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Two materially better-than-expected pieces of economic news in the US, with both GDP and employment numbers reversing the recent softer trends

Posted in Currencies

By Ian Dobbs*:

Last week proved to be a very interesting one in the wider financial markets.

Three major pieces of news provided the lead for some periods of wild price action, especially into the later end of the week.

The European Central Bank (ECB) aggressively cut their “refi” rate by .25% to .25%, which is the first cut since May 3rd.

Whilst not out of the blue, the move follows a very recent of a change in sentiment in the interest rate market in Europe as inflation numbers came in lower than expected.

Adding to the mix were two materially better than expected pieces of economic news in the US. Both the GDP and employment numbers reversed the recent softer trends. The implications of which affect all markets with the prospect of initial tapering of the Quantitative Easing (QE) apparently re-emerging as a prospect for the December Fed monetary policy meeting.

Australasian markets were not without their interest either. Australian news was mixed, with strong retail sales data coupling with soft employment news and a relatively neutral stance from the RBA at their monetary policy statement.

In New Zealand the pressure builds on the RBNZ with materially better than expected employment numbers further boosting sentiment.

Major Announcements last week:

·  Australian Retail Sales +.8% vs +.5% expected

·  UK Construction PMI 59.4 vs 58.9 expected

·  RBA leaves monetary policy unchanged as expected

·  UK Services PMI 62.5 vs 60.4 expected

·  US Non-Manufacturing ISM 55.4 vs 54.2 expected

·  NZ Employment change +1.2% vs +.5% expected

·  Canadian Ivey PMI 62.8 vs 54.7 expected

·  Australian Employment change 1.1k vs 10.3k expected

·  BOE leaves monetary policy unchanged as expected

·  ECB cuts “refi” rate by 25pts to .25% unexpectedly

·  US Advanced GDP 2.8% vs 2.0% expected

·  Canadian Employment growth 13.2k vs 12.7k expected

·  US employment growth 204k vs 121k expected

·  Chinese Inflation 3.2% vs 3.3% expected

·  Chinese Industrial Production 10.3% vs 10.1% expected

NZD/USD

After gaining in the early stages of last week the New Zealand dollar could not sustain levels above 0.8400 and started to drift lower. Soft Australian employment data weight on the NZD a touch and a solid US GDP figure on Thursday saw further downside. On Friday night the US employment report also surprised on the strong side and the NZD plummeted to 0.8226 in the aftermath. We saw a small recovery yesterday but overnight sellers emerged to test the lows again. There is a fair amount of support between 0.8200 and 0.8220 which has so far contained the downside and I expect the pair to do some more work around this level. Any sustained break below there would be a negative signal and the NZD would likely move quickly to test 0.8100. This week we hear from Bernanke and incoming Fed Chairman Janet Yellen as well as having trade balance data to digest. From NZ we have the RBNZ financial stability report on Wednesday and retails sales on Thursday.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.8234 0.8200 0.8400 0.8226 - 0.8414

NZD/AUD (AUD/NZD)

Last week’s better than expected NZ employment data combined with the much poorer Australian result to see this pair rally up towards 0.8840 (down towards 1.1312). That level however has so far capped the NZD topside on a number of occasions in the last few days. Dips have been limited to around 0.8785 ( rallies to 1.1383), and it will take a break of either of those two levels to give a clearer picture on near term direction. Any break above 0.8840 (below 1.1312) will likely see a test of recent highs around 0.8916 (lows around 1.1216). Selling into that strength would be recommended as that level provides strong resistance and should continue to limit topside gains in the medium term. A break below 0.8785 (above 1.1383) would likely encourage further weakness toward 0.8700 (1.1494) initially. From NZ this week we have the RBNZ financial stability report on Wednesday and retails sales on Thursday. While from Australia there is consumer sentiment, wage price index, and inflation expectations to draw focus.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8820 0.8640 0.8840 0.8701 - 0.8839
AUD / NZD 1.1338 1.1312 1.1574 1.1303 - 1.1493

NZD/GBP (GBP/NZD)

