Currency trends for thirteen key currency pairs

By Sam Coxhead*:

Last week’s price action in the foreign exchange markets proved to be interesting to say the least.

The intense focus on the European debt situation remains, with the prospect of a Greek debt restructure causing the most debate.

 Major Announcements last week:

- UK CPI 4.0% vs 4.4% expected
- German ZEW Economic Sentiment 7.6 vs 11.7 expected
- Bank of Canada leave cash rate unchanged at 1.0% as expected
- UK Unemployment Claims rise.7k vs -3.6k expected
- US Core Retail Sales +.8% vs +.7% expected
- US Unemployment Claims 412k vs 379k expected
- Chinese CPI 5.4% vs 5.2% expected
- Chinese GDP 9.7% vs 9.5% expected
- US core CPI .1% vs .2% expected
- US UoM Consumer Sentiment 69.7% vs 68.7 expected

NZD/USD 
The New Zealand dollar continued its rapid rise against the ailing USD last week. It reached a high of .8000 and has risen by almost 12% in the last five weeks.

The weaker USD has been part of the equation, but higher short term interest rates in NZ are also driving this appreciation. While momentum has not slowed as yet, for those looking to send money to New Zealand some kind of correction lower cannot be too far away.

Momentum in the AUD appears to have slowed into the end of last week, and this could be the first signs of a top being set in place, thus helping arrest the NZD’s momentum.

Monday’s CPI data in NZ saw a rate of .8% for the quarter which was below the market expectation of 1.0%.

In the US the economic data flow is relatively light, with Building Permits on Tuesday, Existing Home Sales on Wednesday and manufacturing numbers Thursday. The oil price could well be the driver for a fight back from the USD.

A move higher from the US yield curve would certainly help this cause. In the meantime, those looking to make purchases in US dollars should make use of this historically high New Zealand dollar.

NZD/AUD (AUD/NZD)
The New Zealand dollar continued the trend of grinding appreciation over the Australian dollar over the last week. In the absence of economic data the main driver was comments by RBNZ Governor Bollard.

Dr Bollard stated that New Zealand higher terms of trade were being reflected in the level of the NZD, and due to cheaper imported goods inflationary pressures could emerge. This sent the shorter term interest rate markets higher.

With the interest rate differential closing, an adjustment in the exchange rate is warranted. The New Zealand dollar remains historically good value buying for money transfers from Australia.

The  NZ CPI number of .8% saw the NZD dip against the AUD by around .5%. Tuesday sees the RBA monetary policy meeting minutes released and will be closely watched by the market.

NZD/GBP (GBP/NZD)
Last week’s lower than expected inflation number in the UK saw the GBP underperform almost across the board and the NZD was no exception.

A double whammy of short term interest rates moving higher in NZ meant the NZD appreciated easily against the Pound Sterling.

After Monday’s NZ inflation came in at .8%, the focus for the week will be on the Bank of England monetary policy committee meeting minutes which are due Wednesday. A change in the committee voter split toward a rate hike would definitely be GBP positive, and this would be appreciated by those waiting to transfer GBP in the NZD.

With this pair not far from the all time highs of the NZD against the GBP, moves higher from here from the NZD should be more difficult.

 
NZD/CAD
The NZD outperformed the CAD over the last week as the Bank of Canada was more guarded in its inflation outlook than the market expected.

With hike in the cash rate being pushed out a little, interest rate differentials were always going to make it hard going for the Canadian dollar. After Monday’s NZ CPI number came out at .8%, we also have the Canadian CPI number out on Tuesday, before Thursday’s release of the retail sales statistics.

A correction lower in the oil price would not help those looking to convert CAD to NZD.

NZD/RAND
The New Zealand dollar showed relentless strength against the RAND last week breaking through resistance levels on a daily basis. Driven by demand for NZD  as investors chase yields, comments from RBNZ Governor Bollard added fuel to the fire.

The NZ inflation number released Monday showed a less than expected .8% increase for the quarter. The rise of the NZD has been dramatic and accounts looking to transfer funds from Rand to New Zealand dollars will be hoping that this inflation number proves to be a turning point.

Given the reluctance of offshore investors to buy South African bonds last week, it may be too early to tell if this current move by the NZD has finished. February’s peak around 5.6500 will certainly provide a tough test if the market can close through the 5.45 level as first resistance.

NZD/EURO (EURO/NZD)
The New Zealand dollar had another week of grinding appreciation against the EURO.

A higher interest rate curve following comments by RBNZ Governor Bollard certainly helped NZD sentiment as investors chase yield.

