Global risk aversion sets the currency tone

By Sam Coxhead*:

Last week market sentiment overall, was one of risk aversion. For the most part the economic data has continued to soften around the globe.

Stock markets continue their recent bearish trend, commodities are lower for the most part, and in the face of lower longer end interest rates, the US dollar strengthened. The European debt situation continues to be closely watched. Tensions remain elevated and the politics surrounding the extended Greek bailout package dominate the headlines. 

The stand out performance came from the New Zealand dollar, as the Reserve Bank of New Zealand (RBNZ) pointed towards a December cash rate hike.

Independently of OPEC, Saudi Arabia pledged to increase its oil production, which caused a move lower in the oil price on Friday.

Following the latest severe Chritchurch quake, the NZD has been sold against all currencies by around 1%. Until further is known about the extent of the wider infrastructural damage, expect any NZD appreciation to be limited. The interest rate market has reduced the chances of a December OCR hike to around a 33% chance.
 

Major Announcements last week:

- RBA leaves cash rate unchanged at 4.75%
- UK housing and manufacturing data lower than expected
- US Federal reserve Chairman Bernanke makes subdued comments about the economy, acknowledges slowdown in first half 2011
- RBNZ leaves cash rate unchanged at 2.50%, identifies December for hike
- Australian employment growth lower than expected, led by full time fall. Unemployment rate remains unchanged at 4.9%
- BoE leaves the cash rate unchanged at .5%
- ECB leaves cash rate unchanged at 1.0%. July hike probable, dependent on conditions
- Chinese Trade Balance lower than expected , led by increased imports.
- Canadian employment numbers stronger than expected, and unemployment rate drops to 7.4% from 7.6%
- Greek issues remain unresolved and the spread between Greek and German bonds pushes to all time record.
- South African Manufacturing Production and Sales +.4% vs 5.0% expected
- Major aftershocks hit Christchurch - liquefaction and further damage to infrastructure and building has occurred

NZD/USD 
The New Zealand dollar posted a post float high against the US dollar following the RBNZ’s Monetary Policy Statement last Thursday. The increased probability of a hike in the cash rate in December has seen investors flock into the NZD. During the offshore session on Friday, risk aversion pushed the NZD from its highs down towards current levels.

Expect risk aversion, and a slight resurgence in the US dollar to continue this week. In the US we have retail sales on Tuesday, inflation numbers Wednesday, and manufacturing and consumer sentiment numbers on Friday.

In New Zealand, the focus will be on retail sales numbers on Wednesday. Assuming the general market risk aversion prevails, expect the NZD topside moves to be hard fought after last week’s gains. Will little other Australasian data due, Chinese inflation data will be closely watched on Tuesday also. Updates of further damage following the large aftershocks in Christchurch this week should limit the topside potential for the NZD in the short term.

NZD/AUD (AUD/NZD)
The New Zealand dollar outperformed the Australian dollar last week as the RBNZ signaled a December cash rate hike. Conversely the probability of a hike from the RBA dropped after their cash rate meeting. 

Weak Australian employment growth added to the momentum as the NZD pushed back closer to historical averages against the AUD. The NZD can still be regarded as good value buying with AUD at current levels, even after last week’s move. The absence of Australian data this week, means the focus for this pair will be on the NZ retail sales number due for release on Wednesday. Updates of further damage following the large aftershocks in Christchurch on Monday should limit the topside potential for the NZD in the short term.

NZD/GBP (GBP/NZD)
The New Zealand dollar pushed to post float highs against the Pound Sterling last week as the RBNZ signaled a December cash rate hike. Yield chasing investors pushed the pair to .5083 (1.9673).

This week will see focus start on the UK inflation numbers on Tuesday ahead of the NZ retail sales numbers on Wednesday and UK retail sales numbers on Friday. BoE Governor King also makes a speech on Wednesday, which will be closely watched. Expect gains from the NZD  to be much harder fought after last week’s progress.

The risk aversion apparent late last week should continue and this will help temper NZD gains from here. Updates of further damage following the large aftershocks in Christchurch this week should limit the topside potential for the NZD in the short term.

 
NZD/CAD
The New Zealand dollar outperformed the Canadian dollar last week as the RBNZ signaled a December cash rate hike. This saw the NZD appreciate to levels not seen since early 2008 against the CAD.

Expect this week’s trade to be more orderly in the absence of any top tier Canadian data and just retail sales to focus on in NZ. The easing oil price on the back on potentially increased supply from Saudi Arabia may see the NZD consolidate around current levels, but expect further progress to be hard fought.

The raft of monthly Chinese data should impact the NZD more than the CAD if it offers any surprises. Updates of further damage following the large aftershocks in Christchurch should limit the topside potential for the NZD in the short term.

NZD/RAND
The New Zealand dollar outperformed the Rand last week as the RBNZ signaled a December cash rate hike. Weaker than expected South African manufacturing numbers also added to the momentum.

Expect progress from current levels to be harder fought from the NZD as the global growth outlooks continues to soften and the growth assets of the Australasian currencies suffer as a consequence.

