Weekly FX Update – By Sam Coxhead from www.directfx.co.nz

Direct FX Weekly FX Update – By Sam Coxhead from www.directfx.co.nz

Market Overview:

Last week’s trade in the foreign exchange markets saw the continuation of the trend of US dollar weakness. There were a number of contributing factors, but to mind my the main driver the was continuing trend of high oil prices. The battle for control of Libyan oil fields and processing plant continued between the Gaddafi and Rebel forces. If these tensions continue in the short term, the oil price will remain at elevated levels. With most oil contracts settled in USD, the petro-dollar diversification away from USD maintains the upward pressure on other currencies. There are reports that some kind of “road map for peace” has been reached with Gaddafi. Details remain sketchy at the time of writing, and the oil price is just a little lower from Fridays close in New York. The EUR and commodity currencies, such as the AUD and NZD, have continued to benefit from this high oil price theme. Adding to the USD uncertainty was the Budgetary agreement between Obama and the Republicans. A 38 billion dollar cut in spending was finally agreed and passed into legislation at the final hour. This averted the embarrassing situation of a US Government shut down that would have started this week.

The USD weakness was in the face of continuing debt issues in Europe that saw various Debt credit rating downgrades, and Portugal finally approaching the EU and IMF for funding assistance. Adding to the complexity of Europe’s situation was the European Central Bank (ECB) expected lift their cash rate by 25pts to 1.25%.  This increase in the ECB cash rate, and the prospect of another 75pts of cash rate appreciation over the next three quarters, puts even further pressure on the struggling peripheral states. This is because their interest rates are pegged to the ECB cash rate in their bailout packages.

The Bank of Japan(BOJ) has understandably downgraded Japan’s economic outlook, as export volumes slump with halted manufacturing production lines. As aftershocks continue in Japan, the YEN should remain heavy in the absence of Insurance inflows.  Speculation of the BOJ underwriting Japanese Government “Earthquake Bonds” further added to the YEN sentiment, as this eventuality would equate to the printing of money.

China posted their first quarterly trade deficit in seven years as the high commodity prices make the cost of their imports more expensive. In a further effort to curb inflationary pressures the Peoples Bank of China (PBOC) raised their lending and deposit rates for the 4th times in 6 months.

The Australian dollar continued its rise, which saw it reach new post float highs on a daily basis. Fridays push higher on the USD strength saw it peak at 1.0577. The momentum is undeniable, and was added to by Thursdays employment numbers that saw the Unemployment rate dip to an impressive 4.9%. The AUD also benefitted by further Asian central bank diversification away from the USD. In the statement that accompanied their unchanged cash rate at their announcement on Wednesday, the RBA said the high level of the AUD was reducing the need for cash rate increases in the future.

The New Zealand dollar was another beneficiary of the USD weakness , much to the dismay of the exporting sector. In the absence of any market moving economic data, its performance was driven by investor appetite for risk. Relatively high yielding NZ interest rates have been in demand . This demand for yield is well highlighted by the ease at which the NZ Debt Management office has progressed the NZ Governments increased Bond tender program.

In the UK the economic numbers were better than expected almost across the board, and inflationary pressure remains high. The Bank of England left the cash rate unchanged and we wait for the Meeting Minutes to be released on the 20th for further insight on the cash rate looking forward. The GBP has been the underperformer of the non USD currencies for the most part, and a signal of the hike in the cash rate in the future from the BoE would benefit the struggling GBP. UK Inflation numbers on Tuesday will be closely watched for further insight to the mounting pressure on the Bank of England (BOE) Monetary Policy Committee to raise their cash rate.

In Canada the economic data remains relatively positive with Building and Employment numbers beating expectations. The high oil price saw the CAD in demand, although not to the extent of the Australasian currencies. Next week Bank of Canada Interest rate meeting should see no change in the cash rate, but the statement will hold interest.

Major Announcements last week:
RBA leaves the cash rate unchanged as expected
UK Services PMI jumps to 57.1 vs 52.5 expected
US FOMC Meeting Minutes show mixed opinions reduction of easy Monetary Policy, downside risks diminished
Australian Unemployment rate dips to 4.9% vs 5.0% expected
BOJ downgrades Japanese economic outlook, leaves rates unchanged as expected
ECB hikes cash rate 25pts to 1.25% as expected
BOE leaves cash rate and QE program unchanged as expected
Canadian Unemployment rate 7.7% as expected
Peoples Bank of China increase lending and deposit rates for the 4th time in six months

NZD/USD 
The NZD continued its rampant form against the USD last week. In the absence of NZ domestic economic data this week, the lead will come from the US and global developments. If some kind of resolution is found in Libya, the oil price should correct and this would enable the USD to take back some of the lost ground. In the US, there is the usual host of economic data due for release. Importantly, Wednesday sees the release of monthly Retail Sales numbers, and Inflation numbers are due on Friday. Also the quarterly earnings season starts on Wall Street, positive numbers could well see the appetite for risk assets continue, and this would benefit the NZD.
 
