Four major central banks set to report with Bank of Japan (BoJ) likely to be focal point

By Sam Coxhead*:

The major themes continued throughout the shortened trade of Easter markets over the last week.

Elevated Europe uncertainty has capped material appreciation of the Euro, with Cyprus and the Italian political landscape undermining sentiment.

The economic data has been mixed around the globe.

Softer economic data in the US providing a timely reminder to investors of the staggering nature of the economic recovery.

Chinese indicators continue to recover, albeit not quite at the pace of analyst’s expectations. This week sees a return of focus on central banks.

The respective central banks of Australia, Japan, the United Kingdom and Europe all make monetary policy announcements this week.

The Bank of Japan (BOJ) will likely provide the most interest with the new leadership needing to make their mark immediately.

Major Announcements last week:

·  US Durable Goods Sales -.5% vs +.7% expected

·  US New Home Sales 411k vs 426k expected

·  ANZ NZ Business Confidence 34.6 vs 39.4 previous

·  UK Current Account -14.0B vs -12.8B expected

·  Canadian Inflation +.8% vs +.3% expected

·  Canadian GDP +.2% vs +.1% expected

·  US Manufacturing 51.3 vs 54.2 expected

·  Chinese Manufacturing 50.9 vs 51.6

NZD/USD 

This pair has traded a relatively tight range throughout the Easter period. Resistance at .8350 was finally ground down, and further resistance at .8400 has curbed further appreciation for the NZ dollar for the time being at least. In the absence of any economic news in NZ this week, expect the lead to come from developments in the US. The primary focus for the week being Friday's US employment numbers. Current levels offer relatively good value buying of US dollars with NZD. However, the longer the pair remains close to resistance at .8400, the more vulnerable that resistance will be.

NZD/AUD (AUD/NZD)

The NZ dollar saw some grinding appreciation against the AUD at the start of last week. The pair has now consolidated at this new level towards the upper end of the recent range. The pair has now spent almost a month contained in this current .7880 - .8080 ( 1.2375- 1.2700) range. This week sees the RBA monetary policy decision later today as a focus. Also in Australia is Wednesday's trade balance, and Thursdays building approvals and retail sales data. There is an absence of NZ economic data this week.

NZD/GBP (GBP/NZD)

It has been another interesting past week for this pair. The increased Fonterra payout was enough to see the NZD climb to the highs against the GBP, but the NZD gains were not to be sustained. Towards the end of the week, not even the softer GBP data could stop the GBP from taking back some of its lost ground. So the increasingly well established .5350 - .5550 range (1.8020 - 1.8700) remains in place. In the absence of any material NZ economic data this week, the UK news will provide the lead. The manufacturing, housing and construction numbers will provide the focus ahead of what will likely be an unchanged monetary policy decision from the BOE on Thursday. The pair is looking increasing comfortable around current levels.

 NZD/CAD

This pair has seen a relatively contained range throughout the course of the last week. It remains up towards the upper end of the recent range, and is at levels that constitute great value buying of CAD with NZ dollars. In the absence of any NZ economic data this week, expect somewhat dreary trade ahead of the Canadian employment, trade balance and manufacturing numbers on Friday. A consolidated move higher in the longer end interest rates is needed for a material bounce in demand for CAD, and this will be forth coming if the higher inflation numbers continue like last week.

NZD/EURO (EURO/NZD)

The NZ dollar remains at elevated levels against the EURO. Concerns in Europe surrounding Cyprus and the Italian political situation point toward the pair remaining with the NZD at elevated levels in the short term at least. With little in the way of NZ economic data this week, expect further developments in Europe to drive price action. European unemployment, retail sales and inflation numbers join the ECB's monetary policy decision in providing focus for this pair. Current levels offer continued value buying of EURO's with NZ dollars.

 NZD/YEN

This pair has spent the last month trading within its now established 77.50 - 79.50 range. The NZD hit the highs for last week following the announcement of the increased payout forecast from NZ dairy giant Fonterra. However, the gains have proven short lived and the market seems to be covering "sold YEN" positions ahead of Thursday's BOJ monetary policy announcement. Significant policy easing is expected, and the risk remains that the new BOJ leadership under deliver and the YEN continues to strengthen. Those looking to transfer YEN into NZD should look at targeted levels, as the pair will see increased levels of volatility around the announcement, and possibly before.

