With little in the way of developing trends, currency markets are treading water; equity markets meanwhile hit all-time record levels

By Sam Coxhead*:

The presence of on-going US quantitative easing (QE) has continued to provide the primary driver for the wider markets over the last week.

Incoming Fed Chair Janet Yellen laid the foundations for on-going stimulus from the Fed at her testimony last week.

Since then the US dollar has seen weakness in demand, stock markets have hit all-time record levels, and bond markets remain in demand.

This dynamic is the twisted logic of QE, where most asset markets rally in unison, and contrary to pre-QE price action.

So the foreign exchange markets continue to trade within their increasing familiar broader ranges, with little in the way of developing trends. Expect this to continue through into the New Year.

The prospect 2014 represents is of significant challenges in terms of predicting economic impacts.

Expect US Federal Reserve monetary policy to remain of paramount significance.

Any unwinding of the massive QE program will likely expose the markets addiction to cheap money and have a de-stabilizing effect across all markets.

At the very least, 2014 will prove to be an interesting time to be watching the global financial markets.

Major Announcements last week:

• UK Inflation (core) YoY 2.2% vs 2.5% expected

• UK Retail Sales (ex-fuel)MoM -.6% vs -.2% expected

• UK Unemployment rate 7.6% vs 7.7% expected

• NZ Retail Sales QoQ +.3% vs +.9% expected

• Japanese GDP Q0Q +.5% vs +.4% expected

• US Empire State Manufacturing Index +2.21 vs 5.00 expected

• US Industrial Production MoM -.1% vs +.2% expected

• China Communist Party 5year plan release sees positive response from markets

NZD/USD

The New Zealand dollar has performed well over the past week, but much of this has been due to broad USD weakness. The USD came under pressure across the board last week as incoming Fed Chair Janet Yellen showed her strong support for the current quantitative easing programme. The NZD saw further gains yesterday as releases from the Communist Party conference in China over the weekend surprised many with the broad reforms proposed. That buoyed Asian stock markets and was generally positive for risk sentiment. Levels towards 0.8400 could not be sustained however, and the USD has recovered some lost ground in the last 12 hours. This was on the back of a number of other Fed speakers were more positive on the prospect for US growth than the market had been expecting. The NZDUSD looks set to continue ranging between 0.8200 and 0.8400 in the near term. There will be plenty of data to digest this week from the US with the highlights being inflation, retail sales, and minutes from the last Fed meeting.

NZD/AUD (AUD/NZD)

Last week saw this pair break above minor resistance at 0.8840 (support at 1.1312) which opened the way for a test of recent highs around 0.8920 (lows near 1.1211). This relative strength came even as retail sales data from NZ surprised to the downside on Thursday. The market seemed to shrug that off and has tested key resistance around 0.8920 (1.1211) on a couple of occasions in the past 48 hours. That level however provides a strong barrier on the topside and will be hard to overcome. The likely scenario will be another failure above 0.8900 (1.1236) which results in a pull back to 0.8840 (1.1312) initially. In the last hour we have seen the release of minutes from the last RBA meeting although these have had little impact. Focus for the rest of the week will come from NZ producer prices prices tomorrow and a speech from RBA governor Stevens on Thursday.

NZD/GBP (GBP/NZD)

We have seen mostly range bound action for this pair over the last week with little overall direction. The New Zealand dollar did see some relative strength at the start of this week on the back of some positive risk sentiment. This was the result of the reform package announced by the Chinese Communist Party over the weekend. That buoyed Asian stock markets and risk assets in general. This took the pair above 0.5200 (below 1.9231) for a time, but the cross has quickly reverted to more comfortable levels around 0.5170 (1.9342). There is little to draw focus from NZ this week with only producer prices data out tomorrow. From the UK we have minutes from the last BOE monetary policy meeting, along with headlines from a number of on the record speeches that are scheduled. Expect more ranging around the 0.5150 (1.9417) level over the coming week.

 NZD/CAD

Over the last week this pair has seen the NZ dollar rise in mostly grinding appreciation over the CAD. In the face of weak NZ retail sales numbers, the wider markets risk appetite spurred the NZD demand. Much of this will be attributable to the accepting attitude from incoming Fed Chair Janet Yellen to the current QE program from the Fed. Positive sentiment towards the CAD has emerged in the last few sessions, and this has curbed further appreciation from the NZD for the time being. For the most part, the pair remains within its recent broader, if a little elevated, range. The focus for the remainder of the week is mainly based in Canada, with retail sales and inflation numbers on Friday. In NZ, we just have produce prices tomorrow and these will likely be of limited impact. Current levels look to offer good value buying of CAD with NZ dollars.

