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Debt ceiling negotiations remain a tool for political posturing but needless to say, it seems likely a last minute agreement will be reached

Currencies
Debt ceiling negotiations remain a tool for political posturing but needless to say, it seems likely a last minute agreement will be reached
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By Sam Coxhead*:

There has been a strange dynamic in the financial markets over the last week.

With a limited amount of economic data released, the focus moved away from the central banks towards the various political issues emerging.

The German economic elections held limited drama as Angela Merkel’s looks to form a stable coalition. However the games continue in Italy, with Signor Berlusconi’s party remaining a disrupting force, pushing the Prime Minister to undertake a confidence vote.

Things are no better in the United States where the debt ceiling negotiations remain a tool for political posturing that could be of a very destabilizing nature. Needless to say, it seems likely that a last minute agreement will be reached.

All of these factors continue to promote the trendless nature of most markets that we have seen evolve of the last few months and seem likely to play out for the remainder of 2014 at least.

Major Announcements last week:

·  HSBC Chinese Manufacturing 50.2 vs 51.2 expected

·  German Business Climate Index 107.7 vs 108.4 expected

·  Canadian Retail Sales 1.0% vs .6% expected

·  US Consumer Confidence 79.7 vs 79.9 expected

·  US Durable Goods Sales -.1% vs +1.1% expected

·  US New Home Sales 421k vs 422k expected

·  US Pending Home Sales -1.6% vs -.9% expected

·  ANZ NZ Business Confidence 54.1 vs 48.1 previous

·  Canadian GDP .6% as expected

NZD/USD

After coming under pressure in the early part of last week the New Zealand dollar found support around the 0.8220 level and what followed was mostly quiet ranging trading below 0.8300. The NZD got a boost yesterday after the release of strong business confidence numbers, and then overnight the pair traded to 0.8334 as the USD weakened in the lead up to the US government shutdown. It seems most of immediate impact is already priced into the market, so the focus will turn to how long this shutdown will run and what sort of impact it will have on the US economy. Friday’s key employment report looks to be on hold from the US, although we still expect to get data on the manufacturing and service sectors this week. There is little from NZ set for release so most of the influence on the local currency will come from broader movements in the USD.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.8298 0.8250 0.8450 0.8217 - 0.8334

NZD/AUD (AUD/NZD)

After coming under pressure in the early part of last week this pairing bounced from the 0.8770 (sold off from 1.1403) level, and since then we have seen a recovery all the way back up to recent NZD highs. Last night 0.8916 (1.1216) traded which is exactly the same level as the NZ dollar peaked at on the 21st of September, and only a few points shy of the 0.8922 peak (1.1208 bottom) from 31st July. So there is big resistance around the 0.8920 (support around 1.1211) level, which has so far capped the New Zealand dollar. Expect that to continue ahead of the RBA policy statement later this afternoon. That will likely be the deciding factor for near term direction of the cross. Any break above 0.8920 (below 1.1211) will open the way for further NZD gains with an initial target of the psychologically important 0.9000 (1.1111) level. Another rejection from 0.8920 (1.1211) will see a deeper NZD pullback targeting support at 0.8740 (resistance 1.1442) to start with.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8900 0.8740 0.8920 0.8773 - 0.8916
AUD / NZD 1.1236 1.1211 1.1442 1.1216 - 1.1399

NZD/GBP (GBP/NZD)

The New Zealand dollar has remained under pressure from a strong Pound since it was rejected from around 0.5250 (1.9048) a week and a half ago. So far the downside has been contained by minor support around 0.5100 (minor resistance 1.9608). The latest NZD upside attempt has however been capped by resistance at 0.5160 (1.9380 support) and the market has now turned back down. A test below 0.5100 (above 1.9608) looks to be on the cards in the near term. Looking at the broader picture, the cross could easily trade down to what is now key support around 0.5000 (resistance around 2.0000) over the coming weeks. The chance of that will likely be determined by UK data this week in the form of indexes from the manufacturing, construction, and service sectors.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5120 0.5000 0.5250 0.5106 - 0.5205
GBP / NZD 1.9524 1.9048 2.0000 1.9212 - 1.9585

 NZD/CAD

After trading down to 0.8474 in the early stages of last week the New Zealand dollar has slowly recovered and is currently testing minor resistance near 0.8580. The recovery has been helped by better business confidence numbers out of NZ and a Canadian dollar that has been weighed on by the US government shutdown. This came in the face of good monthly GDP numbers in Canada yesterday. With little out of either country for the rest of the week the focus will continue to be on the stalemate with the US government and its potential impact on the wider market.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8562 0.8450 0.8650 0.8579 - 0.8474

NZD/EURO (EURO/NZD)

The NZDEUR broke down below the 0.6160 support level (EURNZD resistance 1.6235) early last week ,and traded down to a low of 0.6083 (high of 1.6439). Since then, the 0.6160 (1.6234) level, has capped the NZD topside on two separate occasions, the most recent being last night as the political situation in Italy weighed on the Euro. But with the pair failing to get back above that level it may well test the downside again. Tomorrow Italian vote of confidence could well be the deciding factor for near term direction. If PM Letta wins the vote we can expect some relief buying of Euros and this will see the cross to the NZD lower. If Letta losses the vote and calls an election the Euro will likely remain under pressure and 0.6160 (1.6234) could well give way with a test of recent NZD highs around 0.6220 (1.6077) likely.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6134 0.6000 0.6160 0.6083 - 0.6163
EUR / NZD 1.6303 1.6234 1.6667 1.6226 - 1.6439

