BoJ's aggressive monetary policy initiatives have had a significant effect on NZ$/JPY; moves favour NZ$ for now

By Sam Coxhead*:

Last week was all about the aggressive front loading of monetary stimulus from the new BOJ leadership at their first monetary policy announcement.

Governor Kuroda certainly did not disappoint. The subsequent pressure on the YEN has been significant and with little respite. Expect this to become a trend in the coming weeks if not months.

The two year time frame to eradicate deflation in Japan is a big job, and expect joint policies from the BOJ and the government to be working towards this goal.

This week sees just todays benign current account data offer any focus, and next week sees the release of the minutes from last week’s significant monetary policy meeting, and these will be closely watched.

Major Announcements last week:

·  The BOJ  make aggressive stance of deflation fight

·  The ECB leave monetary policy unchanged

·  The BOE leave monetary policy unchanged

·  The RBA leave monetary policy unchanged

·  US Manufacturing 51.3 vs 54.2 expected

·  US Services 54.4 vs 55.9 expected

·  AU Retail Sales +1.3% vs +.3% expected

·  UK Services 52.4 vs 51.4 expected

·  UK Manufacturing 48.3 vs 48.9 expected

·  CAD Employment +54.5k vs +6.8k expected

·  US Employment +88k vs +198k expected

·  CAD Manufacturing 61.6 vs 52.4 expected

NZD/USD 

This pair has consolidated through topside resistance levels over the last week. While the wider market lead has been mixed, the latent demand for the NZ dollar has remained in place. The US dollar has seen pressure as longer term US interest rates moved lower alongside the weak US economic data. Expect further headway to be harder fought for the NZ dollar, as the pair looks to establish a new range around the current elevated levels. With the countering factors of lower levels of expected global economic activity, and the ongoing, and increased levels of central bank intervention, range trading can be expected for this pair in the short term at least.

NZD/AUD (AUD/NZD)

The NZ dollar made steady ground against the Australian dollar last week. There were a number of factors adding to the increased NZD demand, including rumoured re-insurance demand and the setting of record dairy prices at Fonterra's latest Global Dairy Trade (GDT) auction. What made the NZD gains somewhat curious was the AUD supportive Australian economic data that came to light. It looks like the pair is getting up towards the end of a range that represents good value buying of AUD with NZ dollars. This week will see the Australian employment numbers offer the primary focus on Thursday.

NZD/GBP (GBP/NZD)

This pairing looks to be establishing itself within a new range around the record high NZ dollar levels. Given the current environment, continued trading at the elevated NZD levels should not be ruled out in the short term at least. The increasing risk aversion in the wider market, coupled with a scramble to buy GBP after the unchanged BOE monetary policy decision, to see the GBP pare a good portion of its initial losses last week. However, this week has seen it under renewed pressure, and immediate direction from current levels remains far from certain. Following today's broadly positive NZIER Business Confidence Survey, the focus for this pair now turns to the UK manufacturing numbers later today in the UK.

 NZD/CAD

The Canadian dollar had managed to contain the NZ dollar for the majority of last week ahead of the very disappointing Canadian employment numbers. The CAD saw saw pressure following the numbers and not even better than expected manufacturing number were able to contain the pressure. This pressure has spilled further into this week and the pair finds itself at recent high levels. Weak US economic news of late has certainly helped undermine demand for the CAD. Further appreciation from current levels should be harder fought from the NZ dollar in the absence of further data this week. The Canadian focus comes in the form of the latest building permit data later on today, but this should have limited impact on the price action.

NZD/EURO (EURO/NZD)

The NZD saw initial demand against the EURO last week. However, the post GDT auction demand was not to last and as the market scramble to cover "sold EURO" positions, the increasing EURO demand pushed the pair back to some support at .6450 (resistance at 1.5500). There is no hiding the issues in Europe, but with the US dollar back under renewed pressure, further gains but the EURO cannot be ruled out in the short term. This week sees little in the way of economic data of impact in either economy. Expect the variable EURO demand to be the primary driver for the pair. Anywhere around current levels and above for the NZ dollar constitutes great value buying of EURO.

