sign up log in
Want to go ad-free? Find out how, here.

With little in the way of inflation to worry about, there's plenty of room for US Fed to keep stimulating the economy

Currencies
With little in the way of inflation to worry about, there's plenty of room for US Fed to keep stimulating the economy
<a href="http://www.directfx.co.nz/ApplyAccount?referral=00183">Contact Direct FX here ></a>

By Sam Coxhead*:

The broad USD strength of the past couple of weeks has finally eased. The start of this week has seen some retracement with most currencies gaining back a little of the lost ground against the US currency.

The overall economic picture hasn’t changed much with a brighter outlook for the US, UK and Japan, supported by recent data.

Europe however is getting left behind, and it’s hard to see where sustained growth in the Euro-zone is going to come from. The focus for all markets at the moment is the issue of the tailing off of quantitative easing (QE) measures in the US.

We should get more clarity on this from FED chairman Bernanke over the coming days. A firm signal from him that the FED will start scaling back measures over the coming months would see reaction across all asset classes.

Until recently it seemed improbable that there would be any tapering QE measures ahead of the end of 2014.

The willingness of chairman Bernanke to provide monetary stimulation has remained unwavering until this point. With little in the way of inflation to worry about, this leaves them plenty of room to keep stimulating the economy.

This is the central issue that provides increased focus this week.

Major Announcements last week:

·  US Retail Sales +.1% vs -.3% expected

·  NZ Retail Sales +.5% vs +.9% expected

·  German Economic Sentiment 36.4 vs 39.5 expected

·  German GDP +.1% vs +.3% expected

·  UK Unemployment claims -7.3k vs -3.1k expected

·  Canadian Manufacturing -.3% vs +.6% expected

·  US Philadelphia FED Manufacturing -5.2 vs 2.5 expected

·  US Consumer Confidence 83.7 vs 77.9 expected

NZD/USD 

Offshore factors have been driving the NZD lately, with little in the way of domestic economic news to be of any impact. Broad USD strength has been the story of the past couple of weeks. After such a strong run it’s not surprising to see a small corrective pullback. And this is what has eventuated over the last 24 hours. The NZ dollar closed last week near its recent lows around 0.8060, but recovered off those lows yesterday as the USD gave back some ground across the board. The bounce from the lows has so far reached 0.8170, and there is little in way of upside resistance until 0.8260. The focus this week will remain on the US, with the Fed monetary policy meeting minutes set for release along with a testimony by Bernanke on the economic outlook. Any major signals from him with regard to tapering off quantitative easing will see renewed demand for USD.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.8182 0.8060 0.8260 0.8064 - 0.8296

NZD/AUD (AUD/NZD)

This pair has continued to trade sideways around 0.8300 (1.2050). Dips below 0.8280 (above 1.2075) are finding NZD support, but the pair has struggled on any moves up toward 0.8350 (below 1.1975). Although the longer term trend is for NZD appreciation in the current environment, these are attractive levels to buy AUD with NZ dollars,relative to the pricing over last few years. It would take a sustained move below 0.8250 (above 1.2120) to turn the focus to the NZD weakness, and signal the start of a bigger pullback for the NZD against the Australian dollar.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8341 0.8200 0.8400 0.8274 - 0.8354
AUD / NZD 1.1989 1.1900 1.2200 1.1970 - 1.2090

NZD/GBP (GBP/NZD)

This week provides a good opportunity for the GBP to continue it’s recent outperformance with plenty of scheduled economic releases. These will be key to the near term direction for the GBP. The Bank of England (BOE) will be hoping for the data to confirm the improved outlook Governor King recently spoke about. After trading down to just above 0.5300 (below 1.8870) late last week, the NZDGBP cross has put in a small bounce to currently trading around 0.5360 (1.8660). Topside resistance comes in at 0.5440 (support 1.8380) and as long as the pair holds below there, the scope is for further pressure on the NZD from the resurgent GBP. Support around 0.5250 (resistance 1.9050) provides the initial target for further NZD under performance.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5363 0.5250 0.5480 0.5309 - 0.5422
GBP / NZD 1.8646 1.8240 1.9050 1.8443 - 1.8836

 NZD/CAD

Late on Friday afternoon this pair was testing support around 0.8250, and the NZD was looking heavy. That support held however ,and the resulting bounce gained momentum after the release of Canadian inflation data. It come in at very low levels and undermined recent support for the CAD. Initial resistance at 0.8400 has been tested and so far at least, has capped the bounce. Further tests of the topside look likely with the only data out of Canada this week being  the latest monthly retail sales numbers, and these should be of limited impact.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8385 0.8200 0.8400 0.8262 - 0.8406

NZD/EURO (EURO/NZD)

