Conditions have improved for equity markets with the largest inflow of money in five years recorded

By Sam Coxhead*:

The New Year has started with a burst of positivity across most markets.

A compromise in the US to avert the “fiscal cliff” has been joined by impressive Chinese economic data, massive stimulus in Japan and a positive slant for Europe from the European Central Bank.

Last week equity market funds saw the largest money inflows in the last five years, providing hard evidence of the boosted sentiment.

Without doubt the conditions have improved for the global markets, but the energy in the improved sentiment appears to have got ahead of itself.

This week will see corporate earning’s results released in the US, and this may provide a sobering insight to business conditions in the final quarter of 2012.

There is little in the way of expectations for rapid economic or labour market growth in the large economies in 2013.

Expectations should be for staggering growth, as a protracted global recovery continues, with the influence of very accommodative monetary policy from the leading central banks.

Major Announcements last week:

·  Canadian Manufacturing 52.8 vs 51.3 expected

·  European Unemployment rate 11.8% as expected (record high)

·  Australian Retail Sales -.1% vs +.3% expected

·  Chinese Trade Balanace 31.6B vs 20.1B expected

·  BOE leave monetary policy unchanged

·  ECB leave monetary policy unchanged

·  Chinese Inflation 2.5% vs 2.3% expected

·  US Trade Balance -48.7B vs -41.1B expected

NZD/USD 

The NZD has seen periods of strong demand against the USD since the start of 2013. So far the resistance at .8450 has held, but the longer the pair remains at elevated levels the more pressure will build on that resistance. Today’s NZIER quarterly survey again boosted sentiment for the NZ dollar and the next 24 hours will be interesting for the short term direction of this pair. NZ inflation numbers on Friday should be of limited impact. Given the wider markets surprisingly positive start to the year, current levels may well prove to have offered good value buying of USD over time.

NZD/AUD (AUD/NZD)

This pair remains in what has become familiar territory of late. This pair remains a function of the cash rate expectations over the short to medium term, and the current rate is comfortable with the stable expectations of the RBNZ and easing bias for the RBA. Expect the recent .7900 - .8000 range to remain in place for the short term. The employment numbers in Australia on Thursday represent the main event risk for the week, with the NZ inflation number likely to be of limited impact.

NZD/GBP (GBP/NZD)

This pair has moved to the upper end of its wider .5050 - .5250 (lower 1.9050 – 1.9800) range since the new year. It has been dual pressures of stronger NZD demand and increased GBP supply. The GBP has seen pressure from weaker than expected data and supply via pressure buying of EURGBP. From here further ground will be more hard fought for the NZ dollar. The resistance at .5250 (support 1.9050) has proven solid in previous attempts. Inflation numbers in the UK later  today, and in NZ on Friday should provide some ongoing focus. Friday’s UK retail sales will also be watched.

 NZD/CAD

On Friday in the offshore session, the NZD finally finished its recent grinding appreciation against the Canadian dollar. The turnaround saw it tumble in the session and erased most of its week’s gains. The risk sentiment turned as the market digested the fact that the ECB were unlikely to move their cash rate lower in the coming months. The NZ did recover somewhat to start this week, but the improved Canadian business outlook numbers have seen CAD demand re-emerge. The remainder of the week will see the NZ inflation and Canadian manufacturing numbers provide the focus. Current levels look to offer relatively fair value when considering the recent range.

NZD/EURO (EURO/NZD)

For the first week of January, the NZD saw solid gains over the EURO as funds flowed from Europe in to NZD to buy NZ Government bonds. This saw the NZD appreciate by over 3.5% in a short period. Ending the rapid appreciation was the ECB monetary policy statement last week. With the ECB indicating that there is little chance of easing to the cash rate in the months, the EURO has made a solid resurgence. From current levels direction is less certain, and current rates look to offer reasonably fair value in the current environment. European and NZ inflation numbers will dominate the focus for the remainder of the week, with the European number on Wednesday being of primary focus because of New Zealand’s benign inflationary environment.

 NZD/YEN

The NZ dollar demand coupled with new Japanese Yen undermining policies have seen the NZD appreciate by over 5% against the YEN since the new year. Progress from the current levels should be a little harder fought given that the NZD weakness seen on Friday should slow momentum to a degree. Today’s positive news from the NZIER survey may see the pair move up towards the resistance at 75.50. With so much Japanese policy yet to become action, just how quickly the expected YEN weakness with further emerge remains the question. In markets such as these, dollar cost averaging is a strategy that should be investigated. The NZ inflation number on Friday will be closely watched, but should be of little material impact.

AUD/USD

This pair has seen interesting price action since the new year. Periods of strong demand for Australian dollars have been interspersed with sharp declines. The patchy economic numbers continue for both economies, but the surprising strength of the Chinese data and increased wider market sentiment have fuelled the AUD out performance. US retail sales, company earnings reports, and inflation numbers will dominate the focus in the US for the remainder of the week. In Australia the employment numbers on Thursday will hold the attention. The 1.0600 level should cap the appreciation in the short term and current levels look to offer reasonable value buying of US dollars in the short term at least.

AUD/GBP (GBP/AUD)                            

This pair remains well contained by its now familiar wider range. Since  the new year the AUD has outperformed, but the momentum has certainly slowed in the last few sessions. UK inflation numbers later on today will be closely followed, as will the UK retail sales numbers on Friday. In Australia, the employment numbers on Thursday are the primary focus. Any reprieve for the GBP against the EURO would likely see it take back some of the recently given up ground to the Australian dollar.

