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Currency trends as risk appetite rises

Currency trends as risk appetite rises

By Sam Coxhead*:

Over the course of the last week the global appetite for risk increased.

This  risk appetite was somewhat surprising given the fact that there are still geo-political, environment and financial stresses evident across the world.

 Major Announcements last week:

- US Existing and New Home Sales slump much worse than expected, foreclosures making up 40% of sales
- UK CPI 4.4% vs 4.2% expected
- UK Public sector borrowing increases by more than expected
- Canadian Retail Sales 0.0% vs +.8% expected
- NZ Current Account -3.52Bil vs -2.13Bil expected
- BoE MPC vote split remains 3-6
- NZ GDP +.2% vs +.1% expected
- UK Retail Sales -.8% vs -.5% expected
- US Durable Goods Orders -.6% vs +2.1% expected
- Fitch and Moody’s downgrade Portugal’s Govt credit rating
- US 4th Quarter GDP revised to 3.1% from 2.8% previously
- US Consumer sentiment dips
- US Fed upbeat comments takes market by surprise, USD positive

NZD/USD 
The NZD/USD pair is in for an interesting week.

If re-insurance flows into NZD continue, then we will see grinding appreciation.

From the US perspective, the turnaround in comments from some Fed officials with regards to ending Quantitative Easing means that the USD may finally see some buying interest.

In New Zealand most interest will be centered around the NBNZ Business Confidence Survey on Thursday.

In the US there is the usual large array of data to provide noise, but most closely watched will be the Employment numbers on Friday. Expectations are for an unchanged Unemployment rate of 8.9%. Anything better than the 8.9% expectation would be seen as USD positive.

  Current level Support Resistance Last wk range
NZD / USD 0.7508 0.7350 0.7650 0.7308 - 0.7576


NZD/AUD (AUD/NZD)
The New Zealand to Australian cross has been fairly stable over the last week.

Around current levels represents very good value buying of NZD with AUD. Both currencies were surprising strong last week with M&A activity driving the AUD, and re-insurance buying interest lifting the NZD. This week is light on economic data ahead of Thursday when we have Building Consents and Retail Sales numbers in Australia, and NBNZ Business Confidence numbers in New Zealand.

  Current level Support Resistance Last wk range
NZD / AUD 0.7317 0.7250 0.7400 0.7287 - 0.7380
AUD / NZD 1.3667 1.3500 1.3775 1.3550 - 1.3722


NZD/GBP (GBP/NZD)
The NZD surprisingly outperformed GBP over the last week.

The price action was caused by a mixture NZD strength driven by re-insurance flows related to the Christchurch earthquake, and negative GBP sentiment caused by the release of the Bank of England Monetary Policy Meeting minutes.

With an unchanged 3-6 voter split, the market took it as the Bank look poised to accept the growing inflationary pressures in the short term. The adverse reaction to the disciplined UK budget released last week may well lend on GBP sentiment this week also.

Tuesday sees the release of the UK Current Account and Final GDP figures for the 4th Quarter 2011. Thursday sees the NBNZ Business Confidence number released in NZ followed by various housing and manufacturing numbers in the UK, which should not cause a reaction. 

The Pound Sterling’s performance to the EURO will also be a factor. Large selling of GBP and buying of EURO was evident last week, and affected all GBP cross rates. If we see a pull back in this move the GBP should outperform the NZD.

  Current level Support Resistance Last wk range
NZD / GBP 0.4688 0.4500 0.4600 0.4517 - 0.4686
GBP / NZD 2.1331 2.1740 2.2220 2.1338 - 2.2138

 
NZD/CAD
The NZD outperformed the CAD last week in what was almost entirely a one sided move higher.

Re-insurance flows and the magnetic pull by the AUD meant the NZD moved well off the recent post earthquake lows against CAD.

In Canada the Conservatives lost a confidence vote in Parliament which points towards an election in May. This kind of uncertainty will weigh on sentiment for a currency. Not even the continued high level of the oil price could properly defend the CAD and this highlights the strength of the surprising NZD move.

The data of significance this week starts on Thursday with the NBNZ Business Confidence Survey, followed by the Canadian GDP number which is expected to be +.5%. 

  Current level Support Resistance Last wk range
NZD / CAD 0.7367 0.7200 0.7450 0.7156 - 0.7417


NZD/RAND
The NZD outperformed the RAND over the last week.

With re-insurance buying interest and the drag by the rampant AUS providing the boost, the NZD/RAND briefly touch resistance at 5.2000.

This coming week sees little in the way of South African data and just NBNZ Business Confidence in New Zealand. If the re-insurance flows continue this week, expect some pressure to be put on the resistance at 5.2000 once again.

  Current level Support Resistance Last wk range
NZD / RAND 5.1599 5.1000 5.2000 5.0795 - 5.1997


NZD/EURO (EURO/NZD)
The New Zealand dollar had a surprising rally against the EURO over the last week.

Being dragged higher by the rampant AUD, earthquake re-insurance flows added the extra boost. Slightly weighing on the EUR will have been the Govt debt issues, but the price action shows that the move was mainly driven by the NZD.

