The gradual recovery of global economic health will be an undulating path

By Sam Coxhead*:

The financial markets have been full of drama throughout the past week.

The dynamic mix of influences has seen the markets produce volatile price action within a relatively contained range.

The faltering dominance of the US dollar, the re-emergence of fragility in Europe, and unexpected central bank posturing have all been of influence.

This patchy sentiment is likely to continue in 2013.

The gradual recovery of global economic health will be an undulating path.

The upward momentum in global stock markets has waned, and longer term interest rates have moved lower accordingly. Expect more of the same this week with major news scheduled in all economies of note.

Major Announcements last week:

·  UK Manufacturing -1.5% vs 0.0% expected

·  US Retail Sales 1.1% vs .5% expected

·  RBNZ unchanged as expected

·  Australian Employment growth +71.5k jobs vs 9.5k expected

·  European Inflation 1.3% as expected

·  US Inflation .2% as expected

·  US preliminary Consumer Sentiment 71.8 vs 78.2 expected

·  Cyprus announce proposed bank deposit tax

NZD/USD 

This pair remains trapped within its recent .8150 - .8350 range. The NZD saw increased pressure following the RBNZ monetary policy statement, but this pressure could not be sustained as the USD dollar gave up some of its recently gained ground across the board. This week is likely to see continued price action within the recent range. The NZ GDP numbers provide an obvious domestic focus in NZ on Thursday. In the US, the FED's monetary policy announcement will take centre stage on Wednesday. Expect the FED to maintain their "easy money" rhetoric in what will likely be an effort to curb any further USD appreciation in the short term at least. The strong performance of the AUD will be of support to the NZ dollar if it continues to consolidate at the current higher levels.

NZD/AUD (AUD/NZD)

The NZ dollar saw sustained pressure from the resurgent Australian dollar last week. It was a double whammy of increased AUD demand following the strong employment data, and increased NZD supply following the RBNZ monetary policy statement. The pair has stablised off the NZD lows, and the pair feels comfortable around current levels for the time being. Today's RBA monetary policy meeting minutes shed little in the way of new insight, and the focus now turns the belated 4th quarter NZ GDP number on Thursday. In the absence of a surprisingly weak NZ GDP number, current levels look to offer reasonably good value buying of AUD with NZ dollars.

NZD/GBP (GBP/NZD)

The NZD finally saw some sustained pressure from the GBP last week. For the most part, the turnaround came following the RBNZ monetary policy statement. However, demand for the NZD has returned as the instability in Europe has increased and affected the GBP as a negative consequence. Apart from the important 4th quarter NZ GDP numbers on Thursday, much of the focus will come from the UK.  UK inflation, employment and retail sales numbers come alongside the BOE monetary policy meeting minutes. This pair does seem a little more comfortable back from the recent NZD record highs, but repeatedly weak UK data may see the pair move in favour of the NZD once again.

 NZD/CAD

The NZ dollar saw some solid pressure from the CAD following the RBNZ monetary policy statement last week. The NZD has recovered some of the lost ground in recent sessions, but the pair remains in the lower end of the recent trading range. This week sees the NZ 4th quarter GDP number offer a NZ focus, whilst Canadian manufacturing and retail sales data offers economic insight in Canada. The 8400 level remains the initial target for further CAD appreciation. Consolidation through that level is key for this pair to return to levels closer to it's historical average.

NZD/EURO (EURO/NZD)

It was an interesting wrestle for this pair last week. The EURO put pressure on the NZ dollar following the RBNZ monetary policy statement. However the NZD dollar managed to fight back from its lows late on Friday, and following the Cyprus announcement over the weekend, the NZD leapt back higher to start this week. For the time being the resistance at .6400 (support 1.5625) has held. This level remains the key for direction in the near term. Along with the various economic data releases in Europe, further news from Cyprus will offer primary focus this week in Europe. The belated NZ GDP numbers on Thursday will offer local NZ attention. Current levels could well have proven to have offered good value buying of EURO with NZ dollars in the coming months.

