Increased A$ demand following the release of stronger-than-expected retail sales numbers

By Sam Coxhead*:

Recent US dollar strength continued to permeate across markets throughout last week. This central theme comes as the US economic data continues to recover.

Also the FED remains committed to low interest rates until the labour market meets targeted thresholds.

A 7% unemployment rate is a central goal, and with lowering US Government spending, there is little chance of a material pull back in stimulation until 2014.

With other major economies remaining under considerable pressure, central bank stimulus is boosting stock markets across the globe.

In Europe concerns over Italy remain, but any contagion effect has been discounted. An Italian credit downgrade from Fitch had limited effect, and this highlights the market's current confidence in the structural strength in place.

As markets look forward to the normalisation of interest rates away from emergency lows in the next couple of years, expect both the New Zealand dollar and Australian dollar be more contained, as interest rate differential between Australasia and our trading partners contracts.

Major Announcements last week:

·  AU Building Approvals -2.4% vs +2.8% expected

·  UK Construction PMI 46.8 vs 49.2 expected

·  AU Retail Sales +.9% vs +.4% expected

·  RBA leave monetary policy unchanged

·  UK Services PMI 51.8 vs 51.1 expected

·  AU GDP +.6% as expected

·  BOC leave monetary policy unchanged

·  Canadian Manufacturing 51.1 vs 56.2 expected

·  BOJ leaves monetary policy unchanged

·  ECB leaves monetary policy unchanged

·  Canadian Unemployment rate 7.0% vs 7.1% expected

·  US Unemployment rate 7.7% vs 7.8% expected

NZD/USD 

This pair saw interesting price action last week. The NZD saw increased demand throughout the belly of the week following positive news offshore and the release of the latest GDT auction results. However, in the approach to Friday's employment numbers, the demand for US dollars returned and then accelerated as the strong US employment market numbers came to light. This week has started with pressure on the NZD continuing, and the target will be support at .8150, if the increased USD demand persists. Thursdays RBNZ news will dominate the domestic focus, but expect limited impact from the likely unchanged policy decision. The US focus comes from monthly retail sales, inflation and consumer sentiment numbers. If the support level holds, expect further range trading in the short term, albeit with a bias towards the strengthening of the US dollar.

NZD/AUD (AUD/NZD)

The price action for this pair has been somewhat curious in the last week. The NZD has seen renewed pressure from the Australian dollar following the materially better than expected retail sales numbers in Australia on Tuesday. Not even the outstanding GDT auction results in NZ were enough to counter the increased AUD demand, and gains were consolidated following the as expected 4th quarter Australian GDP figure. The weaker Chinese numbers revealed over the weekend may see the AUD soften a bit as the news is digested today, and that maybe enough to see a rebound in fortunes from the NZD. Certainly the pair is moving back towards the lower NZD end of the range, and current levels offer better value buying of the NZ dollar with AUD.

NZD/GBP (GBP/NZD)

This pair saw unsurprising price action last week. The NZD remains justifiably at elevated levels against the pressured Pound Sterling. This week should not see material change in sentiment and it points towards on going trade within the recently established .5440 - .5540 (1.8050 - 1.8380) range. The UK manufacturing numbers on Tuesday, and RBNZ monetary policy statement on Thursday will offer increased focus, but the impact on the price action should be limited. Further appreciation from the NZ dollar seems unlikely with the softer Chinese data recently coming to light.

 NZD/CAD

It was an interesting last week for this pair. The BOC's move back to neutral from its previous tightening bias comes after months of softening economic data. Ironically, the employment number on Friday in Canada saw a jump in new jobs and this helped pressure the NZD back from its lofty highs earlier in the week. Following the weekends soft Chinese numbers, the pressure may remain on the NZ dollar and the focus may come onto the .8400 support level in the short term. This will have to be assisted by renewed demand for the USD, in the absence of any material news in the Canadian economy. For those needing to buy CAD in the short term, targeting the low .8400's at the inter bank level looks to offer value.