Importantly for those looking for a lower NZD is that resistance at 0.5375 (1.8600-support EUR/NZD) has not been breached and hopes remain that the strength of this level remains in place. A lack of concrete progress from the EU summit with regards to Emergency Mechanism specifics may weigh on the EURO this week, but it should not be a surprise to the market.

There is an array of second tier data die for release in Europe which should cause too much reaction. In NZ the NBNZ Business Confidence Survey released on Thursday will be closely watched.

  Current level Support Resistance Last wk range
NZD / EUR 0.5342 0.5150 0.5375 0.5151 - 0.5366
EUR / NZD 1.8720 1.8600 1.9420 1.8633 - 1.9413

 
NZD/YEN (NZD/YEN)
The NZD performance against the YEN over the last week has been one of grinding appreciation.

After initially being dragged higher by the rampant AUD, the emergence of re-insurance flow buying saw the NZD perform on its own merits. Making its progress easier was the fact that the Bank of Japan remain poised to intervene in the should the YEN show any real signs of gaining upside momentum.

There is still a lot of uncertainty with regards to the full impact of the disaster, and until that becomes clear I expect the BoJ to remained ready to intervene. As Japanese data does not affect the market, the main data focus will be the NBNZ Business Confidence survey on Thursday.

  Current level Support Resistance Last wk range
NZD / YEN 61.37 60.00 62.00 58.99 - 61.51


AUD/USD
The Australian dollar was surprisingly rampant against the US dollar last week.

Fridays high at 1.0293 was a record high since its float 29 years ago. The initial boost came out of the blue from a large insurance M&A flow out of the UK reportedly to the tune of around 4 billion AUD. This relentless buying over a couple of days caused a squeeze in the market.

As supposed resistance levels were quickly brushed aside, investors with sold AUD positions scrambled to reverse their positions, adding to the buying frenzy.

There is a large array of data in both countries this week. Of note in Australia is Building Approval and Retail Sales numbers on Thursday. In the US, Unemployment numbers are released on Friday with the expectation of an unchanged rate at 8.9%. Initial resistance is provided just above Fridays record high at 1.0300.

  Current level Support Resistance Last wk range
AUD / USD 1.0260 1.0050 1.0300 0.9952 - 1.0293


AUD/GBP (GBP/AUD)                            
The AUD had unrelenting pressure on the GBP last week.

Surprised M&A demand for AUD, coupled deteriorating GBP sentiment after the Bank of England minutes were released provided the pressure. Current Account and final GDP figures on Tuesday in the UK will provide the initial focus.

In Australia on Thursday Building Approval and Retail Sales numbers will also be closely watched. Should the renewed market appetite for risk continue this week expect the AUD to test resistance levels across the board, and the GBP will be no exception. Public dissatisfaction with last week’s disciplined UK Budget may weigh on the GBP in the short term. 

  Current level Support Resistance Last wk range
AUD / GBP 0.6405 0.6330 0.6515 0.6139 - 0.6409
GBP / AUD 1.5613 1.5350 1.5800 1.5604 - 1.6289

 
AUD/EURO (EURO/AUD)
Price action in the AUD/EUR was one of grinding appreciation last week.

The M&A inspired AUD rally gained momentum on Friday as the stresses related to the Govt debt issues finally started to take their toll on the EURO. Had it not been for continued Asian Central Bank diversification and the flow of Petro-dollars supporting the EUR on dips against the USD, the progress of the AUD against the EURO would have been greater.

With short covering continuing in the AUD, expect the bias to favour the AUD this week. There is little in the way of top level data due for release in Europe this week, so expect Thursdays Australian Building Approval and Retail Sales Numbers to be closely watched for a further lead on this pair. 

  Current level Support Resistance Last wk range
AUD / EUR 0.7299 0.7200 0.7410 0.7057 - 0.7315
EUR / AUD 1.3700 1.3500 1.3875 1.3670 - 1.4170


GBP/USD
The GBP found itself under pressure from the USD after the release of the unchanged 3-6 voter split on the Bank of England Monetary Policy Committee meeting minutes. Not even Tuesdays higher than expected CPI number could stem the tide.

Adding to the USD strength were comments from various US Fed members acknowledging that it was close to being the time to end the Quantitative Easing program.

Overall this pair remains stubbornly in its broader overall range of 1.6000-1.6400, albeit currently right on the cusp of the lower end of the range.

Progress from the USD will be closely watched, and a breakdown through the 1.5980 level could well signal a move for another leg lower for the Pound Sterling.

Tuesday sees the UK Current Account and Final GDP numbers released amidst a flurry of data throughout the week in the US. Most closely watched will be the US Employment numbers on Friday. 

  Current level Support Resistance Last wk range
GBP / USD 1.6018 1.6000 1.6350 1.6001 - 1.6401


GBP/EURO (EURO/GBP)
Last week saw continued appreciation of the EURO over the GBP, albeit in more erratic and less convincing fashion than the week previous.

