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Direct FX Weekly FX Update- 13th Feb 2012

Direct FX Weekly FX Update- By Sam Coxhead of

Market Overview:
Last week improved sentiment, which has been the theme of 2012, continued for the most part. Globally the economic data continued its positive momentum. The foreign exchange market however, did not fully mirror the wider market sentiment, as the US dollar finally saw some demand creep back in. Many currencies saw mostly sideways movement, before losing ground to the greenback into the end of the week. The situation in Greece is reaching a short term crescendo, as the Greek Parliament this morning voted in the EU required spending cuts. This difficult vote came as rioters hit the streets in Athens and seven MP’s resigned in protest. Focus this week will remain in Greece, as the EU finance ministers are now set to agree on the next tranche of bailout funds are to be offered to Greece. Assuming this happens, it opens the way for the third step of the debt swap, which will see massive write downs on Greek debt, to enable Greece a chance to start to economically recover from its situation over the next decade. The only certainty is that this painful situation will continue to be an ongoing saga. Fortunately the time it has taken to come to this partial conclusion, has given the rest of Europe time to get its house in some as semblance of order, and financial stability is better in Europe generally.
The New Zealand labour market outlook remains clouded. Last week saw the unemployment rate fall to 6.3%, but employment growth fall. These factors were NZ dollar neutral for the most part and the domestic focus this week will be on the retail sales numbers on Wednesday. The NZDUSD lead therefore will no doubt come from offshore, and the wider market appetite for risk. The recent NZ dollar momentum does look like it may have run its course in the short term, as it backs off from the recent highs against its major trading partners.
Last week in Australia the Reserve Bank of Australia (RBA) provided the excitement, when they left the cash rate unchanged at 4.25%. Expectations had been for a 25pt cut to 4.0%. In their accompanying statement the RBA board made it clear that movements going forward would be very much dependent on the economic data, both domestically and offshore. Fridays release of their quarterly Monetary Policy Statement gave further insight to their thinking. They remain poised to cut the cash rate further if required, but were content at current levels given the stablisation of indicators in Asia and US. Thursdays Australian employment numbers will be the focus of the coming week.
In the US encouraging signs continue for most of the economy. Federal Reserve (FED) chief Bernanke remains concerned about the state of the housing market, commentating that it was holding up any decent economic recovery. This works in with other comments that the FED would tolerate a little inflation, as the economy started to recover. Higher house prices would immediately impact on wider sentiment in the US, and should be closely watched as 2012 unfolds. This week the retail sales number on Wednesday, manufacturing numbers Thursday, and inflation numbers on Friday will be closely watched.
In Europe, the economic situation in the core economies has brightened recently. The European Central Bank (ECB) announcement that the cash rate would remain unchanged last week was expected. But the tone of the accompanying statement was more upbeat that the previous one. The Greek debt swap remains the pivotal EURO news in the short term, so focus will squarely remain of the progress in Athens. The ECB will offer further long term funding facilities to banks towards the end of February, and this should further ease financial stability concerns in the region.
Sentiment in the UK should improve in the coming months if the better than expected manufacturing and housing numbers can continue their recent form. The increase in the Bank of England’s (BOE) quantitative easing (QE) program announced last week, should add further confidence overtime, through its lowering effect on longer term funding rates. This week sees inflation numbers on Tuesday. These are expected to move lower through 2012. Unemployment numbers come Wednesday and retail sales numbers on Friday. A higher than expected inflation number would benefit the GBP, as it would lower the chance of an increased QE program going forward.
In Japan the authorities continue to point out the negative impact of the strong YEN on their economy. Last week saw only second tier data on the calendar, with real estate and machinery numbers weaker than expected. Today saw the preliminary release of quarterly GDP numbers, which came in worse than expected. The Bank of Japan’s (BOJ) monetary policy decision will be released tomorrow. Expect further lip service to be given to the strong nature of the YEN after today’s GDP number, but no change to the already loose monetary conditions.
Last week the Canadian economy saw more encouraging signs in the form of better than expected manufacturing and construction numbers. Also adding to the positive sentiment was the trade balance that shows a materially larger trade surplus than expected. This week sees a quiet economic calendar, with just inflation numbers on Friday. Given the current environment, inflation is not of any concern, so expect the lead on the CAD pairing to come from external factors.
Major Announcements last week:
• Australian Retail Sales -.1% vs +.2% expected
• UK House Price Index +.6% vs +.1% expected
• Canadian IVEY manufacturing Index 64.1 vs 58.6 expected
• NZ Labour Cost Index .7% vs .5% expected
• RBA hold the cash rate unchanged at 4.25%
• NZ unemployment rate 6.3% vs 6.5% , but employment growth slows
• Chinese Inflation 4.5% vs 4.0% expected
• UK Manufacturing 1.0% vs +.3% expected
• BOE increase QE by 50 billion GBP, cash rate unchanged at .5%
• ECB leave the cash rate unchanged at 1.00%
• Chinese Trade Balance 27.3B vs 10.8B expected
• Canadian Trade Balance 2.7B vs .7B expected
• US Consumer Sentiment 72.5 vs 74.4 expected
• Greek Parliament passes vote needed for EU/IMF bailout