After making gains in the first part of last week the NZD came under pressure on Thursday and Friday on the back of good US data. In the wake of much better than expected US GDP and employment numbers the New Zealand dollar lost substantially more ground than the UK Pound. This saw the cross fall from 0.5220 to a low of 0.5141 (rally from 1.9157 to 1.9451). So far we have seen a small recovery off those NZD lows and the risk remains for further downside towards support around 0.5120 (resistance 1.9531). That level will likely provide good value buying of NZD against the GBP over the course of the week. This week will be another interesting one for the UK with inflation, employment, and retail sales all set for release. We also get the Bank of England’s inflation report and a speech from Governor Carney to digest. From NZ we have the RBNZ financial stability report on Wednesday and retails sales on Thursday.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5155 0.5060 0.5260 0.5141 - 0.5230
GBP / NZD 1.9399 1.9011 1.9763 1.9120 - 1.9451

 NZD/CAD

This pair made dramatic gains in the early part of last week helped by good employment data out of NZ. The cross made a high of 0.8783, before the Canadian dollar found support from a much better than expected Ivey PMI index. This was the turning point for the pair and since that release we have seen further losses aided by strong GDP and employment data from the US. Both those results helped to support the Canadian dollar as did its own employment data that also hit the wires on Friday night. This week from NZ we have the RBNZ financial stability report on Wednesday and retails sales on Thursday. While a Canadian holiday today means we have a very quiet week data wise with only the trade balance and manufacturing sales out towards the end of the week.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8628 0.8500 0.8700 0.8617 - 0.8783

NZD/EURO (EURO/NZD)

This pair spiked up to highs of 0.6281 (lows of 1.5921) in the immediate aftermath of the ECB decision to cut rates late last week. But soon after that release we had strong US GDP figures and the NZD substantially underperformed the EUR as a wave of USD buying swept the market. A similar thing happened on Friday evening after more strong US data was released. The US payrolls number caused further buying of USD’s across the board and the NZD again underperformed the EUR. This has resulted in the cross trading below the level it was before the ECB cut rates. There is some support around 0.6140 (resistance 1.6287) and then again at 0.6100 (1.6393) and these two levels should contain any further downside action in the near term. This week we get GDP readings from France, Germany, and Italy, along with Euro-zone industrial production and a second reading of inflation. From NZ we have the RBNZ financial stability report on Wednesday and retails sales on Thursday.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6148 0.6000 0.6200 0.6116 - 0.6281
EUR / NZD 1.6265 1.6129 1.6667 1.5921 - 1.6351

 NZD/YEN

This pair put in a dramatic fall in the wake of the stronger than expected US GDP figures last Thursday. Massive Yen buying combined with selling of New Zealand dollars to see a low of 81.24 trade. The pair has been a little more subdued since then and maintained a tighter range even after Friday night’s US employment data that also surprised to on the strong side. There is support around 81.20 while resistance comes in on the topside towards 83.00. This week from NZ we have the RBNZ financial stability report on Wednesday and retails sales on Thursday. While from Japan we get consumer confidence, core machinery orders, and GDP data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.92 80.00 82.00 81.24 - 83.04

AUD/USD

The Australian dollar struggled in the second half of last week undermined by poor local employment figures and surprisingly upbeat data from the US. Much better than expected US GDP on Thursday was backed up by strong employment data on Friday and this saw the US dollar make good gains across the board. The AUD fell to a low of 0.9353 initially and the resulting bounce lacked any real purpose. As a result the downside was tested again last night and then again today a fresh low of 0.9335 was made. The risks are still skewed to the downside with a test of support around 0.9300 likely over the coming days. The pair may do some work around that level however, and the reaction there will be key for the near term outlook. This week we hear from Bernanke and incoming Fed Chairman Janet Yellen as well as having trade balance data to digest. From Australia we have consumer sentiment, wage price index, and inflation expectations to draw focus.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9337 0.9300 0.9500 0.9335 - 0.9543

AUD/GBP (GBP/AUD)                            

