Hopes for a flourishing recovery for the global economy in the first half of 2013 were misplaced

By Sam Coxhead*:

It has been a very interesting last few weeks for the wider financial markets.

It has become more evident that earlier hopes for a flourishing recovery for the global economy in the first half of 2013 were misplaced.

Expectations now build of improving activity in the second half of the year has come as global indicators have missed expectations almost across the board for the first quarter.

This pushing out of the recovery horizon has come as global inflationary pressures remain benign. These benign pricing pressures have joined with the increased central bank stimulation to push longer end borrowing rates lower across the globe.

With the continuing presence of these opposing forces of increased monetary stimulation, and low levels of economic activity, further directionless sideways trade in many markets in the coming months.

Major Announcements last week:

·  Chinese GDP 7.7% vs 8.0% expected

·  UK Inflation +2.8% as expected

·  Canadian Manufacturing Sales 2.6% vs .6% expected

·  US Inflation +.1% (mth) vs +.2% expected

·  NZ Inflation +.4% (qtr) as expected

·  UK Unemployment 7.9% vs 7.8% expected

·  BOC leave cash rate unchanged

·  UK Retail Sales -.7% as expected

·  Canadian Inflation +.2% (mth) as expected

·  US Existing Home Sales 4.92m vs 5.02m expected

·  Chinese Manufacturing 50.5 vs 51.4 expected

NZD/USD 

This pair has traded in a relatively contained range over the last week, albeit with a slight bias to the downside for the for the NZ dollar. The weak global growth data is subtly undermining demand for so called growth assets like the NZ dollar via weak commodity prices. With today’s weaker than expected Chinese manufacturing data, expect this to remain a theme in the short term. Tempering moves to the down will be on-going demand for higher yielding interest rates that NZ offers. These opposing forces point towards the continuation of the familiar range trading trend for this pair.

NZD/AUD (AUD/NZD)

This pair continues to trade at the upper NZD end of its recent range. The weak Chinese economic data will likely have larger impact on the Australian economy and this has been a factor in the recent pricing. From a risk vs return perspective, buying AUD with NZ dollars at current levels looks to offer value. The focus for the pair comes tomorrow (Wednesday) with the release of the RBNZ monetary policy announcement and the latest Australian inflation numbers. If the interest rate market looks to further increase odd of an imminent RBA easing to the cash rate, the pressure will stay on the AUD.

NZD/GBP (GBP/NZD)

This pair has continued to trade within its recent and increasingly familiar range over the last week. Today’s weak Chinese manufacturing number has further exposed the recent air of vulnerability to the NZ dollar, and the pair is currently at the NZD lows for the last seven days. This week sees the focus initially come from tomorrow’s RBNZ monetary policy statement ahead of the preliminary 1st quarter UK GDP number on Thursday. Yield chasing investor flows should support the NZ dollar on any material dips. It looks likely the pair will continue to move around within its broader .5400 - .5600 (1.78560 – 1.8520) range in the coming weeks.

 NZD/CAD

The Canadian dollar has finally started to put some pressure on the NZ dollar. Today’s NZD weakness follows the disappointing Chinese manufacturing numbers, that come as the global growth profile continues to soften. With the RBNZ and BOC is very similar situations, expect the latest retail sales in Canada, and BOC Governor  Carney speech later on today(Tuesday) to be closely watched. Tomorrow sees the RBNZ monetary policy announcement take centre stage. Even the current levels offer very good value buying of CAD with NZ dollars, albeit at lower levels than seen in the last couple of weeks.

NZD/EURO (EURO/NZD)

For the most part this pair has traded within a very contained range throughout the course of the last week, albeit with a slight bias towards NZ dollar underperformance. This increasing vulnerability for the NZ dollar has increased as the concerns about the global growth path have increased, and the wider commodity markets have come under pressure. Today’s weaker than expected Chinese manufacturing numbers have further these issues for the NZ dollar ahead of the RBNZ monetary policy statement tomorrow (Wednesday). This meeting, along with the European manufacturing numbers later on today, provide the respective domestic focal points for the week. Expect the pair to continue trade within the wider range in the coming weeks.

