Weaker US corporate earnings offset by better economic news from China, UK and the US

By Sam Coxhead*:

Last week was an interesting one for the wider financial markets. The equity markets struggled with weaker US corporate earnings and this balanced some better economic news from China, the US and the UK.

In Europe the situation remains uncomfortable, with economic indicators remaining under pressure as the wide spread austerity curbs any real chance of a return to growth in the short term.

The Japanese economy remains in the spotlight as markets await what further measures the Bank of Japan (BOJ) will introduce at this week's monetary policy meeting.

Concerns in Canada remain about the sustainability of its recovery, and the exposure of local banks to its inflated property market.

Australian inflation numbers have moderated calls for more extensive easing to the cash rate. And the new Reserve Bank of New Zealand (RBNZ) Governor made a balanced assessment of the domestic situation in his first public address.

Major Announcements last week:

·  Canadian Retail Sales +.4% vs +.3% expected

·  Bank of Canada keeps cash rate unchanged at 1.0%

·  Australian Q3 Inflation 1.4% vs .9% expected

·  HSBC Chinese Manufacturing 49.1 vs 47.9 previous

·  European Manufacturing 43.5 vs 43.9 expected

·  US FED leave monetary policy unchanged

·  RBNZ leaves monetary policy unchanged

·  Prelim UK Q3 GDP 1.0% vs .6% expected

·  US Durable Goods orders 2.0% vs .8% expected

·  US advanced Q3 GDP 2.0% vs 1.9% expected

NZD/USD 

Throughout the course of last week this pair saw some sharp swings in demand, whilst contained within its broader and increasingly familiar range. Expect this lack of direction to continue at least ahead of the US elections, and probably beyond. Any further appreciation will likely see reasonable resistance around .8280, and this level would certainly constitute good levels to buy US dollars with NZD. On NZ dollar weakness the initial support comes in at the .8080 level, and this provides the initial target for NZD weakness. In the absence of domestic NZ economic numbers this week, expect the lead to come from the US, and in particular the latest employment numbers on Friday.

NZD/AUD (AUD/NZD)

The NZ dollar saw some intense pressure from the Australian dollar last week. Ahead of the RBNZ monetary policy announcement the market naively started to price in the chances of an interest rate easing in the cash rate in the coming months. When Governor Wheeler did not share its view, the market quickly corrected and demand pushed the NZ dollar back to more comfortable levels against the Australian dollar. The increased Australian inflation numbers will probably have provided a floor for the RBA’s cash rate at 3.00%, and this will curb any enthusiasm for further NZD in the short term. In the absence of any NZ economic data, the pair will likely trade in an orderly fashion this week, with just the latest Australian building approval numbers on Wednesday to digest.

NZD/GBP (GBP/NZD)

This pair continues to trade in its contained and familiar range. Fundamentals may have started to point for GBP appreciation, but it may be some time coming. In the meantime, expect the range to continue this week, and the focus to come from the UK in the absence of any material NZ economic data. The manufacturing numbers Wednesday, and construction numbers Thursday provide the focus and should provide further picture building on the economy instead of any material impact on current price action.

 NZD/CAD

This pair sits right at the top of its recent range and at a level easily identified as a solid resistance level. Current levels offer excellent value buying of CAD with NZ dollars for those looking to make transfers into CAD. An inability to consolidate through the resistance at .8220 will likely see the CAD in demand at some stage this week. In the absence of any economic data in New Zealand, expect the bulk of the lead to come from developments in Canada. GDP numbers Wednesday and employment numbers Friday will provide the focus. Also of note will be the address from BOC Governor Carney on Wednesday. Given the markets focus on the subtle changing of stance from the BOC, his comments will be closely followed.

NZD/EURO (EURO/NZD)

This pair continues to trade within what has quickly become a comfortable range. Assuming that NZD resistance at .6400 (EURO support at 1.5625) holds in place, we should expect this recent range to continue this week. The Spanish reluctance to formally approach for bailout assistance is starting to weigh on the market, and this represents the greatest short term risk to the recent EURO’s stability. In the absence of material NZ economic data this week, the focus again comes solely from Europe. Spanish GDP numbers and the European inflation and unemployment estimates will be the closest followed of the data.

