Signs are a US fiscal deal is imminent which is proving positive for Australasian currency pairs

By Ian Dobbs*:

This past week has been all about the political situation in the United States.

Talk of a near term deal last week saw a return of risk appetite which was positive for both the NZD and AUD. But when that fell apart over the weekend, gains were quickly reversed.

Since then however, the news wire have been suggesting another deal is almost done, and again the Australasian currencies are performing well.

We had one piece of data that took focus off the US for a moment and that was Chinese exports. They surprisingly showed an unexpected fall of -0.3% year on year for September against an expectation of +5.5%. At first glance this would seem negative for global demand and hence growth. However, commentators were quick to point out that it could have more to do with overly inflated data last year, than real current weakness.

Major Announcements last week:

·  NZIER Business Confidence 38 vs 32 prior

·  UK Manufacturing Production -1.2% vs +.3% expected

·  Australian Unemployment rate 5.6% vs 5.8% expected

·  BOE leave monetary policy unchanged

·  Canadian Unemployment rate 6.9% vs 7.1% expected

·  Prelim. US Consumer Sentiment 75.2 vs 77.2 expected

·  Chinese Trade Balance 15.2B vs 25.2B expected

NZD/USD

Price action in the New Zealand dollar has been dominated over the past week by news flow and speculation around the US government shutdown and debt ceiling standoff. Reports last week that a deal was close saw an increase in risk appetite come back into the market and the NZD benefited with a move up to 0.8354. When it became clear a deal wasn’t so close the NZD drifted back off to 0.8280. But now it looks like we are once again close to some sort of deal and the NZD has again found support rallying to 0.8381 so far. The next topside resistance comes in around 0.8440 being the peak the market reached after the Fed famously failed to taper quantitative easing back on September 19th. It’s hard to know just how much of the current USD weakness is as a result of the announcement that Janet Yellen will take over from Ben Bernanke at the Fed. The market consensus is that she is very supportive of easy monetary policy, which naturally undermines support for the dollar. Most believe QE tapering could be delayed even further as a result of her appointment. This is certainly a factor but only time will tell if the market is correct in its assessment of her.

NZD/AUD (AUD/NZD)

With little in the way of fundamental news from either country to drive this pair recently, the price action has been contained with key support and resistance levels. On the down side that level is 0.8740 (upside resistance 1.1442) and it was tested last week. The failure to break this level has seen a NZD bounce and the pair has traded back up as high as 0.8848 ( low 1.1302). Price action in the last few hours though has seen further NZD pressure just below the 0.8800 level (above 1.1364). On the topside key resistance comes in around 0.8920 ( support 1.1211), where the pair has had three failed break attempts. Until either of those levels are broken we can expect further range trading. Later this week from Australia we get business confidence data, and a speech from RBA Governor Stevens to focus on. While from NZ we just have inflation data out tomorrow.

NZD/GBP (GBP/NZD)

This pair had a sharp move higher last Wednesday on the back of the surprisingly weak industrial production number from the UK. Since then we have seen further moves in the same direction, but this has mainly been due to strength in the New Zealand dollar. The driver for this seems to be an increase in risk appetite as a deal in the standoff in Washington appears close. How much further this takes the pair remains to be seen, but we are now approaching the top of the current range around 0.5250 ( range lows 1.9048). I would suggest further NZD gains from there will prove tough going, and the risks are for a reversal of strength over the coming days. Key drivers this week come in the form of inflation data for both countries, followed by UK employment and retails sales.

 NZD/CAD

The NZ dollar has continued its recent run of form throughout the course of the last week. In the absence of material local NZ economic news, the pair has been driven by news from Canada and the US. The outlook for the US debt ceiling debacle has been the primary driver. The only material waves of weakness have come when it looks less likely of a solution coming to the fore. Pivotal for near term fortunes will be the resistance at .8700. The US political arena will continue to be of primary influence. The NZ inflation data on Wednesday, followed by Canadian manufacturing and inflation data on Wednesday and Friday respectively will be of secondary influence. Certainly further ground from current levels should be harder fought for the NZD over the CAD.

NZD/EURO (EURO/NZD)

After spending the better part of three weeks ranging sideways below 0.6160 (above 1.6234) this pair has managed to break through that level in the last 12 hours. The driver for this seems primarily to be strength in the New Zealand dollar. With a deal in the political standoff in the US looking likely, we have seen an increase in risk appetite return to the market and this has supported the NZD. Any further upside action on the NZD will run into resistance at 0.6220 (support at 1.6077). The down side is supported by the bottom of the recent range at 0.6060 (range top at 1.6502). With only inflation data out of NZ tomorrow, focus will then turn to German economic sentiment numbers, Eurozone inflation and current account data.

