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Recent US data hasn’t been weak enough for the market to reassess expectations of the Fed announcing its tapering package

Currencies
Recent US data hasn’t been weak enough for the market to reassess expectations of the Fed announcing its tapering package
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By Sam Coxhead*:

The last week has been an interesting one in the financial markets.

The influence of central banks on the price action has continued to emerge. After so long with static monetary policy from most central banks, there is a likelihood of increased volatility as a period of readjustment dawns.

Undoubtedly the most significant influence will come from the US Federal Reserve. Not only do we have the prospect of the tapering of its massive quantitative easing program to digest, but the prospect of new leadership looms large for the start of 2014.

As the prospect of lower levels of US quantitative easing has been digested, the repercussions have been seen across all markets. Higher longer end interest rates around the world are just the starting point. The potential impact will be felt across all asset classes and through most of the world’s economies.

As the global economy attempts to emerge from a period of sustained economic pressure, there will be imbalances. Over the short to medium term, the success of central banks will be gauged by how they smooth this transition.

Major Announcements last week:

·  Chinese Trade Balance 28.5B vs 20.3B expected

·  Chinese Inflation 2.6% as expected

·  UK Unemployment claims -32.6k vs -21.2k expected

·  RBNZ leaves monetary policy unchanged as expected

·  Australian Unemployment rate 5.8% as expected

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

·  US prelim. Consumer Sentiment 76.8 vs 82.6 expected

NZD/USD

The New Zealand dollar made good gains against the USD last week, especially in the wake of the RBNZ monetary policy statement. Key resistance between 0.8150 and 0.8180 capped the gains into the weekend, however that all changed in thin Monday morning trade when news of Larry Summers withdrawal from the race for the Fed chairmanship hit the wires. The NZD gapped higher and traded all the way up to 0.8224 before running out of steam. Since then we have seen a small pull back with the currency currently trading around 0.8180. While above 0.8150 the focus remains of the topside, although further gains may be limited ahead of the key event of the week being the Fed announcement on tapering out Thursday morning. Later that same morning we also get NZ GDP to throw in the mix.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.8173 0.8150 0.8350 0.8011 - 0.8224

NZD/AUD (AUD/NZD)

The New Zealand dollar lept higher against the Australian dollar last week in the wake of the RBNZ monetary policy statement and the soft Australian employment figures. That has left the picture looking positive once again for the NZD, as long as support at 0.8730 (resistance 1.1455) hold any downside tests. The pair did pull back to 0.8746 (rallied to 1.1434) yesterday, but has since bounced and currently trades near 0.8780 (1.1390). The RBA minutes this afternoon have had little impact, confirming the banks more neutral stance. In New Zealand we get the important 2nd quarter GDP number on Thursday to digest. There is also plenty of potential for volatility after the Fed's monetary policy announcement  with regards to tapering on Thursday morning.  However, it should have limited impact on the overall trend of the pair.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8784 0.8600 0.8800 0.8652 - 0.8820
AUD / NZD 1.1384 1.1364 1.1628 1.1337 - 1.1558

NZD/GBP (GBP/NZD)

After the NZD snapped higher mid last week on the back of the RBNZ monetary policy statement, this pair has remained somewhat range bound. 0.5120 to 0.5160 (1.9380 to 1.9531) has seemed to contain price action since then, and with it currently trading bang in the middle of that tight range there seems little motivation to break out. However, there is plenty this week to spark interest starting with UK inflation data tonight. The market is expecting a small decline to 2.7% and any reading above there could materially increase demand for the Pound Sterling. Inflation has been stubbornly high in the UK throughout the recession, and a move back up toward 3% would be a real concern for the BOE. Wednesday sees the release of the minutes from the latest BOE  monetary policy meeting, and on Thursday the latest retail sales numbers are due for release. From NZ attention will turn to current account and GDP out on Wednesday and Thursday respectively.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5140 0.5000 0.5200 0.5090 - 0.5161
GBP / NZD 1.9455 1.9231 2.0000 1.9376 - 1.9646

 NZD/CAD

This pair has a strong run since the beginning of September, and last week was no exception. The New Zealand dollar materially outperformed the Canadian dollar and saw the cross peak at the lofty height of 0.8470. Like a number of NZD crosses, there has been little in the way of a significant pullback or retracement over the last two weeks and this must surely make further topside action in the near term a tougher proposition. A correction back to support around 0.8350 would only be healthy within the broader positive outlook. Expect the Feds announcement on tapering on Thursday to potentially have a big impact on this pair, as the fortunes of the US are closely tied to those of Canada. From NZ this week we also get current account data and the latest GDP figures to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8436 0.8350 0.8550 0.8311 - 0.8470

NZD/EURO (EURO/NZD)

