Direct FX Weekly Market Overview: 13 December

Direct FX Weekly Market Overview: 13 December

last week’s trade in the market was reasonably choppy in nature. December is notoriously illiquid, with the market lacking depth and this has been easily observed. On balance, mainly sideways movement has been seen in most currencies. Whilst focus remains on the European debt crisis, there was no major market moving news to hit the headlines. The debate remains based around the most efficient path forward to stem the contagion spreading from Greece and Ireland to other member states. It seems fairly obvious to all that a coordinated approach is needed, but as yet a definitive course of action has not been decided upon. The idea of initiating a Euro-Bond program, for all member states to replace individual member Govt debt, has been squashed. The ECB and German Govt saying that this is not an option. As the difference in yields between peripheral member states and the benchmark Germany remain wide, focus will remain on Europe.

The bi-product of the Federal Reserve’s Quantitative Easing (QE) program up until last week has been one of weakening the USD. This theme well and truly stopped last week as Obama’s extension of the Bush tax cuts gave the market a real growth outlook boost. This saw bond yields rise in an incredibly fast fashion. The global benchmark US 10 year yield rose by over 25% to sit around 3.30%. Rising yields will provide a base for USD strength. With the exception of the recent horrible employment numbers, the economic data in the US has been mainly positive of late, and looks likely to continue into 2011 as the stock market is at its highest level in over two years.

The Great British Pound had a strong week, outperforming across the board. Buoyed by better manufacturing numbers and a positive recruitment survey which pointed to stronger employee demand across all sectors, the chances of continued recovery remain well placed. Barclays Bank also released a paper that said they see the Pound Sterling as being the best performing major currency in 2011. The Bank of England monetary policy meeting was uneventful, but they remain poised to react to any developments in 2011.

In Australia, the RBA monetary policy meeting was reasonably uneventful, but the stellar employment numbers produced the big surprise with the unemployment rate dipping to 5.2%. This meant any dips in the AUD were shallow. Chinese officials raised the reserve ratios for the Chinese banks for the third time in a month. This is an attempt to slow the economy and in particular the property market. Inflation also remains a problem in China with inflation recorded at 5.2%, with food prices leading the way. With the Australian dollar so closely linked to development in China, any interest rate rise in China may temper demand for the AUD in the short term.

Running up to the RBNZ cash rate review the NZD saw some selling pressure come to the market as investors who had bought NZD repositioned themselves. This weakness continued after the RBNZ statement because of the more cautious wording with regards to the economic recovery. With growth below the RBNZ projections held at the previous statement in September, the market now has just half a chance of a 25pt hike in the cash rate by June 2011. With the prospect of low interest rates for longer, it is reasonable to expect that any rallies will be limited in the short term. Another interest rate rise in China will negatively impact all the commodity/growth currencies, but given New Zealand is a food exporter, the medium term impacts are less certain.

In Canada the Bank of Canada monetary policy statement was also more cautious than the market expected, with interest rates expected to remain on hold for longer than expected a few months ago. Export numbers remain buoyant and property looks to have stabilised. If the positive story in the US continues to gain momentum, so will the prospects for Canada, being its closest and largest trading partner.

The strength of the Rand remains of concern in South Africa. Its remains the key factor for the South African Reserve Bank, in terms of their assessment of a further cut in interest rates. The theory being that a cut in interest rates will make the Rand less attractive to foreign investors as the yield drops, and therefore the Rand will decline in value. With retail sales and housing numbers seemingly picking up, the balance comes from the manufacturing sector which remains under pressure.

