It is becoming apparent we will not see a straight forward recovery for the global economy this year

By Sam Coxhead*:

The last week has proved to be a most interesting period for financial markets.

For the most part sentiment proved enthusiastic, with stock markets pushing to record high levels as central bank monetary stimulation provided direction.

However economic data has been soft as numbers for the first quarter have emerged.

Friday's release of weak US retail sales and consumer sentiment numbers point towards further pressure on growth numbers to start 2013 for the world’s largest economy.

These concerns further increased yesterday as lower than expected Chinese growth and industrial production numbers for the first quarter were released.

With the world’s two largest economies underperforming to start 2013, a test of the markets commitment towards higher growth asset prices has ensued.

Hard commodity prices have been smacked lower in the opening sessions this week (gold down around 10% yesterday), and a surge in the US dollar and Japanese YEN has ensued.

Needless to say as the rapidly changing sentiment came to light, the Australian and New Zealand dollars have come under substantial pressure.

In the last couple of hours the senseless bombings in Boston have further rattled market confidence. To what extent there are ongoing ramifications of this terror threat re-emergence play on the market will take time to ascertain.

The terror threat to sentiment aside, it seems increasingly clear that 2013 is not going to be a year of straight forward recovery for the global economy.

Similar to 2012, the opposing influences of extensive central bank stimulation, and a moribund global growth story, point toward range bound markets lacking firm direction.

Major Announcements last week:

·  Chinese Inflation 2.1% vs 2.5% expected

·  UK Manufacturing +.8% vs +.4% expected

·  Chinese trade Balance -.9B vs +15.2B expected

·  Australian Unemployment rate 5.6% vs 5.4% expected

·  US Retail Sales -.4% vs 0.0% expected

·  Preliminary US Consumer Sentiment 72.3 vs 79.1 expected

·  Chinese GDP 7.7% vs 8.0% expected

·  Terror bombings in Boston boost risk aversion

NZD/USD 

Up until the offshore session on Friday last week the NZ dollar had outperformed the US dollar. However, in the opening sessions of this week we have seen a reversing of much of the NZD appreciation. The release of weak US and Chinese economic data, coupled with the disturbing terror events in Boston, has increased the safe haven demand for the US dollar. The pair has now consolidated off the lows set this morning, and the immediate direction remains unclear. Certainly events in the US will continue to dominate headlines in the short term. In any event the pair now looks to be at more comfortable levels than it was last week. Consolidation in the precious metals markets will stabilise the FX markets after yesterday's dramatic pull back in prices. If the metals pricing remains vulnerable, the demand for the US dollar will continue to increase and keep the NZD under subsequent pressure.

NZD/AUD (AUD/NZD)

Last week saw the NZ dollar push up to the top of its recent range against the Australian dollar. Weak Australian employment numbers aided what was increased demand for the New Zealand dollar across the board. The pair remains at what can be considered relatively fair levels, given the outlook for monetary policy from the respective central banks. The RBA minutes confirm they remain open to further easing of the cash rate if required, albeit they not at that point right now. It seems the pair will remain weighted in favour of the NZD in the short term. The NZ inflation number on Wednesday provides the primary focus for this pair in the short term.

NZD/GBP (GBP/NZD)

The widespread demand for the NZ dollar drove it to record highs against the GBP last week. However these extreme levels could not be sustained as weak US and Chinese economic numbers undermined the wider markets risk appetite. With commodity markets under renewed pressure and elevated risk aversion thanks to the horrible terror events in Boston, expect the pair to consolidate back at the current more comfortable levels in the short term. The respective inflation numbers will provide the data focus for the week, as well as the BOE monetary policy meeting minutes. Targeting levels with orders left in the market is a good way to use the current volatility to lock in rates at opportune levels.

 NZD/CAD

The NZ dollar saw further increases against the CAD for much of the last week. However after setting the highs, the CAD finally showed some fight. Helping the cause were the weaker US and Chinese numbers, as they really turned the risk appetite on its head. The NZ dollar has seen renewed pressure following the terror events in Boston and this will likely cap too much NZD appreciation in the short term. This week will see the Canadian manufacturing numbers tonight provide focus ahead of the NZ inflation numbers on Wednesday. What should be an unchanged monetary policy decision will come later on Wednesday, ahead of the Canadian inflation numbers on Friday.

NZD/EURO (EURO/NZD)

The increased demand for the New Zealand dollar saw it push through the resistance at .6550 (1.5270 support) last week. It was only following weak US data on Friday, that the NZ dollar started to give up some of its gained ground. However, weak Chinese GDP number and subsequent rout in the commodity markets has coupled with the frightful terror event in Boston to see the EURO place further pressure on the NZD. So now the pair sits comfortably back in what had been a very familiar range until last week. Expect NZD demand to remain vulnerable in the short term.

