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A hint of what could be ahead was shown in Japan with their stock market falling 7% in one day

Currencies
A hint of what could be ahead was shown in Japan with their stock market falling 7% in one day
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By Sam Coxhead*:

The big driver in markets over the last week has been the revelation from Ben Bernanke that the Fed could start scaling back quantitative easing (QE) over the next few months.

This would happen if the employment picture continues to improve. This added to an already well supported US dollar which continues to make broad gains.

It seems we could be in for a period of increased volatility as the markets pay even closer attention than normal to key US economic data.

A hint of what to expect may have come from Japan after their stock market fell over 7% in one day on the back of some soft Chinese data.

Quantitative easing has distorted market pricing across a broad range of asset classes. If that influence is going to be withdrawn, there will be all sorts of volatility as markets reprice asset valuations.

Major Announcements last week:

·  UK Inflation 2.4% vs 2.6% expected

·  UK Retail Sales -1.3% vs 0.0% expected

·  Canadian Retail Sales -.2% vs +.2% expected

·  Chinese Manufacturing 49.6 vs 50.5 expected (contraction below 50.0)

·  German Manufacturing 49.0 vs 48.6 expected

·  US New home sales 454k vs 429k expected

·  German Business Confidence 105.7 vs 104.6 expected

·  US Durable Goods Sales +1.3% vs .6% expected

NZD/USD 

With the US and UK both on holiday Monday, the market has been very subdued since Friday. The NZD has kept a tight range trading just below 0.8100. Recent volatility suggests this period of calm won’t last long though. The NZD has so far held above the psychological level of 0.8000, but if more US strength is seen this week, then that level will come under pressure. The weak AUD is also helping to drag the NZD lower. Any recovery in the currency will have to overcome resistance around 0.8160 to take the immediate focus off the downside.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.8084 0.8000 0.8200 0.8016 - 0.8203

NZD/AUD (AUD/NZD)

After being capped around 0.8350 (1.1975) for most of the last two weeks, the NZD has finally broken higher and now trades around 0.8400 (1.1905). This latest move is on the back of weakness in the AUD. We are currently trading at the highest levels since 2008. There is a lot of negativity around the AUD at the moment, with forecasters starting to make calls for the pair to reach 0.9000 (1.1110) in the next 12 months. Dips will continue to find buyers with 0.8350 (rallies 1.1975) now the first level of NZD support.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8385 0.8300 0.8500 0.8319 - 0.8405
AUD / NZD 1.1926 1.1765 1.2050 1.1895 - 1.2020

NZD/GBP (GBP/NZD)

This pair seems comfortable trading around 0.5350 (1.8690) at the moment, in what has been a quiet few days thanks to a US and UK holiday on Monday. Somewhat disappointing data from the UK last week put an end to recent GBP outperformance, and saw the NZD bounce from its low of 0.5309 (1.8835). We have had some strong UK house price data so far this week. If consumer confidence and mortgage data later in the week print strong, we could see a test back toward 0.5300 (1.8870). The flipside will see a move back up to 0.5400 (1.8520) on weaker data.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5353 0.5250 0.5480 0.5333 - 0.5405
GBP / NZD 1.8681 1.8250 1.9050 1.8501 - 1.8750

 NZD/CAD

The NZDCAD seems very comfortable around the 0.8350 level recently, having gravitated back there after any strength or weakness over the past week. The overall trend of the past five weeks has been one of a pullback from the elevated levels around 0.8750. If the market can continue to consolidate around current levels, we may see the pair try to stage a recovery. The first line of resistance is around 0.8420. A sustained move above there would open the way for further gains. Initial downside support comes in at 0.8320.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8362 0.8200 0.8400 0.8319 - 0.8414

NZD/EURO (EURO/NZD)

The last few days have seen this pair trade a tight range around 0.6250 (1.6000), which is not far off its recent lows. The lack of any meaningful bounce after the sustained downtrend of the last month is not a good sign. This keeps the focus on a test of yearly lows near 0.6130 (highs 1.6310). With little out on the domestic front for New Zealand this week, the driving force will come from Europe which has plenty of economic data set for release. Initial resistance at 0.6310 (support 1.5850) will need to be overcome to relieve downside pressure.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6258 0.6200 0.6400 0.6233 - 0.6362
EUR / NZD 1.5979 1.5625 1.6130 1.5718 - 1.6043

