US economy showing signs of vulnerability and concerns around China's banking sector spills over into markets

By Sam Coxhead*:

The patchy nature of the global economic recovery was well presented last week.

The vulnerable US economy continues to see softness return to their economic data. This is an issue that will have been exacerbated by the on-going debt ceiling political standoff.

Adding to the volatility were concerns in China over the banking sector, and this spilled over into the wider markets.

On a positive note, the UK continues to see relatively buoyant economic news with preliminary 3rd quarter GDP numbers coming in on expectation at +.8%.

The balance of the news provided some sustained periods of risk aversion and this was evident in the weak performances of the Australasian currencies in the later part of last week.

It can be expected that the recent rangy nature of the price action will continue in most markets this week.

Central bank focus comes in the form of the US Federal Reserve (FED), Bank of Japan (BOJ) and Reserve Bank of NZ (RBNZ) monetary policy announcements. No change is expected from any of the three, but all will be closely watched by market participants.

Major Announcements last week:

• Canadian Retail Sales +.4% vs +.2% expected

• US Unemployment rate 7.2% vs 7.3% expected

• Australian 3rd quarter Inflation 1.2% vs .8% expected

• BOE leaves monetary policy unchanged

• BOC leaves monetary policy unchanged

• HSBC Chinese Manufacturing  Index 50.9 vs 50.5 expected

• German Business Sentiment 107.2 vs 108.2 expected

• Prelim UK GDP +.8% as expected

• US Durable Goods Sales +.1% vs +.6% expected

NZD/USD

The New Zealand dollar has been under pressure since making highs on Tuesday evening after the softer than expected US employment numbers. The initial down move came on the back of concerns about the Chinese banking system, but since then the NZD has remained on the back foot. The currency has traded down to minor support around 0.8270 which has held the downside so far. A break below this level would open the way for further losses towards 0.8160. Levels above 0.8500 were a step too far for the NZD and we are probably approaching fairer value for the currency, even in light of the weaker near term outlook for the USD. Key for this week will be RBNZ rate statement on Thursday. While from the US we get retail sales, inflation, Fed rate decision, and the manufacturing index.

NZD/AUD (AUD/NZD)

Last week’s Australian inflation data was the catalyst for this pair to break down below key support at 0.8740(above resistance at 1.1440). The NZ dollar losses continued into the weekend with the cross closing the week around 0.8640 (1.1575). We saw a small NZD recovery yesterday, but the pair has leapt higher in the last few hours on the back of AUD weakness after a speech by RBA Governor Stevens. His efforts to talk the AUD down are certainly having an impact and it will be interesting to see how much further the cross will rally as a result. We could easily retest the key 0.8740 (1.1440) level, and reaction here will be important. Later this week from Australia we get building approvals and new home sales, and then on Friday we have producer prices data. But the key event for the pair this week could well be the RBNZ rate review and statement on Thursday. Risks are skewed to the NZD upside if the central bank signals increased concerns over the housing market.

NZD/GBP (GBP/NZD)

Weakness in the New Zealand dollar last week saw this pair continue to give up ground and the cross traded down to 0.5114 (up to 1.9554) heading into the weekend. Solid UK GDP data on Friday helped to increase demand for the GBP and kept the NZD under pressure. But there has been little follow through selling of NZ dollar in the early stages of this week. Looking at the broader picture, the pair is now trading near the middle of the 0.5000 to 0.5300 (1.8868 - 2.0000) range that has contained it for a number of months now. This range is expected to continue to define trade over the coming weeks and maybe even into the years end. The risks for near term direction are still skewed to the downside with move toward 0.5060 (up to 1.9763) favoured. Key to any price action this week however will be the RBNZ rate statement on Thursday. From the UK we should continue to see strong numbers this week when we get lending data, house price index, and a reading on the manufacturing sector.

 NZD/CAD

The last week has seen some volatile price action in this pair. The net result is that the cross is currently testing support around 0.8640 and a break below here would reinforce the negative near term outlook. This would open the way for a pull back toward 0.8500 initially. A move back to that level is favoured in light of the broader picture that has seen the cross rally from near 0.8100 at the beginning of September. That move came as the NZD strengthened and the CAD weakened, but it looks to have run its course for now. The risk event on the week will be the RBNZ rate statement on Thursday, but we also hear from BOC governor on Wednesday and have Canadian GDP on Friday.

