Sluggish economies of Britain and the US weigh on currency markets

By Sam Coxhead*:

Over the course of the last week further signs of a slowing global economy have emerged. In particular the outlook for the sluggish economies of Britain and the United States has softened again, and the prospects of 'lower for longer cash rates' increased.

There has been some progress on the Greek debt situation. The 'Troika' of the European Union, European Central Bank (ECB) and International Monetary Fund have ended their investigations positively. So long as the Greek administration can get pass marks on prospective budget cuts and privatisation schedules, the extension of bail funds will be forth coming and early July payments are likely to be made.

 Major Announcements last week:

- South African GDP 4.8% vs 4.2% expected
- New Zealand Trade balance 1.113B vs 603M expected
- Canadian GDP .3% vs .2% expected
- Canadian Current Account -8.9B vs -2.9B expected
- NBNZ NZ Business Confidence jumps to 38.3 from 14.2 previously
- Australian Building Approvals -1.3% vs -1.7% expected
- Euro-zone Unemployment rate 9.9% as expected
- US Consumer Confidence 60.8 vs 66.3 expected
- Australian GDP -1.2% vs -1.0% expected (although better than rumoured)
- UK Manufacturing PMI 52.1 vs 54.2 expected
- US ISM Manufacturing PMI 53.5 vs 58.1 expected
- Australian retail Sales 1.1% vs .4% expected
- UK Services PMI 53.8 vs 54.4 expected
- US Non-Farm Employment change 54k vs 194k expected
- US Unemployment rate 9.1% vs 9.0% expected

NZD/USD 
The NZD remained in demand against the US dollar last week, reaching a post float high of .8264. The weaker economic data in the US means that any correction lower is likely to be driven by NZD weakness, rather than strong USD demand.

The RBNZ Monetary Policy Statement on Thursday at 9:00 AM (NZT), is the key focus this week. With a soft global economic outlook, any NZD strength is likely to be driven by the prospect of earlier than expected cash rate hikes in NZ. Resistance around the .8250 level is reasonable, and support at .8100 and .8000 should provide the boundaries for the coming weeks trade.

NZD/AUD (AUD/NZD)
The Australian dollar managed to take back some lost ground against the resurgent New Zealand dollar through the second half of last week.

The respective central banks hold the key to progress this week, along with Australian employment numbers on Thursday. Progress for the NZD should be harder fought from here, with the RBA expected to hike the cash rate as early as next month. Should support at .7575 (1.3200 resistance) be broken, expect further support at .7450 (1.3335 resistance).

NZD/GBP (GBP/NZD)
The NZD remains close to post float highs against the Pound Sterling, as weaker economic data pushes back expectations of a rate hike by the BoE.

The respective central bank announcements of Thursday will garner most attention, along with producer price and manufacturing production data on Friday in the UK. Expect the wider .4900 - .5030( 1.99 - 2.04) range to remain in play for the week, as resistance at .5030 (1.9900 support) has held on earlier tests.

 
NZD/CAD
This pair consolidated at its elevated levels over the last week. Canada’s mixed run of economic data continues, and until we see some less positive data from New Zealand’s perspective, these elevated levels will continue.

Given the slowing global growth picture, progress higher from the New Zealand dollar will be difficult.

A positive Canadian employment report on Friday could see the CAD exert a little pressure on the NZD, assuming that the RBNZ monetary policy meeting on Thursday holds few surprises.

NZD/RAND
The stronger than expected South African GDP numbers last week saw the RAND outperform the NZ dollar. This has been driven by expectations of a SARB rate hike in the cash rate, ahead of the  previously priced December meeting.

Should manufacturing and sales numbers in South Africa on Thursday support the stronger growth picture, expect RAND momentum to remain in place. The RBNZ meeting on Thursday will be closely watched, though no change is expected in the cash rate until December in New Zealand.

NZD/EURO (EURO/NZD)
The euro outperformed the NZD last week as it benefitted from a likely reprieve on the Greek debt situation, and weaker US dollar in the wake of the weak employment numbers in the US.

Progress for the euro should be slightly more hard fought from current levels ahead of both the RBNZ and ECB monetary policy announcements on Thursday. While structural problems remain in the Euro-zone, the very weak US dollar should see the euro remain with the upper hand this week.

 
NZD/YEN (NZD/YEN)
The New Zealand dollar gave some ground against the yen last week, as the global growth profile softened. Should this continue, expect the NZD to continue to underperform as risk aversion increases.

The focus for the week will be the RBNZ Monetary Policy Statement on Thursday. A break on support at 64.50 would see solid support at 64.00 tested. Final first quarter Japanese GDP numbers will be watched on Thursday, but should not provide too much of a surprise.

AUD/USD
The Australian dollar remains in demand against the weak US dollar. The weakening global growth profile is tempering its progress as risk aversion grows.

The RBA Monetary Policy Meeting announcement today provides the initial focus. Although no change is expected, the statement will be closely watched. Thursday sees the release of the employment numbers.

Any stronger than expected jobs growth and corresponding drop from its currently impressive 4.9% unemployment rate, would see further chances of a hike in the cash rate in July. This would strengthen the AUD further, as any prospect of a rate hike in the US in 2011, is diminishing in probability.

AUD/GBP (GBP/AUD)                            
This pair remained in its relatively high, but contained range over the last week. Disappointing UK manufacturing numbers being balanced out by general market risk aversion as the global growth profile softens.

Current levels remain very good levels for money transfers from Australian dollars to Pound Sterling, given the historical levels this cross has traded.

The respective central bank monetary policy meetings this week provide the focus, along with Australian employment numbers on Thursday. Expect both cash rates to remain unchanged, but the RBA are close to hiking their cash rate, with a 50% chance currently priced for the next meeting in July. This contrasts expectations of the BoE, who are now picked to avoid hiking their cash rate until closer to the end of the year. 