The Australian dollar has continued to lose ground to the UK Pound of the course of the last week. Soft Australian employment data last Thursday didn’t help and neither did much better than expected results from US GDP and payrolls data. In the wake of both those releases the AUD underperformed the GBP. From the UK the data has continued to be very supportive of the economic recovery and that should be further underline this week when we get UK inflation, employment, and retail sales. We also have the Bank of England’s inflation report and a speech from Governor Carney to digest. From Australia we have consumer sentiment, wage price index, and inflation expectations to draw focus. The risks for the pair remain to the downside and a test of support around 0.5820 (resistance around 1.7182) could well be seen over the coming days.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5844 0.5820 0.6020 0.5846 - 0.5964
GBP / AUD 1.7112 1.6611 1.7182 1.6767 - 1.7006

AUD/EURO (EURO/AUD)

This pair spiked up to highs of 0.7115 (lows of 1.4055) in the immediate aftermath of the ECB decision to cut rates late last week. But soon after that release we had strong US GDP figures and the AUD substantially underperformed the EUR as a wave of USD buying swept the market. A similar thing happened on Friday evening after more strong US data was released. The US payrolls number caused further buying of USD’s across the board and the AUD again underperformed the EUR. This has resulted in the cross trading below the level it was before the ECB cut rates. Key downside support comes in around 0.6900, but it would take a fair bit more AUD weakness to test that. This week we get GDP readings from France, Germany, and Italy, along with Euro-zone industrial production and a second reading of inflation.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6970 0.6870 0.7070 0.7005 - 0.7115
EUR / AUD 1.4347 1.4144 1.4556 1.4055 - 1.4276

AUD/YEN

This pair spiked up to highs of 0.7115 (lows of 1.4055) in the immediate aftermath of the ECB decision to cut rates late last week. But soon after that release we had strong US GDP figures and the AUD substantially underperformed the EUR as a wave of USD buying swept the market. A similar thing happened on Friday evening after more strong US data was released. The US payrolls number caused further buying of USD’s across the board and the AUD again underperformed the EUR. This has resulted in the cross trading below the level it was before the ECB cut rates. Key downside support comes in around 0.6900, but it would take a fair bit more AUD weakness to test that. This week we get GDP readings from France, Germany, and Italy, along with Euro-zone industrial production and a second reading of inflation.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 92.85 92.50 94.50 92.35 - 94.16

AUD/CAD

AUD gains in the early part of last week for this pair were quickly reversed on the back of soft Australian employment data. The downside price action continued as US GDP surprised on the strong side and then again on Friday night employment numbers from both Canada and the US hit the wires. The Canadian result was less spectacular than that of the US, but positive US data will always underwrite the CAD to a degree and that was certainly the outcome late last week. The risks are all still skewed to the downside with the pair now trading back below 0.9800. From Australia this week we have consumer sentiment, wage price index, and inflation expectations set for release. While a Canadian holiday today means we have a very quiet week data wise with only the trade balance and manufacturing sales out towards the end of the week.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9780 0.9750 0.9950 0.9778 - 0.9966

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Market commentary:

Last week proved to be a very interesting one in the wider financial markets. Three major pieces of news provided the lead for some periods of wild price action, especially into the later end of the week. The European Central Bank (ECB) aggressively cut their “refi” rate by .25% to .25%, which is the first cut since May 3rd. Whilst not out of the blue, the move follows a very recent of a change in sentiment in the interest rate market in Europe as inflation numbers came in lower than expected. Adding to the mix were two materially better than expected pieces of economic news in the US. Both the GDP and employment numbers reversed the recent softer trends. The implications of which affect all markets with the prospect of initial tapering of the Quantitative Easing (QE) apparently re-emerging as a prospect for the December Fed monetary policy meeting. Australasian markets were not without their interest either. Australian news was mixed, with strong retail sales data coupling with soft employment news and a relatively neutral stance from the RBA at their monetary policy statement. In New Zealand the pressure builds on the RBNZ with materially better than expected employment numbers further boosting sentiment.

Australia

The Australian dollar was weighed on last week by the very average employment data that showed a big fall in full-time work and a big increase in part-time employment. But this negative influence has been countered somewhat by consistently better than expected data coming out of China. The RBA have said that effects of previous rate cuts are still flowing into the economy and that was underlined yesterday by home loans data that showed a bigger than expected jump of +4.4%. In the last hour we have also seen business confidence figures that showed a substantial decrease from last month. This is helping to keep the AUD on the back foot. The rest of the week sees consumer sentiment, wage price index, and inflation expectations set for release.

