China's new policies to curb house price appreciation has fueled market volatility

By Sam Coxhead*:

Last week saw the financial markets continue their plunge back into reality after a exuberant start to 2013. The political inspired uncertainty in Europe was heightened by the mostly sluggish economic data.

The United Kingdom also remains under pressure as the stagnant economy teeters on the edge of a third dip back into recession in the last five years.

Of some contrast to the dark mood in wider Europe, is growing, but realistic optimism in the United States.

Whilst the economic data continues its slow recovery, the political stumbling blocks about the fiscal negotiations remain in place, albeit they have been discounted by the market for the time being.

Asia markets remain weary of the nervous European outlook, and the latest Chinese data was of mixed results. Adding fuel to the week’s volatility was the weekends announcement in China of new policies to curb house price appreciation.

This week renewed focus on the Australasian economies will be seen as the respective central banks make their latest monetary policy announcements.

The RBA’s monetary policy announcement later on today should not surprise with an unchanged cash rate of 3.00%,and the wait and see approach looks to continue into the belly of 2013.

In New Zealand, next week’s monetary policy statement will be an opportunity for the RBNZ to pour cold water on a market speculating on cash rate hikes coming in 2013.

Major Announcements last week:

·  US Consumer Sentiment 69.6 vs 60.8 expected

·  UK GDP revision -.3% as expected

·  US Durable Goods Orders +1.9% vs +.3% expected

·  US Pending Home Sales +4.5% vs +1.7% expected

·  NZ Business Confidence 39.4 vs 22.7 previous

·  AU Private Capital Expenditure -1.2%, but strong outlook

·  US prelim GDP +.1% vs +.5% expected

·  UK Manufacturing 47.9 vs 51.0 expected

·  US Manufacturing 54.2 vs 52.7 expected

·  AU Retail Sales +.9% vs +.4% expected

NZD/USD 

The NZD has seen periods of further pressure from the US dollar. However, with the FED rhetoric pointing towards ongoing stimulus beyond the end of 2013, any material weakening of the NZ dollar maybe some time off yet. Support at .8250 finally gave way, but the pair has not been able to consolidate into a lower range. The wider .8100 - .8500 range that has been seen for the last 6 months or so remains in place. Expect the AUD to provide the lead in the coming week ahead of next Thursday's RBNZ monetary policy statement. In the absence of any surprises from the various central bank meetings this week, the .8150 - .8350 range should contain the week's price action.

NZD/AUD (AUD/NZD)

This pair has traded a relatively contained and expected range over the last week. Certainly as expectations of near term easing from the RBA have reduced, any NZD appreciation has proven harder fought than in previous weeks. This week is all about the Australian economy and the RBA. Today's retail sales numbers further point towards a wait and see approach from the RBA in the short term. Tomorrow's GDP numbers are equally as important and will be closely watched. Certainly a surprise would be needed to see this pair move out of the recently established range.

NZD/GBP (GBP/NZD)

This pair has traded a relatively tight range over the last week. Both currencies have seen periods of pressure, but material downside moves could not be sustained for either currency. Expect this rangy trade to continue this week with the focus completely on the UK in the absence of any news in NZ. The GBP has a lot of negative news already priced into it, so any further under performance seems unlikely from the current levels. The BOE meeting will provide the primary focus, albeit no change expected.

 NZD/CAD

This pair has consolidated back from the record high level seen the previous week. Friday's GDP result saw the NZD open up this week under renewed pressure, but today's Australian data has dragged the NZD back higher. In the absence on any NZ economic news this week, look to Canada for the lead for this pair. The BOC monetary policy statement on Wednesday and employment numbers Friday will be of primary focus. Current levels continue to offer good value buying of CAD with NZD.

NZD/EURO (EURO/NZD)

The NZD saw some intense pressure from the EURO to start last week. However, after bouncing from the lows the pair saw relatively quiet trade within a contained range. Europe will provide the sole focus for this pair this week, as there are no data releases of note in NZ. The ECB is the the primary event, and the accompanying statement of what should be an unchanged cash rate decision  provides the primary focus. The Italian political situation also will have a baring, and should be closely monitored by those with EUR interest.

