Inflation number for NZ higher than expected but globally inflationary pressures remain subdued

By Ian Dobbs*:

The last week has been a relatively uneventful one for the wider financial markets.

There has been little in the way of economic news that materially impacted pricing. The softer than expected Australian employment numbers offered the largest surprise, but will not be enough to see immediate action from the Reserve Bank of Australia (RBA) on their own.

On a more positive note has been the latest news from Asia. Chinese growth numbers released overnight showed solid 7.7% GDP growth and export numbers from Taiwan also were buoyant.

Helping settle markets have been solid retail sales figures from the UK and US also.

Globally the inflationary pressure remains somewhat subdued, albeit today’s New Zealand numbers were higher than expected and provided a boost for the Kiwi dollar.

Expect the range bound nature of most markets to continue in the short term at least, albeit there being increasing nervousness about the elevated global stock markets.

Major Announcements last week:

·  UK Core Inflation 1.7% vs 1.8% expected

·  US Core Retail Sales .7% vs .4% expected

·  Australian Employment change -22.6k vs +7.5k expected

·  European Inflation +.8% as expected

·  US Core Inflation 1.7% as expected

·  Chinese YoY GDP 7.7% vs 7.6% expected

·  NZ Inflation 1.6% vs 1.5% expected

NZD/USD

The New Zealand Dollar performed very strongly in the early stages of last week helped by solid NZ business confidence data. But levels over 0.8400 were a step too far for the currency and as the week progressed the NZD drifted lower. The turnaround was aided by the solid retail sales numbers out of the US that helped support the USD and saw it regain much of the ground lost after the previous weeks poor employment numbers. Support towards 0.8200 was never really tested however, and in the last few hours the release of NZ inflation data has given the local currency another boost. The slightly stronger than expected result saw the currency leap a good half cent against the USD. At this point it seems likely we will continue to range broadly between 0.8200 and 0.8400 heading into next week’s RBNZ official cash rate review. The risks to that scenario are probably to the topside although I continue to feel the currency will struggle to maintain levels over 0.8400 in the near term.

NZD/AUD (AUD/NZD)

The New Zealand dollar has had a strong run against the Australian dollar in the first few weeks of this year. The high of 0.9481 (low of 1.0547) was touched last week in the wake of some poor Australian employment figures and although we have seen a corrective pullback since then, the risks are still skewed to the NZD topside. In the last few hours the NZD has jumped up again thanks to stronger than expected NZ inflation data. Support on the downside comes in around 0.9300 (resistance at 1.0753), while the topside will continue to run into resistance toward 0.9500 (support towards 1.0526). The only other data from NZ this week is the manufacturing index, while from Australia we get consumer sentiment and inflation data tomorrow, followed by inflation expectations on Thursday.

NZD/GBP (GBP/NZD)

The New Zealand dollar seems content to trade between 0.5000 and 0.5120 (2.0000 and 1.9531) to the UK Pound at the moment. The lower end of that range was tested on Friday evening after much stronger than expected UK retail sales numbers hit the wires. However in the last few hours we have seen NZ inflation data released that was a touch stronger than expected. This caused an increase in demand for NZD’s and as a result the pair has leapt up towards 0.5070 (1.9724). We can likely expect a similar range to dominate trading heading into next week’s RBNZ rate meeting. Ahead of that we have the NZ manufacturing index on Thursday. From the UK we get minutes from the latest Bank of England (BOE) rate meeting on Wednesday along with the unemployment rate.

 NZD/CAD

The New Zealand dollar finally ran out of steam against the beleaguered CAD last week. The resistance at .9200 proved too much for the pair, and profit taking pressure saw the support at .9000 tested yesterday. There has been a bit of the recovery today following the higher than expected NZ inflation numbers and the pair sits comfortably mid-range now. The focus turns to the barrage of Canadian news that starts late Wednesday with the BOC monetary policy decision. Then comes the retail sales data on Thursday ahead of the inflation numbers on Friday. Barring any surprise, it seems likely the established support at .9000 and resistance at .9200 will contain the price action in the short term.

NZD/EURO (EURO/NZD)

The New Zealand dollar has been gradually appreciating against the Euro since the beginning of the year. Data out of Europe is lacklustre at best while NZ releases continue to surprise on the strong side. After trading up to 0.6161 (down to 1.6231) early last week this pair turned around and proceeded to drift lower in what looks very much like a corrective pullback. There were no fundamental drivers for the correction and it seems the market was just waiting for the opportunity to buy the NZD again. All it took was some slightly stronger than expected inflation numbers released in the last few hours and the NZD was back in hot demand. Further gains a likely as the NZD should remain well supported heading into next week’s RBNZ interest rate meeting. Ahead of that we have the NZ manufacturing index on Thursday. From Europe tonight we German economic sentiment figures. These are followed later in the week by manufacturing and service PMI’s and the current account balance.

 NZD/YEN

This pair saw mixed price action last week, with a real lack of momentum in either direction. The investigations through the initial resistance around 87.20 proved to be short lived, as did the push through the 86.00 support. So the range bound nature of the pair looks to continue in the short term at least. Today’s NZ inflation number has seen some increased demand for the NZD and pushed the pair firmly back into mid-range territory. From here the focus turns to the BOJ’s monetary policy announcement on Wednesday and Monthly economic survey on Thursday.