AUD/USD

This pair ran out of steam as it approached the 1.0500 resistance level last week. After reaching the week's highs, there were periods of sustained pressure on the AUD and the pair opened this week under further pressure. However, the turnaround came as reasonable Chinese manufacturing numbers were coupled with weak US manufacturing data overnight, and this has eased the way for the pair to move back in the AUD's favour. So the 1.0500 level remains the key in the short term at least. Anywhere around current levels could well prove to have offered good value buying of US dollars with AUD in the coming months. The RBA announcement later today should be of limited impact, but will be closely watched. As will the Australian building approval and retail sales numbers on Thursday. In the US the main focus now comes from the employment numbers on Friday.

AUD/GBP (GBP/AUD)                            

This pair has traded a relatively contained range over the last week. The AUD hit its peak early, and then the GBP saw a pick up in demand to provide grinding appreciation over the AUD. The pair looks far more comfortable around the current levels than it does up above the .6900 level (below 1.4500). This week sees the respective central bank announce monetary policy decisions. Both should be of limited impact with unchanged decisions expected. In Australia the building approval and retail sales data on Thursday provides further focus. In the UK, manufacturing, home sales and construction numbers come ahead of Thursday's BOE announcement.

AUD/EURO (EURO/AUD)

This pair has traded a relatively contained range over the last week. Of note remains the pressure on the EURO rising from consternation around Cyprus and the Italian leadership issues. This week sees the respective central banks provide a focus, albeit likely that neither will be changing policy settings at this meeting. Elsewhere in Australia Wednesday's trade balance and Thursday's building and retail sales numbers are of note. In Europe the unemployment, inflation, manufacturing and retail sales numbers all provide colour. Expect the current range to continue in the short term, offering further opportunity to buy great value EURO's with Australian dollars.

AUD/YEN

The volatility continues for this pair. Last week saw demand pick up for the YEN, and this has seen various waves of "stop loss" investor covering of sold YEN positions. This was most evident as the price slid through the former support level of 98.00, and the selling quickly accelerated. This week sees both respective central banks provide the focus. The RBA announcement later today should be of limited impact to price action. The BOJ announcement on Thursday is a difference proposition. The new leadership’s first meeting has high expectations and it is important that Governor Kuroda sets the right tone early if he is to be successful in stimulating the economy. Other news on Thursday will be the Australian building and retail sales numbers. The loading of limit orders at targeted levels could prove of value if the volatile price action continues.

AUD/CAD

The Australian dollar finely saw some pressure from the Canadian dollar last week. Higher than expected Canadian inflation numbers started the move and moment was finely halted by the initial support at the 1.0575 level. This week sees today's RBA monetary policy announcement start the focus, albeit should be of limited impact. Then comes the Australian building and retail sales numbers on Thursday, ahead of the important Canadian employment and manufacturing numbers on Friday. Consolidation through initial support at 1.0575 will expose the 1.0520 level below. If the Canadian dollar can see improved demand, and can break these levels, it could well indicate the start of a move back to more historically average levels.

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Market commentary:

The major themes continued throughout the shortened trade of Easter markets over the last week. Elevated Europe uncertainty has capped material appreciation of the Euro, with Cyprus and the Italian political landscape undermining sentiment. The economic data has been mixed around the globe. Softer economic data in the US providing a timely reminder to investors of the staggering nature of the economic recovery. Chinese indicators continue to recover, albeit not quite at the pace of analyst’s expectations. This week sees a return of focus on central banks. The respective central banks of Australia, Japan, the United Kingdom and Europe all make monetary policy announcements this week. The Bank of Japan (BOJ) will likely provide the most interest with the new leadership needing to make their mark immediately.