NZD/EURO (EURO/NZD)

Despite some average data from Europe lately the EUR has continued to find buyers and this has combined with a softer New Zealand dollar over the last week to see the cross rate lose substantial ground. The pair headed into the weekend trading around support at 0.6000 (resistance 1.6667). There has been little in the way of a NZD recovery in the early stages of this week and this leaves the risks still skewed to the downside. The key event however will be the RBNZ rate statement on Thursday and to what degree they signal the need for a hike next year to help cool the property market. There is a lot of second tier data from Germany this week, however it seems unlikely it will materially affect the recent strength of the European currency.

 NZD/YEN

After last week’s big ‘risk off’ move that saw the New Zealand dollar come under pressure, and the Japanese Yen benefit, this pair has remained on the back foot. The cross headed into the weekend near its lows and only staged a small recovery yesterday. But in the last couple of hours the pair has turned down again and all the risks remain skewed to the downside and a test of support around 80.00. We have both the RBNZ and BOJ rate reviews this week to draw focus. Also from Japan we get household spending, retail sales, and industrial production.

AUD/USD

The Australian dollar has remained under pressure since last week’s spike higher. The weakness was triggered by concerns about the Chinese banking system, but even as those fears faded, the currency remained heavy. In the last few hours the AUD has come under renewed pressure as a result of a speech by RBA Governor Stevens. There is minor support around 0.9530 and a move below there opens up the way for broader losses towards 0.9400. Later this week from Australia we get building approvals and new home sales, and then on Friday we have producer prices data. While from the US we get retail sales, inflation, Fed rate decision, and the manufacturing index.

AUD/GBP (GBP/AUD)                            

As the Australian dollar gave up some of its recent gains last week, its lost some of its recent appreciation over the GBP. Solid GDP data from the UK on Friday only served to support the move as the pair traded down to 0.5906 (up to 1.6932). We saw a small recovery in the early stages of this week but in the last few hours the AUD has come back under pressure after comments from RBA Governor Stevens. This has seen the AUDGBP back towards recent lows (GBPAUD to highs) and all the risks remain skewed to the AUD downside. The target at this point is a test of support at 0.5820 (resistance 1.7182). From Australia this week we get building approvals and new home sales on Thursday, and then on Friday we have producer prices data. While from the UK we should continue to get strong numbers this week when we see lending data, house price index, and a reading on the manufacturing sector.

AUD/EURO (EURO/AUD)

To the surprise of many, the EURO has remained well supported recently even as data has failed to impress. This strength in the European currency has combined over the past week with a softer Australian dollar to see the cross rate lose substantial ground. It ended last week around 0.6940 (1.4409), but has broken through those AUD lows in the last few hours as the AUD came under renewed pressure on the back of comments by RBA Governor Stevens. This keeps the focus on the down side and a test of the next support level at 0.6870 (resistance 1.4555). Later this week from Australia we have building approvals, new home sales, and producer prices data to digest. While from Europe there is a raft of second tier releases from Germany.

AUD/YEN

Last week’s big ‘risk off’ move sent the Australian dollar tumbling, and at the same time benefited the Japanese Yen. The pair remained on the back foot trading to a low of 93.01 on Friday. We did see a small recovery in the early stages of this week, but the cross has since turned back down again. The latest leg lower comes on the back of comments from RBA Governor Stevens that have weakened the AUD further. The risks are all still skewed to the down side and a move below support around 92.70 would confirm the negative near term outlook. Later this week from Australia we have building approvals, new home sales, and producer prices data to digest. While from Japan we have the BOJ rate review along with household spending, retail sales, and industrial production.

AUD/CAD

For much of the past week this pair continued to strengthen trading up to a high of 1.0047 yesterday. Since then however, we have seen a sharp reversal. The latest leg lower comes on the back of RBA Governor Stevens who has done his best to talk the AUD lower in the last few hours. We may well now have seen a medium term top put in place at 1.0047, and I wouldn’t be surprised to see a much deeper correction targeting 0.9800 initially. Looking at the bigger picture, this pair has staged a phenomenal run from below 0.9200 at the beginning of August up to recent highs. It is well overdue for a corrective pullback and the sharp reaction from about 1.0000 suggests that is now underway. Later this week from Australia we have building approvals, new home sales, and producer prices data to digest. While from Canada we hear from BOC governor on Wednesday and have GDP data on Friday.

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Market commentary:

The patchy nature of the global economic recovery was well presented last week. The vulnerable US economy continues to see softness return to their economic data. This is an issue that will have been exacerbated by the on-going debt ceiling political standoff. Adding to the volatility were concerns in China over the banking sector, and this spilled over into the wider markets. On a positive note, the UK continues to see relatively buoyant economic news with preliminary 3rd quarter GDP numbers coming in on expectation at +.8%. The balance of the news provided some sustained periods of risk aversion and this was evident in the weak performances of the Australasian currencies in the later part of last week. It can be expected that the recent rangy nature of the price action will continue in most markets this week. Central bank focus comes in the form of the US Federal Reserve (FED), Bank of Japan (BOJ) and Reserve Bank of NZ (RBNZ) monetary policy announcements. No change is expected from any of the three, but all will be closely watched by market participants.