The NZ dollar has lost its upward momentum against the US dollar for the time being. The NZ labour market numbers were of little influence on this pair last week, as the lead came from the wider market appetite for risk. After seeing mostly sideways price action for most of the week, the NZD came under pressure on Friday, as some nervousness entered the market surrounding the ability of Greek authorities to organized the required debt swap. Today’s confirmation that the Greek Parliament has passed the austerity vote, has seen the NZ dollar take back a bit of lost ground. Expect the lead to continue to be driven by the European influenced risk appetite for the remainder of the week. One release that will be closely followed will be the FED monetary policy meeting minutes, when released late Wednesday in the US.
Current level Support Resistance Last week’s range
NZD/USD .8332 .8220 .8420 .8248 - .8407

This pairing remains in what has become a familiar range. The RBA decision to keep the cash rate on hold at 4.25% dashed any chance of the NZ dollar breaking the NZDAUD .7800 level (1.2820 AUDNZD). Further attempts at moving higher by the NZ dollar may prove difficult in the short term, without the closing of the cash rate differentials. Expect the recent range trading to continue this week. Focus will come from NZ retail sales on Wednesday ahead of the important Australian employment numbers on Friday.
Current level Support Resistance Last week’s range
NZD/AUD .7756 .7600 .7800 .7704 - .7787
AUD/NZD 1.2893 1.2820 1.3150 1.2845 - 1.2980

The NZ dollar has lost its upward momentum against the GBP. Last week’s increase in QE was already built in by the market and further upside through the NZDGBP .5300 level (GBPNZD 1.8860), should prove to be hard work in the short term for the NZ dollar. Better than expected UK manufacturing and housing numbers helped counter the NZD’s recent upside momentum. This week coming sees the focus in the UK for the most part, with inflation numbers Tuesday, the BOE quarterly Inflation Report Wednesday and retail sales numbers on Friday. In NZ, we have just the 4th quarter retail sales numbers on Wednesday as the focus.
Current level Support Resistance Last week’s range
NZD/GBP .5277 .5100 .5300 .5232 - .5296
GBP/NZD 1.8950 1.8870 1.9610 1.8880 - 1.9115

The NZ dollar remains at elevated levels against the CAD, albeit currently back from the highs. The resistance at .8350 held last week as positive Canadian data outweighed the mixed NZ labour market numbers. The stablisation of the US dollar has also helped the cause of the Canadian dollar. This week sees just retail sales numbers in NZ on Wednesday, and Canadian inflation numbers on Friday. Any further upside efforts from the NZ dollar will be hard fought from the current levels, with the wider market risk appetite most likely assisting any appreciation.
Current level Support Resistance Last week’s range
NZD/CAD .8325 .8150 .8350 .8256 - .8356

The EURO saw grinding appreciation over the NZ dollar throughout last week. A slightly more positive ECB statement accompanying its unchanged monetary policy decision helped the EURO. The prospect of moving closer to some finality on the Greek debt swap issue, also saw some investors with “sold EURO” positions covering, and this added some momentum to the move. There is likely to be increased market noise this week following the positive austerity vote in the Greek parliament, but ahead of the EU/IMF confirmation of bailout funds. Current levels still represent great value buying of EURO with NZ dollars. The economic data will take a back seat this week, given the larger forces at play in Greece in particular.
Current level Support Resistance Last week’s range
NZD/EURO .6288 .6175 .6375 .6238 - .6377
EURO/NZD 1.5903 1.5690 1.6200 1.5681 -1.6031

