(As written for My Paper on 12 June 2012. Click here to enlarge)

Last week, four of the world’s most powerful central bankers turned dovish on the world economy.

On 5th June, Reserve Bank of Australia (RBA) chief Glenn Stevens cut interest rates from 3.75% to 3.5%, its lowest since November 2009.

On 6th June, European Central Bank (ECB) President Mario Draghi met the press and left the door open to a possible rate cut from the current level of 1%. This could be a turning point because the ECB rate has never gone below 1%. However, recent Eurozone news show that inflationary pressures are down and economic activity is weakening.

Although historic, an impending rate cut by the ECB is well justified, considering the dire conditions in Europe now.

On 7th June, Federal Reserve chairman Ben Bernanke told the joint Economic Committee that the Fed “remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”

Also on 7th June, PBOC Governor Zhou Xiaochuan cut benchmark interest rates by 25 basis points to shore up slackening growth. This put the lending rate at 6.31% from 6.56% and the deposit rate at 3.25% from 3.5%.

Interestingly enough, China’s rate cut comes at a time when exports rose last month at more than double the estimates. This tells us that the rate cut was aimed at countering a domestic slowdown.

Indeed, inflation rose the least in two years in May, slowing to 3% from a year earlier. Industrial production didn’t fare better, coming in below 10% for a second month in May, the first such occurrence in three years.

The most downcast data belonged to retail sales, rising the least in almost six years, excluding the January and February holiday months.
The biggest worry for all central bankers now is still Europe, with Spain taking centre-stage. Over the weekend, Spain requested euro-region governments for a bailout worth as much as 100 billion euros to rescue its banking system.

The Spanish government’s credibility was jolted by the funding hole reported last month by Bankia, Spain’s third-biggest bank. It has since been nationalised. Last week, Fitch Ratings also cut the government’s credit rating to BBB, two levels from junk.

Suffice to say, all eyes are now on Spain – and it’s not because they are reigning European football champions.

Top News This Week

UK: Manufacturing Production m/m. Tuesday, 12th June, 4.30pm. I expect figures to come in at 0.1%, (previous figure was 0.9%).

USA: Retail Sales m/m. Wednesday, 13th June, 8.30pm. I expect figures to come in at -0.1%, (previous figure was 0.1%).

Trade Call

Short NZD/USD at 0.7715

On the H1 chart, NZD/USD opened with a gap up of 65 pips due to the positive risk sentiment associated with China’s interest rate cut. However, with combined effect of Australia’s interest rate last week and China’s domestic slowdown will take its toll on New Zealand.

Although momentum is slightly up, we will go for a reversal trade this round. An entry is taken once prices fall to 0.7715, covering the gap. A stop loss of 70 pips is placed at the last high of 0.7785.

We will have two targets on this trade, exiting the first position at 0.7645 and the final position at 0.7575.

Entry Price = 0.7715
Stop Loss = 0.7785
1st Profit = 0.7645
2nd Profit = 0.7575