 NZD/YEN

BOJ monetary policy initiatives last week have had a significant effect on this pair. The trend has been almost entirely in the NZ dollars favour since the aggressive announcement and it looks like this will continue in the short term at the least. There has to be some kind of pull back at some stage, but those looking to buy NZ dollars with YEN would be advised to load orders at targeted levels in order to have any chance at getting set, as any YEN strength will no doubt be short lived. There is little in the way of domestic economic data for this pair this week, so expect the lead to come from the varying international demand for the New Zealand interest rates, and general YEN performance, or under-performance as the case will likely be.

AUD/USD

This remains in the 1.0300 -1.0500 range that has grown increasingly familiar over the last month. The positive Australian economic data was not enough to sustain the AUD through the wider market risk aversion that increased towards the end of last week, mostly as a result of the weak US employment numbers. The move lower in the longer term US interest rates points towards continued trading for this pair at the somewhat elevated, current levels. There is plenty to focus on this week, with the latest FED monetary policy meeting minutes to be released ahead of the important Australian employment numbers on Thursday.  Also in the US we have retail sales and consumer confidence numbers on Friday, ahead of another speech by FED chairman Bernanke.

AUD/GBP (GBP/AUD)                            

Last week this pair saw volatile price action, whilst contained by its wider recent range. Following the initial AUD demand after the unchanged RBA monetary policy decision and positive Australian economic news, sustained demand for the GBP came to the market. Certainly the risk ahead of the BOE's monetary policy meeting was that they increased their quantitative easing (QE) program. So the demand for GBP increased following the unchanged decision, and this coupled with the positive UK services numbers to enable the move in the favour of the GBP. Current pricing sees the pair close to the middle of its recent range, and the focus this week comes from UK manufacturing numbers later today, ahead of the important Australian employment numbers on Thursday.

AUD/EURO (EURO/AUD)

Last week was a very interesting one for this pair. Both central banks left monetary policy unchanged as was expected for the most part. However, it was the comments from ECB Draghi that disappointed investors positioned for an easing lower of the European cash rate at the next meeting in May. The ensuing scramble to buy EURO was coupled with a huge swing in the EURO's favour against the YEN following the BOJ monetary policy announcement (EUR/JPY +500pts higher). These factors have seen the EURO push the AUD down through support at .8000 (resistance 1.2500), as the pair moves into a new range. Ironically, this move has come as the uncertainty remains in Europe and the data in Australia as strong last week. This week sees the economic data focus for this pair based on the Australian employment numbers on Thursday. The tolerance for uncertainty in Europe will likely remain as long as the soft US economic data continues, as it is certainly a contributing factor.

AUD/YEN

The actions from the BOJ predictably drove the price action for this pair last week. A muted start to the week was swept away by the aggressive monetary policy easing that looks to be entrenched by officials over the next two years as they fight deflationary pressure. Whilst there will likely be some pull backs at times, it seems likely that the trend of YEN weakness will continue in the coming months. Certainly the front loading nature of the BOJ program points towards the easy ground being already given up by the YEN, but the joint efforts of the Government and BOJ, should prevent any sustained YEN bounce. Whilst the data will be of limited impact in the short term at least, this Thursday's Australian employment numbers will be closely watched.

AUD/CAD

Last week saw this pair continue to trade in the elevated range it has occupied over the last month. The positive Australian data initially saw increased AUD demand. Then came the wider market risk aversion increase, and the AUD pared its gains. The mixed Canadian economic data on Friday saw a volatile end to the week. This week has seen the CAD under some renewed pressure and the pair finds itself again towards the middle of its recent range. The focus this week comes in the form of Canadian building permits later today, and these come ahead of the Australian employment numbers on Thursday. Whilst these elevated levels may continue in the short term, they certainly offer ongoing good value buying of CAD with AUD.

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Market commentary:

Last week was all about the aggressive front loading of monetary stimulus from the new BOJ leadership at their first monetary policy announcement. Governor Kuroda certainly did not disappoint. The subsequent pressure on the YEN has been significant and with little respite. Expect this to become a trend in the coming weeks if not months. The two year time frame to eradicate deflation in Japan is a big job, and expect joint policies from the BOJ and the government to be working towards this goal. This week sees just todays benign current account data offer any focus, and next week sees the release of the minutes from last week’s significant monetary policy meeting, and these will be closely watched.
Australia

Australia

The RBA maintained their recent "wait and see" approach as they left the cash rate stable at 3.00% last week. The following building approvals and retail sales data certainly supported this stance, with both beating the market expectations. The retail sales number was the most exciting with an upward revision of the previous number adding to the positivity created by 1.3% current monthly increase in activity. This week’s focus will be dominated by Thursdays employment number where a small 6.7k fall in jobs is expected along side a stable unemployment rate of 5.4%.