 NZD/YEN

For the most part, the price action for this pair was relatively contained last week. Not even the weaker NZD demand following the RBNZ monetary policy statement offered much in the way of volatility. However, the Cyprus news over the weekend increased the wider markets uncertainty and this saw this pair open the week right on the support at 77.50. Since that gap lower over the weekend, the NZD has seen grinding appreciation as further information about the special circumstances in Cyprus comes to light. This week sees the European woes of primary focus. These will be watched alongside the 4th quarter NZD GDP number on Friday. Expect any further comments from the new BOJ leadership to be closely watched.

AUD/USD

The Australian dollar saw strong gains against the US dollar throughout the course of last week. The boosted demand came following the bonanza Australian employment numbers. Moves in the interest rates market underpinned the increase in the AUD. The AUD started the week under some pressure as the pair gapped lower over the weekend following the increase in uncertainty driven from Cyprus. The AUD has seen grinding appreciation since that lower start, and has stalled at the resistance just above the 1.0400 level. Today's RBA monetary policy meeting minutes revealed the comfort with the current 3% cash rate for the time being. The effects of previous easing's "still have further to run", though the exchange rate remains elevated. The remainder of the week sees the focus provided by US news. The FED's monetary policy statement, homes sales and unemployment numbers come ahead of the latest manufacturing numbers. With the change in bias from the RBA over the last week, the pair seems more comfortable around current levels.

AUD/GBP (GBP/AUD)                            

The GBP has finally seen an increase in demand push the AUD back from the lofty heights from early last week. The pair has bounced twice from the initial support level of .6830 (resistance 1.4645) and this level remains the primary target for further GBP out performance. Today's RBA monetary policy meeting minutes reiterate the change in stance towards a neutral stand point from the RBA. This means that further appreciation from the GBP will be hard fought. This points towards further range trading for the time being. The UK news now becomes the focus for the week. Alongside the BOE monetary meeting minutes, the latest inflation, employment and retail sales numbers will be closely watched.

AUD/EURO (EURO/AUD)

The Australian dollar has seen resurgent demand against the EURO over the last week. The initial wave of demand came following the strong employment numbers. The weekend's news from Cyprus has seen the EURO under renewed pressure and this has seen the pair push up towards AUD resistance at .8050 (EURO support 1.2425). Today's RBA monetary policy meeting minutes solidifies the RBA's more neutral stance on monetary policy. This will provide some latent demand for AUD in the short term at least. In Europe the attention will come from the various German sentiment numbers, and the latest manufacturing and services data.

AUD/YEN

This pair saw ongoing volatility last week. Wider market sentiment seems to be the primary driver at the moment. The booming Australian employment number saw a bit of appreciation from the AUD, but this was easily wiped out as sentiment turned a little sour into the end of the week. Certainly the risk aversion that was spawned in Cyprus over the weekend saw the pair open under considerable pressure. In the subsequent sessions the risk aversion has subsided and the AUD has easily taken back lost ground. Today's RBA monetary policy meeting minutes have had a limited effect on the price action and now focus moves to the Japanese trade balance on Thursday. Developments in Cyprus will drive the wider market risk appetite, albeit to a less extent than initially assumed this week.

AUD/CAD

This pair saw further AUD appreciation last week, albeit with slowing momentum. It seems likely that the CAD will see demand that will cap further appreciation this week, as the pair remains at very elevated levels. Today's RBA monetary policy meeting minutes reiterate the "wait and see" approach to monetary policy decisions in the near term. The remainder of the week will see the focus come from the Canadian manufacturing and retail sales numbers. The short term pull back in demand for the US dollar will temper a material CAD bounce this week, but current levels offer great value buying of CAD with AUD.

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Market commentary:

The financial markets have been full of drama throughout the past week. The dynamic mix of influences has seen the markets produce volatile price action within a relatively contained range. The faltering dominance of the US dollar, the re-emergence of fragility in Europe, and unexpected central bank posturing have all been of influence. This patchy sentiment is likely to continue in 2013. The gradual recovery of global economic health will be an undulating path. The upward momentum in global stock markets has waned, and longer term interest rates have moved lower accordingly. Expect more of the same this week with major news scheduled in all economies of note.

