Sentiment flipped on its head as latest set of US corporate earnings disappoint

By Sam Coxhead*:

Last week continued the theme of mixed perfomances from financial markets for the most part.

Initially sentiment was relatively bouyant with most risk assets seeing gains through until the middle of the week.

Unfortunately, Friday saw sentiment turn  and stock markets came under intense pressure as a disappointing corporate earnings season played out in the US.

The result of which was an interesting dislocation between the wider asset markets, and the foreign exchange market.

The currencies performing relatively well in the face of the somewhat dramatic fall in equity indexes.

Major Announcements last week:

·  Chinese Inflation 1.9% YoY as expected

·  US Retail Sales 1.1% vs .6% expected

·  NZ Inflation .3% QoQ vs .5% expected

·  UK Inflation 2.2% YoY as expected

·  US Inflation .1% MoM vs .2% expected

·  Chinese GDP 7.4% as expected

·  UK Retail Sales .6% vs .4% expected

·  Canadian Inflation .2% MoM vs .3% expected

NZD/USD 

This pair remains stuck within its recently familar range. Last weeks lower than expected inflation number saw demand for the NZD undermined as it underperformed. This week sees the focus come from the respective central bank statements. Of note will be the RBNZ and the first outing for new Governor Wheeler. If the equity markets continue to give up ground, the NZ dollar should re-test support levels.

NZD/AUD (AUD/NZD)

Following last week's lower than expected NZ inflation number the NZ dollar saw real pressure from the Australian dollar. The NZD weakness was finally stemmed by the significant support at .7880 (resistance 1.2700). This week has started with the NZD taking back a little of last weeks lost ground. The focus this week comes from the Australian 3rd quarter inflation number on Wednesday, and the RBNZ monetary policy meeting Thursday. Both events will be closely followed. Any hint at a potential easing from the RBNZ would see the NZD support level at .7880 (1.2700) under renewed pressure. In the absence of that bias from the incoming Governor Wheeler, current levels provide reasonable levels to buy NZ dollars with AUD.

NZD/GBP (GBP/NZD)

The NZD saw some pressure from the GBP following last weeks lower than expected NZ inflation number. The positive UK data added a little to that pressure, even though the NZ dollar was able to recover. The pair remains in recently familiar ranges as we start this week. The bulk of this weeks focus comes on Thursday, as we have the RBNZ monetary policy meeting ahead of the preliminary 3rd quarter UK GDP number.

 NZD/CAD

The NZ dollar made almost constant gains against the Canadian dollar last week. It was entirely a case of CAD under performance, as opposed to any material NZD strength. With the market expecting the BOC to remove their "hawkish" stance towards the cash rate at Wednesday meeting, the CAD may stay under pressure. Ironically, similar risks are at play in New Zealand following the lower than expected inflation number last week. On Thursday the RBNZ hold their monetary policy meeting, and whilst no change is expected, new Governor Wheeler's comments will be closely watched, for any bias towards easing the cash rate. Given the move last week, current levels offer reasonably good buying of CAD with NZ dollars.

NZD/EURO (EURO/NZD)

The NZ dollar saw some intense pressure from the EURO last week following the lower than expected NZ inflation numbers. However, towards the end of the week the NZD was able to consolidate back off its four month lows. This week expect the European manufacturing numbers on Wednesday to hold the focus ahead of Thursday's RBNZ monetary policy meeting. In the event of an approach from Spain for funding assistance, increased demand for EURO would likely be seen in the short term at least.

 NZD/YEN

This pair remains in very faimilar territory as both currencies saw periods of pressure last week. There was little in the way of economic data in Japan, and the lower than expected inflation number provided the focus in New Zealand. This week sees the RBNZ monetary policy meeting the sole focus in NZ ahead of the Japanese inflation number on Friday. Expect the current range to continue in the short term at least.

AUD/USD

The Australian dollar saw strong demand against the US dollar for much of last week. The pair was taken from the highs in the last couple of sessions as the equity markets really gave up some ground. The pair starts the week right above inital AUD support at 1.0300. The focus will come from Australian inflation numbers on Wednesday, ahead of the FED's monetary policy meeting. Expect no change from the FED, but the accompanying comments will be closely watched. The advanced 3rd quarter US GDP numbers come late Friday and will be closely watched. Expect further sideways trade within the recent ranges in the short term.

AUD/GBP (GBP/AUD)                            

The Australian dollar made steady gains against the Pound Sterling throughout last week. It was a case of material AUD demand in the face of some solid UK economic data. The appreciation slowed finally as the equity markets turned sharply lower to finish the week. This week sees the focus start with Australian 3rd quarter infrlation numbers on Wednesday, ahead of the 3rd quarter UK GDP numbers on Thursday. Expect further gains from the currents levels to be harder fought for the AUD, especially if the pair approaches resistance at .6500 (support 1.5385). If the Australian inflation number undershoots, the expected .5% rise, the current levels may well prove to have offered good value buying of GBP with AUD.

 AUD/EURO (EURO/AUD)

This pair remains squarely within its recently familiar range and we start this week at almost identitcal levels to where last week commenced. The initial focus will come from the 3rd quarter Australian inflation numbers on Wednesday, which are followed by the European manufacturing numbers later that day. Any progress on a Spanish approach for funding assistance, would boost EURO demand in the short term at least. If the Australian inflation numbers undershoot expectation, the AUD may see a drop in demand as the way is eased for further cash rate reductions from the RBA, if needed.