 NZD/YEN

After having a relatively contained range for much of last week, the build-up to the G20 meeting last weekend saw the NZ dollar make solid gains against the YEN. However, the easy acceptance of the BOJ policies has combined with weak economic to start this week, and the NZD has all but given up it recent gains. Expect the support at 82.50 to offer some support and any further dips would likely see demand again pick up for the NZ dollar. This pair can expect to see continuing volatility as the opposing forces of lower global growth profile, and yield chasing demand battle for dominance in the short term.

AUD/USD

The Australian dollar has continued to underperform over the last week. The resistance at 1.0350 tempered the one material bounce, and represents reasonable resistance going forward. The weaker than expected Chinese manufacturing numbers have further undermined prospects for the AUD today. Increasing chances of a cut to the 3.00% cash rate from the RBA should contain any significant bounces from the AUD in the short term. Tomorrow Australian inflation numbers will offer some focus ahead of the advanced 1st quarter GDP numbers in the US on Friday. Those who have been patiently waiting for an opportunity to buy Australian dollars at less elevated levels should be considering level to target in the coming days/weeks.

AUD/GBP (GBP/AUD)                            

The Australian dollar has seen increasing pressure from the GBP over the last week. The support at .6750 (resistance 1.4820) and this has opened up the way for another leg lower from the AUD.  Today’s lower than expected Chinese manufacturing numbers re-iterate the recent theme of lower global growth.  Tomorrow offers the 1st quarter Australian inflation numbers as a focus ahead of the preliminary 1st quarter UK GDP number on Friday. A low inflation number would offer the RBA increased flexibility in terms of lower and cash rate, and this would likely further impact demand for the AUD. Those that have been looking to buy AUD with GBP should start to identify target levels, in order to take the opportunity to buy better value Australian dollars than that have recently been available.

AUD/EURO (EURO/AUD)

The Australian dollar has become increasingly vulnerable as the global growth picture has become more clouded over the last few weeks. Today’s weaker than expected manufacturing numbers further reiterate this theme. Subsequently the AUD has been pushed through support at .7850 (resistance 1.2740) in the last couple of hours. Consolidation through this level in the coming sessions is key to whether or not we see further underperformance from the AUD. Later on today (Tuesday) we have the focus on the European manufacturing numbers, and these come ahead of the important 1st quarter Australian inflation data tomorrow. Renewed demand for EURO from Japanese pension funds over the last week has also helped support the EURO.

AUD/YEN

This pair has seen further volatile price action over the duration of the last week. The Australian dollar saw initial pressure following the weak Chinese GDP number early last week. However, it saw a significant bounce as the weekend approached and the YEN saw renewed pressure across the board. Subsequent to the uneventful G20 meeting the pair has started the week with the AUD again under pressure. This pressure increased further after today’s weak Chinese manufacturing number. Direction from here will come from dual leads of the 1st quarter Australian inflation number tomorrow, and the wider markets appetite for risk. There is potential for the pair to consolidate around the current range.

AUD/CAD

The Canadian dollar saw grinding appreciation throughout the course of last week, and the pair finished the week on its lows. This week so far has seen a continuation of this theme. Today’s weak Chinese manufacturing numbers further undermined demand for the AUD, and the pair pushed down to settle at current levels just above the support at 1.0500. Direction from here will depend on the wider marker risk appetite in the coming session, and the Australian inflation numbers tomorrow. A low number would certainly further undermine the AUD, as it would see increased chances of further easing to the cash rate from the RBA.

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Market commentary:

It has been a very interesting last few weeks for the wider financial markets. It has become more evident that earlier hopes for a flourishing recovery for the global economy in the first half of 2013 were misplaced. Expectations now build of improving activity in the second half of the year has come as global indicators have missed expectations almost across the board for the first quarter. This pushing out of the recovery horizon has come as global inflationary pressures remain benign. These benign pricing pressures have joined with the increased central bank stimulation to push longer end borrowing rates lower across the globe. With the continuing presence of these opposing forces of increased monetary stimulation, and low levels of economic activity, further directionless sideways trade in many markets in the coming months.