 NZD/YEN

This pair has seen considerable volatility over the course of the last week. The determined NZD demand early in the week drove the pair to the highest levels since 2007. However the pair did not last long at those elevated levels. Weak US and Chinese data, coupled with a dramatic fall in the commodities index and terror events in Boston, materially boosted demand for safe haven assets. Of course this had a dramatic effect on this pair as the NZD declined and the YEN jumped higher. So the pair remains at elevated levels, but well over 3% from its highs. The outlook remains uncertain in the short term. Certainly events will have to play out in the US and these will likely be of more impact than the benign NZ inflation numbers tomorrow.

AUD/USD

This pair spent a good portion of last week trying to establish itself through the resistance at 1.0500. Ironically, whilst it was able to do it for a time following the disappointing Australian unemployment numbers, the weak US data proved to be the start of its demise. These weak US retail sales numbers created a question over risk appetite in the wider market. As the weak Chinese GDP number coupled with the ongoing softer US outlook, the demand for the US started to gain momentum. The collapse in the hard commodity markets, and following terror events in Boston should temper any rebound in demand for the AUD in the short term. Today's RBA monetary policy meeting minutes gave little fresh insight, and now the focus turns to the run of US data for the remainder of the week. The wider market risk appetite will provide the lead for this pair, and the support at the 1.0300 level remains the key in the short term.

AUD/GBP (GBP/AUD)                            

This pair traded a relatively small and uninteresting range for the most part last week. However, the snow balling risk aversion that started with the weak US retail sales numbers on Friday has pushed the AUD down towards support levels that have been in place over the last six weeks or so. This .6750 (1.4820) level remains the key in the short term. If the pair can consolidate through this level, then the way is opened for further GBP appreciation. The RBA monetary policy meeting minutes were of limited impact today. Now focus moves to the UK. The inflation numbers are due later today and come ahead of employment data and BOE minutes tomorrow, and retail sales numbers Thursday.

AUD/EURO (EURO/AUD)

This pair saw increased AUD demand push it through resistance at .8020 (support 1.2470) last week. The AUD enjoyed its elevated levels in the face of weak Australian labour numbers. However, wider market risk aversion turned following weak US retail sales number on Friday and this saw the AUD pressured back through that level. Subsequently, we have seen weak Chinese data further increase risk aversion and couple with the Boston terror event to further unsettle markets. Today's RBA monetary policy meeting minutes did not surprise the market and it seems the pair will consolidate around the recently familiar .7820 - .8020 (1.2470- 1.2790) range this week.

AUD/YEN

This pair has seen a wild ride over the last week. After the pair saw grinding appreciation come in the face of weaker Australian employment numbers, the wider market risk aversion started to increase towards the end of last week. Soft US and Chinese economic numbers seemingly undermined demand in the commodities markets, and coupled with increased uncertainty following the Boston explosions, pushed the pair to the lows earlier today. As noted last week, corrective moves lower for this pair were likely to be sharp, and swift. A partial recovery has played out and further recovery will continue to be driven by the wider markets varying risk appetite, in the absence of any further economic data of note in either economy this week.

AUD/CAD

The Australian dollar started this week under considerable pressure as the wider market risk aversion increased. Weaker than expected economic news in the US and China has exposed vulnerabilities in the hard commodities markets, and this coupled with uncertainly following the Boston explosions to push the AUD down on this pairing. It seems that increased uncertainty will likely persist in the short term, and the 1.0520 level will remain key if there is a further slump in AUD demand. Today's RBA monetary policy meeting minutes were of limited impact and now the focus turns to today's Canadian manufacturing numbers, tomorrow's BOC monetary policy announcement (unchanged expected), and Friday's Canadian inflation number.

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Market commentary:

The last week has proved to be a most interesting period for financial markets. For the most part sentiment proved enthusiastic, with stock markets pushing to record high levels as central bank monetary stimulation provided direction. However economic data has been soft as numbers for the first quarter have emerged. Fridays release of weak US retail sales and consumer sentiment numbers point towards further pressure on growth numbers to start 2013 for the world’s largest economy. These concerns further increased yesterday as lower than expected Chinese growth and industrial production numbers for the first quarter were released. With the world’s two largest economies underperforming to start 2013, a test of the markets commitment towards higher growth asset prices has ensued. Hard commodity prices have been smacked lower in the opening sessions this week (gold down around 10% yesterday), and a surge in the US dollar and Japanese YEN has ensued. Needless to say as the rapidly changing sentiment came to light, the Australian and New Zealand dollars have come under substantial pressure. In the last couple of hours the senseless bombings in Boston have further rattled market confidence. To what extent there are ongoing ramifications of this terror threat re-emergence play on the market will take time to ascertain. The terror threat to sentiment aside, it seems increasingly clear that 2013 is not going to be a year of straight forward recovery for the global economy. Similar to 2012, the opposing influences of extensive central bank stimulation, and a moribund global growth story, point toward range bound markets lacking firm direction.