The NZ dollar continued its recent appreciation against the YEN last week. Today’s weaker than expected Japanese GDP numbers will do little to turn the momentum in the short term. If the news continues to be more positive from Europe, expect further gains from the NZ dollar to be more easily made. The wider market risk appetite will drive this pairing for the most part this week, with only 4th quarter NZ retail sales due for release on Wednesday. The BOJ monetary policy decision on Tuesday should not surprise, but expect further talk from officials with regards to the across the board strength of the YEN continuing to choke the economy.
Current level Support Resistance Last week’s range
NZD/YEN 64.65 63.50 65.50 63.46 – 64.86

The Australian dollar gave up ground to the US dollar last week, as the US dollar saw some across the board support. This US dollar outperformance came in the face of the RBA leaving the cash rate unchanged at 4.25%. Whilst the Greek Parliament passing the austerity vote is only the first step of three towards a Greek bond swap, the risk appetite has increased since the news hit the wires, and the AUD has moved higher with it. After today’s slightly better than expected Australian home loans data, the next Australian focus will be Thursdays employment report. In the US there are numerous releases this week, but of note will be the release of the FED monetary policy meeting minutes on Wednesday. Expect news from Europe to be a dominating factors throughout the week also.
Current level Support Resistance Last week’s range
AUD/USD 1.0741 1.0600 1.0800 1.0635 - 1.0845

The Australian dollar set new all time highs against the GBP last week as the RBA surprised the market with its unchanged cash rate decision. Since setting the new highs the AUD has succumbed to some selling pressure as the outlook in the UK starts to get brighter little by little. Better than expected housing and manufacturing numbers came in the UK as the BOE increased their QE program by 50 billion, as the market had anticipated. Hopefully with a little more stimulus (QE), this recent run of more positive data will continue for the UK economy. Again, any attempts at further appreciation by the AUD will prove to be hard work from current levels.
Current level Support Resistance Last week’s range
AUD/GBP .6803 .6650 .6850 .6738 - .6839
GBP/AUD 1.4699 1.4600 1.5040 1.4622 - 1.4841

The Australian dollar again hit record highs against the EURO last week, following the unchanged cash rate decision from the RBA. However since then the EURO has seen some demand, as the progress in Greece towards a manageable debt loads continues. The success of the debt swap plan remains the key to the price action for this pair in the short term. The first step has been made with the positive vote from the Greek Parliament, next comes the EU/IMF acceptance and the subsequent release of the bailout funds, and then comes the debt swap acceptance. Expect this week and next to see periods of volatility, but hopefully we have seen the highs set for this latest move. The economic data remains almost inconsequential from the European point of view, but in Australia, Thursdays employment numbers will be closely watched.
Current level Support Resistance Last week’s range
AUD/EURO .8105 .8020 .8220 .8048 - .8239
EURO/AUD 1.2338 1.2165 1.2470 1.2137 - 1.2425

The recent resurgence by the GBP against the US dollar lost its momentum last week. Rising bond yields in the US supported the US dollar. Given the US dollar stablisation, further gains from the GBP will be harder to make. Consolidation within this recent range could see the support at 1.5720 tested at some stage this week. In the US, retail sales numbers Tuesday, FED monetary policy meeting minutes Wednesday and inflation numbers Thursday will be closely watched. The UK focus comes in the form of inflation data Tuesday, the quarterly BOE Inflation Report Wednesday and retail sale numbers on Friday.
Current level Support Resistance Last week’s range
GBP/USD 1.5788 1.5720 1.5920 1.5725 - 1.5929

The EURO saw some steady demand against the GBP throughout the course if last week. A more upbeat assessment of the core economies from the ECB at their monetary policy meeting, points towards no further cuts to the European cash rate in the short term, and this is EURO supportive. Adding to this is the fact that progress is being made in Greece towards eventually putting the debt swap deal together and it is easy to see why the EURO has bounced from its lows against the GBP. The .8425 (1.1870) provides the next target for the EURO, a break of these levels would enable another leg higher for the beleaguered single currency.
Current level Support Resistance Last week’s range
GBP/EURO 1.1915 1.1800 1.2080 1.1896 - 1.2105
EURO/GBP .8392 .8280 .8480 .8261 - .8406

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