The focus on central banks remains the primary driver of sentiment

By Ian Dobbs*:

The last week in the financial markets has been marked by somewhat incoherent themes.

Some materially better than expected global economic news has been mixed with a number of softer releases.

Last week saw significant increases in demand for both the Great British Pound (GBP) and the Euro, while curiously the Australian and New Zealand dollars were matched in their weakness by the Japanese YEN.

The start of this week has seen further strength in economic news around the globe, most notably in manufacturing numbers from the major economies.

The focus on central banks remains the primary driver of sentiment, with stock markets looking vulnerable following the strong US data.

The US Federal Reserve (Fed) now hold one third of all US government debt thanks to their quantitative easing initiatives. The proposition of the Fed reducing these holdings, or even slowing their accumulation, will have far reaching implications throughout the upcoming year.

Major Announcements last week:

·  US Consumer Confidence 70.4 vs 72.9 expected

·  UK GDP 1.5% as expected

·  US Durable Goods Sales -2.0% vs -1.9% expected

·  Japanese Inflation +1.1% as previous

·  European Inflation 1.0% vs .9% expected

·  NZ ANZ Business Confidence Index 60.5% vs 53.2% previous

·  Australian Private CAPEX +3.6% vs +1.6% expected

·  Canadian GDP 2.7% vs 2.5% expected

·  Chinese HSBC Manufacturing 50.8 vs 50.5 expected

·  NZ Terms of Trade +7.5% vs 3.1% expected

·  UK Manufacturing 58.4 vs 56.0 expected

·  US Manufacturing 57.3 vs 55.0 expected

NZD/USD

Recent data out of New Zealand has been overwhelmingly positive, however its impact on this pair has been outweighed by the broader trend of a strengthening USD. For much of last week the NZD lost ground trading to a low of 0.8088 before recovering a touch heading into the weekend. That recovery accelerated early on Monday helped by improving Chinese manufacturing data released over the weekend, and then further by the very strong NZ terms of trade data out yesterday. The NZD is now trading around 0.8200, but direction from here will once again be driven by news flow from offshore. With little domestic data for the rest of this week the market will be focusing on a number of key US releases. We have the trade balance, non-manufacturing ISM, and GDP all set for release ahead of the all-important employment report on Friday. The key level to watch is still the support area around 0.8100. The bounce from there in the last two days is a positive sign, but if the pair fails to kick on up through 0.8200 we could easily turn back down and test it again. A move below 0.8100 would open the way for much broader losses.

NZD/AUD (AUD/NZD)

Recent price action in this pair has been very NZD positive and supports the view for further NZD gains. Late last week the NZD pulled back from recent highs and tested support around 0.8920 (resistance around 1.1211). Over the previous couple of months this level had provided strong NZD resistance (AUD support), but once the pair broke above there a couple of weeks ago the level then reverted to strong support. This support held well heading into the weekend, and since then we have seen a NZD bounce that has taken the pair to fresh cycle highs (AUDNZD cycle lows). This is very positive price action and was helped by very good terms of trade data out of NZ yesterday, along with some soft Australian manufacturing figures. There is very little out of NZ this week to influence the pair, however from Australia there will be plenty to digest. Retail sales, the RBA rate statement, and GDP could all impact and will be closely watched. The risks at this point however, continue to be skewed to further NZ dollar outperformance.

NZD/GBP (GBP/NZD)

Last week was a big one for this pair with price action suggesting the cross is breaking into a new lower trading range. Support around 0.5000 (resistance 2.0000) had contained the pair for much of the past six months, but this well and truly gave way late last week as cross traded to a low of 0.4941 (high of 2.0239).  Since then we have seen a NZD recovery helped yesterday by very good terms of trade data out of New Zealand, and the pair now trades back above 0.5000 (below 2.0000). We could easily see further NZD upside to around 0.5050 (1.9802) in the short term, but looking further out, the risks are skewed to the downside. The next key support is 0.4750 (2.1053) and I would not be surprised to see a 0.4750 - 0.5000 (2.0000 - 2.1053) range dominate trade over the coming months. With little in the way of economic data from NZ this week the focus will turn to the UK. From there we get readings on the construction and service sectors, along with the BOE rate decision and statement on Thursday.