 NZD/YEN

Since late last week this pair has been making gains on the back of optimism that a deal will be reached in the political standoff in Washington. When a deal looked to have fallen apart over the weekend the pair had a sharp correction lower, but since then we have seen further gains as news of an impending agreement leaks out. There has been little in the way of fundamental data from either country to drive the pair and that is mostly true for the coming week as well. With just NZ inflation data tomorrow along with Japanese industrial production, events in the US will continue to have the overriding influence.

AUD/USD

Along with the NZD, the Australian dollar has been dominated over the past week by news flow and speculation around the US government shutdown and debt ceiling standoff. Reports last week that a deal was close saw an increase in risk appetite come back into the market and the AUD benefited with a move up to 0.9484. When it became clear a deal wasn’t so close the AUD drifted back off to 0.9415. But now it looks like we are once again close to some sort of deal, and the AUD is back on the front foot having rallied to 0.9506 so far. Any further strength will run into resistance around 0.9530 being the peak the market reached after the Fed famously failed to taper quantitative easing back on September 19th. It’s hard to know just how much of the current USD weakness is as a result of the announcement that Janet Yellen will take over from Ben Bernanke at the Fed. The market consensus is that she is very supportive of easy monetary policy, which would undermine demand for the USD. Most believe tapering could be delayed even further as a result of her appointment. This is certainly a factor but only time will tell if the market is correct in its assessment of her.

AUD/GBP (GBP/AUD)                            

This AUD had a sharp move higher after last week surprisingly soft UK industrial production number. The pair was quickly testing resistance around 0.5930 (support around 1.6863), and although it took a couple of days to overcome that level, it seems we have now got a solid break above there. This is a positive for near term direction for the AUD. The latest move higher comes on the back of Australian dollar strength as a return of wider market risk appetite has come back into the market. This is thanks to expectation of a deal being reached in the US. Later this week from Australia, we get business confidence data and a speech from RBA Governor Stevens to focus on. While from the UK we get inflation, employment and retail sales figures.

AUD/EURO (EURO/AUD)

After spending the better part of last week ranging sideways below 0.7000 (above 1.4286), this pair has managed to break through that level in the last 12 hours. The driver for this seems primarily to be strength in the Australian dollar. With a deal in the political standoff in the US looking likely, we have seen an increase in risk appetite return to the market and this has supported the AUD. Any further upside action on the AUD will run into resistance at 0.7050 (support at 1.4184). The down side is supported by the bottom of the recent range at 0.6940 (range top at 1.4409). Later this week from Australia we get business confidence data and a speech from RBA Governor Stevens to focus on. While from Europe we have German economic sentiment numbers, Eurozone inflation and current account data.

AUD/YEN

The driving force in this pair over the last week as been the political standoff in the US. As news of a potential deal did the rounds late last week we saw a return of appetite for risk come back into the market. This was positive for the AUD and negative for the Yen and the pair rallied to 93.44. That deal fell apart over the weekend and the AUDJPY gapped lower in early Monday morning trade. But it recovered quickly and has made further gains as it seems likely a deal will be reached very soon. The next target is the 19th September high of 94.48, until we get confirmation that a political solution has been reached in the US there is always the chance of a sharp reversal. Later this week from Australia we get business confidence data and a speech from RBA Governor Stevens to focus on. While from Canada we have manufacturing sales and inflation data to digest.

AUD/CAD

The resurgent nature of the AUD over the CAD has continued for the most part over the last week. The primary influence continues to be the US political debacle. The only material waves of weakness have come when it looks less likely of a solution coming to the fore. The US political arena will continue to be of primary influence as the pair attacks resistance around 0.9860. A move above there could open the way for gains to 0.9950. Later this week from Australia we get business confidence data and a speech from RBA Governor Stevens to focus on. While from Canada we get manufacturing data and inflation.

