After 2 weeks of aggressive equity market selling, global stock indices have finally stabilised and have even begun to rally. This was largely due to better than expected economic data releases from China (manufacturing PMI) and the US (Durable Goods) combined with rumours that Ben Bernanke (head of the Federal Reserve) may use the Jackson Hole central bankers summit to announce another round of QE (asset purchases) in order to stimulate the flagging US economy.

The Fed announced the last round of asset purchases (so called QE2) at last year’s summit, which appears to be the main reasoning for market expectations that something similar will happen this time around. If Bernanke makes such a commitment in his speech at 15:00 tomorrow, then stock markets should continue higher meaning the GBPAUD exchange rate is likely to come under further pressure.

Personally, I think the market is getting ahead of itself and the Fed are unlikely to make such an announcement tomorrow simply because inflationary pressures are beginning to build in the US and the macro data is improving (albeit at a slower pace than they would like).

From a technical analysis point of view, support at 1.5575 (50% Fibonacci level) is important and needs to hold. If this fails, then a test of previous resistance now support at 1.5495 is likely to follow and a move below here will put us back in the 1.50-1.55 range of earlier this year. As long as 1.55 holds, there is potential for a move back into the high 1.50’s and possibly 1.60 regions once more. At present, the momentum indicator points to a move lower but sentiment can change very quickly in the current market.

With so much uncertainty and the potential for big moves over the long weekend (Monday 29th is a UK holiday), there is really only one way to play the market i.e. stop loss and limit orders.

Personally, I would suggest a stop loss at 1.54 and a limit order at 1.58 (possibly higher depending on how ambitious you would like to be) for any Aussie buyers.

For any sellers, I would consider the opposite strategy i.e. a stop above 1.60 with a limit order in the 1.525 region.

Tom Ives

The only data release this week from New Zealand was last night’s quarterly retail sales for Q2. It was a stronger figure coming in +0.9% against 0.6 expectations and led by stronger retail sales in Christchurch after the earthquake. It offered tentative evidence of an improving economy but did little to bring forward expectations of a rise in interest rates whilst the global outlook remains so uncertain. The chance of a 25 basis point increase in NZ interest rates on Sept 16th is currently running at about 16% which is a big drop from the 70% estimated chance of a rate hike prior to the downturn in the global economic outlook.

Things have calmed down a little bit, nonetheless and this week we’ve seen stronger economic data lead to a bounce in stock markets - we had stronger US durable goods orders, better Chinese manufacturing data and a moment ago Warren Buffet, undoubtedly one of the most successful investors of all time, announced a massive USD 5 billion purchase of Bank of America stock; affirming his belief in, and support of both the US banking sector and the wider US economy as a whole.

Undoubtedly the focus of the whole week and the reason we are sending out the Weekly Currency Insight today is tomorrow’s meeting of the major central bankers at Jackson Hole.

Why I hear you ask?
There have been rumours all week (and they drive prices after all), that Ben Bernanke the Federal Reserve Chairman may announce a third round of fiscal stimulus (QE), boosting the asset purchase program by another USD 500-600 billion. He’s speaking tomorrow Friday at 3pm (UK time) and if the rumour is confirmed, then expect a continuation in the price action seen this week - stock markets will rally, GBPNZD will fall further. We’re not convinced that such an announcement will be forthcoming yet and so there’s a chance markets will be disappointed and the flight to safe havens will commence once more.

So expect volatility tomorrow and into next week - there’s a UK bank holiday on Monday so we’re closed for business - so the best way to take advantage of this long weekend is to place automatic orders in the market that will purchase your NZD if GBPNZD pushes back up. We already have a large number of orders in to trigger purchases at 2.00 - 2.01 and we would love to come in to work Tuesday morning with even more client’s traded at these higher levels. Email your consultant or call them if you wish to place a automatic order.

Technically we’re seen a pull back towards the 50% Fibonacci retracement (of the move from 1.8548 up to 2.0413) and the market has found support above 1.9600. Initial targets for a move higher would target 1.99 initially and then potential for retest of the highs at 2.02-2.04.

If Bernanke announces an extension to the QE program then it won’t be welcome news for NZD buyers, there’s likely to be an increase in flows into NZD and AUD. That would cause a rally and we may see a fall down through the 1.9500 region into next week. If you want to protect against a quick move lower ask your consultant about stop-loss orders which act as a safety mechanism, triggering a purchase of NZD before a greater fall ensues.

Alastair Sweetman

Data from the UK was almost universally disappointing over the course of last week and very mixed through this one. Last week began with higher than anticipated UK inflation data on Tuesday which showed that prices rose at 4.4% in July; up from 4.2% previously. I’m sure that this was no surprise to anyone who has had to buy food or fill their car up with petrol over the last few months. UK unemployment also rose by 38,000 to 2.49 million and shopkeepers on our high streets were also seen to be suffering with retail sales growing by only 0.2% in July, which was disappointing and proved that consumers are unwilling to spend on big ticket items. Normally a raft of such negative data would have seen Sterling under pressure but the pound has remained among the top performing currencies in spite of the UK’s economic underperformance. It would seem that investors are looking for safe havens during this period of market turbulence and Sterling has been a major beneficiary. Additionally there was news of a huge one off flow to purchase Pounds with Autonomy, the UK software company, being bought by Hewlett Packard for close to £6.7Bln!

In the US the manufacturing data out of Philadelphia was shocking at -37 when it was expected at + 2.0 but truth be told the markets have been ignoring most of the macro data recently as risk has been taken off across the board as investors fret about global growth or if we are perhaps heading towards a depression. Safe havens have been sought therefore Gold has appreciated to record highs and the Swiss Franc has strengthened to astonishing levels which has encouraged the SNB to even consider pegging their currency to the Euro!

This week has been equally confused on the data front until Looking ahead to this week, there is a dearth of major macro data to look forward to until Friday when we will see the second estimate of GDP from the UK and the US however the market will be watching and waiting over the weekend for any rhetoric with regard to the Eurozone debt crisis.

Technically (if your eyes are glazing over, you can ignore this bit) we have completed the inverse head and shoulders pattern and reached our target of 1.6558. It is no surprise that we have seen some consolidation and a fall back towards 1.6400. This could easily continue as low as 1.6300. If we do see some gains above 1.6560, the next target on the upside is the 2011 high of 1.6745.

NASA was interviewing potential astronauts for a mission to Mars. It was a very tense interview though because, due to fuel and supplies constraints, only one person would fit in the space craft and it would be a one-way trip with no chance of the ‘lucky’ candidate ever returning to Earth. They had received applications from all manner of people with a wide range of skills and backgrounds but they had narrowed the shortlist down to three blokes.

The interviewer asked the first applicant, an engineer, how much he wanted to be paid for going.
“One million dollars,” the engineer answered. “And I want to donate it all to my University to create a scholarship.”

The next applicant was a doctor, and the interviewer asked him the same question.
“Two millions dollars,” said the doctor. “I want to give a million to my family and leave the other million for the advancement of medical research into cancer.”

The last applicant was a lawyer. When asked how much money he wanted, he whispered in the interviewer's ear, “Three million dollars.”

“That’s a lot more than the others?” the interviewer asked. “Why would NASA want to pay so much?”
The lawyer replied, “You give me three million, I'll give you one million, I'll keep a million, and we'll pay the engineer to go.”