 NZD/CAD

This pair has continued to trade in its increasingly familiar range over the last week. The NZ dollar saw periods of strong pressure last week , but managed to bounce from the support around the .8560 level. The increased NZD supply was a little surprising given the buoyant domestic numbers of late. The pressure was reversed over the weekend as stronger than expected Chinese manufacturing numbers renewed demand for the NZD. Yesterday, this momentum was added to by the materially better than expected NZ terms of trade for the 3rd quarter. For the remainder of the week the focus entirely comes from the Canadian input. The BOC monetary policy announcement on Wednesday will be unchanged as wholly expected, but the statement will be closely watched none the less. Thursday sees the latest building and PMI numbers come ahead of the all-important employment numbers on Friday. Expect the pair to be contained by the recent .8560 - .8760 range.

NZD/EURO (EURO/NZD)

For much of last week the New Zealand dollar lost ground to the Euro, as broader market moves saw the NZD under some pressure. This relative weakness came despite solid data from NZ and continued lacklustre results from Europe. The pair did eventually find support on Friday around 0.5940 (resistance 1.6835) and a small recover ensued. The turnaround was triggered by poor readings from German retail sales and French consumer spending, that both helped to put the Euro under some pressure. Over the weekend we had some improving Chinese manufacturing data and this helped to support the NZD early on Monday. We then got very good number for NZ terms of trade and the upside price action continued. The NZDEUR has now recovered to 0.6050 (1.6529) and we could easily see a move toward 0.6100 (1.6393) . However, resistance around there will likely cap any further NZ dollar strength for now. With little in the way of NZ domestic data out over the coming days, the focus will turn to the ECB rate decision and statement on Thursday. Ahead of that we have the European service sector PMI and retail sales data to digest.

 NZD/YEN

For much of last week both the NZD and the JPY were coming under pressure against the USD, and this resulted in the cross trading sideways in a choppy range. That all changed in the early stages of this week however, as the New Zealand dollar managed a broad recovery helped by very strong terms of trade data yesterday. The Japanese Yen however has remained under pressure and as a result this pair broke up through resistance around 84.00. A pull back toward 83.50 cannot be ruled out but it wouldn’t change the broader picture which is now overwhelmingly positive. A test of the April 2011 high at 86.41 could well be on the cards over the coming weeks.  Data wise from Japan this week we have  average cash earnings and leading indicators to draw focus, along with a couple of speeches from Governor Kuroda. From NZ there are no key releases.

AUD/USD

The Australian dollar remained under pressure last week against the USD, although the losses were a lot less dramatic than the previous week. After trading to a recent low of 0.9057 the AUD recovered a touch heading into the weekend. That recovery was aided further by better than expected Chinese manufacturing data released over the weekend. The AUD traded up to 0.9168 yesterday, before some very average domestic manufacturing data saw the currency turn back down. Key for near term direction will be the RBA rate review and statement out later today. No change in rates is expected, so it will come down to what tone the RBA project in their statement and how much they try to ‘talk’ the AUD down. Risks for the pair are skewed to the downside and a move below 0.9050 would open the way for a test towards 0.8850.

AUD/GBP (GBP/AUD)                            

With continued strong data coming out of the UK, and Australian domestic releases being patchy at best, this pair has lost a lot of ground over the last two weeks. An improvement in Chinese manufacturing data over the weekend has helped the pair stabilize, but there has been little in the way of a meaningful AUD bounce. The two economies are on diverging paths as the UK recovery continues to gain strength and Australia struggles to transition away from mining investment to other drivers of growth. As a result this pair made fresh AUD cycle lows last week at 0.5536 (highs at 1.8064) and has only managed a small recovery. Key topside resistance comes in around 0.5730 (support around 1.7452), but I would be surprised to see that troubled with all the risks still skewed to the downside. There will be plenty to digest this week starting with the RBA rate statement this afternoon. The UK also has their rate decision on Thursday along with readings on the construction and service sectors of the economy.