The NZD was under pressure from the EURO last week, and finished the week on its lows under 0.6300 (above 1.5870). However, the NZD has regained some composure in the last 24 hours and traded back up to 0.6350 (1.5750). The last three weeks has seen a pullback from the 0.6550 (1.5270) level, and this has kept the NZD downside the immediate focus. However, it’s hard to get overly negative on this on the NZD against the EURO around the current levels. New Zealand is economically very sound at the moment, while Europe is the complete opposite. Broadly speaking, much of the last year has seen the NZDEUR drift up and down between 0.6200 (1.6130) and 0.6600 (1.5150). It’s hard to see anything in the near term that will change that. Any moves down toward 0.6200 (1.6130) present good value to buying of NZD against EUR.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6347 0.6200 0.6400 0.6283 - 0.6415
EUR / NZD 1.5755 1.5625 1.6130 1.5590 - 1.5915

 NZD/YEN

This pair has seen more sideways action within the recently defined range of 82.80 - 84.80. Comments from Japanese officials signaling they are comfortable with the overall level of the Yen will help to cap further gains from the NZ dollar. The focus this week will be on the Bank of Japan(BOJ) monetary policy decision and monthly economic report, both of which could provide some volatility.  A break above 84.80 opens the way for a test of recent highs at 86.40, while a sustained break below 82.50 will could signal a move back to 80.00.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 83.86 82.80 84.80 82.78 - 84.52

AUD/USD

After making lows late last week just above 0.9700, the AUD has recovered a touch thanks to the USD giving back some of it’s recent gains. The recovery in the AUD was dealt a small blow leading into the release of the RBA minutes, as selling pressure saw it fall from 0.9820 to 0.9760. However, the minutes themselves might actually help support the AUD over the coming days, as another rate cuts doesn’t seem imminent. Key to direction for the rest of the week will be comments from Fed president Bernanke tomorrow when he testifies on the economic outlook. If he fails to give any signal that the Fed is looking at scaling back QE over the coming months, support for the USD will wane.Under this scenario the AUD could easily climb back above .9900.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9808 0.9700 1.0000 0.9707 - 0.9918

AUD/GBP (GBP/AUD)                            

The AUD gave up a fair amount of ground to the GBP last week as the general theme of a better UK outlook and softening Australian economy played out. The pair briefly traded below 0.6400 (above 1.5625) before putting in a small bounce. The risk is still the downside for the AUD. There is plenty of economic data out in the UK this week. Strong data will see renewed demand for the GBP, and the AUD suffer as a consequence, and the pair likely push to the recent AUD lows.. However, if previous history is an indicator, improved numbers are not guaranteed.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6430 0.6300 0.6500 0.6389 - 0.6523
GBP / AUD 1.552 1.5380 1.5870 1.5330 - 1.5650

AUD/EURO (EURO/AUD)

Like most other crosses, the bout of AUD selling at the end of last week saw this pair making fresh lows. A mild recovery back above 0.7600 (below 1.3160) has taken the immediate pressure off the downside for the AUD. A failure to hold above that level will leave the AUD looking vulnerable to further pressure from the EUR. Australia only has consumer confidence scheduled for release this week. The focus will turn to Europe, which has releases of manufacturing and service data along with German GDP and business climate survey. Recent Euro-zone data has disappointed and if that continues then the pair could easily recover back above 0.7700 (below 1.3000)

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7607 0.7500 0.7700 0.7566 - 0.7698
EUR / AUD 1.3145 1.3000 1.3330 1.2990 - 1.3220

AUD/YEN

The last five weeks have seen the AUDJPY chopping back and forth within a 99.50 -102.50 range. Late last week the lower end of the range was tested on the back of AUD weakness. It held firm, and has since recovered to trade around 100.40. Comments from Japanese officials over the last few days suggesting they are comfortable with the level of the yen will likely limit further yen weakness in the very near term. It will therefore take some strength in the AUD to see this pair recover further back toward the middle of the recent range. Any weakness in the AUD will see 99.50 tested, with a break below there opening the way for a move toward 97.00.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 100.52 99.50 102.50 99.67 - 101.47

AUD/CAD

The end of last week saw this pair testing key support at 0.9950. That support held and the resulting bounce was helped by a weak reading from Canadian inflation. That undermined support for the CAD, and the pair has so far recovered to 1.0070. This bounce has taken the immediate focus off the downside, and a bigger corrective rally toward 1.0200 could easily eventuate.  A move below 0.9950 however, would signal further downside action is likely. The data front is pretty light in both countries for the rest of this week. Canadian retail sales and Australian consumer confidence the only releases of note.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 1.0054 0.9950 1.0200 0.9958 - 1.0096

-------------------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

Email:  

--------------------------------------------------------------------------------------------------------------------------

Market commentary:

The broad USD strength of the past couple of weeks has finally eased. The start of this week has seen some retracement with most currencies gaining back a little of the lost ground against the US currency. The overall economic picture hasn’t changed much with a brighter outlook for the US, UK and Japan, supported by recent data. Europe however is getting left behind, and it’s hard to see where sustained growth in the Euro-zone is going to come from. The focus for all markets at the moment is the issue of the tailing off of quantitative easing (QE) measures in the US. We should get more clarity on this from FED chairman Bernanke over the coming days. A firm signal from him that the FED will start scaling back measures over the coming months would see reaction across all asset classes. Until recently it seemed improbable that there would be any tapering QE measures ahead of the end of 2014. The willingness of chairman Bernanke to provide monetary stimulation has remained unwavering until this point. With little in the way of inflation to worry about, this leaves them plenty of room to keep stimulating the economy. This is the central issue that provides increased focus this week.

