Portugal's political risk eases and peripheral Euro-zone bond yields fall; Small amount of positivity around risk assets including NZ$

By Ian Dobbs*:

It’s been a quiet few days for the markets in general.

The USD is slightly weaker across the board and commodities have made some gains, with gold in particular breaking back above $1,300.00.

Global stocks are nearing five year highs and this comes in the face of some patchy earnings reports. The majority of the market still expects the Fed to scale back asset purchases in September, and this must surely weigh on stocks at some point.

Over the weekend Japan's prime minister Abe has strengthened his power base after the upper house elections. This will see his growth policies unchallenged going forward and comes as the G20 pledged over the weekend to put growth before austerity.

Also over the weekend China has announced it’s taken steps to liberalise lending rates that could help to increase funding to businesses.

Portugal's political risk has subsided and this has seen peripheral Euro-zone bond yields fall. As a result of this combination of factors, there is a small amount of positivity around risk assets, of which the NZD and AUD are included.

This has seen gains for both currencies in the early part of the week. The question is how far can this positive sentiment push them within the context of their broader downtrends?

Major Announcements last week:

·  Chinese GDP 7.5% vs 7.7% expected

·  US Retail Sales 0.0% vs +.5% expected

·  NZ Inflation +.7% vs .8% expected

·  UK Inflation +2.9% vs +3.0% expected

·  UK Unemployment claims -21.2k vs -7.5k expected

·  BOC leaves monetary policy unchanged

·  UK Retail Sales

·  US Philly FED Manufacturing Index 19.8 vs 8.5 expected

·  CAD Inflation 0.0 vs +.2% expected

·  USD Existing Homes Sales 5.08m vs 5.27m expected

NZD/USD 

The recent waning of momentum in the USD has allowed the New Zealand dollar to regain some of the ground it has lost over the last couple of months. The earthquakes in the Wellington region have had little impact on the currency, and that should continue to be the case in the absence of a bigger, more damaging shake. The NZD has also been helped up by a slightly firmer AUD that has been underpinned so for this week by stronger commodities and some positive developments out of China. The NZD is currently right in the resistance zone of 0.7950-0.8000 which will be tough to overcome. If it does manage to get up through 0.8000, then a test of 0.8100 could well be on the cards. Trade balance data tomorrow should have limited impact ahead of the more important RBNZ monetary policy decision on Thursday.

NZD/AUD (AUD/NZD)

After rallying last week up through 0.8600 (1.1630), the pair looks comfortable consolidating the move in sideways trade through that level. A brief flurry up to 0.8662 (down to 1.1545) was short lived, and the pair pulled back to currently trade around 0.8620 (1.1601). The longer term trend is up and we expect further gains in the coming weeks and months. Any potential dips will now run into key long term trend support at 0.8460 (resistance 1.1820) and this should limit any NZD downside. The risks this week are centred around Australian inflation data tomorrow, and the Reserve Bank of New Zealand monetary policy statement on Thursday.

NZD/GBP (GBP/NZD)

This pair has traded a relatively small range throughout the course of the last week. There were some sharp moves within that small range, but all of these have lacked any real momentum. This week’s focus comes from the RBNZ monetary policy statement on Thursday, which is then follow by the preliminary release of 2nd quarter GDP in the UK. The RBNZ will hold the cash rate unchanged at its emergency lows of 2.50%, but the accompanying statement will offer valuable insight to possible timing of cash rate hikes that will likely start at some stage in the next six months or so. The UK GDP number sees the forecast of .6% for the quarter, and this comes against the previous quarters .3% increase in activity.

 NZD/CAD

The NZD saw grinding appreciation over the Canadian dollar last week. The CAD was dragged lower by the pressure on the USD, and this combined at the end of the week when the lower than expected Canadian inflation number came to light. The earthquakes in NZ over weekend saw the NZD give up some of Friday’s gains to start the week. But again the demand has increased in the last 24 hours, and this comes ahead of the Canadian retail sales number later on today. The NZ focus comes in the form of the monetary policy statement from the RBNZ on Thursday. No change is expected at this meeting, but any intimation of the timing of cash rate hikes expected in the coming year will be closely watched for. The resistance at .8300 seems the most vulnerable end of the range in a quiet week for data in the wider market.

NZD/EURO (EURO/NZD)

This pair looks increasingly comfortable in its recent .5900 - .6100 (1.6400 - 1.6950) range. This week should prove interesting with the latest European manufacturing and business confidence data to provide a focus. In New Zealand, the RBNZ’s monetary policy statement that will accompany its unchanged cash rate will be closely followed on Thursday. Any insight to the timing of cash rate hikes expected in the coming year will be of impact. Barring any major surprise, expect this pair to remain within its recent range this week. The pick in sentiment in the European periphery should provide support for the EURO in the short term.