The global outlook will provide most of the lead this week, with just NZ retail sales numbers on Wednesday to provide the lead.  Updates of further damage following the large aftershocks in Christchurch should limit the topside potential for the NZD in the short term.

NZD/EURO (EURO/NZD)
The New Zealand dollar outperformed the Euro as the RBNZ signaled a December cash rate hike. As general market risk aversion increased in the offshore session on Friday, the NZD gave up some of its gains.

Continued concerns about the Greek debt situation should see this pair consolidate this week, as the euro will struggle on most cross rates, but similarly the NZD will struggle as the uncertain global outlook weighs on the growth currencies. The NZ focus for the week will be on the retail sales number due for release on Wednesday.

In Europe the industrial production number on Wednesday and inflation on Thursday will be closely watched. Updates of further damage following the large aftershocks in Christchurch should limit the topside potential for the NZD in the short term.

 
NZD/YEN (NZD/YEN)
The NZ outperformed the Yen last week but stayed in the overall expected range. The NZD rise was led by RBNZ signaling a December cash rate hike. The rise in the NZD was tempered by safe haven demand as the stock markets remained under pressure for most of the week. In the current environment of risk aversion, expect any progress from here from the NZD to be hard fought.

The economic data focus for the week will be the NZ retail sales number on Wednesday. Also being watched will be the monthly Chinese economic numbers expected on Wednesday also. If these numbers are weaker then expectation, the YEN will outperform, and conversely the NZD will likely outperform if the numbers are positive. Updates of further damage following the large aftershocks in Christchurch should limit the topside potential for the NZD in the short term.

AUD/USD
The Australian dollar struggled against a resurgent USD last week. The RBA’s comments accompanying its unchanged cash rate decision disappointed the market with its lack of commitment to a rate hike in the coming months. The weaker than expected employment growth added to the softer nature of the AUD performance.

The US has benefitted from the weaker global outlook, and the underperformance of the EURO due to the increased debt concerns. The fact that US Federal Reserve Chairman Bernanke did not allude to any further quantitative easing measures in a speech on the economy will also have helped USD sentiment.

Chinese monthly economic data on Wednesday will be closely watched, expected to see the AUD react if any of the indicators are far away from expectations. In the absence of Australian data this week, the rest of the lead with be driven by overall market appetite for risk and the US data. US retail sales numbers on Tuesday, inflation numbers Wednesday and manufacturing and consumer sentiment numbers will all be closely watched.

AUD/GBP (GBP/AUD)                            
The Australian dollar and Great British Pound pair stayed within the expected range last week, with both central banks leaving their cash rates unchanged as expected. The GBP gained some ground to its highs against the AUD, as weaker than expected employment growth data was released. With little prospect of a cash rate hike in the UK in the coming months expected, any GBP strength to be muted at best in the short term.

The softer outlook for the global economy is weighing on the AUD currently, and Wednesday’s raft of monthly Chinese economic data will negatively affect the AUD if it comes in softer than expectation. In the UK we have the monthly inflation number due on Tuesday and retail sales on Thursday to provide some direction. A larger than expected inflation number would put pressure back on the BoE to lift the cash rate before the end of the year, and this would be GBP positive.

 
AUD/EURO (EURO/AUD)
The Australian dollar and euro pair starts this week at very similar levels to last week. For the bulk of last week the AUD was under pressure as the RBA was non committal about future hikes in the cash rate and the employment growth numbers disappointed. Towards the end of the week the euro started to come under pressure as questions remain about the ability of the Greek government to put in place the austerity measures needed to access funds from contributing member states.

This week starts with the risk aversion sentiment at play and should see the pair remain in its wider band. In the absence of any meaningful Australian economic data, expect the lead to come European inflation numbers on Thursday and the general market appetite for risk.

The noise around the Greek debt situation will continue, and without a clear path forward, expect the euro's progress to be hard fought.

GBP/USD
The Great British Pound was outperformed by the resurgent US dollar last week, albeit most of the USD progress was made in Friday’s session. The lack of movement from the BoE at their cash rate meeting was of no surprise, but this week’s inflation number will be closely watched. Any number higher than the expected 4.5% number may put further pressure on the BoE, and this would be GBP positive.

In the US retail sales numbers are due Tuesday, inflation on Wednesday and manufacturing and consumer sentiment numbers due Thursday. In the absence of a threat of further quantitative easing from the US Federal Reserve, we may see a resumption of a flight to safety in the US dollar on weaker US data.

GBP/EURO (EURO/GBP)
The Pound Sterling saw grinding ascendancy over the euro over the course of the last week. Increased tensions on the Greek debt front provided the vehicle for this outperformance. This week will see the focus on the debt issue remain high. Both central banks keep the respective cash rates unchanged last week, but ECB rhetoric towards a hike remains on the next meeting in July.

This is a complicated matter and if resolution proves difficult in Greece, it is difficult to see the cash rate moving as a member state approaches default on Government bonds. In the UK on Tuesday we have the inflation number due, a surprise to the topside would see the probability for a cash rate hike bought forward from the end of the year and this would prove GBP positive, as unlikely as it maybe.

Wednesday sees industrial production numbers released in Europe ahead of UK retail sales and Euro-zone inflation numbers on Thursday.

GBP/RAND
The Pound Sterling and Rand traveled within the expected range last week, as both were under pressure from the resurgent US dollar.

This week sees little in the way of economic data in South Africa, so expect the lead to come from the UK. Tuesdays UK inflation data due , followed by retail sales on Thursday. A higher than expected inflation number would increase the chances of a hike from the BoE before the end of the year, and this would prove to be GBP positive.

Market commentary:

Last week market sentiment overall, was one of risk aversion. For the most part the economic data has continued to soften around the globe.

Stock markets continue their recent bearish trend, commodities are lower for the most part, and in the face of lower longer end interest rates, the US dollar strengthened. The European debt situation continues to be closely watched. Tensions remain elevated and the politics surrounding the extended Greek bailout package dominate the headlines.  The stand out performance came from the New Zealand dollar, as the Reserve Bank of New Zealand (RBNZ) pointed towards a December cash rate hike. Independently of OPEC, Saudi Arabia pledged to increase its oil production, which caused a move lower in the oil price on Friday.
 
The New Zealand dollar set post float highs against the US dollar and Pound Sterling, as investor demand increased in the wake of RBNZ Monetary Policy Statement. The RBNZ have pointed towards December as the time when they start to raise the cash rate from the record low of 2.50%. The demand following the release has been impressive to say the least. Only general market strong risk aversion has been able to curb the offshore enthusiasm. Whether or not this enthusiasm follows through over the coming weeks remains to be seen. The old adage of every five percent appreciation in the currency equating to a .25% hike in the cash rate, should be kept in mind. Wednesday sees quarterly retail sales numbers due for release in New Zealand and provides the domestic highlight of the coming week.
 
In Australia a relatively unchanged statement by the Reserve Bank of Australia (RBA) accompanying their static cash rate decision, led to a weaker AUD. The market was obviously looking for more from the statement and chances of a hike at the July meeting have reduced accordingly.  The weaker fulltime employment numbers released added to the negative AUD sentiment, even with the unemployment rate remaining at an impressive 4.9%. The general market risk aversion naturally will see the AUD under pressure, and the coming weeks Chinese economic numbers will have a bearing on the prospects for the Australian dollar. There is little in the way of domestic economic data, so the lead this week will entirely be driven by offshore sentiment.
 
In the US the weaker economic data flow continues. The inevitable debate about the possibility of further quantitative easing has started, but is premature at this stage. The US dollar has found support  as the EURO has come under renewed pressure and the commodity market outlook softens somewhat. The next two weeks looks to be fairly pivotal from an international perspective. The Chinese data will shed further light on the strength of their burgeoning economy, and the wider global outlook. In Europe the progress towards Greek agreement on extended bailout terms remains key, any further escalations of tensions will see US dollar demand increase. Domestically, retail sales numbers Tuesday, inflation numbers Wednesday and manufacturing and consumer sentiment numbers Friday will provide the focus. Risk aversion should under pin US dollar demand in the short term.
 
In Europe the European Central Bank (ECB) remains in an unenviable position. A July hike in the cash rate remains on the cards due to inflationary pressures, but this would come as the peripheral states remain under intense economic pressure. The Greek situation remains unresolved ahead of some top level EU meetings. Unless the Greek Government can commit to the required austerity measures, contributing members will not commit extended funds. These tensions should weigh on the EURO in the short term and lends towards the risk aversion sentiment remaining in place for the broader market.
 
The sluggish economic data flow remains in  place in the UK. Tuesdays inflation numbers will be closely watched, as with retail sales numbers on Thursday. Bank of England (BoE) Governor King also speaks on Thursday and comments with regards to monetary policy will be reacted to. Last week’s unchanged cash rate decision was expected, but with a new voting member on the committee, next week’s release of the meeting minutes will be closely watched.
 
The monthly Chinese data will be closely watched for any softness. Inflation, industrial production, producer price and new loans numbers are all due Wednesday and could be some market reaction. Expect the AUD and a lesser extent the NZD react to these, being so closely linked to the Chinese growth profile.
 
In Canada, better than expected employment numbers were outweighed by risk aversion leading the Canadian dollar lower. With little in the way of top level domestic economic data this week, expect the overall market appetite for risk to continue to provide the lead. A speech by Bank of Canada Governor Carney, will be closely watched for any comments regarding the outlook for monetary policy.

Addition since completion of this report: Monday afternoon has seen two major aftershocks hit the city of Christchurch NZ. There has not been any further deaths, but there has been further destruction. Liquefaction is widespread again in the eastern part of the city, and further damage to buildings in the CBD is evident. At the timing of writing 54,000 homes were without power and the much heralded rebuild process is likely to be set back by months. The NZD has been sold against all currencies by around 1%. Until further is known about the extent of the wider infrastructural damage, expect any NZD appreciation to be limited. The interest rate market has reduced the chances of a December OCR hike to around a 33% chance.
 

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