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Overseas investors like the Budget, buy the NZ$

Overseas investors like the Budget, buy the NZ$

By Sam Coxhead*:

The New Zealand dollar outperformed on most cross rates. The disciplined, but benign Govt Budget aimed at appeasing the credit rating agencies, seemed to attract investors. Since its release there have been various flows into NZD, with the largest move seen on Friday as a US bank bought the NZD against various currencies. 

In Europe the suspension or delay of the IMF/EU investigations into the extension of bailout proposals has been forced by the necessity for the Greek authorities to get their affairs in order.

These delays are not positive and nervous investors will start to look at related exposures further afield. The further downgrade of the Greek debt credit rating, and that of huge European institution Credit Agricole, because of apparent exposure to Greek debt, is an example of the far reaching implications of this situation.

To intensify issues, Italy’s credit rating has been placed on negative watch by S&P and will do nothing to quell fears that the contagion has further to spread.

 Major Announcements last week:

- Australian Home Loans -1.5% vs +2.3% expected
- Euro-zone core  CPI 1.6% vs 1.5% expected
- UK CPI 4.5% vs 4.2% expected
- US FOMC Meeting minutes allude to rising inflationary pressure, normalisation discussions start
- Japanese QTR GDP -.9% vs -.5% expected
- UK Retail Sales 1.1% vs .9% expected
- Canadian CPI .2% vs .1% expected
- Credit downgrade for Greece, and Credit Agricole on Greek debt exposure
- IMF/EU investigations delayed until Greek affairs put in order- adding to uncertainty

NZD/USD 
The NZD saw demand in the second half of last week following the disciplined NZ Govt Budget. Of note on Friday was a large spike in demand for NZD from a US bank that saw it appreciate quickly against all cross rates and the USD was no exception.

Worries about the US debt ceiling negotiations could see volatile price movements over the next six weeks or so.

The outlook for commodity markets also remains mixed, although downside corrections seem more likely to my mind.

RBNZ quarterly Inflation Expectations on Tuesday and US preliminary GDP figures on Thursday will be closely watched. Expect any break of topside resistance at .8000 to be hard fought.

  Current level Support Resistance Last wk range
NZD / USD 0.7910 0.7820 0.8000 0.7756 - 0.8000


NZD/AUD (AUD/NZD)
The NZD made up lost ground against the AUD last week. The support for NZD since the NZ Govt Budget release and the less hawkish nature of the RBA Monetary Policy Meeting minutes, enabled this appreciation of the NZD.

This pair remains in its recent range and current levels still represent good value buying of NZD with AUD.

The RBNZ quarterly Inflation Expectations on Tuesday and Australian Private Capital Expenditure numbers on Thursday will be closely watched this week.

A break to the levels of .7500 (1.3333) would enable another lunge higher for the NZD, although I think this will be a difficult task this week.

  Current level Support Resistance Last wk range
NZD / AUD 0.7470 0.7300 0.7500 0.7359 - 0.7477
AUD / NZD 1.3386 1.3333 1.3700 1.3375 - 1.3589


NZD/GBP (GBP/NZD)
The NZD appreciated up towards the recent highs against the GBP over the last week. The NZD appreciation was driven by post NZ Govt budget demand for NZD, and a softer GBP following the release of the Bank of England Monetary Policy Committee Meeting minutes in the UK.

The break of the .4910 (2.0365) has not been sustained as yet and this level remains the key to halting the NZD’s progress from current levels. The RBNZ quarterly Inflation Expectations on Tuesday and final GDP numbers in the UK on Wednesday will be closely watched. Current levels represent great value buying of GBP with NZD in my view.

  Current level Support Resistance Last wk range
NZD / GBP 0.4845 0.4720 0.4910 0.4781 - 0.4915
GBP / NZD 2.0500 2.0365 2.1185 2.0345 - 2.0918

 
NZD/CAD
The lower than expected inflation and retail sales numbers in Canada, coupled with post NZ Govt Budget demand for NZD, saw the NZD outperform the CAD last week.

With resistance at .7720 broken, the next target level will be a break of .7800 for those looking to exchange NZD to CAD.

There is no economic data due for release in Canada this week, so all eyes will be on the RBNZ Quarterly Inflation Expectations on Tuesday. Current levels represent good value buying of CAD with NZD transfers.

  Current level Support Resistance Last wk range
NZD / CAD 0.7718 0.7560 0.7800 0.7567 - 0.7766


NZD/RAND
The RAND initially outperformed the NZD last week, but after the NZ Govt Budget and lower than expected South African inflation and retail sales numbers the NZD saw strong demand.

Resistance levels at 5.60 remains in place and the RBNZ Quarterly Inflation Expectations on  Tuesday remains the focus for the week. Should we see any pressure on the precious metal markets, expect the RAND to underperform.