 NZD/YEN

Some choppy price action at the end of last week saw this pair spike down through the bottom of its recent range at 82.50 before staging a quick recovery. That bounce could not be maintained though, and the cross heads into this week firmly entrenched below the 82.50 level. This would suggest a retest of last week’s low at 81.15 is on the cards, however the UK and US holiday yesterday meant there was limited action and sideways trading has dominated the start of this week. Do expect this calm to last for long though. I suspect last week’s volatility across a number of market is a sign of things to come.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 82.42 81.00 83.00 81.15 - 84.11

AUD/USD

The AUD has remained on the back foot recently, with little in the way of positive news flow to turn things around. There is a lot of negative sentiment around at the moment with talk of it trading down to 0.9000 over the next 12 months. As I write this the currency is testing the 0.9600 level. A move below 0.9580 would see the target will shift to 0.9388, being the low from October 2011. The fate of the AUD over the rest of this week will likely be determined by US consumer confidence and GDP data. Topside resistance comes in at 0.9710, where there will likely be a plentiful supply of Australian dollars.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9635 0.9580 0.9710 0.9594 - 0.9831

AUD/GBP (GBP/AUD)                            

Broad AUD weakness has meant most of the AUD cross rates are also trading at, or near their recent lows. This is certainly the case for this pair, which currently sits at 0.6375 (1.5685). Unless we see a turnaround for the Australian currency, the outlook will be for further underperformance against the GBP. It will take a move back above 0.6440 (1.5530) to take the focus off the downside for the pressured AUD.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6380 0.6300 0.6500 0.6363 - 0.6478
GBP / AUD 1.5674 1.5380 1.5870 1.5437 - 1.5715

AUD/EURO (EURO/AUD)

Like most of the AUD pairings, the AUD is firmly entrenched in a downtrend trend against the EUR. The pair is currently trading near recent lows, and these levels were last seen in November 2011. Trying to call a bottom on a move like this is never a good idea. Only a move up through 0.7520 (below 1.3300) will take the pressure off the downside for the AUD, and could signal a bigger correction is underway. This focus this week will be on Euro-zone data in the form of unemployment, inflation, and consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7460 0.7400 0.7600 0.7438 - 0.7625
EUR / AUD 1.3405 1.3160 1.3510 1.3115 - 1.3445

AUD/YEN

Like most AUD crosses the AUDJPY has been trading heavily thanks to a very weak AUD. However, this pair seems to have held a test of key support at 96.90 and now looks to be trying to stage some sort of comeback. This resurgence is largely on the back of some JPY weakness. The pair is currently trading at 98.00 with key upside resistance coming in at 99.50. A move below support at 96.90 would be a very weak signal, and further losses would follow. As long as it remains above there however, a reasonable chance remains of test back up toward 99.50. And a  move above the 99.50 level, and the picture will look a lot less bleak.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 98.25 96.90 99.50 96.98 - 100.80

AUD/CAD

The last few days have seen the AUDCAD scratch out fresh lows at 0.9933. It has however recently recovered back above 0.9960, and this keeps the outlook more balanced. There is every chance the pair could try to stage a recovery from these levels. Over the last two years the AUDCAD has bounced from levels around here a number of times, and put in medium term lows. If it can hold these levels in the near term, we may see a test of initial resistance at 1.0080. A move above there would signal a much broader correction is underway. A move such as this  would need assistance from a weakening CAD, as well as a pick-up in AUD demand.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9973 0.9930 1.0080 0.9933 - 1.0079

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Market commentary:

The big driver in markets over the last week has been the revelation from Ben Bernanke that the Fed could start scaling back quantitative easing (QE) over the next few months. This would happen if the employment picture continues to improve. This added to an already well supported US dollar which continues to make broad gains. It seems we could be in for a period of increased volatility as the markets pay even closer attention than normal to key US economic data. A hint of what to expect may have come from Japan after their stock market fell over 7% in one day on the back of some soft Chinese data. Quantitative easing has distorted market pricing across a broad range of asset classes. If that influence is going to be withdrawn, there will be all sorts of volatility as markets reprice asset valuations.