The New Zealand dollar materially outperformed the Euro last week as demand surged for the local currency in the wake of the RBNZ monetary policy statement. Gains have however run into key resistance around 0.6160 (support 1.6234), that are the NZD highs from early July, and this has capped further NZD strength on a number of occasions since Friday. While this level contains the topside, the risk remains for a pullback to support around 0.6000 (resistance 1.6667). Any move above 0.6160 (1.6234) would be a positive signal and open the way for broader gains toward 0.6300 (1.5873). But having rallied all the way from 0.5800 ( sold from 1.7241) without a significant pull back, this seems unlikely in the near term. We get data on German economic sentiment tonight, and on Friday we get Eurozone consumer confidence. While from NZ the focus will be on 2nd quarter GDP data out on Thursday.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6127 0.6000 0.6160 0.6056 - 0.6154
EUR / NZD 1.6321 1.6234 1.6667 1.6250 - 1.6513

 NZD/YEN

Recent strength in the New Zealand dollar has been matched by the Japanese Yen and this has seen the cross maintain a tight range between 80.50 and 81.50 for much of the past week. Resistance at 81.50 should prove tough to overcome, as there has been no significant retracement since the pair took off from below 76.00 at the end of August. This week could prove to be a decisive one however, with the key Fed announcement on tapering out on Thursday morning. In NZ this week we also get current account data and the important 2nd quarter GDP. From Japan the trade balance and a speech from Governor Kuroda will draw focus.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.07 79.50 81.50 79.81 - 81.35

AUD/USD

Gains in the Australian dollar came to a screeching halt after their poor employment data last week. The AUD lost around 100 points against the USD in the aftermath of the release, and headed into the weekend very subdued around the 0.9250 level. Things livened up in thin Monday morning trade when news of Larry Summers withdrawal from the race for the Fed chairmanship hit the wires. This is seen a positive for risk assets and the  AUD gapped higher and traded all the way up to 0.9387, before running out of steam. Since then we have seen a small pull back with the pair currently trading around 0.9310. The RBA minutes released in the last hour have confirmed the more neutral stance of the bank and seen the AUD gain a little ground. We can expect plenty more action this week with the key Fed announcement on tapering set for release on Thursday morning.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9301 0.9225 0.9425 0.9223 - 0.9387

AUD/GBP (GBP/AUD)                            

The Australian dollar lost a lot of ground against the UK Pound Sterling in the wake of the poor Australian employment figures last week. That data was in stark contrast to the UK employment numbers that continue to surprise on the upside. Heading into the weekend the AUD continued to drift lower against the GBP trading near 0.5820(1.7180). But yesterday morning the AUD materially outperformed the GBP, gapping higher on the back of the Larry Summers announcement. This saw the cross trade all the way back up to 0.5893 (below 1.6970) before pulling back to currently sit just above 0.5850 (below 1.7095). In the last hour we have seen the release of the minutes from the last RBA meeting. They confirm a more neutral stance saying a rate cut is not imminent, but do not completely rule one out either. This has seen the AUD gain a little ground as a result. Near term direction is tough call from here with price action likely contained within the 0.5820 to 0.5920 (1.6890- 1.7180) range ahead of the Fed’s announcement on tapering later this week.  We get UK inflation data tonight which will be closely watched, as will the Bank of England minutes on Thursday.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5855 0.5730 0.5930 0.5820 - 0.5923
GBP / AUD 1.7079 1.6863 1.7452 1.6883 - 1.7182

AUD/EURO (EURO/AUD)

The Australian dollar has been largely range bound between 0.6940 and 0.7040 (1.4205 and 1.4409) for the past week or so. The lows of the week traded in the wake of the poor Australian employment data, while yesterday morning’s spike on the back of the Larry Summers announcement saw the highs at 0.7032 (1.4221) trade.  Since then we have seen the pair drift back in the middle of the range around 0.6970 (1.4347). With little direction in the pair over the last week, it’s hard to expect anything more ahead of the Fed’s tapering announcement on Thursday. We get data on German economic sentiment tonight and on Friday we get Eurozone consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6979 0.6930 0.7130 0.6944 - 0.7032
EUR / AUD 1.4329 1.4025 1.4430 1.4221 - 1.4401

AUD/YEN

After last week’s poor Australian employment data the AUDJPY fell below 93.00 trading down to 91.72. Since then however the pair has lacked any real direction with only a small move higher yesterday morning. This came as the Australian dollar outperformed the Yen on the back of the Larry Summers announcement. The topside has been contained by 92.80, and we can likely expect more range trading ahead of the Fed’s tapering announcement on Thursday. There is only second tier data out of Australia for the rest of the week and nothing from Japan until Thursday, when we get the trade balance and a speech by Governor Kuroda.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 92.37 91.50 93.50 89.69 - 93.57

AUD/CAD

The AUDCAD was struggling up against resistance at 0.9640 last week, when the poor Australian employment numbers saw it quickly lose ground. The lows of 0.9528 traded in the wake of that data and the pair was subdued heading into the weekend. But the surprise announcement yesterday morning that Larry Summers was withdrawing from the race to replace Bernanke as Fed Chairman saw the Australian dollar materially outperform the CAD. The pair even briefly traded up through 0.9640 reaching 0.9669, before pulling back to near 0.9600. We can expect some sideways trade ahead of the Fed’s tapering announcement on Thursday. That could be key for the pairs near term direction as the fortunes of the Canadian dollar are closely tied to those of the US.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9607 0.9440 0.9640 0.9457 - 0.9642