The EURO performed reasonably well given the level of concern surrounding peripheral member debt levels and ability to refinance. The fact that both UK and US inflation numbers were lower than expected, definitely helped appetite for EURO. Yesterday's less than expected NZ inflation number has seen the NZD retrace from the recent highs and these remain significant levels of resistance .5550 NZD/EURO 1.8020 EUR/NZD).

With little further economic data for either economy, the debt issue in Europe and the oil price will remain key drivers.

 
NZD/YEN (NZD/YEN)
The NZD/YEN saw sideways price action over the last week as the YEN bounced a little against all currencies after its recent weakness. The outlook in Japan remains bleak with the Fukushima power plant issues showing no real sign of resolution and large aftershocks still happening regularly.

At this stage the pair looks to have a cap in place at 66.75. After the release yesterday of the lower than expected NZ inflation number the NZD hastily retreated back below 66.00. With little in the way of economic data for the remainder of the week, expect the markets appetite for risk and repatriation flows back into YEN to dominate.

AUD/USD
The Australian dollar has managed set further post float highs at 1.0581 against the USD over the last week. Gains from here are going to be hard fought as momentum eases.

The less than expected inflation number in the US, coupled with the persistently elevated oil price means the USD is unlikely to put any immediate pressure on the AUD.

Reserve Bank of Australia monetary policy meeting minutes provide the first focus on Tuesday, before US building permits data Wednesday, existing home sales numbers Thursday, and Australian producer price data and US manufacturing numbers on Thursday. While we will probably get another leg higher from the AUD at some stage, current levels represent great value buying of USD with AUD.

AUD/GBP (GBP/AUD)                            
The AUD saw grinding appreciation against the GBP over the last week. The lower than expected UK inflation number stymied any progress by the GBP as the market reassesses the timing of potential hikes in the cash rate from the Bank of England (BoE).

The release of the RBA and BoE monetary policy meeting minutes on Tuesday and Wednesday respectively, will be closely watched.

Current levels represent good value buying of GBP with Australian dollars. Any further progress from the AUD will be harder fought, and there is potential for some weakness in the AUD as Chinese authorities continues with measures to slow their economy to quell the burgeoning inflationary pressures.

 
AUD/EURO (EURO/AUD)
The Australian dollar put on a little ground against the EURO last week. It was more a case of grinding appreciation that gained a little momentum towards the end of the week as concerns about Greek debt restructures, and a double level credit downgrade for Ireland hit the wires.

The further pressure on the EUR seen today so far is adding to the weakening EUR bias.

For accounts looking to purchase EUR with AUD, current levels represent great value for transfers. 

The headlines will dominate the weeks prices action as further developments in Greece unfold. From the Australian perspective the RBA monetary meeting minutes on Wednesday will hold attention. A break of support at 1.3500 EUR/AUD (.7410 AUD/EUR) will open up the way for another leg higher from the AUD, or lower by the EURO , as the case will be.

GBP/USD
The GBP/USD pair remains in its familiar range. The threatening GBP strength was brushed aside by the release of the less than expected UK inflations numbers.

The persistently strong oil price due to the tensions in the Middle East/North Africa region mean that any bounce back from the USD should not eventuate this week.

Wednesday sees the release of US building permits numbers, followed by the much anticipated Bank of England monetary policy meeting minutes. Thursday holds retail sales numbers in the UK and further manufacturing numbers in the US.

With interest rate differentials unlikely to change on this pair in the coming months, expect the lead to come from external factors such as the oil price, and the debts issues in Europe.

GBP/EURO (EURO/GBP)
The EURO outperformed the GBP initially last week, as the lower than expected UK inflation numbers disappointed those looking for a May increase in the cash rate from the Bank of England.

Towards the end of the week the GBP took back ground as focus on the European debt issues again intensified. The Bank of England monetary policy meeting minutes on Wednesday will provide the initial focus before retail sales numbers on Thursday.

If we see further drama from the debt issues in Europe this week, the EURO may give up some of its recent gains against the Pound Sterling. Note this should be driven by general EURO weakness rather than particular GBP strength.

GBP/RAND
The GBP outperformed the RAND over the last week as another round of across the board Rand selling eventuated.

Rand weakness being attributable to a lack for foreign demand for South African bonds.

A close above 11.2500 would open up the way for another leg higher by the Pound Sterling. In terms of data the Bank of England monetary meeting minutes on Wednesday will be closely watched followed by retail sales on Thursday.