 NZD/YEN

The volatility has continued for this pair over the last week. The wider market risk aversion early last week saw the NZD under considerable pressure from a resurgent YEN. However, the pressure could not be maintained and increasing optimism saw the NZD demand finish strongly. With the pair back above the 76.50 level, look for the 76.50 - 78.50 range to contain the price action in the coming week. In the absence of NZ economic news this week, the lead will come from the BOJ monetary policy statement on Thursday. Looking at last week's price action, buying of NZD below 76.50 looks to offer good value for the time being.

AUD/USD

The USD dollar continued its pressure on the AUD last week. Early this week saw a sharp fall from the AUD following the weekend's change in housing policy in China. This weakness was not to be sustained and the 1.0100 support provided a solid bounce back up to current levels. The better Australian retail sales have enabled this strong bounce back. Expect the volatility to continue this week. The RBA monetary policy meeting, Australian GDP numbers and US employment report will offer the primary focus alongside a raft of second tier data. It looks like further US dollar out performance is going to be harder fought now the easy work has been done. The FED remain committed to the QE program until the unemployment rate falls to 7% in the US, so the employment data on Friday is very important for this pair.

AUD/GBP (GBP/AUD)                            

This pair has been contained by a fairly tight range over the past week. Certainly the price action points towards the fact that the easy gains against the GBP have already been made. Current levels still offer great value buying of GBP with AUD. This week sees the respective central banks provide the focus. Australian GDP numbers on Wednesday will also be keenly watched.

AUD/EURO (EURO/AUD)

This pair has traded a contained range throughout the course of the last week. It does remain at elevated levels in favour of the AUD, and may remain so ahead of some kind of resolution of the Italian political situation. This week sees a central bank focus with both the ECB and RBA due to announce monetary policy. Expect no change from either, but the accompanying statements will be closely monitored. Wednesday's release of the 4th quarter Australian GDP number will also be of primary focus. Current levels still offer good value buying of EURO with AUD.

AUD/YEN

Early last week saw the YEN in large demand as the market scrambled to cover "sold YEN" positions as the uncertainly in the wider markets increased. The YEN weakness proved short lived and this pair finds itself back at what seems to be far more comfortable levels in the current environment. There is heightened focus this week with both central banks making monetary policy announcements. Adding to the mix is the important 4th quarter Australian GDP numbers on Wednesday.

AUD/CAD

This pair continues to consolidate at levels that offer continued good value buying of CAD with Australian dollars. The AUD did see periods of concerted pressure from the CAD. Friday's GDP number is encouraging for the CAD, which has seen so much pressure recently. This week sees a busy economic calendar in both economies. Both central banks will make monetary policy decisions. These should both be unchanged and come along 4th quarter GDP in Australian and monthly employment numbers in Canada.

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Market commentary:

Last week saw the financial markets continue their plunge back into reality after a exuberant start to 2013. The political inspired uncertainty in Europe was heightened by the mostly sluggish economic data. The United Kingdom also remains under pressure as the stagnant economy teeters on the edge of a third dip back into recession in the last five years. Of some contrast to the dark mood in wider Europe, is growing, but realistic optimism in the United States. Whilst the economic data continues its slow recovery, the political stumbling blocks about the fiscal negotiations remain in place, albeit they have been discounted by the market for the time being. Asia markets remain weary of the nervous European outlook, and the latest Chinese data was of mixed results. Adding fuel to the week’s volatility was the weekends announcement in China of new policies to curb house price appreciation. This week renewed focus on the Australasian economies will be seen as the respective central banks make their latest monetary policy announcements. The RBA’s monetary policy announcement later on today should not surprise with an unchanged cash rate of 3.00%,and the wait and see approach looks to continue into the belly of 2013. In New Zealand, next week’s monetary policy statement will be an opportunity for the RBNZ to pour cold water on a market speculating on cash rate hikes coming in 2013.

Australia

Last week was a relatively quiet one for Australian economic news. Most noteworthy was the detail in the private capital expenditure number. This was materially stronger looking forward, than the backward looking headline number suggested. The decent outlook for non-mining expenditure saw the market pare back expectations of a near term interest rate cut from the RBA. Yesterday saw a disappointing building approvals number released. Today's retail sales number showing a nice +.9% jump in activity comes ahead of what should be an unchanged monetary policy decision from the RBA. Tomorrow's 4th quarter GDP number will also be closely monitored as usual. The vulnerability in demand for AUD over the coming weeks has continued to play out in a mixed fashion. Whilst lower against the resurgent US dollar, the EURO and GBP remain under pressure and have been weakening more quickly than the AUD for the most part.