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Market commentary:

The last week has been an interesting one in the financial markets. The influence of central banks on the price action has continued to emerge. After so long with static monetary policy from most central banks, there is a likelihood of increased volatility as a period of readjustment dawns. Undoubtedly the most significant influence will come from the US Federal Reserve. Not only do we have the prospect of the tapering of its massive quantitative easing program to digest, but the prospect of new leadership looms large for the start of 2014. As the prospect of lower levels of US quantitative easing has been digested, the repercussions have been seen across all markets. Higher longer end interest rates around the world are just the starting point. The potential impact will be felt across all asset classes and through most of the world’s economies. As the global economy attempts to emerge from a period of sustained economic pressure, there will be imbalances. Over the short to medium term, the success of central banks will be gauged by how they smooth this transition.

Australia

There has been no data of note out of Australia since last Thursday’s soft employment figures. The Australian dollar had remained under pressure heading into the weekend,  although yesterday’s announcement by Larry Summers that he was pulling out of the race for the Fed chairmanship saw the AUD snap higher across the board and recover it losses. Today’s minutes from the last RBA monetary policy meeting have had little impact confirming the banks more neutral stance. There is little on the calendar for the rest of the week with only a speech by assistant governor Edey scheduled for tomorrow and the RBA bulletin on Thursday.

New Zealand

The NZD has remained in demand since last week’s RBNZ monetary policy statement. We have had some second tier data out in the form of consumer sentiment and a reading from the service sector, both of which have come in just below expectation. The REINZ house price index for August also hit the wires yesterday. It showed continued strength in the sector, although sales growth did slow ahead of the impending loan-to-value limits been imposed by the RBNZ. We get current account data tomorrow and GDP figures on Thursday to digest. The market will also be paying close attention to the Fed’s announcement on tapering early Thursday morning.

United States

Recent data out of the United States has been a touch on the soft side. That trend continued at the end of last week with the release of retail sales, producer prices, and consumer sentiment. All three results were a little below market expectation and kept the US under some pressure. However, the data hasn’t been weak enough for the market to reassess expectations for the Fed to announce a tapering of $10 - $15bln when they meet later this week. If they announce a tapering of less than the forecast the dollar will no doubt weaken some more. Early yesterday morning we did get a sharp drop in the value of the USD across the board as Larry Summers withdrew himself from the race to become the next Fed chairman. With Bernanke’s term as chairman expiring at the end of January 2014, there has been a lot of interest in who will replace him. Summers was the frontrunner and was perceived to be in favor of a faster tapering than others (US dollar positive). His withdrawal was then seen as a negative influence on the USD and in thin Monday morning trade the news got a decent reaction. The key event this week will be that announcement from the Fed on early on Thursday morning. Markets worldwide will be focused on the pace of any potential tapering. Also this week we get inflation data, building permits, and existing home sales.

Europe

The last week has been a quiet one for European data, with no releases materially impacting the current economic outlook. However, over the weekend there have been a couple of interesting developments within the Eurozone. A poll from Germany shows the election there on the 22nd will be tight race. Angela Merkel's coalition looks like it has a very slim majority, but it’s almost too close to call. There is talk Merkel may need to get the support of more parties and form a ‘grand coalition’. This would have the effect of softening Germany’s tough austerity stance in the Euro zone as any likely coalition partners are advocating for more growth-stimulating policies. We have also seen comments from an ECB official who says more reforms are needed to stimulate growth in Europe. He sees very tentative green shoots of recovery and they must nurture that growth with care. He also stressed there is no consideration of any ECB rate hike anytime soon. We could see some fireworks from Italy this week with a senate panel set to vote on whether Berlusconi should be expelled from parliament. Some of his allies in parliament have threatened to bring the government down if the vote goes against him. Tonight sees the release of the latest German economic sentiment, and on Friday we get Eurozone consumer confidence.

United Kingdom

There has been no economic data of significance from the UK since last Wednesday’s strong employment numbers. The Pound Sterling has remained well supported on most crosses since then, although it is less noticeable against the NZD. There is a bit more this week to focus on with inflation data tonight, followed by the Bank of England minutes tomorrow night, and retail sales on Thursday.

Japan

Japan saw some patchy data last week but the highlight was the upward revision to second quarter GDP. We have seen a very quiet start to this week with a Japanese bank holiday yesterday and no data scheduled for release until Thursday when we get a speech from BOJ Governor Kuroda and Trade Balance data. Expect Kuroda to repeat the forecast that Japan is on track to beat deflation and achieve its 2% inflation target, even if the sales tax increase goes ahead next year.

Canada

Data out of Canada in the second half of last week was a little on the soft side with both housing starts and capacity utilization coming in under expectation. This saw the currency lose a little ground heading into the weekend, however it did snap higher against the USD yesterday after news of Larry Summers withdrawal from the race for the Fed chair. The major focus this week will be on the Feds potential tapering announcement, however from Canada we also have manufacturing sales, wholesales sales, and inflation data to digest.

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

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