Australia

Today in Australia saw the release of the RBA minutes from their last meeting. They have given a clearer picture to the thinking behind the 25 point cut they made a couple of weeks ago. It seems with inflation remaining low it has given them room to react to support growth that is forecast to be a little below trend going forward. They say the AUD remains overvalued by historical standards, and effects of earlier cuts are still working their way through the economy. The minutes certainly don’t give the impression the RBA are poised to make another cut in the near term. Tomorrow sees consumer confidence figures released which will also be closely watched.

New Zealand

The New Zealand economy remains on a firm footing with little in the way of domestic data or news flow to change that outlook. Offshore factors have been driving the currency. The broad USD strength has been the overriding theme driving the currency down from 0.8550 early in the month, to a low of 0.8060 at the end of last week. We have seen a small bounce from those lows at the start of this week. Today saw the release of inflation expectations which remain subdued, and later in the week we get trade data.

United States

The strong USD sentiment of late was given a boost with the release of consumer confidence data at the end of last week. The USD surged to it’s highest levels in nearly six years as Americans said they feel better about their financial and economic prospects. Hot on the heels of consumer confidence came the release of US leading indicators. This is a gauge of future US economic activity, and printed at its highest levels since June 2008. There is growing debate about just when the Federal Reserve will look to scale back asset purchases (quantitative easing). With inflation running so low they will feel no need to hurry with that decision. This week has plenty for the market to digest with FED Chairman Bernanke speaking on Wednesday ahead of the release of minutes from the last FED monetary policy meeting. Thursday sees weekly jobless claims and housing data, then on Friday there is durable goods orders.

Europe

Europe must be feeling somewhat left out in the cold recently. Over the last few weeks we have seen an improved economic outlook for the US, UK and even Japan. There is still a long way to go in all those economies, but the initial signs of recovery are there. In Europe however, winter looks to be far from over. Even Germany, the powerhouse of the region, has seen very patchy economic data lately. There will be more to digest this week in the form of consumer confidence and producer prices, along with data on the manufacturing and service sectors.  Further stimulus from the ECB over the coming months is a very real possibility. However, the real work needed to turn Europe around has to come from Governments. It seems the divide between what the dominant leader  of Germany, and the rest of Europe want, is as wide as ever.

United Kingdom

This week is a big one in terms of economic data for the UK. It kicks off tonight with the important inflation numbers. Then Wednesday sees release of the Bank of England (BOE) minutes from their last monetary policy meeting, as well as the latest retail sales. Thursday sees the second release of the important GDP numbers. The general theme of the last few weeks has been one of a better outlook for the UK, and as a result the GBP has strengthened on most crosses. However it is still well below levels it was trading late last year, and that means there is plenty of room for further appreciation. Some more good figures this week will certainly help its cause.

Japan

Japanese officials have been all over the news wires the last few days. News started with the economy minister who over the weekend said “the correction of the strong yen is largely completed”. It seems the government is comfortable with the level of the yen here, as he added “if the yen keeps weakening a lot more, it will have a negative impact on people’s lives”. Given that markets rarely like to trade at levels governments are comfortable with, and the massive amount of quantitative easing recently announced , more yen weakness is a very real possibility. Yesterday saw the release of the governments monthly report where they upgraded their assessment of the economy. They see a gradual recovery underway, and recent data supports that. The question is whether or not it can be sustained. The Bank of Japan’s (BOJ) rate decision and policy statement on Wednesday will be closely watched. Japanese bond yields have also moved recently, in what has been some volatile trade.

Canada

The Canadian dollar lost ground against most of its traded pairs at the end of last week following the release of inflation data. The inflation number came in at its lowest level in more than three years, and leaves little doubt that rock bottom interest rates are here to stay for the foreseeable future. However, there is plenty of uncertainty around what impact the new governor at the Bank of Canada will have when he takes over in the next few weeks. With only retail sales to focus on this week, the market will be closely watching all the US releases.

No chart with that title exists.

-----------------------------

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

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

2 Comments

"The overall economic picture hasn’t changed much with a brighter outlook for the US, UK and Japan"

U.S is not alone in this time of economic downturn. But its not a good news though, it will turn out as career failure to all. Plus the inflation will strongly keep us suffer from declined job opportunities. A new report from the Economic Policy Institute states that the rate of low-end careers in the United States economy is not going to decrease in the next decade, even if the economy rebounds. The study states that 28 percent of American workers are in low-wage careers, and the pattern will not change. This is why when most need help in  paying for something while waiting on a new job, they ended up  of financial assistance. If we continue to experience this inflation rate dilemma we will end up having laods of debts and economic anxiety.

Up
0

Deflation.
Low income households, once were middle-class active consumers.

Up
0