Disappointing data for the US and a theme of ongoing central bank support will provide underlying demand for the NZ$ and A$

By Sam Coxhead*:

The wider financial markets have seen weak economic indicators recently with the overall theme being one of very tame inflation, and continued central bank support.

This should be underlined this week with meetings by the ECB and the US Fed.

There is growing expectation that ECB President Draghi will announce a 25 point cut on Thursday, and a broad consensus that the FED will continue quantitative easing (QE) at the current levels over the coming months.

Stock markets have seen solid gains with Wall Street approaching record highs.

The US dollar is weaker against most currencies and bond markets have generally been well supported.

This theme of ongoing central bank support will provide underlying demand for the New Zealand and Australian dollars in the coming months.

After the soft start to 2013, the prospect of a closing of the interest rate gap between the larger economies and that of Australasia has diminished.

This is central to the prolonged demand for the Australasian currencies and the continuation of their trade at elevated levels with attractive interest rate yield driving demand.

Major Announcements last week:

·  HSBC Chinese Manufcaturing PMI 50.5 vs 51.4 expected

·  Euro-zone Manufcaturing PMI 46.5 vs 46.8 expected

·  Canadian Retail Sales +.7% vs +.5% expected

·  US manufcaturing PMI 52.0 vs 53.8 expected

·  US New Homes Sales 417k vs 416k expected

·  RBNZ leaves monetary policy unchanged

·  Australian Inflation +.4% vs +.7% expected

·  US Durable Goods Sales +1.4% vs +.5% expected

·  Preliminary UK GDP +.3% vs +.1% expected

·  BOJ leaves monetary policy unchanged

·  US Advanced GDP +2.5% vs +3.1% expected

·  Italy finally establishes new Government

NZD/USD 

Broad based support for the NZD continues with the currency making a move above resistance at 0.8550 in the last 24 hours. If it can consolidate these gains it will open the way for a retest of recent highs at 0.8648, although a lot of that will depend on key releases out of the US later in the week. The positive reaction after the RBNZ policy statement last week has been underpinned by an increase in the cost of the Christchurch rebuild and the resulting reinsurance flows. So the NZD starts this week on a firm footing, and with the upside very much in focus. Expect dips to find support ahead of FED’s monetary policy announcement (Wednesday) and US employment data (Friday), which will set the tone heading into the following week.

NZD/AUD (AUD/NZD)

Those waiting for a pullback in the NZD against the AUD have been sorely disappointed lately ,with the NZD relentlessly grinding higher for much of the past six weeks. The last five days have seen it establish a firm footing above 0.8250. A test of recent highs around 0.8290 seem likely. At some point a corrective from the NZD will no doubt happen, but the timing of such a move, and from what level remains uncertain. Against a backdrop of a relatively strong NZ economy, and a reasonably good chance of an RBA cut later in the year, the pressure seems to be to the upside. Ahead of the May 7th RBA monetary policy meeting, it looks increasingly likely that buying emerge on any pullback from the NZ dollar.

NZD/GBP (GBP/NZD)

Strength in the NZD this past week has been outperformed by the GBP which is holding onto gains made after the stronger than expected GDP number last Thursday. This has seen the currency pair consolidating above 0.5500 (1.8181) after retreating from recent highs at 0.5628 (1.7768) in the middle of the month. Dips below 0.5500 (1.8181) are finding support, and as long as this continues the upside is still the main focus. Be wary of a move below 0.5480 (1.8248) however, as this could signal the start of a much deeper correction although it’s hard to see what might spark such a move in the near term with a lack of key data out of either country this week.

 NZD/CAD

The NZD and CAD have both been strong against other currencies this week. This is thanks to stronger commodity prices, and a relatively positive outlook for both economies going forward. The recent range of the past three weeks is still holding, with support toward 0.8600 and resistance around 0.8750. Although that defines trading for now, the bigger picture is one of slight outperformance by the NZD that is seeing cross rate edge higher in the long run. Key US employment data at the end of the week has the potential to move the CAD more than the NZD, and hence a number outside of expectation could see either extreme of the recent range tested.

NZD/EURO (EURO/NZD)

The NZDEUR has been consolidating gains (EURNZD losses) made over the past week on the back of broad based NZD strength. With expectations growing of a 0.25 point cut by the ECB at it’s Thursday rate meeting, the risk is for further NZD outperformance in the short term. Initial resistance lies at 0.6550 (support 1.5267), ahead of recent highs at 0.6609 (1.5130). Minor support at 0.6470 (resistance 1.5455) protects the more important level of 0.6425 (resistance 1.5565) on the downside. The ECB monetary policy decision provides the primary focus this week for this pair.