Australia

Last week saw the weak 1st quarter Chinese GDP numbers ensure that demand for the Australian dollar was somewhat tempered. The domestic focus of the week was the RBA monetary policy meeting minutes. These revealed little of material surprise, with the way remaining open to a lowering of the 3.00% cash rate should conditions become more difficult. This week will see passing focus on the latest Australian inflation numbers at tomorrow’s release. Today saw the latest Chinese manufacturing numbers released. These were weaker than expected, which continues recent run of soft Chinese economic data. The odds of a lower cash rate from the RBA have increased in the last couple of weeks, and now move close to a 50% chance of a cut at upcoming meetings. Domestically, of primary concern are the continuing low levels of investment in non-mining sectors.

New Zealand

Last week saw the latest Global Dairy Trade (GDT) auction results show consolidation of prices at record levels after the 9th straight increase. These came as easing drought conditions were seen in the north island, after periods of widespread rain. This should help support next season production levels for the important sector. The latest inflation numbers were on expectation with a moderate .4% increase in prices for the 1st quarter. Continuing demand for NZ Government bonds will likely provide some on-going support the NZ dollar in the coming months. The RBNZ monetary policy announcement tomorrow provides the primary focus this week. The statement accompanying the unchanged cash rate decision will be closely watched. Expect further reference to the Auckland property market, and the NZ dollar.

United States

Last week’s US inflation numbers were lower than expected, and re-iterate the importance of the FED’s monetary stimulus to the economy’s vulnerable recovery. The rest of the economic news remains mixed with housing activity consolidating around its improved levels along with industrial production, but corporate earnings have been weak as a balancing factor.  This Friday will see the first quarter GDP numbers released, and these provide the primary focus amongst various other data due for release. Expectations are for increased activity around 3% for the quarter. Also of note will be the manufacturing numbers later on today, durable goods sales numbers tomorrow, along with various corporate earnings results on Wall Street.

Europe

There has been little change to economic sentiment in Europe in the last week. The numbers continue to point towards further easing to the cash rate at some stage from the ECB, and now the debate becomes about the effectiveness of additional easing. Growth is really struggling to re-emerge and it seems likely that there will be easing of time frames to get debt to GDP ratios in order in the coming months. Lower levels of Government spending are materially impacting the recovery, and a loosing of time frames would certainly offer some assistance. Inflationary pressure remains under control, easing the way for policy accommodation from the ECB of deemed appropriate. Of interest has been the material increase in demand for European debt as cashed up Japanese pension funds chase yield following the BOJ policy initiatives. This week’s focus comes from the manufacturing and services numbers later on today. Expect pressure across the board, with Germany the only member with a chance of showing increased activity.

United Kingdom

Last week saw UK inflation released as expected at 2.8% on an annual basis. Labour market numbers remain mixed at best with the unemployment rate lifting slightly to 7.9%. The retail sales sector remains under pressure, albeit the last numbers met expectation with a .7% decline in activity on the month. An unsurprising credit down grade from ratings agency Fitch did not have a lasting effect on the GBP. This week will sees just passing domestic focus in the UK ahead of the primary focus in the form of the preliminary 1st quarter GDP numbers on Thursday. These figures are crucial to the decision making from the BOE with regards to future monetary policy stimulus. Weak numbers would further increase the chances of additional quantitative easing, placing further pressure on the GBP.

Japan

The weekend’s G20 meeting offered a chance for friction on the Japanese aggressive policy released in the last few weeks. Externally at least , there was no debate and this means a tick of approval from the international community. In the absence of any material economic news of note, the Yen saw periods of demand as wider market risk aversion increased. So with the softer global growth outlook, further YEN weakening will not come as easily as the previously ground lost. Interestingly, an externality of the BOJ’s policy will see increased Japanese investor buying of foreign bonds as they chase higher yield. This does not only mean Australia and New Zealand. This has already been seen in European peripheral member debt last week. Good support in the bond markets pushed yields lower and provided support for the EURO itself. The BOJ get another chance to voice their policy at the monetary policy meeting this Friday.

Canada

Last week was a mixed one for the Canadian economy. Better than expected manufacturing numbers were balanced by the material fall in the important raw commodity markets. The Bank of Canada maintained and unchanged cash rate as expected. Whilst they maintained the next move would be an increase from the current emergency levels, they also revised growth expectations from 2.0% to 1.5% for 2013. Monthly inflation was confirmed at .2%, and these factors mean the BOC will remain on the side lines for the coming months at least. This week sees the retail sales number later today (Tuesday) offer focus ahead of speeches by outgoing Governor Carney on today and tomorrow.

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