Australia

The primary domestic news focus for the Australian economy in the last week was the materially weaker than expected employment numbers on Thursday. Not only was there a contraction in the number of jobs in the economy, the number of people looking for jobs also contracted, indicating that workers have given up looking for employment. These indicators certainly legitimise the wait and see approach from the RBA with regards to further easing of the cash rate. Yesterday saw the latest Chinese growth and industrial production numbers reveal lower than expected levels of activity in China. As Australia's largest trading partner this will impact the Australian economy overtime, and the Australian dollar saw immediate pressure across the board following these announcements. Adding to the pressure this week will be the tempering of stock markets, and the collapse in the precious metals markets. Today's RBA monetary policy meeting minutes revealed little of surprise with the bank remaining poised to offer further stimulation as the need arises, which for now it does not. The remainder of the week will have an external focus for the Australian economy, in the absence of any further economic data of note on the local calendar.

New Zealand

Last week saw the latest quarterly Survey of Business Opinion released from the NZIER. This survey has seen sentiment consolidate at elevated levels. It has made steady recovery from the dip seen in the middle of last year. The NZ government bond market has continued to see increased levels of interest from offshore, and this has further fuelled demand for the New Zealand dollar. Also of note is the re-emergence of re-insurance flows that we have seen periodically over the last couple of years. The weak US and Chinese economic data in the last few sessions of trade has finally undermined some of the recent NZ dollar demand, which will be of relief to the export/import substitution sectors. This week sees NZ inflation numbers on Wednesday provide the primary domestic focus.

United States

The first quarter of 2013 is looking increasing like it has been a soft patch for the US economy. The FED's monetary policy meeting minutes last week did not shed much in the way of new insight. The FED remains committed to ongoing economic stimulation until the labour market consolidates with lower levels of unemployment. Friday’s weak retail sales and consumer sentiment numbers are the latest evidence of the struggle for growth, in the face of lower government spending. The horrible events on Boston could impact market sentiment for the US dollar depending on how events play out. This week is relatively light on economic data releases. Later today sees the latest building permit and inflation numbers released, but these should be of limited impact to USD demand. Manufacturing numbers later this week provide the primary focus alongside various corporate earnings results as they come to light.

Europe

Last week was relatively quiet for economic news in Europe. Of note was a upward revision of 2013 economic forecasts from Germany's economic ministry. The ECB issued their monthly bulletin and stated they continue to monitor the economy very closely, but they do expect an increase in economic activity in the latter half of 2013. Contrary to this is the latest news from two of Europe's largest trading partners the US and China. Lower than expected activity in core export markets will be of concern. With completely moribund domestic Europe growth, foreign market activity for European exports are central to improving Europe's fortunes. The latest industrial production numbers were neutral with the current months ahead of expectation, but the previous number being revised down. This week sees German economic sentiment and European inflation numbers released later today and these will be closely watched.

United Kingdom

The UK economy was off the market radar last week, with just better than expected manufacturing numbers offering any focus. This week offers more, with the latest inflation numbers due later today. Inflation has remained at stubbornly elevated levels in the last couple of years in the UK. Lower than expected numbers would certainly make further monetary stimulation more palatable at the BOE, and this is why the number will be closely watched. Unemployment data and the BOE monetary policy meeting minutes come tomorrow, ahead of the important retail sales numbers on Thursday. Any change in the vote split for further policy accommodation will be revealed in the BOE minutes, and these will offer the primary market focus.

Japan

There was little in the way of economic news in Japan last week. New BOJ Governor Kuroda continues to take opportunities to further explain his aggressive monetary policy stance. Ahead of the Group of 20 (G20) finance ministers meetings at the end of this week, expect further rhetoric about the BOJ stimulation being aimed purely at domestic issues, and not specifically at the level of the YEN. Thursday's trade balance numbers will be closely watched as usual, but in the current environment, will likely be of limited impact. In the last couple of sessions the market has seen sentiment swing quickly back towards risk aversion. The YEN has seen a strong pickup in demand as a consequence, especially against the Australian and New Zealand dollars. This kind of corrective move was to be expected at some stage after the massive downward pressure on the YEN seen over the last month or so. The YEN has already seen a retracement from its high levels set earlier today, so expect further volatility in the coming days.

Canada

Last week was a quiet one for economic news in Canada. Following the lacklustre BOC Business Outlook survey, the volatile building numbers survey came in below the 3.7% rise in expected activity, at just 1.7%. This week offers far more in terms of domestic focus in Canada. The manufacturing numbers later today start proceedings, with expectations of a .6% increase in activity. The BOC monetary policy announcement should see the cash rate unchanged at 1.00%, but the accompanying statement will be closely watched. Friday sees the release of the latest inflation and wholesale trade numbers and these will round out the focus for the week.

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