Expect more volatility due to the Fed’s inability to communicate effectively

By Ian Dobbs*:

The global markets continue to be dominated by expectations around the timing of a potential Fed tapering. This was highlighted last week after the release of the Fed minutes seemed to suggest that if the data warrants it, they would start to taper in the coming months.

Interest rates moved higher and the USD made gains across the board on the back of this, completely reversing losses seen the previous week after Janet Yellen's testimony.

We can expect more of these broad swings over the coming months which have been exaggerated by the Fed’s lack of ability to communicate a consistent tone.

Exiting the extraordinary policy of quantitative easing was never going to be easy for the Fed, but they seem determined to make the timing of such a move as unpredictable as possible.

All markets will continue to see increasingly wild moves until there is a lot more clarity on the issue.

Major Announcements last week:

·  US Inflation 1.0% as expected

·  US Retail Sales +.4% vs +.1% expected

·  Chinese HSBC Manufacturing Index 50.4 vs 50.9 expected

·  BOJ leaves monetary policy unchanged as expected

·  Canadian Inflation +.7% vs +.9% expected

·  Canadian Retail Sales +1.0% vs +.3% expected

NZD/USD

The New Zealand dollar came under all sorts of pressure from the USD in the second half of last week. The move was triggered in large part by the Fed minutes which seemed to increase the risk of tapering in the coming months. A very weak Australian dollar also weighed heavily on the NZD and the currency made a low of 0.8125 heading into the weekend. We have seen a recovery of sorts in the early stages of this week with the NZD currently testing minor resistance around 0.8240. A break above here would likely see a move back up towards 0.8300, where I suspect there will be plenty of sellers lurking. This week from NZ we have trade balance data, business confidence, and building consents to draw focus. While from the US we get building permits, consumer confidence, and durable goods orders.

NZD/AUD (AUD/NZD)

Last week was an interesting one for this pair as key topside resistance at 0.8920 (support at 1.1211)  finally gave way. The driver for the move was weakness in the Australian dollar with a number of factors combining to see the AUD one of the worst performers on the week. With that key resistance level now out of the way the pair is now targeting the psychological level of 0.9000 (support 1.1111). We have come close to there in the last 24 hours and can expect further attempts toward there in the coming days. This level should however prove tough to overcome in the very near term. This week from NZ we have trade balance data, business confidence, and building consents to draw focus. While from Australia we only have private capital expenditure figures on Thursday.

NZD/GBP (GBP/NZD)

This pair spent the better part of a month trading around 0.5150 (1.9417) with little overall direction. However, the release of the Fed minutes last week was the trigger the pair needed for a move toward key support around 0.5000 (resistance around 2.0000). The New Zealand dollar underperformed the UK Pound as the market re-priced the risk of Fed tapering in the coming months. This saw the cross trade to a low of 0.5021 (high of 1.9916) heading into the weekend. We have seen a decent NZD bounce from there in the early stages of this week with the pair now testing minor resistance at 0.5100 (support at 1.9608) . It seems likely however that we will spend some more time in the lower part of the broader 0.5000 - 0.5250 (2.0000 - 1.9048) range that has dominated trading for much of the past six months now. Buying anywhere below 0.5050 (1.9802) should continue to provide good value over the medium term as that broad range looks likely to remain in play for now. This week from NZ we have trade balance data, business confidence, and building consents to draw focus. From the UK we have BOE officials testifying tonight in front of a parliamentary committee, then later in the week we get the second estimate of GDP, the BOE financial stability report, and speech from BOE Governor Carney.

 NZD/CAD

Last week saw some volatile price action as the New Zealand dollar underperformed the Canadian dollar for much of the week. This was in large part a result of the Fed minutes which saw the market re-price the risk of tapering in the coming months. The pair made a low of 0.8561 heading into the weekend, but has put in a decent bounce in the early stages of this week. So far that bounce has been capped by minor resistance at 0.8680 and this keeps the risks skewed to the downside. This week from NZ we have trade balance data, business confidence, and building consents to draw focus. While from Canada later this week we have current account and GDP data to digest.

NZD/EURO (EURO/NZD)

Last week saw the Euro outperform the New Zealand dollar in the wake of the Fed minutes. This caused the cross to fall from just below 0.6200 (1.6129) all the way to 0.6012 (1.6633) heading into the weekend. Continued talk of the potential for move to negative interest rates by the ECB isn’t helping the EUR, but weakness in the NZD was the overriding factor in the fall of the last five days. We have seen decent recovery so far with the pair bouncing back toward 0.6100 (falling to support 1.6393), but further gains from here should prove tougher going. Over all we can expect continued ranging trading between 0.6000 and 0.6200 (1.6667 and 1.6129) for the rest of this week. This week from NZ we have trade balance data, business confidence, and building consents to draw focus. While from Europe there is a raft of second tier data set for release.