 NZD/YEN

The YEN was vulnerable in the run up to the upper house elections in Japan. With the uneventful poll result, the YEN has started the week on a better footing as the pair was contained by the resistance at 80.00. There is little other news due from japan this week, so the focus will come from the RBNZ monetary policy statement on Thursday. Whilst no change is expected to the emergency low 2.50% cash rate, any guidance to the timing of hikes expected in the coming year will garner attention. The pair is looking increasingly comfortable in the 77.50 - 80.00 trading range that it has established over the last month. Any intimation of early than expected cash hikes from the RBNZ would see some pressure on the resistance at 80.00, albeit an unlikely scenario.

AUD/USD

The Australian dollar has continued to make some gains against the USD in the early part of this week. These gains have been helped by news out of China over the weekend that the Peoples Bank of China (PBOC) have taken steps to liberalize lending that could help to stimulate activity. Commodities, and in particular metals, are also a bit stronger recently and that is also supporting the currency. Out of the US last night we saw weaker than expected figures on existing home sales and that caused some USD weakness across the board. The AUD is currently trading around 0.9250 but gains from here will prove tough in the near term. There is a fair amount of resistance around the 0.9300 level which will take some work to get through, and the market may struggle to do that ahead of tomorrow’s inflation data.

AUD/GBP (GBP/AUD)                            

After retreating from gains above 0.6100 (below 1.6393) in the middle of last week, this pair has since seen mostly sideways action in a tight range. The down side has been supported by 0.6000 (1.6667), while gains have been capped at 0.6045 (1.6543). The two key events this week are Australian inflation and UK GDP figures. Near term direction is a tough call at the moment, however and break below 0.6000 (1.6667) would be a weak signal for the AUD, and open the way for a test back to recent lows around 0.5915 (highs 1.6906). Increased AUD demand would find resistance comes in between 0.6160 - 0.6180 (support1.6181 - 1.6234) and should prove a tough barrier to overcome.

AUD/EURO (EURO/AUD)

There has been very little direction in this pair over the last week. Trading has mostly been contained in a tight range between 0.6970 (1.4347) and 0.7050 (1.4184). The rest of this week could provide the dive needed for the pair to break out of this range. We have Australian inflation numbers to digest tomorrow, and a raft of European data starting with consumer confidence tonight. That is followed by readings on the manufacturing and service sectors on Wednesday night, and a survey on German business climate Thursday evening. The longer term trend in this pair is for a weaker AUD, however the last month has seen mostly sideway trading as the pair consolidates the AUD losses of the last few months. Support is seen around the cycle lows at 0.6915 (resistance 1.4461) with key topside downtrend resistance now at 0.7100 (support 1.4085). Expect those levels to contain the action this week.

AUD/YEN

After making gains from below 90.00 in the first half of last week, the Australian dollar has traded mostly sideways against the Japanese Yen. Resistance around 92.50 has capped the topside for now, with dips limited to 91.50 since mid-last week. The pair is currently trading toward the lower end of this range thanks to some positive Yen sentiment in the wake of the Japanese upper house elections over the weekend. Australian inflation data tomorrow will be important as the market tires to weigh the chance of another rate cut this year by the Reserve Bank of Australia (RBA). Tomorrow also sees Japanese trade data, and Friday we get Japanese inflation. Look for 92.50 (or 93.00 on the wide) to continue to cap any near term strength.

AUD/CAD

After recovering off its cycle lows early last week the AUDCAD ran out of steam at 0.9645, and retraced back to 0.9500. We have seen a slow drift sideways since then, with a small upside bias thanks to some relative strength in the Australian dollar. The pair looks like it may test a bit higher again in the near term with an attempt of initial resistance now coming in around 0.9610. A break above there would open the way for gains to 0.9750, however this pair has struggled on any bouts of strength the last two months. It would take a big effort to overcome 0.9610 in the near term. With key inflation data out of Australia tomorrow, I expect that level to cap the topside until then. Canada does have retails sales data out tonight which could impact, but that’s pretty much it on the data front.

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Market commentary:

It’s been a quiet few days for the markets in general. The USD is slightly weaker across the board and commodities have made some gains, with gold in particular breaking back above $1,300.00. Global stocks are nearing five year highs and this comes in the face of some patchy earnings reports. The majority of the market still expects the Fed to scale back asset purchases in September, and this must surely weigh on stocks at some point. Over the weekend Japan's prime minister Abe has strengthened his power base after the upper house elections. This will see his growth policies unchallenged going forward and comes as the G20 pledged over the weekend to put growth before austerity. Also over the weekend China has announced it’s taken steps to liberalise lending rates that could help to increase funding to businesses. Portugal's political risk has subsided and this has seen peripheral Euro-zone bond yields fall. As a result of this combination of factors, there is a small amount of positivity around risk assets, of which the NZD and AUD are included. This has seen gains for both currencies in the early part of the week. The question is how far can this positive sentiment push them within the context of their broader downtrends?