AUD/EURO (EURO/AUD)

Relative weakness in the Australian dollar has seen this pair lose a lot of ground over the past couple of weeks. European data has also left a lot to be desired, but this didn’t stop the cross trading to a low of 0.6652 (high 1.5033) on Friday. We have seen a small AUD bounce since then, thanks in part to poor data on German retail sales and French consumer spending which put the Euro under some pressure. Good Chinese manufacturing data over the weekend helped to support the AUD early on Monday, but the currency gave back some ground after local manufacturing data surprised to the downside. Near term direction will be dictated by the RBA rate statement out later today. We can expect no change in rates, and the RBA will likely signal that they still see the currency as being overvalued. This will be followed by GDP data on Wednesday and trade balance figures on Thursday. From Europe we have service sector PMI and retail sales data to digest ahead of the ECB rate decision on Thursday evening.

AUD/YEN

Both the Australian dollar and the Japanese Yen have been on the back foot lately coming under pressure across the board. But over the last few days the AUD has started to outperform the Yen, and this has seen the pair trade up towards 94.00. This relative outperformance was helped by improving Chinese manufacturing data over the weekend which supported the AUD to a degree. Key for the pair will be the RBA rate statement later today and this will likely dictate near term direction. Data wise from Japan this week, we have average cash earnings and leading indicators to draw focus, along with a couple of speeches from Governor Kuroda.

AUD/CAD

This pair was pushed to eight week lows last week, as the AUD succumbed to further broad based weakness. The partial recovery came after the improved Australian capital expenditure numbers, and again was boosted further by the better than expected Chinese Manufacturing numbers over the weekend. The direction in the near term will come from the respective monetary policy statements due this week. Later on today it is the turn of the RBA ahead of the BOC on Wednesday. Expect the RBA to continue its lip service towards a lower AUD, whilst leaving the cash rate on hold at 2.50%. Expect no change from the BOC either, although again the statement will be closely watched. Barring a major surprise from the data, expect the current .9600 -.9800 range to contain the weeks price action. Australian GDP tomorrow and trade balance on Thursday will be closely watched. In Canada the latest building and PMI numbers on Thursday come ahead of the important employment numbers on Friday.

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Market commentary:

The last week in the financial markets has been marked by somewhat incoherent themes. Some materially better than expected global economic news has been mixed with a number of softer releases. Last week saw significant increases in demand for both the Great British Pound (GBP) and the Euro, while curiously the Australian and New Zealand dollars were matched in their weakness by the Japanese YEN. The start of this week has seen further strength in economic news around the globe, most notably in manufacturing numbers from the major economies. The focus on central banks remains the primary driver of sentiment, with stock markets looking vulnerable following the strong US data. The US Federal Reserve (Fed) now hold one third of all US government debt thanks to their quantitative easing initiatives. The proposition of the Fed reducing these holdings, or even slowing their accumulation, will have far reaching implications throughout the upcoming year.

Australia

The big focus for Australia is the RBA rate statement out later this afternoon. The central bank is very unlikely to cut rates at this meeting, but future cuts have certainly not been ruled out. At the moment the bank is in a ‘wait and see’ mode, happy to see the effects of previous cuts continue to flow into the economy. They will be happy with recent weakness in the AUD and are likely to try and talk the currency down some more. Capital expenditure data last Thursday would have been a pleasant surprise for the RBA, coming in much stronger than expected. Yesterday’s release of building approvals was also better than expected although this is a very volatile number, and its impact is therefore somewhat limited. We also had the release of manufacturing PMI yesterday and this result wasn’t so good. The fall to 47.7 in November from 53.2 in October, takes the index back in contraction after two months of expansion. There is still a lot of work to be done in ‘transitioning’ the Australian economy away from mining investment to other sectors. Overall sentiment was helped by better Chinese manufacturing data out over the weekend and in the last hour we have seen retail sales data that came in a touch above expectation.

There will be more to digest tomorrow with GDP data set for release and Thursday sees trade balance figures hit the wires.