New Zealand

The NZ dollar has remained in demand over the last week. Any latent re-insurance flow demand for the NZD , has been ably joined by record dairy commodity prices being fetched as the scramble to secure product in the face of a NZ drought induced fall in expected production over the coming season. The latest NZ Institute of Economic Research Quarterly Survey of Business Opinion was released this morning. The sentiment increased to 23 from the previous level of 20, as the outlook remains relatively positive in New Zealand. Also of note has been the ongoing RBNZ warnings over the housing market. Yesterday saw further warnings from deputy Governor Spencer. He stated that "if the house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures, a monetary policy response would become more likely". Certainly something to be kept in mind over the coming quarters. The remainder of the week is light on domestic focus with the Business NZ Manufacturing Survey on Thursday expected to be of limited impact.

United States

Last week saw further weakness in the US economy emerge in what has turned out to be a soft first quarter for 2013. Soft US manufacturing, services hourly earnings and employment numbers were released. The "participation rate " (those actively working or looking for work) fell to the lowest levels since 1979, and is the kind of number that will ensure the FED remain aggressively trying to stimulate the labour market via their ongoing quantitative easing program (buying bonds to lower longer term borrowing costs). The pending lower levels of central government spending further re-iterate this likelihood. This week sees the minutes from the previous FED monetary policy meeting released on Wednesday, and retail sales and consumer sentiment on Friday. The US dollar has seen pressure across the board of late, with the exception of the YEN. Any rebound in this, will likely be aided by a stronger set of economic data, which seems unlikely in the short term.

Europe

Last week unsurprisingly saw further weak economic data emerge in Europe. Manufacturing numbers were led lower by slumps in Spanish and Italian activity. However, there was increasing resilience in the market for EURO, as weak news in the US came to light. The ECB statement accompanying their unchanged monetary policy announcement also added to EURO demand as the sentiment was not as "dovish" as the market expected. The lack of commitment towards a lower cash rate has seen the probability for a cut to the cash rate moved out from the May meeting to the June meeting. This week sees industrial production numbers come to the fore as well as the ongoing influence of Cyprus, Greece and the Italian political standstill.

United Kingdom

Last week was relatively quiet for economic news in the UK. The Bank of England (BOE) left monetary policy unchanged as expected for the most part. The minutes from the meeting next week will reveal whether or not the bias towards further quantitative easing has increased. Manufacturing and construction numbers were lower than expected, but were somewhat balanced by surprisingly high activity in the services sector. Of note also was the re-affirmation of the AAA credit rating by ratings agency S&P. This week is also on the quiet side for economic news, with further manufacturing numbers providing a focus alongside second tier GDP and retail sales indicators.

Japan

Last week was all about the aggressive front loading of monetary stimulus from the new BOJ leadership at their first monetary policy announcement. Governor Kuroda certainly did not disappoint. The subsequent pressure on the YEN has been significant and with little respite. Expect this to become a trend in the coming weeks if not months. The two year time frame to eradicate deflation in Japan is a big job, and expect joint policies from the BOJ and the government to be working towards this goal. This week sees just todays benign current account data offer any focus, and next week sees the release of the minutes from last week’s significant monetary policy meeting, and these will be closely watched.

Canada

All the Canadian economic news came out on Friday last week. Materially weaker than expected employment growth numbers negate the strength from the previous month, and the unemployment rate edged higher to 7.2%. The trade balance was also worse than expected, on the back of lower exports, and increased import demand. Balancing these were stronger than expected manufacturing numbers, and this gave some level of respite to the Canadian dollar that saw periods of intense pressure throughout the week. Yesterday saw the release of the latest Bank of Canada (BOC) Business Outlook Survey and this was a little mixed. The numbers were a little stronger in the near term, but activity for the next 12 months does remain at pressured levels.

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