 NZD/YEN

The past week has seen some volatile trading for this pair. The lows of 82.16 traded last week with the New Zealand dollar underperforming the Yen as the markets re-priced the risk of Fed tapering in the coming months. But recent price action has seen the Yen play catch up to weakness in the NZD, and the result is we now trade around similar level to where we began last week.  This recent Yen weakness comes on the back of the US - Iran nuclear deal which has reduced demand for the Yen as a safe haven currency. The pair looks set to test resistance toward 84.00 in near term and reaction there will be key. A sustained break above there would open the way for a test of 84.90 ahead of the April 2013 highs of 86.41. This week from NZ we have trade balance data, business confidence, and building consents to draw focus.

AUD/USD

The Australian dollar was one of the worst performers last week in the wake of the resurgent US dollar. The Fed minutes started the ball rolling but the knocks kept on coming for the AUD with comments from the IMF and then RBA governor Stevens both having an impact. There was little respite for the currency in the early stages of this week as a low of 0.9121 was set. We have seen something of a recovery since then with the pair now trading just below 0.9200. This corrective bounce could extend all the way toward 0.9270 before running into key resistance which should cap the topside. The only domestic data of note from Australia this week is private capital expenditure figures on Thursday. While from the US we get building permits, consumer confidence, and durable goods orders to draw focus.

AUD/GBP (GBP/AUD)                            

Weakness in the Australian dollar was the key factor in this pair breaking to fresh cycle lows late last week. The AUD was weighed on by the Fed minutes, an IMF report, and comments from RBA governor Stevens which all combined to see it lose substantial ground. The pair barely paused as it broke below the previous low of 0.5720 (high of 1.7483). The AUD pressure continued in the early stages of this week with the cross trading down to 0.5626 (up to 1.7775). We have seen a small recovery from that AUD low, but the damage has been done and once this corrective bounce runs out of steam expect sellers to re-emerge and force another test lower. The only domestic data of note from Australia this week is private capital expenditure figures on Thursday. From the UK we have BOE officials testifying tonight in front of a parliamentary committee, then later in the week we get the second estimate of GDP, the BOE financial stability report, and speech from BOE Governor Carney.

AUD/EURO (EURO/AUD)

The Australian dollar dramatically underperformed the Euro last week and a number of factors weighed on the local currency. The release of the Fed minutes kicked off the weakness which was compounded by an IMF report and comments from RBA governor Stevens. The AUDEUR pair saw sharp losses down through support at 0.6870 (resistance at 1.4556) trading to a low of 0.6737 (high of 1.4843) yesterday. We have seen a small corrective bounce, but the AUD downside remains the risk. The 0.6870 (1.4556) level should now cap any potential near term AUD strength and we can expect further tests of recent lows over the coming week. The only domestic data of note from Australia this week is private capital expenditure figures on Thursday. While from Europe there is a raft of second tier data set for release.

AUD/YEN

The Australian dollar dramatically underperformed against the Yen last week in the wake of the Fed minutes. These minutes saw the market re-price the risk of tapering by the Fed in the coming months and this set the AUD on a downward path. The relative weakness was aided by an IMF report and comments from RBA Governor Stevens. This saw the pair trade to a low of 92.55 heading into the weekend. We have seen a recovery off those lows however, in the early stages of this week thanks to news of the US - Iran nuclear deal reached over the weekend. That deal has diminished the attractiveness of the Yen as a safe haven currency and seen it weaken across the board. Expect continued volatile trade in the coming days with overall direction unclear at this point. 92.50 to 94.50 looks like a likely range in the coming week.

AUD/CAD

The Australian dollar was under pressure on most crosses last week and this was dramatically represented by its fall against the CAD. From highs of 0.9873, the pair headed south to trade at 0.9638 early yesterday. There has been little in the way of a significant bounce and this leaves the risks skewed to the downside. Any potential recovery should run into resistance around 0.9730 and I would expect this to cap the topside this week. The only domestic data of note from Australia this week is private capital expenditure figures on Thursday. While from Canada later this week we have current account and GDP data to digest.