  Current level Support Resistance Last wk range
NZD / RAND 5.4950 5.4500 5.6000 5.4245 - 5.5346


NZD/EURO (EURO/NZD)
The NZD outperformed the EUR last week as the ongoing Greek debt issues weighed on the EUR, especially on Friday after a further Greek credit rating downgrade.

While we should expect the NZD to remain buoyant against the EURO this week, there is potential for sharp spikes from the EURO that we saw at various times last week. These spikes can be expected with the speculative market holding overall sold positions on the single currency.

Expect plenty of “noise” on the debt issue this week, and in the absence of any tier one economic data due in Europe, the focus will be the RBNZ Quarterly Inflation Expectations on  Tuesday.

  Current level Support Resistance Last wk range
NZD / EUR 0.5613 0.5500 0.5700 0.5492 - 0.5634
EUR / NZD 1.7816 1.7550 1.8518 1.7750 - 1.8209

 
NZD/YEN (NZD/YEN)
The NZD outperformed the YEN over the course of the last week. Weaker than expected Japanese GDP numbers, and rumored merger and acquisition selling of YEN saw it under pressure on almost all cross rates.

The positive market reception of the NZ Govt Budget saw the NZD in demand, and this accelerated on Friday when one large US bank bought NZD across the board, adding to the NZD outperformance. The RBNZ Quarterly Inflation Expectations on Tuesday will be the focus for the week.

Expect resistance at 66.50 to be tough to break as this pair nears the highs for the year, last seen in early April.

  Current level Support Resistance Last wk range
NZD / YEN 64.77 63.50 66.50 62.66 - 65.28


AUD/USD
The AUD outperformed the US dollar over the course of the last week, although it remained in the expected range. The flight to safety bounce back in the gold price on Friday was as the EUR debt fears increased, and this underpins the concerns fragile nature of the USD.

The USD has benefitted from the EUR weakness , but not to the extent than some commentators imagined.

The Congressional debt ceiling negotiations, will be tempering wider US dollar support, and looks unlikely to see any kind of resolution soon. 

Expect good resistance to remain in place around the 1.0700 level. This week sees Australian private capital expenditure numbers released on Thursday and the primary focus in the US will be on the preliminary GDP figures due on Thursday also.

  Current level Support Resistance Last wk range
AUD / USD 1.0585 1.0520 1.0700 1.0505 - 1.0711


AUD/GBP (GBP/AUD)                            
The AUD outperformed the GBP last week, albeit not by a huge margin and inside expected ranges. The clouded commodity outlook will probably see this pair continue to consolidate within its recent range. The early GBP softness was tempered by better than expected retail sales numbers on Friday.

Current levels represent great value buying of GBP with AUD. Apart from being led by the price action in the commodity markets, the focus for this pair will be on Tuesdays Bank of England inflation report hearings, and the Australian private capital expenditure number on Thursday.

  Current level Support Resistance Last wk range
AUD / GBP 0.6528 0.6430 0.6625 0.6488 - 0.6604
GBP / AUD 1.5319 1.5100 1.5550 1.5143 - 1.5414

 
AUD/EURO (EURO/AUD)
This pair surprisingly saw the EURO outperform for much of the week as the weary price action in the commodity markets, and less hawkish than expected RBA Meeting minutes weighed on the sentiment.

This all changed on Friday as the concerns over the Greek debt issue gained momentum after various credit downgrades. Current levels represent good value buying of EURO with Australian dollars.

This week will see focus remain of the European debt issues and the price action of the commodity markets. Australian privates capital expenditure numbers on Thursday will be watched, but only provide passing interest as the more macro influences lead the way.

  Current level Support Resistance Last wk range
AUD / EUR 0.7513 0.7320 0.7565 0.7429 - 0.7541
EUR / AUD 1.3310 1.3220 1.3660 1.3260 - 1.3459


GBP/USD
This pair remains in a well established range with little in either economy likely to provide a definitive lead anytime soon. Within its range the price action was whippy in nature, providing opportunities for those leaving orders at targeted entry levels.

The mostly soft economic data both sides of the Atlantic continues, although the surprisingly strong UK retail sales numbers on Friday did give the GBP a boost.

This week’s focus will start with Tuesdays Bank of England inflation report hearings. Wednesday sees the final UK GDP numbers released, before Thursday’s preliminary GDP figures in the US. The US Govt debt ceiling debate should stop the USD gaining too much momentum if risk aversions leads the market.

  Current level Support Resistance Last wk range
GBP / USD 1.6214 1.6000 1.6300 1.6106 - 1.6305


GBP/EURO (EURO/GBP)
The EUR outperformed the GBP early on last week as UK CPI and Bank of England minutes did little to support the GBP. Friday saw a complete reversal of the week’s gains by the EUR, after various credit downgrades and a delayed timing on any kind of solution to the Greek situation.

