to the slow recovery in important trading partner and neighbor the US. As things across the border improve, so will expectations of Bank of Canada increases to the cash rate. For this reason expect the US news to continue to drive direction for the CAD.

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