 
AUD/EURO (EURO/AUD)
The Australian dollar gave up ground to the EURO, as it started to emerge last week that some kind of resolution would be reached on the requirements for Greek funding. This coupled with the softening global growth profile, further evidenced by the US employment numbers on Friday, and it was no surprise that the AUD underperformed.

This week’s respective reserve bank meeting’s starts today with the RBA. Expect the cash rate to remain unchanged but any comments with regards to the timing of the next hike will be reacted to. Thursdays’ Australian employment numbers should make the timing a little more clear, if the RBA statement does not.

The ECB meets to announce what should be an unchanged cash rate on Thursday, but again, it is the comments they make in their accompanying statement, that will be watched closely. Current levels still represent good value buying of EURO with Australian dollars. 

GBP/USD
Both the UK and US economies are struggling to improve, according to the latest data. Neither central bank is likely to raise their respective cash rates from the current very accommodative levels, before the end of the year at the earliest. With the global growth profile softening, the US dollar may outperform by default.

The BoE Monetary Policy Meeting on Thursday should see the cash rate left unchanged, UK manufacturing and producer price numbers on Friday will be watched, but expect the lead to be provided by the equity markets, in the absence any top tier US data.

GBP/EURO (EURO/GBP)
The euro appreciated against the Pound Sterling last week in what was almost one way traffic. Weaker economic data in the UK and an apparent solution for Greece’s immediate funding issues saw the euro in demand. Both respective central banks have cash rate announcements on Thursday, but expect limited response to these announcements, as both are expected to be unchanged.

There is little in the way of tier one data in Europe this week, so expect any further comments with regards to the Greece bailout extension to be watched closely. UK manufacturing and producer price data on Friday will be watched also.

GBP/RAND
The Pound Sterling gave up ground to the rand last week. Stronger than expected GDP numbers in South Africa, coupled with weak manufacturing numbers in the UK, provided the drivers for the move. Increased probability of a cash rate increase before the end of the year from the SARB, should maintain the momentum in the rand's favour. The BoE cash rate decision on Thursday will reveal no change in the cash rate, and the UK manufacturing and producer price data on Friday will probably garner more of a reaction.

Market commentary:

Over the course of the last week further signs of a slowing global economy have emerged. In particular the outlook for the sluggish economies of Britain and the United States has softened again, and the prospects of 'lower for longer cash rates' increased.

There has been some progress on the Greek debt situation. The 'Troika' of the European Union, European Central Bank (ECB) and International Monetary Fund have ended their investigations positively. So long as the Greek administration can get pass marks on prospective budget cuts and privatisation schedules, the extension of bail funds will be forth coming and early July payments are likely to be made.

Australasian news remains relatively upbeat with rebounding business confidence in New Zealand and much better than expected Retail Sales numbers in Australia. On balance the US dollar remains under pressure and the euro remains the main benefactor of this in the short term. The Australian and New Zealand dollars have demand being balanced by a lower global growth profile, and the prospect of higher domestic interest rates.
 
This coming week is a busy one for central bankers, with the Reserve Bank of Australia (RBA), Reserve Bank of New Zealand (RBNZ), Bank of England (BoE) and ECB, all having their respective monetary policy meetings.
 
The RBA announces rates later today. The cash rate will likely be unchanged, with a 50% probability of a 25pt hike priced into the interest rate market for their July meeting. Also, Thursday sees the all important release of the employment numbers, with jobs growth of 25k expected and the impressive unemployment rate of 4.9% expected to remain unchanged. Any increased likelihood of a July rise in the cash rate, will see the Australian dollar in demand.
 
The positive news for the New Zealand economy continued last week with the sharp rebound continuing in the NBNZ Business Confidence Survey. The RBNZ Monetary Policy Statement on Thursday, will be closely watched, as will Governor Bollard’s comments to Parliaments Finance and Expenditure Committee later that day. Any increase in the probability of an earlier than currently expected cash rate rise, will be NZD positive, but remains unlikely given the global outlook.
 
In the UK weaker than expected manufacturing data has pushed back the prospects of any move higher in the cash rate from the BoE in the short term. Various banks have been adjusting their expectations, for example Barclay’s Bank have moved their expectation for a move in the cash rate from August, to November. Given the mostly short term focus of the foreign exchange market, the Pound Sterling has been under pressure correspondingly. The BoE announcement on Thursday will be watched, but expect little market reaction.
 
The euro had a very positive last week. The beneficiary of good news on the Greek debt front, as well as seeing demand after the much weaker US employment numbers. This trend is likely to continue with little on the economic horizon to drive broad based demand for the US dollar in the short term. The ECB decision on the cash rate will be watched closely, but no change in the cash rate is expected at this Thursdays meeting.
 
In the United States this coming week, there is little in the way of first tier economic data, so look to the equity markets for the lead. The weak data of late has increased speculation about the prospect of a third round of Quantitative Easing (essentially the electronic printing of money) from the Federal Reserve, but this remains unlikely at this stage. Fed Chairman Bernanke speaks on Wednesday night in Atlanta, and any comments that he make with regards to the economy will be closely followed. With housing and employment remaining fragile, expectations for any change in the cash rate in 2011 have been all but ruled out. This should mean the USD remains under pressure as longer term interest rate remain low.
 
The economy of South Africa remains interesting, with a nice surprise jump in the GDP number last week. This has caused RAND watchers to reassess their views on how long the Reserve Bank of South Africa (SARB) can leave the cash rate unchanged. Any strong move to price earlier interest rate hikes from the SARB, will see the RAND appreciate as investor chase higher yield via South African bonds. 

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