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Market commentary:

The global markets continue to be dominated by expectations around the timing of a potential Fed tapering. This was highlighted last week after the release of the Fed minutes seemed to suggest that if the data warrants it, they would start to taper in the coming months. Interest rates moved higher and the USD made gains across the board on the back of this, completely reversing losses seen the previous week after Janet Yellen's testimony. We can expect more of these broad swings over the coming months which have been exaggerated by the Fed’s lack of ability to communicate a consistent tone. Exiting the extraordinary policy of quantitative easing was never going to be easy for the Fed, but they seem determined to make the timing of such a move as unpredictable as possible. All markets will continue to see increasingly wild moves until there is a lot more clarity on the issue.

Australia

The past week has been a tough one for the Australian dollar. There has been little in the way of key economic data released, but that hasn’t stopped the currency putting in one of its worst performances for months. A number of offshore factors have combined over the past week to put the AUD on the back foot. An increased risk of tapering by the US Fed in the coming months, weaker Chinese manufacturing data, a negative IMF report, and talk of intervention by RBA Governor Stevens, have all heaped pressure on the currency. The declining value of the AUD is good news for the economy as tries to transition away from the mining led growth which helped it weather the last five years in relatively good shape. Offshore factors will continue to dominate this week with the only domestic data of note being private capital expenditure data on Thursday.

New Zealand

There has been very little in the way of meaningful economic data out of New Zealand since last week’s stronger than expected Producer Price Index. That data could do little to stop a slide in the NZD against the USD, as the market priced in an increased risk of the Fed tapering quantitative easing purchases in the coming months. A much weaker AUD also helped drag the NZD lower on most crosses. The exception was against the AUD itself, which saw the NZD break to fresh cycle highs on that pairing. This week we have trade balance data, business confidence, and building consents to draw focus.

United States

Last week was dominated by the Fed minutes and the apparent increase in risk around an earlier than expected tapering of asset purchases. Although most still expect this won’t start until around March next year, the minutes suggested that economic data could warrant trimming the pace of purchases in the coming months. This view completely contrasted with the markets take on testimony from incoming Fed Chairman Janet Yellen the previous week, who seemed to support on-going ultra-easy monetary policy. Late last week we also saw a decent fall in weekly unemployment claims, although this was tempered by a softer reading on manufacturing from the Philadelphia region. The latter is considered a leading indicator for the national figure which is due to be released next week. Last night we got data on pending home sales that hit a ten month low, adding to signs of cooling in the housing market. Still to come this week we have building permits, consumer confidence, and durable goods orders which will all be closely watched.

Europe

Recent data from Germany has shown continued improvement which is in stark contrast to the majority of other nations in the region. Last week we got readings on German manufacturing, services, and business climate, which all showed gains. The same could not be said for French data, or the broader Eurozone consumer confidence figures which all declined on the previous month. This disconnect between Germany and the rest of Europe is at the core of struggles within the ECB on further action. Germany flat out won’t allow outright quantitative easing, however it’s looking more and more like the region needs to take drastic measures. At this point the most likely action would be a move to negative interest rates and we have had a number of ECB officials over the past few days suggesting that is on the table. Any such move would not be likely in the very near term however, and would probably play out in the first quarter of 2014. There is a raft of second tier data out this week which will likely continue to highlight the growing disparity between Germany and everyone else.

United Kingdom

There little in the way or market moving data from the United Kingdom over the last few days. Late last week we got figures on public sector net borrowing which showed the on-going recovery is having a positive effect on government finances. Although the drop in borrowing wasn’t as big as had been expected, it is certainly heading in the right direction and should continue to improve as the economy gains strength. Tonight we get testimony from Bank of England (BOE) officials on the inflation and economic outlook in front of a parliamentary committee. Then later in the week we get the second estimate of GDP, the BOE financial stability report, and another speech from BOE Governor Carney.

Japan

There has been little to influence the economic outlook for Japan since the central bank’s Monetary Policy Statement on Thursday last week. In that release Governor Kuroda was generally upbeat about the outlook, noting a pickup in investment by businesses, resilient private consumption, and inflation expectations that appear to be rising. He did however leave the door open for further action if the economy stopped moving in line with projections. Key releases this week come in the form of retail sales, household spending, and inflation data.

Canada

A mixed bag of data at the end of last week did little to influence the outlook for the Canadian economy. Retail sales rose more than expected, printing at +1.0%, but taking out autos, the core number was flat which was a touch worse than forecast. Core inflation data however, came in a touch better than expected at +0.2%. The Canadian Dollar has struggled in the wake of the agreement reached between the US and Iran. That caused oil prices to fall and this has weighed on the CAD do a degree. Later this week we get current account and GDP data to digest.

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