NZD/EURO (EURO/NZD)

This pair continues to trade within the range it has established over the last eight weeks or so. The NZD saw grinding appreciation to start the week and this was boosted by the positive GDT auction results. However, the ECB decision to leave monetary policy unchanged reassured investors and the demand for EURO increased accordingly. The weaker Chinese data over the weekend has seen the NZD start the week under a little pressure. In the absence of any materially important NZ or European news ahead of the RBNZ monetary policy statement on Thursday, expect the wider market sentiment to continue to provide the lead for this pair. Current levels look to offer fair value for this pair in the current environment.

 NZD/YEN

The NZ dollar saw steady appreciation against the YEN last week. This NZD out performance gathered pace in the wake of the BOJ monetary policy meeting, and was only curtailed after the strong US employment numbers on Friday. So the pair is back close to the elevated recent highs where previous legs of NZD appreciation have run out of steam. Certainly, current levels should increase the focus for those with interest in this pair. This week will see the central bank focus continue with the release of the BOJ's monetary policy meeting minutes. Thursday sees the RBNZ make their latest monetary policy statement and this is followed but testimony at Parliament from RBNZ Governor Wheeler.

AUD/USD

This pair continues to muddle around within the expected range, albeit with a bias towards AUD under performance. After starting at the weeks lows, the AUD demand steadily increased following the strong Australian retail sales numbers. After reaching the highs just short of the resistance at 1.0300, the pair spent the remainder of the week in a contained range before the USD saw increased demand following the US employment numbers. The AUD started this week under renewed pressure following the weak Chinese data released over the weekend and the pair finds itself close to the middle of its recent range. The Australian focus for the week comes from Thursday's employment numbers. In the US, retail sales data on Wednesday comes ahead of inflation and consumer sentiment numbers on Friday. The bias for the pair remains to the downside in light of the recent resurgence in US dollar demand.

AUD/GBP (GBP/AUD)                            

The GBP saw unrelenting pressure from the Australian dollar last week. The stronger than expected retail sales numbers in Australia sparked the demand, and the pressure continued for most of the week. The BOE's unchanged monetary policy decision did offer brief respite, but it did not last. The weaker Chinese data over the weekend has seen the AUD open at lower levels, but the pair has ground back to AUD resistance levels at .6850 (GBP support 1.4600). This level remains the key in the short term. If the AUD consolidates higher, then further out performance of the GBP seems likely this week. However, given the record high nature of the pair, the further gains should be harder fought that what was seen last week. UK manufacturing numbers on Tuesday, and Australian employment numbers Thursday will provide the focus. Current levels offer great value buying of GBP with AUD, albeit the AUD may see some further appreciation in the short term.

AUD/EURO (EURO/AUD)

Last week saw this pair continue to trade within the range it has established over the last month. The AUD saw solid demand in the first half of the week following the stellar retail sales number in Australia. After stalling at the .7900 resistance (1.2660 support), the ECB monetary policy statement curbed further AUD out performance. This week will see most of the lead come from external factors ahead of Thursday's important Australian employment report. If European debt markets see pressure re-emerge to push interest rates higher for peripheral members, the AUD will likely test the resistance once again.

AUD/YEN

Last week saw the recent trend of large intra-week moves continue. The AUD saw increased demand as strong Australian retail sales number came to light. This trend continued throughout the week, and momentum gained further following the BOJ monetary policy statement. With the BOJ more than likely to extend their massive stimulatory efforts, expect the weakening YEN bias to continue in the coming months. This week’s focus comes from Tuesday BOJ monetary policy meeting minutes and Thursday Australian employment report. The BOJ minutes will be more pertinent than usual given the dynamic nature of the BOJ at present.

AUD/CAD

It was an interesting last week for this pair last. Following some strong Australian news, and a change back to neutral monetary policy bias from the BOC, the pair tested resistance at the 1.0600 level. These lofty heights did not last long as the surprisingly strong Canadian employment numbers on Friday gave CAD demand a significant boost. Weak Chinese data released over the weekend has further softened the AUD demand to start the week, albeit the AUD remains at elevated levels. This week sees a quiet economic data calendar in Canada. This makes the Australian employment report on Thursday the week's focus, as the pair starts the week close to the middle of the recent 1.0400- 1.0600 range.