The lead from here is likely to be driven by EUR weakness as opposed to Pound Sterling strength. The focus will be on the European debt market “noise”, and Tuesdays Bank of England inflation report hearings and Wednesday’s final UK GDP numbers, a break of the .8650 (1.1560) level would open the way up for further EUR weakness.

  Current level Support Resistance Last wk range
GBP / EUR 1.1510 1.1340 1.1560 1.1305 - 1.1518
EUR / GBP 0.8688 0.8650 0.8820 0.8682 - 0.8845


GBP/RAND
The RAND outperformed the GBP early last week as it stablised along with overall market risk sentiment. As market sentiment spiraled into Fridays session the GBP took back some of its losses, boosted by better than expected retail sales numbers.

Expect this week lead to be made the fortunes of the precious metals markets, before Tuesdays Bank of England inflation report hearings and Wednesday’s final UK GDP numbers.

  Current level Support Resistance Last wk range
GBP / RAND 11.2615 11.1000 11.4000 11.1144 - 11.4156

Market commentary:

The uncertainty continued last week, and was visible in the volatile, but mostly range bound price action across all markets.

Dominating headlines was the ongoing saga of the Greek debt situation, and expect this to continue with talk of possible extension of the debt contagion. Equity, commodity and interest rate markets were all volatile, as the appetite for risk ebbed and flowed.

Notably the gold market saw inflows as the European debt concerns featured on Friday.

Adding to the complexity are the ongoing US Congressional negotiations about the lifting of the US debt ceiling. The fragile nature of recovery of the western economies is plain to see. For the most part economic data was mixed at best in the UK and US. Japanese growth data disappointed as the full implications of the disaster damage starts to come through in the economic numbers.
 
The New Zealand dollar outperformed on most cross rates. The disciplined, but benign Govt Budget aimed at appeasing the credit rating agencies, seemed to attract investors. Since its release there have been various flows into NZD, with the largest move seen on Friday as a US bank bought the NZD against various currencies.

This week sees just quarterly Reserve Bank of NZ Inflation Expectation numbers due for release on Thursday, and do not expect these to raise too much market reaction.
 
The release of the Reserve Bank of Australia’s Monetary Policy Meeting minutes last week saw the prospect of their pending cash rate hike slightly pushed out. Therefore chances of a June or July interest rate hike have diminished a little. The likelihood is a move at the August meeting to my mind, as wage price data was more subdued than expected. This week is light on economic data, with Private Capital Expenditure numbers on Thursday the highlight. Expect the overall market appetite for risk to be expressed in the price action of commodities and the AUD to follow that lead.
 
In Europe the suspension or delay of the IMF/EU investigations into the extension of bailout proposals has been forced by the necessity for the Greek authorities to get their affairs in order. These delays are not positive and nervous investors will start to look at related exposures further afield. The further downgrade of the Greek debt credit rating, and that of huge European institution Credit Agricole, because of apparent exposure to Greek debt, is an example of the far reaching implications of this situation. To intensify issues, Italy’s credit rating has been placed on negative watch by S&P and will do nothing to quell fears that the contagion has further to spread.
 
In the UK last weeks’ inflation numbers exceeded expectations, but again the Bank of England (BoE) stated they see these pressures as mostly transitory. The BoE Meeting Minutes were as expected and do not expect a hike in the cash rate in the short term. On the whole the UK economic numbers remain weak, but the monthly retail sales numbers did show a welcomed jump ahead of expectations. This week’s Inflation Report hearing’s will be closely watched on Tuesday, as will the final GDP numbers due for release on Wednesday.
 
In the US the recovery remains patchy with housing and labour numbers the primary concern. Weaker earnings results from the likes of Wal-Mart and Hewlett Packard are a sign that the consumer remains weary. The Congressional lift of the debt ceiling will remain in the headlines ahead of the August cutoff date, expect a result at the final hour as the Republicans pursue aggressive spending cuts in order to sign off the increase. Along with the usual slurry of economic data, the preliminary GDP figures on Thursday will be closely watched. The appetite for risk will be the leading factor, a further downside lung in commodity prices would obviously see the USD benefit.
 
The Canadian dollar saw selling pressure on Friday as the inflation and retail sales numbers both came in under expectation and give the Bank of Canada more breathing space with regards to raising their cash rate. This theme will see the Canadian dollar underperform in the short term, especially should the oil price see any downward correction.
 
In South Africa both the inflation and retail sales figures came in below expectations last week and this takes pressure of the South African Reserve Bank to lift interest rates. The RAND has been suffering from the exit of the risk trade over the last few weeks and these numbers will do little to change its course. Expect the RAND to closely follow the fortunes of the precious metals markets over the coming week.

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

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