Major Announcements last week: • Obama extends the “Bush tax cuts”

• US bond yields rise sharply, underpin USD demand

• Aust. Employment numbers strong , unemployment rate 5.2%

• RBNZ lowers NZ growth projections

• Chinese inflation rises to 5.1%

• Chinese bank reserve ratios increased to stem growth

• European Govt debt remains under spotlight

Currency Commentaries:

NZD/USD Most direction will come from offshore this week. Retails sales on Tuesday, and NBNZ business confidence numbers will provide some small domestic focus, but retail sales and CPI in the US will get more attention. If bond yields in the US remain high, or higher, the USD will remain well supported and any interest rate rise in China will see the NZD under further pressure. If initial support at .7400 gives way, a leg lower is not out of the question.
Current level Support Resistance Last week’s range
NZD/USD .7 .7400 .7600 .7430 - .7666

NZD/AUD (AUD/NZD) The less positive RBNZ outlook and stronger employment numbers in Australia meant the AUD outperformed the NZD last week. With little in the way of Australian data this week, all eyes will be on NZ retail sales Tuesday and the NBNZ business confidence numbers Thursday. Offshore leads could well dominate, and in the event of a Chinese interest rate hike, the AUD could be seen under a little more pressure than the NZD. At current levels the NZD remains great value when buying with AUD.
Current level Support Resistance Last week’s range
NZD/AUD .7 .7560 .7720 .7559 - .7715
AUD/NZD 1.2 1.2950 1.3230 1.2961 - 1.3229

NZD/GBP (GBP/NZD) Finally we are starting to see the GBP start to outperform the NZD. With lowered growth projections from the RBNZ, and mainly positive numbers in the UK, a break of the .4700 level should mean that we see further weakness from the NZD. Expect producer price data, inflation numbers and retail trade in the UK to get more attention than NZ’s retail sales numbers Tuesday, and the NBNZ business confidence number on Thursday. Any more tightening of monetary conditions in China would add to the New Zealand dollar weakness.
Current level Support Resistance Last week’s range
NZD/GBP .4 .4700 .4820 .4706 - .4856
GBP/NZD 2.0 2.0745 2.1275 2.0593 - 2.1249

NZD/CAD The CAD outperformed the NZD last week. The lower growth projections from the RBNZ and the CAD support garnered by a stronger USD, made the NZD slump in almost one way traffic. With no tier one data due for release in Canada this week, the focus will be on NZ retail sales numbers Tuesday and the NBNZ business confidence report Thursday. The Canadian dollar should be supported due to the stronger USD, if bond yields remain high in the US.
Current level Support Resistance Last week’s range
NZD/CAD .7 . 7450 .7650 .7521 - .7697

NZD/RAND The Rand outperformed the NZD last week, as most currencies did. The weaker growth outlook from the RBNZ maintains the Rand pressure on the NZD. Most focus will be on South African data this week with their inflation number on Tuesday. Current level represent very good value buying NZD with Rand.
Current level Support Resistance Last week’s range
NZD/RAND 5.3 5.0500 5.2000 5.1116 - 5.2761

NZD/EURO (EURO/NZD) The NZD gave up ground to the EURO last week as the lower growth projections of RBNZ took the wind out of the NZD’s sails. Whilst there has not been a marked further deterioration of the European Debt issue, significant risk remains. A coordinated approach to dealing with the situation is required to stop further escalation. Whist this is agreed, a definitive path remains undecided. Until some kind of resolution is reached in Europe, any EURO strength should be gradual at best. With limited first tier data in Europe this week, expect the NZ retails sales number Tuesday and NBNZ business confidence number Thursday to provide some direction.
Current level Support Resistance Last week’s range
NZD/EURO .5 .5600 .5720 .5609 - 5732
EURO/NZD 1.7 1.7480 1.7855 1.7445 - 1.7828

NZD/YEN (NZD/YEN) The NZD YEN pair traded a reasonably tight range last week, even given the broad New Zealand dollar weakness. The lowered growth projections given by the RBNZ should see any rallies in the NZD remain limited. Manufacturing numbers in Japan on Wednesday will provide insight to Japans exporting sector, and retails sales on Tuesday and NBNZ business confidence data Thursday will provide the lead from NZ. Should support at 62.50 give way, it opens up the way to test the next support level at 61.50. Any developments in China, such as a interest rate hike, increases the chances of this happening.
Current level Support Resistance Last week’s range
NZD/YEN 62. 62.50 63.50 62.48 - 63.20