AUD/YEN

The Australian dollar made solid gains against the Japanese YEN last week. It was dual forces of softer YEN demand, and periods of solid demand for Australian dollars, that drove the move. However the momentum waned late in the week, as equity markets suffered following various reports of lower than expected corporate earnings. This week sees inflation numbers as the focus in both economies. Wednesday sees the release of the 3rd quarter Australian inflation data ahead of the monthly numbers in Japan on Friday. Expect any further AUD appreciation to be harder fought in the near term, especially if the pair approaches the resistance at 82.50.

AUD/CAD

This pair saw a perfect storm last week, with the AUD dramatically higher against the CAD the result. The AUD saw across the board demand, and this coupled with material Canadian dollar weakness, eased the way for the pair to resistance at 1.0280. The equity market weakness at the end of the week was just enough to curb further appreciation. This week provides plenty of interest with Canadian retail sales numbers coming ahead of the latest BOC announcement on Tuesday. Australian 3rd quarter inflation numbers come on Wednesday, ahead of further noise from the BOC in the form of the quarterly monetary policy report late Wednesday. In the event of further AUD appreciation, 1.0280 offers initial resistance ahead of 1.0320.

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Market commentary:

Last week continued the theme of mixed perfomances from financial markets for the most part. Initially sentiment was relatively bouyant with most risk assets seeing gains through until the middle of the week. Unfortunately, Friday saw sentiment turn  and stock markets came under intense pressure as a disappointing corporate earnings season played out in the US. The result of which was an interesting dislocation between the wider asset markets, and the foreign exchange market. The currencies performing relatively well in the face of the somewhat dramatic fall in equity indexes.

Australia

Last week was a relatively quiet one for economic news in Australia. The Reserve Bank of Australia (RBA) released the minutes from their previous monetary policy meeting and these were mostly unsurprising and point towards one further easing to the cash rate before year end, inline with interest rate market pricing.  The Chinese economic indicators point towards a stablisation of growth indicators and this should be of direct benefit to the Australian export sector in the coming quarters. This weeks focus comes from Wednesday's release of the 3rd quarter inflation numbers and these will be closely watched.

New Zealand

Last week saw the the release of the materially lower than expected 3rd quarter inflation numbers in New Zealand. This is interesting as the new Reserve Bank of New Zealand (RBNZ) Governor Wheeler considers his statement that will accompany his almost certain unchanged monetary policy decision this Thursday. There have been increasing calls for the possibility of a further easing  from the current 2.50% cash rate in the coming quarters, but this seems an unlikely scenario to my mind. The increasing momentum from the Christchurch rebuild, and the bouyant Auckland property market, are likely to stem further lowering in the inflationary pressure.

United States

The US economy continues to show mostly positive signs for its lethargic recovery.  Last week produced better than expected retail sales, inductrial production and existing home sales numbers. The company reporting season has not been as positive, and this illustrates an environment of stubbornly low growth. Providing interest this week is the Federal Reserve (FED) and their monetary policy statement on Wednesday. No change to monetary  policy is expected from the FED, but the comments will to closely watched ahead of the advanced 3rd quarter GDP numbers on Friday.

Europe

Europe remains a complex proposition to keep a handle on. Sentiment generally remains positive, although much of this is pegged to a Spanish approach for funding assistance. Last weeks EU summit actually produced a result of sorts in term of an agreement on the future on Euro-zone banking sector supervision. This initiates the path towards the ultimate goal of a Euro-zone banking union. This week will cotniue the focus on Spain, as well as revealing the latest manfacturing numbers on Wednesday.

United Kingdom

Last week proved to be an interesting one for the UK economy. The latest inflation numbers provided the focus and they came out on expectation with a yearly rate of 2.2%. Unemployment claims numbers and retail sales data were both more positive than expected and the Unemployment rate surisingly droped to 7.9%, the lowest level in a year. Also of note were lower than expected public sector borrowing numbers. Recent signs have been more positive in the UK and indicate an emergance from their "double dip" recession. This should be confirmed on Thursday as the preliminary 3rd quarter GDP numbers are announced. Also of note this week will be comments from Bank of England (BOE) Governor when he makes an on the record speech  late Tuesday. Generally a more positive enviroment in Europe will benefit the UK economy in the coming months, although this could quickly turn, if negative sentiment returns.

Japan

Last week was a quiet one for economic news in Japan. Bank of Japan (BOJ) Governor again hit the headlines with downbeat comments about both the domestic and internation economies. Whilst acknowledging the worlds 3rd largest economy would emerge from its recent period of stagnation, the slowdown in China and Europe debt crisis clouded the outlook. Earlier today saw the trade balence numbers reveal a larger than expected trade deficit as exports to China fall. The next focus comes in the form of the monthly inflation numbers due for release on Friday.

Canada

Last week continued the recently patchy outlook for the Canadian economy. The Bank of Canada (BOC) business outlook survey revealed a tumbling in hiring ad investment intentions. Interestingly the latest housing numbers point towards a 15.1% fall in the number of house sales as the property market starts to materially slow. This will be welcomed by the BOC as they have struggled with the housing market momentum in some provinces. The inflation numbers were lower than expected and ease the way for a more neutral stance from the BOC at their monetary policy meeting on Tuesday. Also of note has been the weekends news that Canadian authorities have denied the initial application from a Malaysian state firm to buy some significant oil and gas assets. With other deals yet to be tabled for the consideration, this potentially could have significant impacts on demand Canadian dollars in the coming months.

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