Current level
Support
Resistance
Last week’s range
NZD/USD
   .7829
    .7680
   .7860
  .7661 - .7833

NZD/AUD (AUD/NZD)
The NZD made grinding progress against the AUD for much of last week. This progress was only turned around on the release of the better than expected Australian Employment number. With little in the way of domestic economic data in either country this week, the lead will come from offshore. If we see further measures from Chinese authorities to curb inflationary pressure, the AUD should be more negatively impacted than the NZD. At current levels, the NZD represents good value buying with AUD. Expect the pair to remain in the recently established .7325 (1.3650) / .7480 (1.3370) range.
 
Current level
Support
Resistance
Last week’s range
NZD/AUD
   .7412
    .7325
   .7480
   .7390 - .7479
AUD/NZD
  1.3492
   1.3370
  1.3650
 1.3370 -1.3532

NZD/GBP (GBP/NZD)
The NZD  ended last week having outperformed the GBP. The continuing chase of higher yielding commodity currencies mean that the NZD was in demand. Current levels represent good value buying of GBP with New Zealand dollars for those looking to make a money transfer. This week’s data focus will be on the UK Inflation number due out Tuesday with an expectation of 4.4%. A higher than expected number will see the GBP appreciate as the likelihood of a move higher in the cash rate from the Bank of England increases. If we get some kind of correction lower in the oil price via a resolution of the tensions in Libya, expect the NZD to underperform.
 
Current level
Support
Resistance
Last week’s range
NZD/GBP
     .4782
    .4670
   .4850
    .4706 -.4792
GBP/NZD
    2.0912
   2.0620
  2.1415
 2.0866 – 2.1247

NZD/CAD
The NZD outperformed the CAD in grinding fashion last week. This was driven by yield chasing investors looking for better returns. The fight back of the NZD from the post earthquake lows now sees  it in more familiar territory, and progress will be harder won from here. This week is all about Bank of Canada which is due to announce the cash rate unchanged on Tuesday. The statement will be closely watched for insight into further meetings. Should we get some kind of resolution of the Libyan tensions, should see the CAD give up further ground as the oil price corrects.
 
Current level
Support
Resistance
Last week’s range
NZD/CAD
   .7482
   . 7400
  .7550
  .7389 - .7496

NZD/RAND
The NZD outperformed the RAND over the last week as it benefitted from both Petro-dollar, and Asian Central Bank diversification away from USD. Manufacturing data in South Africa continues to improve, which is an encouraging sign for the local economy. The South African Reserve Bank (SARB) have increased their inflation and growth projections for 2011. Should the economic data continue to improve, a hike from the SARB cannot be ruled out in late 2011and this would be RAND supportive. The NZD/RAND should find a cap in the reasonably strong resistance at 5.2500 in the coming week.
 
Current level
Support
Resistance
Last week’s range
NZD/RAND
     5.2064
   5.1500
  5.2500
   5.1310 – 5.2259

NZD/EURO (EURO/NZD)
The ECB hiked the cash rate by 25pts to 1.25% as expected last week. This has been EURO supportive and has been enough to curb any more outperformance of the NZD over the EURO, in the short term. Whilst the debt issues remain real and difficult for the Euro-zone, Portugal’s acceptance that it needs funding help has curtailed fears of Spain being caught up in the contagion for the time being. This week sees little in the way of economic data in New Zealand, so all eyes are on Europe. Tuesday sees German Economic sentiment numbers released and Friday the monthly Euro-zone inflation numbers. The EUR has performed well in the face of the debt issues it is dealing with. This has been because it is one of the main benefactors of global diversification away from USD. If this trend changes, then the NZD may well outperform by default.
 
Current level
Support
Resistance
Last week’s range
NZD/EURO
    .5413
    .5320
   .5550
     .5384 - .5463
EURO/NZD
    1.8474
    1.8000
  1.8800
   1.8305 – 1.8575
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NZD/YEN (NZD/YEN)
The NZD outperformed over the last week. The BOJ’s downgrading of the near term economic performance of the Japanese economy was the main driver. The advent of the large aftershock did nothing to change sentiment towards the YEN. Talk of the BOJ underwriting Japanese Govt “Earthquake Bonds” helped push the YEN lower. There has been no evidence of large insurance flows into YEN as yet, these will help stem the YEN’s decline when they come to the market. Global  risk sentiment will be the driver of the pair this week in the absence of economic data in either economy this week. Should the global appetite for risk continue this week, expect the NZD to test resistance levels.
 