 NZD/YEN

The New Zealand dollar lost some ground against the Japanese Yen in the early part of last week on the back of weakness in the NZD. Since then trade has mostly been contained between 81.00 and 82.00 and there has been little in the way of overall direction. A brief test toward support around 80.50 was short lived, and yesterday’s strong NZ business confidence numbers have helped the cross rally back to 81.60. We can expect some volatility over the next 12 hours with the market awaiting the announcement from Prime Minister Abe on the sales tax increase and potential stimulus measures to offset the impact. In the last couple of hours we have seen readings on the health of the service and manufacturing sectors of the Japanese economy which have come in around expectation. There has been little impact on the level of the Yen so for as a result.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.63 80.50 82.50 80.93 - 83.08

AUD/USD

Since spiking up to 0.9528 back on the 19th of September in the wake of the Fed deciding not to taper, the AUD has slowly, but surely, been drifting lower. It has given back all those gains and headed into the weekend looking soft around the 0.9300 level. The start of this week has seen a small recovery as the USD has come under some pressure as a result of the debt ceiling stalemate, however the market is keenly awaiting the RBA’s monetary policy statement out later this afternoon. The tone of that statement could well decide the near term direction for the Australian dollar. There is minor support around 0.9280 while on the topside resistance comes in around 0.9400. Developments in the US will continue to draw focus this week along with readings on the service and manufacturing sectors. After the RBA decision this afternoon the only other data from Australia will be building approvals and trade balance both out tomorrow.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9320 0.9280 0.9450 0.9286 - 0.9457

AUD/GBP (GBP/AUD)                            

This pair has come close to testing recent cycle lows at 0.5720 (highs at 1.7483) as the UK Pound Sterling continues to outperform the Australian dollar. Strong data from the UK has continued with the most recent house price data showing broad based gains. Whether or not the AUD will test fresh lows will likely be determined by the RBA monetary policy statement later this afternoon. The language in that statement could well set the tone for the AUD in the near term. Later this week we also have key UK data in the form of readings on the manufacturing, construction, and service sectors.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5755 0.5820 0.5930 0.5743 - 0.5895
GBP / AUD 1.7376 1.6863 1.7182 1.6964 - 1.7413

AUD/EURO (EURO/AUD)

The EURO has made grinding appreciation against the Australian dollar throughout the course of the last week. Ironically, this pressure from the EURO has continued as the political instability in Italy has increased. The RBA monetary policy decision in a few hours will provide the near term focus ahead of the pending confidence vote in Italy. The ECB monetary policy announcement and accompanying statement will offer further focus. Expect further efforts to talk the EURO lower from the central bankers throughout the week. However, with the wider market risk aversion in place as the US government approaches shutdown, and recovery from the AUD should be limited in the near term at least. The .6850 (1.4600) level remains the near term target for further EUR outperformance of the Australian dollar.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6890 0.6850 0.7050 0.6868 - 0.7005
EUR / AUD 1.4514 1.4185 1.4600 1.4194 - 1.4560

AUD/YEN

It has been an interesting period for this pair over the last seven days. The wider market risk aversion has seen YEN demand place pressure on the AUD. This has seen a bit of a retracement in the last few hours, but the price action has stabilized as we approach the RBA monetary policy statement a little later on today. The manufacturing and services data in Japan was reasonably positive today, albeit of limit impact as we approach the important announcements from the RBA and Japanese Government (sales tax) later on today. The combination of these announcements will provide the lead in the short term. The US government shutdown will also be a factor that will likely see the YEN maintain its overall pressure in the short term.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 91.56 91.50 93.50 90.74 - 93.58

AUD/CAD

A weakening Australian dollar and some healthy Canadian data has kept this cross under pressure for much of the past week. It traded down to a low of 0.9572 in the early stages of Monday, however since then we have seen a small recovery as the debt ceiling stalemate in the US has weighed on the CAD a touch. Key to near term direction will the RBA monetary policy statement later this afternoon. The language in that statement could well set the tone for the AUD over the rest of the week. We also have building approvals and trade balance data from Australia tomorrow, while from Canada the only other data is a survey of purchasing managers out on Saturday morning.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9610 0.9550 0.9750 0.9572 - 0.9695

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Market commentary:

There has been a strange dynamic in the financial markets over the last week. With a limited amount of economic data released, the focus moved away from the central banks towards the various political issues emerging. The German economic elections held limited drama as Angela Merkel’s looks to form a stable coalition. However the games continue in Italy, with Signor Berlusconi’s party remaining a disrupting force, pushing the Prime Minister to undertake a confidence vote. Things are no better in the United States where the debt ceiling negotiations remain a tool for political posturing that could be of a very destabilizing nature. Needless to say, it seems likely that a last minute agreement will be reached. All of these factors continue to promote the trendless nature of most markets that we have seen evolve of the last few months and seem likely to play out for the remainder of 2014 at least.