 NZD/YEN

The broad range of 82.50 to 84.50 that has contained the NZDJPY for much of the past 2 weeks remains in play. A brief flurry up to 84.80 proving to be unsustainable, before the currency pair retreated back to more comfortable levels around 83.50. After a sharp move higher earlier this month this consolidation can only be healthy. It would seem likely that it is only a matter of time before resistance is tested again as dips remain well supported due to broad NZD strength and general JPY weakness on the back of very expansionary monetary policy.

AUD/USD

After testing major support toward 1.0200 in the middle of last week, the AUD has seen a gradual, and sometimes choppy, recovery from those lows. It’s probably fair to say a good part of the recovery has been due to general USD weakness, although stronger commodity prices will have helped the AUD somewhat as well. Currently trading around 1.0350, and with little in the way of top tier Australian data this week, it will be reaction to the Fed meeting on Wednesday and US employment data on Friday that drives the currency from here. Certainly, the increased prospect of further easing from the RBA in the coming months will continue to be a factor that should temper sharp appreciation from the AUD. Buyers looking to play the range of the past 10 months will no doubt emerge on any dips into the 1.0200-1.0250 area ahead of Friday.

AUD/GBP (GBP/AUD)                            

GBP strength in the days after their better than expected GDP number dove the AUDGBP rate to a low of 0.6635 (GBPAUD 1.5070 high). This has been a continuation of the pull back that the pairing has seen since peaking around 0.6930 (low 1.4430) a month or so ago. The bounce off the week’s lows has been helped by better commodity prices, and there is certainly plenty of room on the upside for the AUD to continue this move. Minor resistance around 0.6745 should probably be tested on this bounce and the reaction there may dictate the near term direction.

AUD/EURO (EURO/AUD)

The AUDEUR has had a directionless week drifting between 0.7875 and 0.7925 (1.2620 and 1.2700). This is a long way off the highs of 0.8170 (1.2240 lows) seen earlier this month. Expect more sideways action going into the ECB rate decision on Thursday. This announcement may provide the driving force to find some direction. With many in the market now looking for a cut from the ECB, the failure to provide one will no doubt see a knee jerk reaction to buy EUR and see support 0.7875 (resistance 1.2700) tested. If we do see a cut then current levels will be very attractive, and gradual recovery back up over 0.8000 (below 1.2500) could well be on the cards.

AUD/YEN

Some volatile trade for this currency pair at the end of last week saw the rate fall from just above 102.5 to a low of around 100.5. This was triggered by a bout of JPY strength after no extra easing measures were announced from the BOJ at their Friday 26th policy statement. The move was further spurred on when US GDP disappointed by coming in below expectation. The moves in the Yen are most likely just a correction within the broader trend of a weakening currency, with a backdrop of the massive stimulus by the BOJ. Stronger commodities have helped the AUD and seen the cross recover back to the 101.5 level. The outlook is for an upside bias with more choppy action, and key support toward 100.00 unlikely to be seriously tested.

AUD/CAD

Data out late last week combined with stronger commodity prices, saw the CAD come to life. A sharp increase in demand for the CAD relative to the AUD saw the cross rate plummet from just above 1.0550, down through the psychological level of 1.0500. It finally found some support at 1.0450. The bounce from those lows has failed to regain the 1.0500 level, and further downside tests seem likely. A slightly softer outlook for the Australian economy relative to Canada is driving the move and with little in the way or top tier data set for release from either country this week the focus will shift to offshore events. Federal Reserve meeting Wednesday and US employment data Friday will both be closely watched.

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Market commentary:

The wider financial markets have seen weak economic indicators recently with the overall theme being one of very tame inflation, and continued central bank support. This should be underlined this week with meetings by the ECB and the US Fed. There is growing expectation that ECB President Draghi will announce a 25 point cut on Thursday, and a broad consensus that the FED will continue quantitative easing (QE) at the current levels over the coming months. Stock markets have seen solid gains with Wall Street approaching record highs. The US dollar is weaker against most currencies and bond markets have generally been well supported. This theme of ongoing central bank support will provide underlying demand for the New Zealand and Australian dollars in the coming months. After the soft start to 2013, the prospect of a closing of the interest rate gap between the larger economies and that of Australasia has diminished. This is central to the prolonged demand for the Australasian currencies and the continuation of their trade at elevated levels with attractive interest rate yield driving demand.