New Zealand

There have been no market impacting releases since last week’s better than expected employment result. We did get credit card spending figures that came in a touch better than expected at +1.4% but there was little interest from the market in the result. Finance minister Bill English was on the wires reaffirming that the NZ budget is on track for a surplus in 2014-15. Tomorrow we hear from the RBNZ when they release their financial stability report. That is followed up on Thursday by retail sales data which will be closely watched.

United States

After Thursday’s surprisingly strong US GDP result all eyes turned to Friday’s release of employment data. The last few months have seen only average results for employment, with most releases coming in a touch under expectation. As a result the market wasn’t getting too carried away with forecasts for this month’s release, expecting an increase of around 120k. The actual figure however, was a surprisingly healthy increase of 204k. This makes it the second strongest reading since early 2012, and coming on the back of the GDP figure it helped to spur increased demand for US dollars. The report did show the unemployment rate ticked up from 7.2% to 7.3% but this was a direct result of the Government shutdown. The furloughed workers were able to apply for unemployment benefits during those two weeks off work, and so the unemployment rate should correct lower next month. The result has also increased chatter about a potential Fed tapering in December, although this is still only a remote possibility. A US holiday yesterday means it has been a quiet start to the week but over the coming days we have trade balance data, a speech from Bernanke, and we will also hear from incoming Fed Chairman Janet Yellen when she testifies on monetary policy before the senate banking committee.

Europe

Last week was dominated by the European Central Bank’s (ECB) decision to cut rates. The risk was always there after very soft inflation the week before. However, many in the market were only expecting a signal from President Draghi that a cut would follow in the December meeting, so the decision came as a bit of a surprise. Over the weekend we have seen comments from an ECB board member who said they can still cut interest rates further if needed and provide more liquidity to the Euro-zone banking system should it be required. The markets suspect any further action will likely take the form of adding liquidity with another LTRO (long term refinancing operation). A recent survey of economists showed 70% expect a new three year LTRO in the first quarter of 2014. Pressure on the Euro was kept up over the weekend after Standard and Poor’s rating agency downgraded France’s long term rating from AA+ to AA. S&P said the rating is constrained by the governments elevated spending and tax levels, and it’s high and still rising debt burden. This week we get GDP readings from France, Germany, and Italy, along with Euro-zone industrial production and a second reading of inflation.

United Kingdom

Last week was a good one for UK data with only the trade balance missing expectations when it was released on Friday evening. Earlier in the week we has good readings from both the construction and services PMI’s, as well as solid results from industrial and manufacturing production data. At this point it seems the only negative for the UK economy is that its fortunes are so closely tied to those of Europe. There is however, growing concern that lessons from the past have not been learnt, and that the UK housing market could once again be a cause for concern. Prime Minister David Cameron is having to defend accusations that the governments ‘help to buy’ scheme is only helping to inflate another property bubble. The PM says it’s all about helping hard working people get on the first rung of the property ladder, but last month alone 2000 new mortgages were issued under the scheme. This week will be another interesting one for the UK with inflation, employment, and retail sales all set for release. We also get the Bank of England’s (BOE’s) inflation report and a speech from Governor Carney to digest.

Japan

The only data out of Japan recently has been the current account figures released yesterday. That result highlighted the structural issues a weaker Yen and massive energy imports are causing. The seasonally adjusted result of -1.3 trillion represents a near record low for data stretching back to 1996. In the last hour we have seen the release of the tertiary industry activity index which came in below expectations at -0.2%. This is considered a lead indicator of economic health and the negative result has weighed on the Yen somewhat. Later this week we get consumer confidence, core machinery orders, and GDP data to digest.

Canada

Data out of Canada last week will have done nothing to influence the Central Banks neutral stance. The highlight was the Ivey PMI (a leading indicator of economic health) which came in well above expectation, however building consents were negative and employment data of Friday was largely uninspiring. Employment rose by 13,200 in October which was just a touch above expectation, but overall a very modest result. The unemployment rate remained the same as last month at 6.9% which is the lowest level since 2008. A Canadian holiday today means we have a very quiet week data wise with only the trade balance and manufacturing sales out towards the end of the week.

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

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