NZD/EURO (EURO/NZD)

The New Zealand dollar consistently outperformed the Euro over the last week. This was helped by largely disappointing data from the Eurozone and continued talk from officials that further measures from the ECB are a possibility. Some positive risk sentiment, on the back of Chinese reform announcements, help boost the NZD at the start of this week and the pair traded up to 0.6217 (down to 1.6085), before eventually running out of steam. In the last few hours we have seen the NZD give back some of those gains and the cross now sits on minor support at 0.6160 (above 1.6235). There is little to draw focus from NZ this week with only producer prices data out tomorrow. From Europe the key data to watch over the coming days includes German economic sentiment, manufacturing and service PMI’s, consumer confidence, and German business climate. The NZD topside looks like it will continue to be capped by 0.6240 (support 1.6025) in the medium term, and we can expect more broad ranging between that level and 0.6000 (1.6665) on the NZD downside.

 NZD/YEN

It has been a bit of a wild ride for this pairing over the last week. The impetus has come from the markets discounting of chances of a Fed taper of their QE program in December. This has seen the NZD out perform as a natural beneficiary of the QE program. Add to this the fact that in the new year the RBNZ are likely to initiate hikes from the emergency low 2.50% cash rate in NZ, and the increased NZ dollar demand is unsurprising. However, in the last few sessions the momentum has waned for the NZD. Global stock markets have moved lower and the NZD has moved lower correspondingly. Direction from the current levels is not clear and the global risk appetite will provide the lead.

AUD/USD

A relatively solid performance from the AUD over the past week has had much to do with broad USD weakness. The USD came under pressure across the board last week as incoming Fed chairman Janet Yellen showed her strong support for the current quantitative easing programme. The AUD saw further gains yesterday as releases from the Communist Party conference in China over the weekend surprised many with the broad reforms proposed. That buoyed Asian stock markets and was generally positive for risk sentiment. The USD has however recovered some lost ground in the last 12 hours. This came after a number of other Fed speakers were more positive on the prospect for US growth than the market had been expecting. This has seen the pair turn back down from just above 0.9400. In the last hour the minutes from the last RBA meeting have hit the wires. This has seen the AUD jump around a touch, but there is nothing new in the release and the impact should be limited. There will be plenty of data to digest this week from the US with the highlights being inflation, retail sales, and minutes from the last Fed monetary policy meeting. From Australia we get more comments from Governor Stevens on Thursday.

AUD/GBP (GBP/AUD)                            

This pair has been in a consistent AUD downtrend for much of the past two weeks, however losses seem to have paused over the past few days. Some positive risk sentiment on the back of reform news out of China has helped to boost the relative performance of the AUD. This caused some small upside price action in the pair at it traded up to 0.5840 (down to 1.7123) last night. That move has raised doubts about the prospect of further downside and leaves the pair with little in way of immediate direction. The RBA minutes just released have been of limited impact however we do hear from Governor Stevens again on Thursday. From the UK we have minutes from the last BOE meeting, along with headlines from a number of on the record speeches that are scheduled.

AUD/EURO (EURO/AUD)

The Australian dollar has shown little in the way of overall direction against the Euro in the past week. Some relative outperformance on Monday was on the back of Chinese reform announcements, but this strength has proven to be short lived. European data of late has been subdued and the same can be said for Australia. In the last hour we have seen the minutes from the last RBA meeting which held no real surprises. The impact has therefore been muted. We get more comments from RBA governor Stevens on Thursday which will draw focus. While from Europe the key data to watch over the coming days includes German economic sentiment, manufacturing and service PMI’s, consumer confidence, and German business climate. The downside is protected by key support around 0.6890 (resistance 1.4514) and while this contains any weakness we can expect more ranging between there and 0.7070 (1.4144) on the topside.

AUD/YEN

This pairing has been locked in a very contained trading range over the the last week. The AUD saw some initial pressure from the CAD before consolidating and seeing a little grinding appreciation in to the end of the week. Consolidation back through the initial resistance at .9800 was a step too far, and the pair again finds itself back towards the middle of its recent range. Today’s RBA monetary policy meeting minutes saw little new material offered. The AUD remains at elevated levels according to RBA models and a lower dollar would help with the rebalancing of the Australian economy away from reliance on the mining sector for investment. From here the focus moves to the Canadian economic data on Friday with inflation and retail sales numbers to provide the fun.

AUD/CAD

This pairing has been locked in a very contained trading range over the the last week. The AUD saw some initial pressure from the CAD before consolidating and seeing a little grinding appreciation in to the end of the week. Consolidation back through the initial resistance at .9800 was a step too far, and the pair again finds itself back towards the middle of its recent range. Today’s RBA monetary policy meeting minutes saw little new material offered. The AUD remains at elevated levels according to RBA models and a lower dollar would help with the rebalancing of the Australian economy away from reliance on the mining sector for investment. From here the focus moves to the Canadian economic data on Friday with inflation and retail sales numbers to provide the fun.