New Zealand

The New Zealand economy continues to improve and is well positioned to perform strongly next year. Recent data has all been positive. Last week we got very strong trade balance and business confidence data, and yesterday saw the release of the NZ terms of trade index for the third quarter. This index showed a substantial gain and is now at its highest level since 1973. An increase in dairy export prices was a major contributor to the positive result. The RBNZ have signalled a cash rate hike is coming next year and with data like this the risk is that the hike comes in the first few months, with meetings scheduled for January and March. Comments from the New Zealand Treasury that they see “pricing pressures starting to emerge” have only reinforced this view. They also said that growth in jobs is a sign the economy’s growth is becoming more sustainable. There is very little on the economic calendar for the rest of the week so the focus will turn to offshore and in particular key US employment data on Friday.

United States

There is a lot of key data out of the United States this week, which has the potential to dramatically affect sentiment and expectations around potential Fed tapering. We got the first of it last night in the form of the ISM manufacturing index. The reading of 57.3 was a good result and well above the expectation of 55.2. The index is now at its highest level since 2011. Looking deeper into the report showed the employment component was particularly strong. Combining this with the decent fall we saw in weekly jobless claims last Thursday will only serve to increase expectation of a solid payrolls figure when the monthly employment report is released on Friday. Ahead of that we have the trade balance, non-manufacturing ISM, and GDP to digest. The USD has performed well over the last week and should continue to be supported by the data this week.

Europe

There has been little to get excited about in terms of economic data from Europe recently. The Euro struggled onto the weekend weighed on by weak readings from German retail sales and French consumer spending. These overshadowed the small improvement seen in Euro area inflation and the small drop in unemployment from 12.2% to 12.1%. Last night’s Eurozone manufacturing index also showed a small increase to 51.6, but again it has had little effect on the currency. The focus for the week will be the ECB rate decision on Thursday. No change is expected although the bank is likely to reiterate that they still have room to act and a move to negative interest rates is possible. Ahead of that we have service sector PMI and retail sales data to digest.

United Kingdom

The UK Pound has been a solid performer recently, underpinned by positive sentiment and generally supportive economic data. Last night saw two interesting releases that have reinforced the positive growth outlook going forward. The first was manufacturing PMI which jumped to 58.4 against an expectation of 56.0. This is its strongest reading in almost three years, and looking into the detail showed new orders rocketing to a 19 year high. That is a very positive signal for the sector that suggest it can maintain this momentum going forward. The Bank of England (BOE) also released data last night on their Funding For Lending Scheme (FLS) which showed a big increase credit flow in the third quarter. Lending through the scheme has now reached its highest total since the programme was introduced 18 months ago. Most of that lending however, has been going to mortgages with credit to small business actually declining. This is part of the reason the BOE announced last week that mortgage lending under the scheme would be scrapped in February next year. The BOE desperately wants to get credit flowing to small business who have been starved of cash since the financial crisis began. For the UK economy to kick into the next gear the central bank needs to achieve this as well as see wages growth accelerate. There is a lot more key data to come this week with readings on the construction and service sectors, as well as the BOE rate decision and statement on Thursday.

Japan

Late last week saw a raft of Japanese data hit the wires. Much of it was a little disappointing with household spending, industrial production, and unemployment all coming in under expectation. There were a couple of bright spots however, with inflation ticking higher to 0.6% and housing starts showing some strength. Yesterday saw the release of capital spending data which was also somewhat below forecast. BOJ Governor Kuroda was also on the wires saying he wouldn’t hesitate to adjust monetary policy as needed if risks to the economy and prices materialize. Inside sources have apparently said the bank is working on contingency plans for further stimulus, although there is no sense that its implementation is imminent. Governor Kuroda is confident the economy is on course to hit 2% inflation in two years, although many other officials are less optimistic. We should hear plenty more from the BOJ Governor this week with a couple of speeches set for release. Data wise the focus will be on average cash earnings out this afternoon and leading indicators on Friday.

Canada

After some less than impressive current account data on Thursday last week, the Canadian economy received some good news with Friday’s release of GDP. Expectations were for a a 0.1% result for September but the actual figure came in at 0.3%. This helped to support the CAD heading into the weekend. There will be plenty more to digest this week with the trade balance, the BOC rate statement, building permits, Ivey PMI and unemployment all set for release.

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