Australia

There is a lot of negative sentiment around the Australian dollar at the moment. A slowing domestic economy combined with softer Chinese data is keeping the currency under pressure. It’s been mostly one way traffic since the RBA cut the cash rate three weeks ago. Recent days have seen analysts from well-known investment banks make calls for a AUDUSD rate of 0.9000 by the end of the year. With very light economic calendars this week in both Australia and China there will be little chance to improve that sentiment. After such a strong down move in the currency recently, there is always a chance of a corrective bounce. Any such move will eventually run into willing sellers though.

New Zealand

New Zealand had some disappointing trade balance figures released at the end of last week. It looks as though the recent drought took its toll on this data, however the impact should be short lived. Some positive news for exporters has been the announcement that NZ is negotiating with China to make the NZD directly convertible to the Chinese Yuan. This would lower costs to exporters, and is a natural move now that China has overtaken Australia as New Zealand’s biggest trading partner. With only minor data out this week, the markets will turn their focus to offshore events. The most notable of which will be US consumer confidence and GDP. The NZD has been dragged down by a very heavy AUD, but has so far held above the psychologically important 0.8000 level against the US dollar. Reserve bank governor Graeme Wheeler is making a speech on Thursday titled ‘Forces effecting the NZ economy and policy challenges’ which will be closely scrutinised for indications as to the next policy move by the bank.

United States

The improving outlook for the US economy was reinforced with the release of durable goods orders on Friday. Coming in well above expectation, the data only served to keep the USD in demand against most other currencies. FED chairman Ben Bernanke’s comments about tapering quantitative easing last week are still a big focus for the market. The majority view seems to be that although we won’t see any change at the next fed meeting in June, the risks are high of a scaling back in the programme after that. This is all data dependant though. If the current trend of improving data continues, then we can expect something from the Fed in July or August. How stock markets will react must be of concern. Recent all-time highs in a number of equity markets are as a direct result of quantitative easing (read-money printing) policies. If the outlook is for that support to be slowly withdrawn, it’s hard to imagine we’ll see continued gains. The risk of disorderly moves, like the 7.3% fall in Japanese stocks last week, must surely have increased. This week’s key data out of the US comes in the form of consumer confidence and GDP.

Europe

The end of last week saw German GDP which came in bang on expectation. This was overshadowed by German business confidence which unexpectedly increased in May. These were important figures as recent data had been patchy at best, and it’s going to come down to Germany to drive any improvement in the Euro-zone in the near term. Core Europe needs to remain as strong as possible while the southern states get their respective houses in order. There is plenty for the market to digest this week with unemployment, inflation, retail sales and consumer confidence all scheduled for release.

United Kingdom

The UK has had a long weekend with Monday being a bank holiday. That didn’t affect the release of housing data that showed prices rose by their biggest monthly increase in six years. The increase was largely driven by London, where a surge in demand has outstripped supply over the past six months. The Bank of England’s (BOE) ‘funding for lending’ scheme can take some credit for these figures, as can the governments ‘help to buy scheme’ announced in the March budget. With last week’s economic numbers disappointing, the market will be keen to see better results from upcoming consumer confidence and mortgage approvals data.

Japan

The Bank of Japan BOJ) released minutes from their last policy meeting yesterday. There were no real surprises, as they see signs of a pickup in economic activity. They see a recovery in mid-2013, and say that communication with the market is critical. The BOJ has taken huge stimulatory steps recently, and it’s now a matter of waiting to see how these policies play out. There have been wild swings in both bonds and stocks recently and it’s hard to imagine we won’t see more of the same over the coming months. There is plenty of data out this week for the market to digest with retail trade, small business confidence and inflation numbers all set for release. The JPY has recently recovered some of its lost ground, but a sustained bout of strength seems unlikely given the current BOJ policies.

Canada

There was little economic news last week for the market to digest, but this week does see a couple of key events. First up is the Bank of Canada’s (BOC) interest rate decision on Thursday, and this is followed by Friday's release of first quarter GDP figures. The rate decision is expected to show no change. A recent poll of economists showed they believe the BOC will keep rates on hold until the second half of 2014. One of the biggest risks facing the Canadian economy is the overvalued housing market. How that plays out over the next year or so will have a big impact on any policy moves. This will be Governor Carney’s last policy meeting before leaving to take over at the Bank of England. His replacement will be Governor Poloz who is expected to keep monetary policy very stimulatory for the time being.

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

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