AUD/USD The AUD/USD traded in choppy fashion last week as the market wrestled with a stronger USD, and strong employment numbers released in Australia. This week’s data is all in the US, with retail sales Tuesday, the FED monetary policy meeting Wednesday, inflation numbers Thursday and construction numbers Friday. Any data that will support higher US bond yields will be particularly focused on. If these bond yields remain higher, the USD will be supported. Any news from China about interest rate hikes or the like will see some pressure being put on the AUD and will see the USD outperform.
Current level Support Resistance Last week’s range
AUD/USD .9 .9750 1.0000 .9748 - .9966

AUD/GBP (GBP/AUD) The Pound Sterling outperformed the Australian dollar last week. This was all the more impressive given the good employment report in Australia. Chipping away at support for the AUD are concerns about the overheating Chinese economy, and in particular the property market. Any signs of a interest rate hike in China will hurt the short term potential of the AUD. The GBP has been buoyed by stronger employment and manufacturing indicators. An addition to this was the report from Barclays Bank stating their belief that the GBP will be the strongest performing major currency in 2011. Data this week in the UK sees inflations numbers released Tuesday and retail sales numbers on Friday.
Current level Support Resistance Last week’s range
AUD/GBP .6 .6120 .6320 .6181 - .6311
GBP/AUD 1.6 1.5822 1.6339 1.5845 - 1.6177

AUD/EURO (EURO/AUD) The Australian dollar slightly outperformed the EURO last week. The strong employment numbers in Australia providing stimulus for the move higher. With no resolution to the Govt debt issue in Europe, any strength from the EURO should be limited. One factor that could see the EURO outperform would be any kind of interest rate hike in China in reply to their recent high inflation numbers.
Current level Support Resistance Last week’s range
AUD/EURO .7 .7350 .7475 .7375 - .7467
EURO/AUD 1.3 1.3380 1.3600 1.3392 - 1.3559

GBP/USD The great British Pound had broad based support last week and against the USD was no exception. The fact that the US saw bond yields jump helped slow the GBP’s appreciation somewhat. Supported by positive indicators in both manufacturing and employment, the Barclays Bank note saying it expected the GBP to be the best performing major currency in 2011, helped sentiment further. Expect an interesting week ahead in this pair as inflation and retail sales numbers in the UK, and retail sales, inflation and construction numbers, as well as the FED monetary policy meeting in the US, provide the focus and plenty of potential action.
Current level Support Resistance Last week’s range
GBP/USD 1.5 1.5650 1.5900 1.5651 - 1.5863

GBP/EURO (EURO/GBP) The Pound Sterling outperformed the EURO last week. Positive indicators from the manufacturing and employment sectors supported the GBP, along with the Barclays Bank note stating their belief the GBP would be the best performing major currency in 2011. Limiting the prospects of the EURO are the ongoing concerns about the Govt Debt problems of peripheral EURO member states. Without some kind of coordinated approach to end the contagion, any resurgence in the EURO will be limited. The main focus in the data for the week will be in the UK with inflation numbers due Tuesday and retail sales on Thursday. A breach of support levels at .8320 EURP/GBP (1.2020 GBP/EUR) opens the way for another move higher by the GBP.
Current level Support Resistance Last week’s range
GBP/EURO 1.1 1.1835 1.2020 1.1770 - 1.1970
EURO/GBP .8 .8320 .8450 .8354 - .8496

GBP/RAND The Sterling Rand pair traded a reasonably tight range last week as both currencies were in demand. Looking ahead this week, both currencies have inflation data that will provide the bulk of the focus, along with UK retail sales. A lower than expected inflation number in South Africa would be Rand negative, as it would possibly open the way for a further rate cut from the SARB, although this remains a small chance at this stage.
Current level Support Resistance Last week’s range
GBP/RAND
11. 11.0500 11.2000 10.7465 - 10.9725

ENDS

© Scoop Media