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

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

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

Market commentary:

This past week has been all about the political situation in the United States. Talk of a near term deal last week saw a return of risk appetite which was positive for both the NZD and AUD. But when that fell apart over the weekend, gains were quickly reversed. Since then however, the news wire have been suggesting another deal is almost done, and again the Australasian currencies are performing well. We had one piece of data that took focus off the US for a moment and that was Chinese exports. They surprisingly showed an unexpected fall of -0.3% year on year for September against an expectation of +5.5%. At first glance this would seem negative for global demand and hence growth. However, commentators were quick to point out that it could have more to do with overly inflated data last year, than real current weakness.

Australia

There hasn’t been much in the way of economic data released in Australia since last week’s disappointing employment numbers. We did get home loan data for August yesterday, that came in below expectation at -3.9%, and had very little impact on the currency. In the past hour we have seen the release of minutes from the last RBA monetary policy meeting. They show that although a rate cut is not completely out of the question should things deteriorate, there is little chance of one in the near future. The RBA is also unsure of whether recent AUD strength will be sustained. They also believe previous cuts are having an impact with effects still flowing into the economy. Later this week we get business confidence data and a speech from RBA Governor Stevens to focus on.

New Zealand

There was a light economic calendar last week, and so far this week we have only seen a couple of releases of second tier data from New Zealand. The services index for September released yesterday showed gains, while house prices continue to appreciate at a concerning rate. Prices in September were 2.6% higher than August and 7.8% up on September last year. The RBNZ will be watching closely over the coming months to see if their loan-to-value ratios (LVRs) are having any impact. If they don’t, then we can expect interest rate rises sooner rather than later. Tomorrow we get inflation data and then that’s it for the week.

United States

All the focus in the US has continued to be on the government shutdown and debt ceiling debate. At the end of last week it looked as if a deal with close to being done, then it all fell apart. The latest news out of Washington is that we are again close to a deal, and with the Oct 17th deadline rapidly approaching, one hopes an agreement is reached. What does seem likely is that any deal will only be a temporary solution and we will be back here at some point in the coming months. On Friday evening we did get consumer sentiment data that printed at its worst level in nine months. That’s hardly surprising though with the first government shutdown in 17 years affecting consumers outlook. We can expect more delays in data this week with large parts of the government still non-operational.

Europe

We had a mixed bag of data last week from Europe. However, there was nothing that materially changed the markets current outlook for the region, which is that of a very gradual recovery. Over the last few days we have seen comments from ECB President Draghi stating that the risks to the recovery are on the downside, with inflation on the very low side of 2%. These views were backed up by ECB’s Bonnici last night who said he’s not sure if the current low inflation rate is a big concern. He added the ECB is prepared to go to a negative deposit rate if needed. Last night we also got industrial production data for the Eurozone and it came in a touch above expectation at +1.0%. Later this week we get German economic sentiment numbers, Eurozone inflation and current account data.

United Kingdom

After last week’s surprisingly soft industrial production number, the market is keen to see if any other economic indicators show signs of weakness. There hasn’t been a lot important data released since then, but over the rest of this week we do get some more pieces of the puzzle. Tonight’s inflation data will be closely watched, then on Wednesday we get employment numbers, followed by retail sales on Thursday. There is a fair amount of debate in the UK at the moment as to whether they are just stoking another housing bubble. Government “help to buy” programmes are certainly boosting demand and prices are rising significantly, but they are at least coming from a low base. There is talk the BOE might need power to dictate loan-to-value ratios (LVRs) in the future.

Japan

Data out of Japan last week was largely supportive of the economy going forward. Good numbers on core machinery orders and consumer confidence have lent support to the current ultra-easy monetary policy. At the G20 over the weekend a Chinese official was less than complimentary though, saying that there was widespread skepticism over Japan's economic plans. I can’t image the Government of BOJ will have paid much attention to his comments. There is very little in the way of data this week with just revised industrial production numbers out later today. BOJ Governor Kuroda is also set to make and on the record speech on Friday that will be closely watched.

Canada

Comments from Bank of Canada’s (BOC) Poloz last week weighed on the currency a touch. He said the Canadian economy is behind where the BOC thought it would be. This is in line with a recent announcement that growth forecasts will be downgraded soon. Canada needs growth above 2.5% to reduce slack in the economy, and it seems momentum in growth is coming slowly. On the positive side Friday’s employment data was supportive showing a gain of 11.9k jobs. This was above expectations of around 10k. The unemployment rate also dropped to 6.9%, although this was in large part due to fewer young people looking for work. Later this week we have manufacturing sales and inflation data to digest.

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

Ian Dobbs is a currency analyst with Direct FX You can contact him here »