Australia

There has been no economic data released in Australia since last week’s inflation numbers that came in on the strong side. We have to wait until Thursday this week when we get building approvals and new home sales, and then on Friday we have producer prices data. In the last few hours we have seen a speech from RBA Governor Stevens which has seen the currency come under some pressure. He said the unusually high Australian dollar was not supported by fundamentals and it seems likely the currency will be materially lower at some point in the future given the declining terms of trade.

New Zealand

There has been nothing to impact the economic outlook for New Zealand since last week’s better than expected trade balance. A holiday yesterday means it has been a very quiet start to this week as well, but things should get more interesting come Thursday. That’s when we get the RBNZ cash rate review and statement, building consents and business confidence. All eyes will be on the RBNZ to see if they give any more clues as to the timing of any potential rate hike. At this point the market is expecting one in the first quarter of next year, but developments in the housing market could easily change this. Governor Wheeler was on the wires recently saying the high New Zealand dollar dampens inflation and gives the central bank a degree of freedom on rates. That may be so, but if the housing market continues to appreciate strongly, the bank won’t have any choice but to hike the cash rate from its “emergency low” of 2.50%.

United States

Recent data from the United States has been mixed at best. There are definite signs of softening activity which won’t be doing anything to support the expectation for Fed tapering in March next year. Late last week we got durable goods orders that looked ok on the headline number, but this was boosted by strong aircraft orders. The core number that excludes transportation wasn’t so flash, falling by 0.1% against an expectation of a 0.6% gain. The final reading of consumer confidence also came in below expectation, although this data could well have been affected by the government shutdown. Last night we saw data on pending home sales which showed the biggest drop since 2010 and the fourth consecutive month of decline. The housing market recovery has been a big factor in the improvement of the broader economy, and this data shows that growth in that sector is starting to wane. There have however been some bright spots, and industrial production data released last night was one of those. It came in above expectation and showed a noticeable improvement over the previous month. There is plenty more data to digest this week. The highlights will be retail sales, inflation, Fed monetary policy decision, and the manufacturing index.

Europe

Last week saw data that mostly came in below expectation for the Eurozone. The trend continued on Friday evening when we got German business climate index. Not only was it below the level expected, but it showed the first fall in six months. The broader trend in this series has been improving and expectations are that this is just a small blip and not the start of a more serious decline. We have seen a number of positive comments recently from officials with regard to Spain. The overriding theme is that Spain has made good progress and ‘turned the corner’ so to speak. The ECB’s Asmussen was a little more cautious when talking about Italy. He said Italy’s fate will determine the Eurozone’s fate. Italy is too big to be rescued from the outside and it has to make the turnaround alone. There is nothing new here, but it serves as a reminder that Europe has a long way to go and many more headwinds to deal with. The Euro however continues to surprise many with its recent strength. There is a lot of second tier data out this week from Germany to draw focus along with Eurozone inflation and unemployment on Thursday.

United Kingdom

At the end of last week we had United Kingdom GDP for the third quarter. It printed at a very respectable 0.8% which was bang on expectation. The result is actually the strongest reading since the second quarter of 2010. Officials were quick to comment with PM David Cameron saying the result shows the economy has real momentum. The UK treasury said Britain is on the path to prosperity and the data shows the hard work is paying off. They will all be hoping for continued strong results later this week when we get lending data, house price index, and a reading on the manufacturing sector.

Japan

In another endorsement of the aggressive monetary policies put in place by the Government and Bank of Japan, inflation data on Friday came in close to a five year high. The core reading of 0.7% was also the fourth consecutive monthly increase. There is plenty more data to come this week including household spending, retail sales, industrial production and the BOJ monetary policy statement. There has been some political posturing between Japan and China over the last few days with regard to territorial boundaries. Kyodo news reported that Japan scrambled jets for the third consecutive day in response to Chinese military aircraft flying near the Okinawa island chain. Any escalation in the posturing could start to worry the markets, but for now the impact has been muted.

Canada

The Canadian dollar struggled last week on the back of a softer economic outlook from the Bank of Canada (BOC) at their monetary policy meeting. Most economists are still predicting modest growth over the next few years but the BOC seems to be stepping away from the outlook for a rate hike late next year. We could get more insight from Governor Poloz on Wednesday when he set to speak, and at the end of the week we get GDP data.

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