 NZD/YEN

The YEN saw periods of pressure across the board last week, and against the NZ dollar was no exception. The breaking of the resistance at 65.50 opened up the way for brisk further appreciation from the NZD, albeit the pair could not consolidate over the 66.00 level. The expectations for substantial policy accommodation from the BOJ at Wednesday’s meeting have built to a point where the risk could be that the market gets disappointed. This week sees the pair open around the former resistance level at 65.50 and this level has again attracted the pair for much of today’s trade. Expect further sideways trade ahead of the BOJ, which provides the primary focus for the week.

AUD/USD

The Australian dollar saw appreciation against the US dollar throughout the course of last week. The driver came from the release of the demonstrably higher than expected Q3 Australian inflation number. The interest rate market subsequently has moved to discount any chance of more than 25pts of interest rate easing from the RBA by year end. This has driven increased demand for the AUD, and the relatively high interest rate yield it offers. This week will sees a majority of the focus come from the US, with only the monthly Australian building approvals number on Wednesday likely to provides much interest in Australia. In the US, various home sales, consumer confidence and regional manufacturing surveys come ahead of the primary focus in the form of the employment numbers on Friday. Any further appreciation from the Australian dollar will likely be harder fought than last week, especially if the resistance at 1.0400 approaches. Current levels could well end up having offered good value buying of US dollars with AUD over time.

AUD/GBP (GBP/AUD)                            

The Australian dollar saw demand increase following the higher than expected Q3 inflation numbers and it was then when the AUD set the highs for the week against the Pound Sterling. From then on the GBP saw demand, especially following the Preliminary Q3 UK GDP result, that was materially stronger than expectations. Unfortunately the demand did not last into the end of the week, and we start the week comfortably in the middle of what has become a familiar range. This week’s focus starts in Australia with the building approvals number on Wednesday, ahead of the UK manufacturing numbers Thursday. Construction numbers in the UK round out the week, which should be one where the pair continues to trade around within the .6300 - .6500 (1.5385 – 1.8575) wider range.

 AUD/EURO (EURO/AUD)

The Australian dollar bounced against the EURO last week following the surprisingly high Australian Q3 inflation number. Once the pair pushed up through the .8000 (1.2500) level, the way was opened for further AUD appreciation. The market seems to be getting frustrated with the gamesmanship being shown by Spain with regards to its likely approach for funding assistance from the European Stability Mechanism(ESM). In the meantime the economic story in Europe remains downbeat. This week sees Spanish GDP, European inflation and unemployment numbers the focus in Europe. Of lesser consequence will be the monthly building approvals numbers in Australia on Wednesday.

AUD/YEN

It was an interesting week for this pair last week. From the lows of the week prior to the higher than expected Australian inflation number, the way higher for the AUD was eased by the weakening YEN as the expectation for substantial policy easing at this week’s BOJ meeting grew. However, the highs above 83.00 proved too much to sustain for the time being and the pair is currently hovering around the former resistance level of 82.50. This week the BOJ meeting and subsequent minutes are the highlight of the week and will drive direction in the short term at least. The risk appears to be under delivery by the BOJ , and that would see a scramble of investors to cover “sold YEN” positions.

AUD/CAD

The Australian dollar materially outperformed the Canadian dollar last week. The dual forces of increased AUD demand coupled with a weaker CAD eased the way for the move to the current levels right on the resistance at 1.0350. A sustained break of the 1.0350 level would open the way for further appreciation, but it is likely any further gains for the AUD would be harder fought from the current levels. Canadian economic data provides the lead this week with the GDP numbers on Wednesday, followed by the employment data on Friday. If the Canadian dollar sees a pick up in demand, the initial support should come in at the 1.0280 level. A break of this level would likely see demand for the CAD gain further momentum, in a corrective move down towards further support at 1.0220.

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Market commentary:

Last week was an interesting one for the wider financial markets. The equity markets struggled with weaker US corporate earnings and this balanced some better economic news from China, the US and the UK. In Europe the situation remains uncomfortable, with economic indicators remaining under pressure as the wide spread austerity curbs any real chance of a return to growth in the short term. The Japanese economy remains in the spotlight as markets await what further measures the Bank of Japan (BOJ) will introduce at this week's monetary policy meeting. Concerns in Canada remain about the sustainability of its recovery, and the exposure of local banks to its inflated property market. Australian inflation numbers have moderated calls for more extensive easing to the cash rate. And the new Reserve Bank of New Zealand (RBNZ) Governor made a balanced assessment of the domestic situation in his first public address.

Australia

Last week’s lead in Australia was provided by the materially higher than expected 3rd quarter inflation numbers. The interest rate market has moved to rule out any chance of more than the expected 25pts of interest rate easing to come before the end of 2012. This paring back of expectations provided the Australian dollar with periods of solid demand. The apparent stabilisation of the economic outlook in China has also help bolster the Australian dollar. This week sees a relatively quiet week for Australian economic data. Wednesday sees the release of the latest building approvals numbers and the official Chinese manufacturing numbers on Thursday will also be of note.

New Zealand

Last week in New Zealand was all about the RBNZ and its new Governor, Graeme Wheeler. The brief statement accompanying the unchanged cash rate at the monetary policy announcement made no mentions of any potential cuts to the cash rate following the low inflation number from the previous week. Then came Governor Wheeler’s first public address. This proved to be a very balanced assessment of monetary policy in New Zealand. He touched on the highly topical subject of the high NZ dollar and the possibility of intervention. Reassuringly, he seems likely to continue with the measured approach shown by previous Governor Bollard. Overall the market should expect little chance of a change to the cash rate in the short term. With the 2.50% cash rate at post earthquake emergency lows, there is room to ease further if needed. But with Asian economic indicators stabilising, and the structural progress that has been made in Europe, the chances of further easing remain low. There is little in the way of economic data set for release in New Zealand this week.

United States

Economic indicators continue to be mainly on the improvement side in the US. Last week saw better than expected new home sales, durable goods orders and advance 3rd quarter GDP numbers. Some of the detail of these numbers points towards fragmented progress, but this is to be expected. The GDP number was boosted by Government spending, and obviously this cannot be expected to continue into 2013, as the “fiscal cliff” approaches at the end of the year. The consumer spending recovery continues and this is in line with the recent improvement in sentiment surveys. The corporate earnings season has disappointed, and this undermined the stock market that saw a 1.5% decline for the week. The election continues to provide the major focus in the coming week, along with the latest employment results on Friday.

Europe

It was a mixed week for Europe last week. The latest manufacturing and services numbers both disappointed and point towards on going contraction within the broader economy. Spanish unemployment has hit 25% as the Government continues to stall on its probable approach for funding assistance. The hard path continues for Greece, who have had an extension of time frames accepted to get its debt to GDP ratios in order. This week will see further concentration on Spain as GDP numbers come on Tuesday. IMF warnings on the ability of Portugal to keep up with its bailout targets further clouds the waters in the short term.

United Kingdom

The preliminary numbers for the 3rd quarter UK GDP was surprisingly strong at 1.0% (.6% expected). If we see an associated pick up in other indicators, further quantitative easing that has been widely speculated on, will probably be ruled out. The increased economic activity has been attributed to a boost in sentiment following the successful Olympic games and the Bank of England will be hoping this momentum follows through into this 4th quarter. This week sees a relatively light economic calendar in the UK with just manufacturing numbers on Wednesday and construction numbers on Thursday.

Japan

The BOJ is the undoubted focus this week in Japan. Tuesday’s meeting is expected to reveal the extent of their latest policy accommodation to try and stimulate their ailing recovery. The BOJ cut its economic assessments for eight out of nine of the regions in their latest quarterly report. Exports have tumbled 10.3% in the year to September, within the wider Asian economy struggling to counter weak growth within key western markets. Ratings agency S&P made further harsh assessments of the Japanese Governments fiscal position, stating “Japan’s deficits to remain high for a number of years” , and with this, Japans ability to deal with this continues to diminish.

Canada

The Bank of Canada (BOC) was the focus last week, and the market has been quick to reverse expectations of a cash rate rise at some stage next year. This turn around in sentiment has been quick and the statement accompanying the monetary policy was more balanced that the market expected. However, the BOC did cut its growth forecasts for the remainder of 2012 and 2013, along with stating the case for a cash rate rise was less imminent that in previous months. Just to round out a particularly hard week for the Canadian dollar, ratings agency Moodys placed six Canadian banks on review for downgrade, after assessing their exposure to consumer credit and the inflated Canadian housing market. This week sees another important week for the Canadian economy with GDP on Wednesday, and the last employment numbers on Friday to round out the week.

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