Current level
Support
Resistance
Last week’s range
NZD/YEN
   66.30
    64.00
  67.00
   64.45 – 66.72

AUD/USD
The AUD continued its outperformance of the USD last week. It set new post-float highs almost daily as global investor demand for high yielding currencies saw it supported any dip. The USD continued to be weighed down by the persistently high oil price. Should a resolution be found in the Libya this week, we can expect some kind of rebound from the USD. Continued Petro-flow and Asian Central Bank diversification away from the USD helped boost the AUD. There is little in the way of meaningful economic data in Australia this week. In the US the major focus will be on the monthly Retail Sales number due Wednesday and the Inflation number on Friday. Over direct will be driven by global appetite for risk. Any further actions by Chinese authorities to curb inflationary pressure in China will potentially take the gloss off the AUD.
 
Current level
Support
Resistance
Last week’s range
AUD/USD
   1.0565
   1.0300
   1.0650
   1.0288 -1.0577

AUD/GBP (GBP/AUD)                             
Both the BoE and RBA held cash rates steady at their respective meetings last week. The AUD continued its trend of appreciation over the Pound Sterling, but its gains were more hard fought. At current levels the GBP remains very good value buying with AUD. If global investor sentiment remains positive this week, expect the AUD to grindingly outperform. With little in the way of economic data in Australia this week, the focus will be on the UK. Of most focus will be Tuesday’s Inflation number , with the market expecting 4.4%. for the year. Any number larger than that will be GBP positive as it puts further pressure on the BoE to hike the cash rate.
 
Current level
Support
Resistance
Last week’s range
AUD/GBP
   .6453
   .6330
   .6515
 .6330 - .6460
GBP/AUD
   1.5497
   1.5350
  1.5800
1.5480 – 1.5800

AUD/EURO (EURO/AUD)
The AUD and EUR were relatively stable last week. The ECB hiked their cash rate 25pts to 1.25% and the RBA left their cash rate unchanged as expected. The Portuguese approach to the EU and IMF for funding assistance did not surprise the market. This coming week sees no first tier data due for release in Australia. In Europe the focus will be on German economic sentiment numbers on Tuesday, and Inflation numbers on Friday. Currently the market expects another 25pts of hiking to come a quarter from the ECB over the next year. Any surprise in the inflation number could see the market price in earlier hikes from the ECB. Early hikes would be EURO supportive in the short term , but would create issues for Euro-zone members already struggling with the high cost of funds. Current levels represent good value money transfer levels from AUD to EURO.
 
Current level
Support
Resistance
Last week’s range
AUD/EURO
   .7305
   .7200
  .7410
    .7247 – .7357
EURO/AUD
  1.3689
  1.3500
  1.3875
  1.3592 – 1.3798

GBP/USD
The Pound Sterling outperformed the USD over the last week in line with the weaker USD across the board. Tuesday’s inflation number in the UK will be closely watched and any number higher than the year on year expectation of 4.4% will be GBP supportive. In the US, Retail Sales on Wednesday Inflation on Friday will draw attention also. Any real resolution of the Libyan tensions should see the oil price fall and this will benefit the USD. A break of resistance at 1.6450 could open the way for a long overdue move higher from the GBP in my opinion. The fortunes of the GBP against the EURO will be a key driver of GBP sentiment across the board, and this includes the USD.
 
Current level
Support
Resistance
Last week’s range
GBP/USD
  1.6369
   1.6150
 1.6450
  1.6092-1.6428

GBP/EURO (EURO/GBP)
The EUR finished the week slightly higher against the GBP than where it started. This was a good result for the EURO as there were various credit rating downgrades for member states, and Portugal finally conceded it need funding assistance from the EU and IMF. The EUR has been a large benefactor if the weaker USD and strong oil price. Should a resolution of the Libyan situation see an oil price correction lower, the GBP should outperform. Tuesday sees the all important UK inflation numbers released. A number higher than the expected year on year figure of 4.4% eventuate, the GBP should respond positively. In the Euro-zone, Tuesday sees German economic sentiment numbers released and Friday the Inflation numbers for March are due.
 
Current level
Support
Resistance
Last week’s range
GBP/EURO
   1.1320
    1.1235
   1.1560
   1.1312 – 1.1476
EURO/GBP
   .8834
    .8650
   .8900
     .8714 - .8840

GBP/RAND
The GBP outperformed the RAND over the last week, albeit the pair remains in a fairly familiar broader range. Focus this week will be on Tuesdays release of the UK inflation numbers with a year on year expectation of 4.4%. A number higher than 4.4% will be GBP supportive and would mean that the pair would likely test resistance levels at 11.0000. If global investor sentiment remains positive the Rand should find support on any weakness as investors chase higher yield.
 
Current level
Support
Resistance
Last week’s range
GBP/RAND
       10.8811
    10.8000
   11.0000
10.7858 – 10.9800

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