AUD/EURO (EURO/AUD)

It has been a dramatic couple of weeks for this pair. Initially the AUD saw strong demand and this drove appreciation by over 2% in just over a week. However, a dramatic turnaround came in the form of the ECB monetary policy meeting last week. The indications are that we are unlikely to see further policy adjustment from the ECB in the short term at least. This drove resurgent demand for the EURO and the pressure remains on the AUD ahead of the Australian employment numbers on Thursday. In Europe the inflation number  tomorrow provides a focus, as well as French and Spanish debt auctions to finish the week.

AUD/YEN

The AUD has seen rapid appreciation against the under pressure YEN since the beginning of the year. The new Japanese policies focused on debasing the YEN are certainly having their intended consequence. The surprisingly strong Chinese economic data is balancing the patchy domestic Australian data, such as the retail sales numbers last week. Given that the pair is at levels not seen since August 2008, the bias has to remain with further YEN weakening. Near term resistance looks to be in place around the 94.50 level. In terms of data focus for the remainder of the week, the Australian employment numbers on Thursday will the key.

AUD/CAD

The Australian dollar remains at historically elevated levels against the CAD. The wider market exuberance in the early new year drove the initial AUD demand. However, the weak retail sales number last week (and ECB comments), saw renewed pressure back on the AUD to enable the CAD to push it back from its highs. The positive Canadian business outlook survey released overnight has benefited the CAD. This pair looks very comfortable within its wider 1.0250 – 1.0450 trading range that it has been in for the past three months.

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Market commentary:

The New Year has started with a burst of positivity across most markets. A compromise in the US to avert the “fiscal cliff” has been joined by impressive Chinese economic data, massive stimulus in Japan and a positive slant for Europe from the European Central Bank. Last week equity market funds saw the largest money inflows in the last five years, providing hard evidence of the boosted sentiment. Without doubt the conditions have improved for the global markets, but the energy in the improved sentiment appears to have got ahead of itself. This week will see corporate earning’s results released in the US, and this may provide a sobering insight to business conditions in the final quarter of 2012. There is little in the way of expectations for rapid economic or labour market growth in the large economies in 2013. Expectations should be for staggering growth, as a protracted global recovery continues, with the influence of very accommodative monetary policy from the leading central banks.

Australia

It has been a mixed start for the Australian economy for 2013. Disappointing domestic numbers in the form of the trade balance, retail sales and building approvals have been counter balanced by buoyant indicators from integral trading partner China. The AUD has seen solid support for the most part, as would be expected with the boosted wider market sentiment seen to start the year. Offering support are commodity prices, especially the iron ore price being Australia’s number one export. This week sees the monthly employment numbers as the focus on Thursday, with the unemployment rate expected to lift a little to 5.4%.

New Zealand

The NZ dollar has had a very strong start to the year. European originated demand for NZ Government bonds has provided the underlying demand for NZ dollars, much to the disappointment of the local export sector. Increased commodity prices have been nullified for the most part by the level of the NZD. The Quarterly Survey of Business Opinion for the final quarter of 2012 released by the NZIER revealed a bounce in sentiment and activity. The increase has been driven by increasing construction momentum driven by the Christchurch rebuild, with manufacturing also looking more buoyant. Expectations should be for a stable NZ cash rate at 2.50% until early 2014, given the current lower inflationary pressure. This week sees the quarterly inflation numbers due for release, but in the current environment these will be of passing interest only.

United States

The first week of 2013 saw successful fiscal negotiations between President Obama and Congress conclude, if only providing short term breathing space. The markets reacted positively to this and now the circus focus turns to the pending debt ceiling issue. Already pressure is building on this issue with comments from Fed Chairman Bernanke pressing for ceiling increases. The economic data in the US remains mixed with last week’s trade balance demonstrably wider than expected. This week sees the latest retail sales, inflation, manufacturing and consumer sentiment numbers due.

Europe

Leaders in Europe hope the economy may finally be at a point where is can start to recover from the debt crisis. The rhetoric from officials is continually pointing out the improved financial conditions for a majority of European nations. Certainly the actions from the ECB in 2012 have steadied the outlook and now the slow recovery should be able to start. Last week saw the ECB leave monetary policy unchanged in line with expectations. The accompanying comments point towards little chance of further easing or policy accommodation in the near term, and this has been EURO supportive. This week saw the latest industrial production numbers disappoint, but this was seemingly cast aside as the market continued to focus on the positive. Wednesdays inflation numbers provide the focus in the near term, and a stronger than expected number would help support the EURO at  its seemingly elevated recent levels.

United Kingdom

The UK economy continues its struggle for a sustainable recovery. Last week saw a mixed group of numbers released. House prices were higher than expected, but manufacturing and trade balance numbers disappointed. The Bank of England held monetary policy unchanged as expected. The GBP saw periods of heavy supply, as buying of EURO versus selling of GBP dragged the GBP lower across the board. This week sees the focus come from inflation numbers late on Tuesday, and retail sales numbers on Friday.

Japan

The new Japanese leadership has wasted no time in initiated their aggressive fiscal policies as they grapple with the third Japanese recession since 2007. Prime Minister Shinzo Abe’s up to 20 trillion YEN stimulation plans should undermine demand for the YEN over the medium term. Abe will also be announcing a new Bank of Japan Governor and has promised someone that will make bold policy moves to mirror efforts being made by the current leadership to overcome the deflationary conditions. Interestingly, Japan has also been pledging to buy large chunks European and US government debt, adding to the pressure on the YEN. With little in the way of Japanese economic data this week, expect offshore influences to dominate in the short term.

Canada

The mixed data continues for Canada. Last week saw better than expected manufacturing numbers balanced by a plunge in building permits and a wider than expected trade balance. This is typical of a staggered re-emergence to growth, and is an indicator that we will see the Bank of Canada keep its monetary policy unchanged in the short term at least. This week has seen an improved business outlook survey buoy demand for the CAD.

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