Australia

Although there hasn’t been any hard economic data out of Australia in the last few days, there have been a couple of interesting articles published. The Australian Financial Review has carried a story that said an August interest rate cut is on the cards. This will be possible, according to their panel of experts, because of very soft inflation numbers that are due to be released tomorrow. Another article over the weekend has stated that the Australian Treasury is going to revise down growth forecasts and revise up the budget deficit. The impact on the currency has limited. The AUD has actually gained ground thanks in part to a slightly weaker USD and stronger commodity prices, but it also got a boost from surprise action by the Peoples Bank of China (PBOC). They have announced measures to further liberalize lending rates which it is hoped will increase competition amongst banks and increase lending to businesses. This has helped to underpin the AUD in what has otherwise been a very quiet start to the week.

New Zealand

There has been very little in the way of economic news out of New Zealand over the last few days. The market will be looking forward to the RBNZ monetary policy decision on Thursday to get a clearer picture on their thinking. It will also be interesting to see if we get any further details on the loan to value ratios (LVR) they are bringing in for home lending. I suspect they can’t be overly happy that just when they are looking to try and take the heat out of the property market, the government look to counter that by fiddling with the Kiwisaver scheme rules for first home buyers. This seems pretty far from a unified response to one of the biggest threats facing the NZ economy. There will no doubt be plenty of debate around this over the course of the week. Before the RBNZ statement on Thursday we have the trade balance figures to digest on Wednesday.

United States

The USD is a touch weaker across the board in the early part of this week. It has not been helped by a weaker than expected reading on existing home sales. The second half of the week will provide a fair bit more for the market to digest. Key readings on the manufacturing sector, new home sales and durable goods orders all scheduled for release. As the market has now had time to digest all the comments, mixed signals, and testimony from Fed officials over the past few weeks, Reuters has produced an interesting poll on tapering expectation. It shows the vast majority of economists still see September as the likely starting point for tapering of the quantitative easing. A few see is starting somewhere between Oct - Dec, while only 2 of the 56 polled see the Fed waiting until 2014. The Fed has been at pains to stress it is all data dependant, but unless we see a marked deterioration in the economic figures, it seems likely that asset purchases will be wound back in September.

Europe

It’s been very quiet on the news and data front in Europe over the last few days.  As we head into European holiday period, we can expect more of the same over the coming weeks. The only event of note has been and easing in the political crises in Portugal. The Portuguese president has backed the present government and ruled out early elections. This has seen borrowing costs for the country reduce significantly in the last couple of days. What isn’t so great is the aggregate level of government debt in the Euro-zone. Eurostat have released figures that show overall government debt has risen from 90.6% of GDP at the end of last year, to 92.2% at the end of the first quarter this year. When you take into account that Germany actually reduced their debt, you start to see the precarious position some of these other countries are in. The ECB can try to keep rates low for as long as possible, but they can do nothing about reducing government debt. Big reforms are still needed in Europe and it’s going to be long time before risks from that part of the world can be discounted.

United Kingdom

It’s been a very quiet start to the week on the data front in most counties, and the UK is no exception. In fact this whole week is light on data from the UK, with the only major release being GDP out on Thursday evening. The Pound Sterling has remained well supported against most other currencies since last week's surprise 9-0 vote against further quantitative easing by the bank of England. The mood in the UK does seem to be improving in line with the data. An interesting article in the Telegraph yesterday states the economy is seeing the ‘green shoots’ of recovery.

Japan

Japan had upper house elections over the weekend and Abe’s ruling LDP party have taken a big win. They now have a comfortable majority in both houses of the Japanese parliament. This certainly gives the party the green light to continue with the growth policies that have become labelled as ‘Abenomics’, and makes further reform a much smoother process. On Monday we also had comments from a Bank of Japan (BOJ) official saying that the bank is finally seeing a self-sustaining recovery in Japan, although it does not rule out additional policy steps. Later this week we have the trade balance and inflation data to digest.

Canada

Canada had inflation data released as the very end of last week. It came in on expectation at 1.3% (annually), but this is well below the Bank of Canada’s medium term target of 2%. This reinforces the softer than expected tone we got from the BOC as its policy meeting last week. The markets were caught a little by surprise after that meeting, and have pushed out the chance of any rate hike in the next 12 months. This inflation data has cemented that move. The initial weakness in the Canadian dollar after that announcement was short lived as the CAD has benefited from rising oil prices over the last few sessions.  The next key piece of data comes in the form of retail sales out early Wednesday morning.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »