Equities and commodities under pressure; interest rates fall, demand for the USD rises

By Sam Coxhead*:

Over the last week the financial markets have seen increased volatility amid heightened risk aversion.

The European debt crisis remains the focus, and the risk hangs on the ability of the Greek Government to pass the required austerity package into law, to secure immediate funding from the EU and IMF. International equity and commodity markets remain under pressure and longer end interest rates moved lower, as bonds benefitted from safe haven demand.

The oil price has weakened further as surprising news emerged that the International Energy Agency (IEA), would release 60 million barrels of its reserve in the next 30 days. Japanese authorities added to this, with a reduction in the amount of reserves they will hold. This looks to be in response to the inability of OPEC to increase supply, as the oil price leeches momentum out of global growth.

The global uncertainty has seen the US dollar in demand.  

Major Announcements last week:

· RBA Monetary Policy Meeting minutes point to no cash rate hike in the coming months
· Canadian Retail Sales 0.0% vs +.5% expected
· US Existing Home Sales 4.81M vs 4.82m expected
· Greek Govt passes confidence vote
· BoE Monetary Policy Meeting minutes raise prospect of further Quantitative Easing
· US Fed Monetary Policy Statement maintains “extended period” wording on low cash rate- no mention of further Quantitative Easing
· US New Homes Sales 319k vs 311k expected
· Chinese, German and French Manufacturing Purchasing Managers Indexes fall
· US Durable Goods 1.9% vs 1.0% expected
· Greek Finance Minster and EU/IMF agree austerity plan to go before vote in Parliament on Tuesday
· South African CPI 4.6% vs 4.3% expected 

NZD/USD 
Monday's worse than expected trade balance number has added to the downside bias for the NZD/USD. Weaker global growth prospects and lower commodity prices should see the US dollar outperform in the current week. Much of the outlook remains pegged to how events unfold with the Greek parliamentary vote on the austerity measures. Any reduction in the fears of debt contagion in Europe would see the USD give up some of its recent gains, but should this happen, expect the recent resistance around .8150/.8200 level to contain the NZD rally. The NBNZ Business Confidence number on Thursday remains the local NZ focus. In the US, consumer confidence on Wednesday, and manufacturing numbers on Friday will be closely watched.

NZD/AUD (AUD/NZD)
This pair remains in its broader one month old range. Monday's NZ trade balance number has seen the NZD give up some ground. The NZD may underperform if recent NZD buyers become restless. The focus for the week with be Thursdays release of the NBNZ Business Confidence numbers, in the absence of any significant Australian data. Expect support around the .7575 level (AUDNZD 1.3200 topside resistance), to hold on any investigations lower, with closing interest rate differentials providing the support.

NZD/GBP (GBP/NZD)
The NZD set new post float highs against the pound sterling in the wake of the BoE Monetary Policy meeting minutes last week. The NZD gave up ground this morning, after the NZ trade balance came out smaller than expected. Any movement lower by the NZD is likely to be driven by NZD weakness, as opposed to any particular strength from the GBP. The NZ focus for the week will be on Thursdays NBNZ Business Confidence survey. In the UK, the final 1st quarter GDP number is due for release on Tuesday, monthly housing numbers Thursday and manufacturing numbers on Friday. If general market risk aversion continues throughout the week, expect the NZD to see some softness, but the pair to remain in the expected .4900 - .5130 range. Current levels represent good value buying of GBP with NZD.

 
NZD/CAD
The NZD grindingly outperformed the CAD throughout the course of the last week. Weaker retail sales numbers in Canada, followed by comments from the Bank of Canada head Carney alluding to the cash rate remaining static in the near term, helped the NZD outperform. In NZ this week the focus will be Thursday’s release of the NBNZ Business Confidence number. In Canada the inflation numbers on Wednesday and important GDP numbers on Friday, will be closely watched. Expect this pair to remain in its recent .7850 - .8050 range. Current levels represent good value buying of CAD with NZD for currency transfers.

NZD/RAND
The NZD saw some small appreciation against the Rand through the course of the last week. Weaker South African non-agricultural employment growth saw the Rand underperform. The higher than expected inflation number was driven by food prices and would have to be sustained to see any proactive action from the Reserve Bank of South Africa. In NZ this week the focus will be Thursday’s NBNZ Business Confidence number. In South Africa Thursday sees the release of producer price and building numbers, which will be closely watched. Any acceleration of the fall in the precious metals markets will likely see the Rand underperform.

NZD/EURO (EURO/NZD)
The NZD some slight appreciation against the euro last week, but the pair remains in familiar territory. While the euro was weak for obvious reasons, the NZD saw selling pressure as the global risk aversion and softer outlook for global growth weighed. This week is a big one for the euro, with the Greek parliament due to vote on their required austerity measures on Tuesday. Should the government get the votes, expect some kind of relief rally from the euro, and this would see the this pair test support levels for the NZD. In NZ Thursdays NBNZ Business Confidence number will be watched, but expect events in Greece to dominate the price action.

 
NZD/YEN (NZD/YEN)
Last week was a game of two halves for this pair. Early in the week the NZD saw grinding appreciation, before giving up its gains as the global risk aversion increased. The NZD gave up further ground Monday in the wake of the lower than expected trade surplus. Expect the volatility to continue as the risk appetite is driven through the events in Greece. The NBNZ Business Confidence number will be watched on Thursday, ahead of the Japanese Tankan Manufacturing index on Friday.

AUD/USD
The AUD performed reasonably well against the USD over the course of the last week, given the general risk aversion at play. The RBA Monetary Policy Meeting minutes indicated there would be no hike in the cash rate in the coming months and this started some AUD underperformance. Monday saw the USD in demand against all currencies and it has the AUD under pressure on crucial support levels. Should this 1.0420 level give way, it opens up the way for another leg lower towards the 1.0250 level, which provided significant resistance on the way up. Price action will likely be driven by events in Greece for much of the week. In the absence of domestic economic data in Australia, expect US consumer confidence on Wednesday, homes sales on Thursday, and the manufacturing data on Friday to be closely watched. A relief rally from the EURO, on a pass vote in the Greek parliament is a possibility, but in the absence of higher commodity prices, expect the AUD to underperform.

AUD/GBP (GBP/AUD)                            
The Australian dollar outperformed the pound sterling last week after the BoE revealed discussions on the possibility of a second program of quantitative easing. At current levels, the GBP represents good value for those looking to send AUD to the UK. In the absence of any Australian domestic data of note, the final GDP number in the UK on Tuesday will be watched, along with monthly housing numbers on Thursday and the manufacturing purchasing managers index on Friday. If risk aversions increases, the AUD may give up some ground, but should remain in the expected range.

 
AUD/EURO (EURO/AUD)
The Australian dollar outperformed the euro last week, as would be expected with the fears surrounding the Greek debt issue. The AUD’s performance was hamstrung a little by the overall risk aversion and softer commodities market. The euro may well get some respite, should the Greek Parliament pass the austerity measures into law on Tuesday, but I imagine that would will not herald the end of the focus on the debt issue. At current levels, the euro represents good value buying with AUD for those looking to transfer funds into euro . Expect the familiar range to contain the week’s price action, barring any further escalation of the debt crisis.

GBP/USD
The GBP was outperformed by the US dollar last week and remains under pressure. The BoE Monetary Policy Meeting minutes revealed the possibility of a second quantitative easing initiative and this led directly to the pound sterling weakness. With softer commodity prices and an air of safe haven US bond buying, expect the US dollar to continue to see demand this week. A positive result from the austerity vote from the Greek Parliament may see some reversal of the US dollar strength, but with the current intensity of the wider European debt issue, this maybe be short lived. Focus in the UK starts with final GDP numbers on Tuesday, followed housing and manufacturing numbers on Thursday and Friday respectively. In the US we have consumer confidence on Wednesday, home sales figures Thursday and manufacturing numbers Friday.

GBP/EURO (EURO/GBP)
This pair was relatively unchanged last week in what was a battle of two depreciating currencies. The euro obviously has its debt concerns, but it also has a central bank that are very conservative with regards to inflation. The release of the BoE Monetary Policy Meeting minutes revealed discussion on the possibility of further quantitative easing and this led to the GBP being sold across the board. It did recover some of the lost ground against the euro as the debt situation intensified towards the end of the week. In the event of a positive result from the Greek Parliamentary vote on the austerity cuts, a relief rally in the euro could be expected. Focus in the UK starts with final GDP numbers on Tuesday, followed housing and manufacturing numbers on Thursday and Friday respectively.

GBP/RAND
This pair was relatively unchanged over the course of the last week. Initially the GBP saw some pressure from the Rand, especially when the BoE Monetary Policy Meeting minutes revealed discussion on further quantitative easing. This pressure was reversed as growth assets and commodities came under further pressure later in the week. This was helped by weaker than expected non-agricultural employment growth figures and higher foods prices in South Africa. The coming week sees the focus start with final GDP numbers on Tuesday, followed housing and manufacturing numbers on Thursday and Friday respectively.

Market commentary:

Over the last week the financial markets have seen increased volatility amid heightened risk aversion.

The European debt crisis remains the focus, and the risk hangs on the ability of the Greek Government to pass the required austerity package into law, to secure immediate funding from the EU and IMF. International equity and commodity markets remain under pressure and longer end interest rates moved lower, as bonds benefitted from safe haven demand.

The oil price has weakened further as surprising news emerged that the International Energy Agency (IEA), would release 60 million barrels of its reserve in the next 30 days. Japanese authorities added to this, with a reduction in the amount of reserves they will hold. This looks to be in response to the inability of OPEC to increase supply, as the oil price leeches momentum out of global growth.

The global uncertainty has seen the US dollar in demand.

The New Zealand dollar remains relatively strong against most currencies, as yield chasing investors maintain demand for the time being. A move higher in short term interest rates through the week supported the NZD. Given the softer global economic outlook and increased risk aversion, tests to the downside for NZD may be seen this week, especially against the US dollar. The NZ trade balance released Monday was $605 million, against an expected one billion surplus, and this saw some NZD selling. From here the domestic focus will be the NBNZ Business Confidence survey due for release on Thursday. The bulk of the lead this week will come from external factors, driven primarily by developments in Greece.

The Reserve Bank of Australia (RBA) released its minutes from its June Monetary Policy meeting last week. The minutes point towards no immediate hike in the cash rate as the RBA give themselves time to assess the economic data over the coming months. The softer global outlook and potential risk stemming from the Greek crisis outweighing the domestic inflationary risks for the time being. In the absence of significant domestic data this week, the lead will be provided by the overall market appetite for risk. Given the uncertainty in the markets with regards to the Greek debt situation, expect a downside bias for the AUD, again especially against the US dollar.

The US dollar has continued to gather a little momentum over the last week, and the European debt situation provided the stimulus for demand. The US economic data was a little mixed, but stronger than expected housing numbers and personal consumption indicators were positive. The intense negotiations around the raising of the Federal debt ceiling continue, and this may provide some US dollar risk over the coming weeks. Falling gold and commodity prices are US dollar positive, and these look be continuing in the short term. Consumer confidence numbers on Wednesday, and manufacturing numbers on Thursday and Friday will provide the economic data focus for the week. But most influential, will be the outcome of the efforts of the Greek Government to pass the austerity program through parliament.

The Bank of England (BoE) minutes from their June Monetary Policy Meeting showed discussion about further quantitative easing (QE) in the UK, and this led to a sell off for the Great British Pound. The UK economy continues to be very soft, and has faced high inflationary pressure since 2009. Normally this inflationary pressure would lead to a higher cash rate, but in the face of slow growth the Bank of England has been caught in an unenviable position. While the prospect of further QE is prominent, there is little prospect of a turnaround in the fortunes of the GBP. Therefore any appreciation of the GBP against the NZD or AUD, will most likely be driven by weakness in the Australasian currencies. The UK focus this week will be the final GDP for the first quarter on Tuesday, followed by housing numbers Thursday and manufacturing numbers Friday.

The euro remains under considerable pressure as the Greek debt situation plays out. Tuesdays vote in the Greek parliament remains the key focus in the short term. The push for banks to accept voluntary write downs or rollovers of their Greek debt holdings means the financial stress of this situation is far reaching. The complexity of the situation is best displayed by the fact that US institutions have provided the bulk of bond insurance, reportedly to the tune of 100 billion USD. European banking stocks were under intense pressure on Friday, as their holdings of Greek debt come under the spotlight. Chinese authorities have stated their commitment to buying European debt in the last couple of days and hopefully this will help calm this very volatile situation. This week and the coming weeks are pivotal to the future of the Euro-zone, given the stresses on all elected officials from their constituents. 

In Canada retail sales came in weaker than expected, with the headline number flat vs. an expectation of a .5% increase. This saw the CAD soften a little against most currencies and this was extended when Bank of Canada head Carney stated that “policy may need to remain stimulative to close the output gap”. This type of comment points towards no hikes in the cash rate in the coming months. This week’s focus starts with inflation numbers due on Wednesday, followed  all important GDP numbers due on Thursday.

The Japanese economy continues to struggle after the devastation from the earthquake and Tsunami. It posted a second straight monthly trade deficit and there are fears that growth will remain under pressure, especially if the nuclear power plants do not resume operation. There has been reports of the Bank of Japan trying to stablise the Nikkei by buying index funds each time the Nikkei sees a 1% fall on a day. The main focus for the week will be the Tankan Manufacturing index on Friday.

In South Africa last week the number employed in the non-agricultural sector beat expectations, showing a rise of .6%. Inflationary pressures are also higher than expected with CPI at 4.6% vs expectations of a 4.3% increase. The extra pressure has almost solely been attributed to an increase in the cost of food. If this persists, the pressure will increase for a sooner than expected interest rate hike from the South African Reserve Bank.

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