Australia

Last week’s materially weaker than expected Australian inflation number continues be felt through the Australian markets. There is a lot second tier data out of Australia this week, and probably nothing to change the markets view that a rate cut by the RBA in the second half of the year, is looking increasingly likely. AIG’s manufacturing index released on Wednesday and service index on Friday will be watched along with new home sale and producer prices. Key releases from offshore will most likely steal the focus and drive the AUD in the later part of the week.

New Zealand

The NZ economy remains on a firm footing with strong reading’s from both the BNZ business confidence and the NBNZ business confidence surveys. Exports to China continue to grow and it has now overtaken Australia as our number one export market, with forecasts of further growth ahead. The latest projection for the cost of the Christchurch rebuild has been pushed up to NZD 40 billion. With a good chunk of that coming from overseas reinsurance, periodic re-insurance will continue to underpin the currency. The rest of the week is very quiet on the data front for NZ, leaving demand for the NZ dollar to be driven by events in the wider market.

United States

The end of last week saw more disappointing data for the US with key GDP figures coming in well below expectation at 2.5%. Forecasts had focused on a result around the 3.0%, so the undershoot will only serve to bolster the FED’s commitment to ongoing quantitative easing at the current rate of $85 billion a month. This week has kicked off with a mixed bag for personal income and consumption data which was largely overshadowed by stronger pending home sales. The wider markets positive reaction to the forming of a government in Italy has seen the US stock market perform strongly with the S&P nearing record highs. The rest of this week sees a full economic calendar of releases for the US with consumer confidence, manufacturing and the FED’s monetary policy meeting all scheduled ahead of important employment numbers at the end of the week. After the FED policy statement, the primary focus comes from the non farm payrolls on Friday. The market expectation is for a number around 170k, after a disappointing result last month with only 95k new jobs created.

Europe

Europe’s focus this week will be on the ECB rate decision on Thursday. The weak data of late combined with some “dovish” talk from officials has seen a growing number of commentators expecting a 25 point cut from the central bank. The impact of any cut is a very debatable point, but what is clear is that with partial repayment by banks of previous long term refinancing operations (LTRO’s), the ECB is the only major Central bank this year with a declining balance sheet. The BOE has increased its funding for lending scheme, the BOJ is undertaking massive monetary easing, and the Fed continues to buy $85 billion a month in bonds and securities. Europe is arguably in greater need for stimulus at the moment than some of the other countries and weather that will see a cut from President Dragi or some other creative measures remains to be seen. There have been some positive developments this week with the announcement of a new coalition government in Italy, while Spain has pushed out it’s target for budget deficit reduction by two years in an effort to ease austerity. This can only be a good thing with unemployment above 27% and recent downward revisions to growth forecasts. Other key data for this week includes Euro zone consumer confidence, inflation, and unemployment.

United Kingdom

Improved sentiment toward the UK as a result of last weeks better than expected GDP number is likely to continue into this week with only data releases of note being nationwide house prices and PMI’s for the manufacturing, services, and construction sectors. With so much negative news being priced into the GBP of late, the jump in demand for the GBP following the positive GDP news should not have come of surprise. The GBP is holding onto it’s recent gains, but direction over the coming days will be dictated by reaction to the  FED and ECB rate meetings later this week and key US employment figures Friday.

Japan

The Bank of Japan’s monetary policy statement on Friday saw no further stimulus measures announced. This was not a huge surprise after unveiling aggressive quantitative easing measures at the previous meeting. As a result of these earlier measures, they have revised higher CPI and GDP forecasts for the next 3 years. The Bank now expects growth of 2.9% in the year to March 14, and inflation to reach it’s 2% target in the latter half of 2015. History would say these forecasts could be a little optimistic, and there is no denying the enormity of the task the BOJ has in turning around 15 years of deflation. The BOJ announcement Friday, combined with the softer US GDP data, actually saw the Yen strengthen against the US dollar, albeit from reasonably weak levels. The rest of the week is relatively light for important data out of Japan, so offshore factors are likely to drive sentiment.

Canada

Supportive economic data and a recent rebound in commodity prices have helped to underpin the stable outlook for the Canadian economy. This has been reflected in the currency that has made good gains against most others over the past week. The only data release this week is GDP, but don’t expect a huge reaction as it’s the February number and is almost obsolete by the time it’s released. Events in the US later this week will be key drivers of the currency.

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