Australia

There has been very little in the way of economic data in Australia over the last week. Of note has been the mixed data released on the Chinese manufacturing index. For the most part the focus has been on the monetary policy statement due from the Reserve Bank of Australia (RBA) later on today. No change is expected from the RBA, but the statement will provide the focus. Expect the wording to remain broadly neutral without ruling out further reduction of the cash rate if the economic indicators resume a weakening trend. After the digestion of today’s statement the focus moves to next week’s monthly employment numbers.

New Zealand

There has been a limited amount of economic news in New Zealand over the last week. Trade balance figures were slightly disappointing, but these have been more than balanced off by the news from NZ diary behemoth Fonterra that they have increased their payout forecast for the season to 8.30 per kilogram. This increased payout potentially boosts the payout, relative to last season by five billion NZ dollars. This week’s domestic data focus has come in the form of yesterday’s building approval and business confidence numbers. The volatile monthly building consents number bounced back into positive territory, whilst the business confidence improved further to very healthy levels. Next week sees the NZIER’s quarterly survey of business opinion the main data focus. Expect this to mirror this week’s positive outlook. The overall picture for the NZ economy remains relatively robust as the increasing momentum in the Christchurch rebuild underpins the wider economy to a certain extent.

United States

On Friday evening we got the final reading of US consumer sentiment for September and it showed consumers are becoming a little wary. The index is now at its lowest point in five months with concerns about government policies and jobs at the forefront. Confidence in the government won’t be improving anytime soon as a political stalemate remains and there is no agreement on raising the debt ceiling. A partial government shutdown is now underway and if agreement isn’t reached by Oct 17th, the US will start defaulting on debt payments. On a more positive note, overnight we got some decent manufacturing activity readings from Chicago and the Dallas Fed, but with all eyes on the circus in Washington there has been little impact. Tonight we get the overall index of manufacturing and on Thursday it will be the nonmanufacturing index. The big data for the week was going to be the employment report on Friday, however the latest news is it will not be released if there is a government shutdown.

Europe

A couple of data releases last night from Europe both came in on the soft side. German retail sales and the flash estimate of monthly inflation both missed expectations although the impact has been limited with the market focusing instead on the political situation in Italy. Over the weekend we got news that five ministers from Berlusconi’s party have resigned from the government coalition. Meetings on Friday about delaying the planned sales tax increase failed and this seems to have kicked off the crisis. Prime Minister Letta will now hold a confidence vote on Wednesday and if he losses that vote he will be forced to resign. Elections will then be held in November. All this has kept the Euro under pressure and the confidence vote on Wednesday will now be key. Still to come this week we have unemployment data, followed by the ECB rate decision and press conference. Although no change in rates is expected, over the weekend we have seen comments from ECB member Coeure who said the ECB retains and easing bias and the possibility of further cuts remain. We can expect President Draghi to take a similar tone and reaffirm that further LTRO’s (long term refinancing operations) are possible. Pretty much everything is still on the table should the Eurozone crisis flared up again over the coming months.

United Kingdom

The UK economy remains on a firm footing with recent data on house prices showing they rose the most in more than six years in September. The continued increase in demand is partially been driven by government measures. David Cameron’s ‘help to buy’ scheme is boosting demand and the second phase of his plan will start this week, three months earlier than expected. This is all fuelling a debate as to whether the government isn’t just creating another housing bubble. In the long run it may well do so, but until now it has really only been London and the south east that has seen all the price increases. Markets outside of London are only now just starting to see price increases after five years of falling or flat prices. The rest of this week will be interesting with key data on the manufacturing, service, and construction sectors set for release.

Japan

Late last week data on Japanese inflation hit the wires. It showed core inflation hit 0.8%, year on year in August, which is the biggest annual rise since November 2008. This will be welcome news for the Bank of Japan (BOJ) as they creep slowly towards their 2% target. The next step is to get the private sector to start raising wages, but that could prove more difficult. The BOJ has been vocal about the need for wages to rise in tandem with inflation. If they don’t then household incomes will get squeezed and this will stiffen any economic recovery. It will also make the planned sales tax increase a lot harder to swallow. We are expecting an announcement of that today from Prime Minister Abe. Also today we have seen the latest readings on the manufacturing and service sectors, which on balance were close to expectations. On Friday we have the BOJ monetary policy statement, albeit this likely be overshadowed by the tax announcement this week.

Canada

GDP out last night from Canada has confirmed the economy is heading in the right direction. After a poor June reading, thanks in part to flooding and strike action, the July number bounced back showing a 0.6% gain. That’s one of the biggest increases in the last two years. This supports Bank of Canada (BOC) Governor Poloz’s belief that the economy has reached a tipping point where business confidence is high enough to trigger more capital spending. Exports are rising driven by demand from an improving United States. This could easily be affected however by a protracted US government shutdown, and that is the most immediate concern. The only other data set for release this week is a survey of purchasing managers out on Saturday morning.

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

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