New Zealand

Last week saw second tier influences make their mark on the outlook in NZ. Lead exporter Fonterra released news that their pay out remains on target at 5.50NZD/KG. The ANZ business confidence survey saw another jump in sentiment from 22.7 to 39.4. This is the highest level since July 2011 and further indicates the momentum being created by the developing Christchurch rebuilding program. Ratings agency S&P warned the NZ banking sector is vulnerable to a pullback in the housing sector. They point out that global uncertainty in the short to medium term represents a risk that interest rates could increase and create pressure on the market. This scenario remains unlikely at this time, but is certainly something that should be kept in mind. The weekend saw reports that News Corporation are to exit their cornerstone shareholding in NZ pay TV provider SKY. This is significant because of the over 800 million NZD price tag and the potential for this to weigh on the NZD in the short term. This week sees little in the way of material economic news in NZ. All domestic focus now is on next week’s RBNZ monetary policy announcement. Over the last few weeks increasing expectations of a hike from the RBNZ in late 2013 that have developed. These may be pared back following the monetary policy statement.

United States

Last week has been one of mostly positive news in the US. Better than expected consumer sentiment, homes sales and manufacturing numbers were slightly offset by soft GDP and durable good sales data. Rhetoric from the FED points towards the quantitative easing program remaining in place as expected into 2014, when the labour market should reach its desired 7% unemployment level. President Obama and Congress continue to battle on spending cuts and the lack of progress has seen the "sequestration" come into action. These somewhat debilitating spending cuts to the tune of 85 billion USD, will see Federal run programs wound down, but should not handicap the economic recovery beyond about .5% of GDP for 2013. This week sees the usual barrage of economic data due, but it is Friday's employment numbers that provide the primary focus.

Europe

The uncertainty in Europe remains in place. The political impasse in Italy continues to drag on, albeit the most likely scenario looks to be second election to try and find viable leadership. Positive news was the Italian funding lines remain open, with bond auctions being completed, although at higher yields than previous issuance. European inflation remains under control with last week's release coming in at 1.8% against the expected 2.0% number. This will increase the monetary policy options for the ECB in the coming months. Unemployment remains a real sticking point for the wider economy as European unemployment rates hit 11.9%. Spanish and Italian manufacturing numbers continued their slide and will undermine the wider European progress. This week sees European retail sales and German industrial production numbers provide a focus alongside the latest monetary policy announcement from the ECB.

United Kingdom

The last week has been more of the same for the under pressure UK economy. Revised GDP numbers were -.3% as the market expected. Both manufacturing and services data show contracting activity in the last month and increase the chances of the UK dipping back into technical recession for the third time in the last five years. The BOE monetary policy announcement this week has been of increasing focus. Outgoing Governor King has stated that he recommends additional quantitative easing (QE) to further stimulate the economy, but given the previous meetings minutes revealed a voter split against the move, this seems unlikely at this meeting. The monetary policy decision provides the focus for the week in the UK. The Pound Sterling has remained under pressure across the board. It is becoming more immune to weak economic data, and could well be starting to put a base in place.

Japan

The economic data has been mixed in Japan in the last week. Better than expected retail sales numbers were balanced by soft industrial production numbers. Given the recent policy initiatives being undertaken in Japan, the economic data has been of secondary importance. Overnight the incoming BOJ Governor Kuroda hit the headlines with comments to the lower house of Parliament about policy implementation. Kuroda pledged to make massive purchases of long dated government bonds in an effort to maintain lower long term interest rates. Interestingly he qualified this stance with the comment "But the central bank also needs to scrutinise market developments at the time, as well as the potential drawbacks", according to Reuters. This does not particularly committed to the aggressive policies he is to be charged with implementing, and is something that could raise questions at some stage in the coming months.

Canada

The last week saw the December GDP numbers provide the primary focus for the Canadian economy. The -.2% number was as expected and produced +.4% growth for the 4th quarter. This growth was driven by private consumption and exports, and made for positive reading. This week sees a busy economic calendar with manufacturing, building and employment numbers joining the latest BOC monetary policy decision and statement as a focus. Expect no change from the BOC, but the statement will provide valuable insight to the current outlook on the economy from the view of the central bank.

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