Australia

The shortened last week in the Australian economy saw the latest private sector credit numbers come in close to expectations. The stubbornly elevated nature of the AUD will provide some on going headaches for the RBA as they contemplate monetary policy over the coming months. The interest rate market is still pricing a further 25pts of easing to the cash rate by year end, but this easing bias has been steady eroded over the last few months. The adoption of a wait and see approach from the central bank comes as the Chinese economy stabilises, and the effects of previous cash rate reductions flow through the economy. Today's monetary policy statement will likely be of limited impact. The remainder of the week sees trade balance, building approvals and the important retail sales numbers provide further insight to the economies health.

New Zealand

It has been a relatively quiet period for economic news over the Easter week. The important dairy sector received a boost of an increased forecast pay out with the recent jump in auctions prices materially impacting the pressured industry. The pay out expectation was lifted to 6.12 NZD per kilo of milk fat and will cushion the blow of lower production volumes following the drought in early 2013. The latest ANZ Business Confidence survey revealed a pull back in sentiment. This is somewhat unsurprising given the elevated levels on this survey of late. This week sees little in the way of scheduled economic news, so expect demand for the NZ dollar to be driven by external factors. Certainly the ongoing uncertainty in wider Europe is benefiting the relatively stable and insulated high yielding currencies of New Zealand and Australia. This theme is likely to continue in the near term.

United States

Last week saw the US economy hit a softer patch of economic data. Lower than expected durable goods sales, consumer sentiment, housing and manufacturing numbers undermined the demand for US dollars and led to a move lower in longer term interest rates. This week sees a number of FED board members due to make on the record speeches, and this will provide further insight to the boards thinking. But the primary focus comes from the employment numbers on Friday. These provide a clear indicator of what impact the quantitative easing program is having, with around 200,000 jobs expected to have been added for the month.

Europe

Unsurprisingly the sentiment remains poor in Europe. The banking sector faces pressure as investor concerns about the safety of deposits rings loudly following the developments in Cyprus. Adding to the mix is the ongoing political stalemate in Italy, with fresh elections the likely outcome at this stage. The Europe Central Bank (ECB) monetary policy decision on Thursday will be closely watched. Whilst no change to monetary policy is expected, the insight from the ECB is always closely followed.This monetary policy statement follows the important manufacturing and employment numbers for the wider economy early in the week.

United Kingdom

Last week saw further weak data come in the UK. Fourth quarter GDP contraction was confirmed at .3% and the trade balance was slightly wider than expected. This week is a busy one for economic news. Manufacturing, house prices and construction data all come before what should be an unchanged monetary policy announcement from the BOE on Thursday. The BOE meeting minutes in a couple of week's will reveal more about the current thinking on the level of quantitative easing. Debate continues on the value of any additional policy accommodation. Whilst the GBP remains under pressure from both the Australian and New Zealand dollars, it sits off the lows despite the weak economic news. This is because the GBP sees increased capital flows when uncertainty increases in Europe. This is likely to continue in the short term at least, and helps explain any latent demand seen for the GBP.

Japan

Last week was a mixed one for economic news in Japan. Retail sales were materially weaker than expected, but household spending beat expectations. Importantly the latest inflation numbers were slightly better than expected at -.5%. These pieces of data came with a back drop of this week’s BOJ monetary policy meeting. Thursday BOJ announcement will be the first for the new leadership and expectations are for increased policy initiatives what will help foster growth. Any disappointment would be detrimental to the wider efforts to curb YEN strength and provide an easier back drop for the struggling Japanese export sector. With a 40% increase in the Japanese stock market in the last year, and a material move lower in longer term Japanese interest rates, any under delivery from Governor Kuroda will have material market impacts.

Canada

It was an interesting last week for the Canadian economy. The latest inflation numbers were materially higher than expected and will add pressure to the BOC's monetary policy decision if a trend of higher inflation is established. GDP numbers were also slightly higher than market expectations, with the month seeing +.2% growth against the expected +.1% rise. This week sees the focus now turn to Friday. The latest manufacturing, trade balance and employment numbers are all scheduled for release. The employment numbers provide the primary focus with an unemployment rate of 7.0% expected.

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