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Market commentary:

The presence of on-going US quantitative easing (QE) has continued to provide the primary driver for the wider markets over the last week. Incoming Fed Chair Janet Yellen laid the foundations for on-going stimulus from the Fed at her testimony last week. Since then the US dollar has seen weakness in demand, stock markets have hit all-time record levels, and bond markets remain in demand. This dynamic is the twisted logic of QE, where most asset markets rally in unison, and contrary to pre-QE price action. So the foreign exchange markets continue to trade within their increasing familiar broader ranges, with little in the way of developing trends. Expect this to continue through into the New Year. The prospect 2014 represents is of significant challenges in terms of predicting economic impacts. Expect US Federal Reserve monetary policy to remain of paramount significance. Any unwinding of the massive QE program will likely expose the markets addiction to cheap money and have a de-stabilizing effect across all markets. At the very least, 2014 will prove to be an interesting time to be watching the global financial markets.

Australia

Domestic data out of Australia last week had little overall influence. The currency was driven by broader market moves such as the USD weakness seen on the back of Janet Yellen’s testimony. The start of this week saw positive risk sentiment also boost the currency after Chinese officials laid out a solid reform package. In the last hour we have seen minutes from the last RBA meeting and these show the board has not closed off the chance of another rate cut. That being said, they saw mounting evidence that past cuts are supporting activity and decided it was prudent to hold rates steady. Later in the week we get more comments from Governor Stevens with an on the record speech set for Thursday.

New Zealand

There has been very little in the way of market influencing data since last week’s soft retail sales figures. Yesterday saw the release of the Business NZ PSI (Performance of Services Index) which showed strength increasing to 58.2 from 56.4. Although not a market moving piece if data, it does reinforce the view that the NZ economy is performing strongly. The bigger impact on the NZD has come after releases from the Chinese Communist Party meeting show they are planning on undertaking much broader reforms than expected. This has helped boost Asian stock markets and risk assets such as the NZD. We may well have seen some flow of funds into the NZD in order to buy some of the Air NZ shares the government is selling. But the amounts on offer means there won’t be a significant or lasting effect on the currency. Tomorrow we get producer prices data to focus on with credit card spending and visitor arrivals later in the week.

United States

Recent data from the US has been a touch on the soft side and this has seen the dollar weaken to a degree. At the end of last week we got capacity utilisation, industrial production, and import prices data that all came in under expectation and down on the previous month. It was the same story for manufacturing data out of New York. This data is considered a lead indicator for the wider manufacturing PMI data set for release in a couple of weeks. After Janet Yellen’s testimony last week saw the USD lose substantial ground. The expectation was that we would here a similar tone from a number of Fed speakers last night. This was the case to a degree with the likes of Dudley saying there was not yet enough growth momentum to give the Fed confidence in the labour market outlook. But over all his comments last night were somewhat balanced as he also said he sees some positive signs inflation will rise to target. There will be plenty of data to digest this week with the highlights being inflation, retail sales, and minutes from the last Fed monetary policy meeting.

Europe

Recent data from the Eurozone has done little to improve the economic outlook. The majority of data last week disappointed, printing either at or under expectation. Last night saw the release of current account and trade balance figures which have again done little to support the Euro. The current account came in well below expectation and down on the previous month, and although the trade balance seems to be strong printing at +14bln, it’s only as a result of very poor domestic demand. This means the Eurozone is surviving on exports, which obviously leaves it very exposed should we see a dip in global demand. There has been a lot of attention paid to comments made by ECB chief economist Peter Praet over the weekend. He suggested that even with interest rates toward zero, the central bank still has room for action in the form of quantitative measures. This could be it bond buying (such as the Fed’s QE program), or liquidity (cash) injections. A recent survey shows a large part of the market is expecting further such measures, in the form of an LTRO, in the first half of next year. Key data to watch over the coming days includes German economic sentiment, manufacturing and service PMI’s, consumer confidence, and German business climate.

United Kingdom

Last week saw a mixed bag of data for the UK, but two out of the three key releases undermined support for the GBP. The first was inflation data early in the week which surprised many coming in much softer than expected. Then near the end of the week we got retail sales figures which caught everyone off guard printing at -0.7%. However, between those two soft numbers we had another very good reading on employment and this helped the GBP maintain some composure on the week. Focus this week will come from the release of minutes from the last BOE monetary policy meeting, along with headlines from a number of on the record speeches that are scheduled.

Japan

After a raft of softer than expected data, last week finished on a brighter note with GDP coming in better than expected at +0.5%. There is little domestic data to drive the Yen now until Thursday’s Bank of Japan (BOJ’s) monetary policy statement. Offshore factors are certainly impacting though with broad moves in the USD combining with news from China on plans for reform causing the Yen to swing back and forth.

Canada

Last week was a quiet one for Canada with only two data points out toward the end of the week. Both came in better than expected with the trade balance printing at -0.4% and manufacturing sales improving to +0.6%. We have seen some interesting data, although somewhat historical, on foreign flows into the Canadian stock market in September. It showed a big jump of C$8.36bn and this corresponds with a decent performance of the CAD over that period. There is more to focus on this week with wholesale sales, inflation, retail sales, and a speech from BOC Governor Poloz all set for release.

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