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Market commentary:

Recent US dollar strength continued to permeate across markets throughout last week. This central theme comes as the US economic data continues to recover. Also the FED remains committed to low interest rates until the labour market meets targeted thresholds. A 7% unemployment rate is a central goal, and with lowering US Government spending, there is little chance of a material pull back in stimulation until 2014. With other major economies remaining under considerable pressure, central bank stimulus is boosting stock markets across the globe. In Europe concerns over Italy remain, but any contagion effect has been discounted. An Italian credit downgrade from Fitch had limited effect, and this highlights the market's current confidence in the structural strength in place. As markets look forward to the normalisation of interest rates away from emergency lows in the next couple of years, expect both the New Zealand dollar and Australian dollar be more contained, as interest rate differential between Australasia and our trading partners contracts.

Australia

The Australian economy received mixed news last week. Weak building and trade balance numbers were countered by better than expected retail sales data and solid GDP numbers for the 4th quarter. The RBA continue with their "wait and see" approach to monetary policy. Further easing to the 3% cash rate will be given if the economic data softens further. The labour market provide the focus for this week through the unemployment numbers on Thursday. Ten thousand seven hundred jobs are expected to be added, along with a small rise in the unemployment rate to 5.5% from the previous 5.4% rate.

New Zealand

There was little in the way of scheduled economic data in New Zealand last week. The latest Fonterra Global Dairy Trade (GDT) auctions produced surprising strength, with auction wide prices leaping 10.4% for their 6th straight month of gains. The increasingly severe drought conditions in New Zealand the obvious driver for the move. This week will see all the action around the RBNZ, and their monetary policy statement on Thursday. No change is expected, but the statement will be closely watched as the RBNZ continues to grapple with balancing a strong housing market and other moribund sectors within the economy. Also of note will be the testimony by RBNZ Governor Wheeler before Parliaments Finance and Expenditure Committee.

United States

The positive sentiment in the US continued last week as the latest manufacturing and employment numbers beat market expectations. One note of concern came from the wider than expected trade balance, although this tempered the US dollar demand temporarily. The unemployment rate edged closer to the targeted 7.0% at 7.7%, but this can be attributable mainly to a lower active participation within the labour market. This week sees the latest retail sales, inflation and consumer sentiment numbers provide a focus.

Europe

The mixed and uninspiring outlook in Europe continues. The Italian political situation has remained largely contained as interest rates for non-core member groups moved back lower as contagion fears abated. This occurred even as ratings agency Fitch cut the Italian credit rating to BBB+ and left it on negative watch. The Spanish economy remains under pressure as unemployment sets new record highs. The ECB look set to leave the cash rate at record low levels for some time. A rate cut was discussed, but was not considered appropriate at this time. The ECB expect growth to start to recover in the latter part of 2013, and this points towards a wait and see approach over the coming months. Fourth quarter GDP was confirmed to have a .6% contraction, although this did not impact the price action for the EURO. This week sees industrial production numbers on Wednesday come ahead of inflation on Friday. The latest EU economic summit will be held on Thursday and Friday, so comments can be expected from officials attending.

United Kingdom

Last week saw lower than expected construction activity balanced by improved services numbers for the UK economy.  The BOE left monetary policy unchanged, and this saw the GBP move higher across the board as investors positioned for an increased QE program scrambled to cover positions. This week is a quiet one for UK economic news and the manufacturing numbers on Tuesday will provide the primary domestic focus for the week ahead.

Japan

The BOJ left monetary policy unchanged last week, as was expected. Of note were the two of nine total votes on the board that were for further stimulatory measure at the meeting. This is of note because these two members are continuing on the voting panel as the newly agreed leadership comes on board at the BOJ. This saw the YEN come under renewed pressure, especially from the US dollar. Friday saw the release of the final GDP numbers for the 4th quarter and these were revised to flat (0.0%), from the previous .1% contraction. Current account data was also better than expected, beating analyst forecasts and the previous release being revised higher. This week sees BOJ monetary policy meeting minutes provide the focus, at their release on Tuesday.

Canada

Last week was an interesting one for the Canadian economy. Manufacturing and building permit numbers were materially weaker than expected. The BOC monetary policy statement saw an unchanged decision as expected, but the bias has moved back to neutral. This was a shift back from their tightening bias as the economic data has softened considerably in the last few months. Ironically, this new bias came ahead of a strong employment number on Friday that saw the unemployment rate dip back to 7%. This week is a quiet one for economic news in Canada, and will see the lead for the CAD come from external factors for the most part.

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