Australia

Last week’s news in the Australian economy was dominated by the latest employment numbers. The very strong report saw 71.5k jobs added on the month, and increased participation rate in the labour market and the unemployment rate fall to 5.4%. The jobs growth was the strongest in 13 years, and has seen the interest rate market pare back expectations for further easing of the 3% cash rate in the coming months. This has increased demand for Australian dollars across the board, after what has been a relatively soft start to 2013. Today saw the release of the RBA monetary policy meeting minutes. These provided the primary focus this week. Unsurprisingly, the minutes indicate the RBA is in data watch mode. The wait and see approach will have been fortified after last week’s employment numbers. Today’s RBA monetary policy meeting minutes further support their “wait and see” approach. They comment that the effects of previous cuts still have further to run, and the exchange rate remained high.

New Zealand

Last week saw new RBNZ Governor Wheeler further stamp his mark on his new role. The expected unchanged monetary policy decision saw the accompanying statement introduce an unlikely, but still possible new scenario to the mix. The alternative scenario presented was one where the elevated NZ dollar, coupled with drought conditions in NZ, stymied economic growth. In this outlined scenario the cash rate could fall to 2.0%, from it current emergency low of 2.5%. This week's focus comes from Thursday's release of the long awaited 4th quarter GDP numbers. Activity is expected to increase to .9% from the low .2% growth seen in the 3rd quarter.

United States

Last week saw a continuation of the recent positive economic news for the most part. Strong retail sales numbers were joined by solid weekly jobless claims and industrial production numbers. The latest inflation read was pretty much as expected and saw a continuation of consumer prices slowly move back towards average growth rates. Late in the week saw a fall in the preliminary consumer sentiment numbers, and this will be something to watch for as the revisions come to light. The political dysfunction is probably causing some consternation and hopefully this does not escalate. This week is another busy calendar of scheduled data releases. Building permits, weekly claims, home sales and manufacturing numbers all feature. Of primary focus will be the release of the minutes from the previous FED monetary policy meeting, and these are due on Wednesday.

Europe

It has been a volatile last week in Europe. The re-emergence of stability concerns has caused sentiment to soften, albeit the EURO managing to hold in at reasonable levels on most pairings. Concerns have increased of Greece's ability to meet bailout requirements in order to receive the next 3 billion EURO tranche of funds. This comes as mixed news comes from Cyprus. Initially the Cyprus bailout was viewed as positive, as the small nation indicated that it would be looking for a lower amount of funds than previously expected. However, the kicker came over the weekend with introduction of the bank deposit tax. This is widely unappealing, and would certainly not be welcomed by other nations requiring assistance. Economic data remains under pressure also, with the latest industrial production numbers underwhelming. This week will see the parliamentary bailout composition vote in Cyprus of primary focus, along with various German sentiment numbers, and European manufacturing and services data.

United Kingdom

It was an interesting last week for the UK economy and the Pound Sterling. The downside momentum for the GBP appears to have run its course. The latest industrial production and manufacturing numbers were weaker than expected, but the demand for the GBP increased. This squeeze on "sold GBP" positions saw investors scramble at times to buy GBP. Outgoing BOE Governor King made some positive comments and this further added to the resurgence in demand. After being under so much pressure in 2013, it looks like there will be some further reprieve for the GBP, especially while concerns in Europe escalate. This week sees a renewed domestic data focus. Aside from the latest BOE monetary policy meeting minutes, the latest inflation, employment and retail sales numbers are due for release.

Japan

Last week saw a smaller than expected contraction in the latest manufacturing numbers. Unfortunately this came following a materially weaker than expected monthly machinery orders number. On a more positive note was the upper house confirmation of the new BOJ leadership. Now the much anticipated aggressive stimulus program can be initiated at the BOJ. This week has just the trade balance numbers to offer as a data focus. Expect increasing headlines to come from the new BOJ leadership, as they look to stamp their mark on the pressured economy. Expect YEN volatility to remain elevated in the short term, especially as the uncertainty increases in Europe. Further instability in Europe will likely limit further YEN downside in the short term.

Canada

Last week was a very quiet one for Canadian economic news. The Canadian dollar saw some residual benefit from the strong employment report late in the week previous, but had some of its gloss tarnished as it was dragged lower by the US dollar later in the week. This week sees the latest manufacturing numbers on Tuesday, and retail sales numbers on Thursday offer focus.

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Sam Coxhead is a currency analyst with Direct FX You can contact him here »