Market commentary:

Last week’s price action in the foreign exchange markets proved to be interesting to say the least. The intense focus on the European debt situation remains, with the prospect of a Greek debt restructure causing the most debate.

Lower than expected inflation numbers in the UK and the US provided some insight. These numbers certainly reduces the pressure on Bank of England and the Federal Reserve to remove their accommodative policies for the time being.

The Australian and New Zealand dollar’s remain in demand, with the NZD being the star performer of the week.

Expectations for the Japanese economy have been lowered as the cleanup of the devastation  stretches out. The Fukushima power plant fallout worsened and this has seen its rating lifted to 7, the same level to that of the Chernobyl disaster.

The commodity markets remain strong, with gold setting record highs and oil remaining at elevated levels on geo-political tensions.
 
The Australian dollar has remained in demand over the last week, albeit its progress somewhat slowing. It saw a new post float high of 1.0581 and starts this week close to that level. A higher than expected inflation number in China saw another 50pt rise in the bank reserve ratios over the weekend from the Chinese authorities. This is an effort to slow bank lending and therefore help reduce inflationary pressures. One might expect this to impact on the performance of the AUD, given its close correlation to the Asian growth profile, but there was no impact as the market opened today. The focus this week will be Tuesday’s release of the Reserve Bank of Australia’s monetary policy meeting minutes, and the quarterly Producer Price Index numbers on Thursday.
 
In the absence of any local data in New Zealand last week, the driver for the New Zealand dollar’s stand out performance were comments made by Reserve Bank of New Zealand Governor Bollard. He commented on the persistently high level of agricultural commodities due to the growth in Asian demand, and the flow on effects of New Zealand export earnings creating inflationary pressure. A five percent increase in the exchange rate roughly equates to a 25pt hike in the cash rate. It would appear from comments like these, that Dr Bollard is happy to let exchange rate appreciation do some of his work for him. Lower than expected inflation numbers in the UK and the US mean that the NZD was pushed higher on interest rate differentials. This happens as the market pushed out the timing of hikes expected from the respective reserve banks.

The NZ CPI inflation number of showed +.8% increase for the quarter against expectations of 1.0%. This saw the NZD sell off across the board by around .3% and is the only significant piece of economic data in New Zealand this week. Of note also is the offshore demand for the increased New Zealand Government bond tender program. The New Zealand Debt Management Office has had no problems issuing bonds in the Governments enlarged borrowing program.
 
The United States dollar remained under pressure for the most part last week. The continued high level of the oil price meaning that any progress from the USD was going to be hard fought. The economic data continues to show improvement for the most part, with manufacturing and consumer sentiment providing the highlights. This week’s focus will be on building permits numbers on Tuesday, homes sales numbers Wednesday and more manufacturing numbers Thursday.

I do think we should see some kind of USD strength return at some stage in the short term. This will probably come with some kind of resolution of the tensions in the middle East/North Africa regions, and the associated drop in the oil price. Next week’s Fed meeting and statement on the cash rate will be focused on as the debate around the removal of stimulus increases. The lower than expected inflation number last Friday will give Chairman Bernanke some assurance that inflation remains in check for the time being.
 
In the UK, the big event of the week was the inflation number that came in at 4.0% for the year against a market expectation of 4.4%.  The release of this number saw a softer GBP across the board as any chance in the lift of rates in May from the Bank of England vanished. With the prospect of no change in the cash rate until August or October, the Pound Sterling remains vulnerable to downside pressure. This week attention will be on the Bank of England Monetary Policy Committee meeting minutes due for release on Wednesday, followed by the monthly Retail Sales number on Thursday.
 
The European debt crisis continued last week. With debate heating up on the prospect of debt restructuring for Greece and the double level downgrade of Ireland by Moody’s getting the most attention. The EURO has been remarkably resilient through this recent focused attention. Diversification away from the USD has continued, and along with the prospect of higher interest rates, has been providing the support to the EURO. The slightly higher than expected inflation numbers last Friday will keep the European Central Bank on the inflation offensive and this should continue to see the interest rate differentials providing key support on any debt inspired EURO weakness. China has also expressed its support for Spain, and Spanish bonds. With little in the way of major European economic data this week, again the focus will be on the peripheral member states and their debts issues.
 
Last week the Bank of Canada left the cash rate unchanged at 1%. The comments accompanying the decision have been taken as more downbeat than expected and the chances of a rate hike in May have now been completely discounted. Accordingly the Canadian dollar softened. Its move lower was helped by an overall weaker equity market. Tuesday sees the monthly inflation number released , followed by Retail Sales on Friday.

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