The disappointing Bank of England minutes outweighed the higher than expected Inflation numbers in the UK. On Friday saw the halting of progress from the EURO as the Debt concerns once again rose amongst the flow of Credit Agency downgrades for various types of European debt. A lack of true resolution from the EU summit also caused Euro investors to be weary.

This week sees little in the way of influential economic data in the Eurozone. In the UK Current Account and Final GDP numbers on Tuesday will be closely watched, before second tier Housing and Manufacturing numbers later in the week.

  Current level Support Resistance Last wk range
GBP / EUR 1.1395 1.1235 1.1560 1.1348 - 1.1555
EUR / GBP 0.8775 0.8650 0.8900 0.8654 - 0.8812


GBP/RAND
The recent volatility of this pair continued over the last week. The higher than expected UK inflation number was not enough to protect reaction to the disappointment of the unchanged 3-6 voter split on the Monetary Policy Committee at the Bank of England.

The markets appetite for risk also benefitted the Rand and should this continue this week, expect the Rand to maintain its pressure on the GBP.

In an absence of South African data this week, expect all eyes to be on the UK Current Account and Final GDP number in the UK on Tuesday. If the GBP/USD rates breaks down through the 1.5980-1.6000 area, then the weakness will likely spread to other cross rates and the Rand will benefit from this. 

  Current level Support Resistance Last wk range
GBP / RAND 11.0100 10.9000 11.1000 10.9672 - 11.3821

Market commentary:

The nuclear fallout situation in Japan remains unclear as the Japanese authorities embark on the earthquake and tsunami clean up with expected efficiency. The Nikkei saw large rallies as the market recovers from the panic selling after the disaster. The Yen has been stable which will be encouraging to the Bank of Japan (BoJ). While they remain poised to intervene further if required, at this stage they have been on the sidelines since the first G7 coordinated intervention.

The ongoing and increasingly widespread civil unrest in the Middle East/North Africa (MENA) region continues to have the oil price at elevated levels. Whilst this will continue to be a drag on global growth, the fact that we have not seen prices increase further above the current levels of around 105 USD per barrel seems to have made markets more relaxed. Volatility measures such as the VIX continued to decrease throughout the week.

In Europe the focus on the Govt debt situation continues to make headlines. The EU summit proved to be long on talk ,and short on action. The credit agencies were busy downgrading various types of debt from Portuguese Govt debt, to Spanish Bank  and Mortgage debt. Portugal remains poised to require bailout funding and will have elections in May after the coalition Government breakdown. Ireland continues to attempt to re-negotiate the terms if its bailout. The EUR performed well considering the attention the debt market was getting. Continued Asian Central Bank diversification out of USD and large petro-dollar flows helping support the EUR on any weakness.

The Bank of England (BoE) Monetary Policy Meeting Minutes disappointed the market when released. The voter split remained 3-6, with 3 votes for a hike and 6 against. This disappointment saw the GBP dumped by those looking for an increase chance of a hike from the BoE, even in the face of the higher than expected UK CPI number. The Pound Sterling lost ground on all crosses and looks poised to test  its substantial support level at 1.5980. The Budget proved to be one of fiscal discipline. The increased taxes and reduced spending programs stimulated a large rally from unhappy voters, which ended with ugly scenes and over 200 arrests. The GBP was under considerable pressure from both the AUD and NZD, which were both surprisingly strong over the course of the week. There were large flows from two UK banks selling GBP and buying EUR which added to the pressure.

The US Federal Reserve looks poised to end its Quantitative Easing (QE) program at the end of June as various members made comments that the time was fast approaching to end the stimulatory efforts. Of particular significance are comments from pro-QE Bullard, this change in sentiment should see further USD buying. Increasing inflationary pressure in the US saw longer term interest rates move higher towards the end of the week, which was mildly USD supportive. US data remained positive for the most part, although Consumer Sentiment and Durable Goods Orders dipped in March. The final GDP reading saw 4th Quarter growth increase to 3.1%. This week sees the all important Employment numbers in the US on Friday, with the market expecting an unchanged Unemployment Rate of 8.9%.

In the absence of any local economic data, the AUD had a huge week. With strength initially provided by a large M&A flow coming from the UK, investors with sold AUD positions were forced to  scramble to exit these losing positions which further added to the AUD upside momentum. With a strong equities market on Friday in the US, the AUD/USD set post float highs at 1.0292, before coming off to current levels. 1.0300 represents considerable FX Option related resistance and a breakthrough of the level will be hard fought, but expect it to be tested in the coming week.

The NZD was dragged higher by the AUD last week. Also adding to the bid tone bias was late talk of re-insurance flows related to the earthquake in Christchurch. The broad strength of demand for the New Zealand dollar was surprising. The increased NZ Govt Bond tender program will probably continue to attract interest while the fragility in other foreign bond markets remain. The NZD strength against the GBP was most surprising to many. Looking forward this week, if the GBP/USD can remain above 1.5980, then a chance of a bounce back against the NZD remains real.

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Sam Coxhead is a currency analyst with DirectFX You can contact him here >>
 

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