AUD/USD

It has been a tough week for the Australian dollar and one that has been dominated by downside price action. Solid US retail sales numbers last Tuesday helped the USD regain all the ground lost to the AUD after the previous week’s poor non-farm payrolls figures. The AUD then took a hammering after its own employment numbers on Thursday, and since then the pair has traded a tight range around 0.8800. Fresh cycle lows at 0.8758 briefly traded yesterday before a small bounce ensued. The recovery from those lows was helped by Chinese GDP data coming in a touch stronger than expected at 7.7%. After the strong down leg of the past week there is always potential for a corrective bounce, but the broader picture is still very negative for this pair. Any near term strength will run into resistance toward 0.8900. From the US this week we have unemployment claims, manufacturing PMI, and existing home sales data to digest. While from Australia we get consumer sentiment and inflation data tomorrow followed by inflation expectations on Thursday.

AUD/GBP (GBP/AUD)                            

There has been no respite for The AUD in this pairing over the course of the last week. The duel drivers of poor Australian employment data and much better than expected UK retail sales have caused the cross to make fresh cycle lows at 0.5334 (highs at 1.8748). The recovery off those lows has left a lot to be desired, never seriously testing initial resistance around 0.5380 (support around 1.8587), and this keep the focus on the AUD down side. The immediate hurdle for the pair comes in the form of Australian inflation data out tomorrow. A weak result here will no doubt see the AUD under renewed pressure and fresh lows trading again. We also get consumer sentiment numbers tomorrow and inflation expectations data on Thursday. From the UK on Wednesday we get minutes from the latest Bank of England (BOE) rate meeting along with the unemployment rate.

AUD/EURO (EURO/AUD)

The Australian dollar has had a tough week against many other currencies and the Euro is no exception. Resistance at 0.6650 (support 1.5038) capped the topside early last week and the resulting pullback accelerated after very soft Australian employment data on Thursday. This saw the pair quickly trade down to support at 0.6450 (resistance 1.5504) and the recovery from those lows has lacked any real momentum. This keeps the focus on the downside heading into tomorrow’s Australian inflation data. The AUD will not react well to further soft figures. From Europe tonight we German economic sentiment figures. These are followed later in the week by manufacturing and service PMI’s and the current account balance.

AUD/YEN

The Australian dollar saw pressure from a slightly resurgent Japanese YEN throughout the course of the last week. Whilst there was little data of significance from japan, the soft Australian employment numbers further enhanced a move that was already underway prior to that numbers release. Support at 91.00 contained the AUD’s pressure for the time being, and the bounce back towards mid-range levels has been relatively orderly. Tomorrow’s Australian inflation numbers are due just prior to the BOJ’s monetary policy announcement, and the BOJ monthly economic survey rounds out the economic news on Thursday. The support at 91.00 seems the most vulnerable side for this pair in current conditions, albeit the news of a stabilizing Chinese economy will be welcomed in Australia.

AUD/CAD

The rollercoaster ride for this pair continued last week. The AUD saw early pressure from the CAD, and the pressure materially increased in the wake of the soft Australian employment numbers. The near term support at .9600 has held for now, but a break of this level would open up the way for further investigations lower. Tomorrow’s Australian inflation numbers provide the focus in the near term ahead of the BOC monetary policy decision. Then comes Canadian retail sales data on Thursday, followed by inflation data on Friday. Expect the volatility to continue for this pair until either or both of the central bank’s monetary policy paths become clearer.

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Market commentary:

The last week has been a relatively uneventful one for the wider financial markets. There has been little in the way of economic news that materially impacted pricing. The softer than expected Australian employment numbers offered the largest surprise, but will not be enough to see immediate action from the Reserve Bank of Australia (RBA) on their own. On a more positive note has been the latest news from Asia. Chinese growth numbers released overnight showed solid 7.7% GDP growth and export numbers from Taiwan also were buoyant. Helping settle markets have been solid retail sales figures from the UK and US also. Globally the inflationary pressure remains somewhat subdued, albeit today’s New Zealand numbers were higher than expected and provided a boost for the Kiwi dollar. Expect the range bound nature of most markets to continue in the short term at least, albeit there being increasing nervousness about the elevated global stock markets.

Australia

There has been no economic data of significance from Australia since last week’s surprisingly soft employment numbers. Those figures put the currency on the defensive and it has remained broadly under pressure since then. If we continue to get soft data from Australia then there is a very real chance of another interest rate cut by the RBA around the middle of this year. We did get Chinese GDP for the fourth quarter yesterday and that came in at 7.7%. This was only slightly weaker than the previous quarter and a touch above expectations. The result gave the AUD a short term boost but impact was limited in an otherwise very quiet trading session. Focus for the rest of the week turns to consumer sentiment and inflation data tomorrow, followed by inflation expectations on Thursday.

New Zealand

New Zealand’s economic performance remains very robust and this was highlighted by business confidence coming in at a 20 year high last week. In the last few hours we have seen the latest reading on inflation and that has also helped to support the currency. The 0.1% result for the fourth quarter was above expectations for a flat reading and the NZD leapt nearly half a cent against the USD after the data. Year on year inflation is now running at 1.6%. The only other data of note this week is the manufacturing index due out on Thursday. Next week we have the RBNZ rate meeting, and the market is pricing in a slight chance of a hike by the central bank. The most likely starting point for the upcoming tightening cycle is however March, when the bank releases a full monetary policy statement.

United States

The highlight of last week’s data from the US was core retail sales that came in substantially stronger than expected. Since then however, the majority of economic releases have come in at, or near, expectation and had little overall impact on the current outlook. This was reinforced by the Fed’s Jeffrey Lacker when he said recent data is ‘far from what would be needed’ to change his view on tapering. On Friday night we had the release of consumer sentiment data and although it was weaker than expected, printing at 80.4 vs a forecast of 83.4, the overall level is still very healthy and consistent with spending growth remaining at current levels. With a US holiday yesterday it has been a quiet start to the week and there really is little in the way of key economic data out over the coming days. Thursday’s weekly unemployment claims, manufacturing PMI, and existing home sales are the only releases of note.

Europe

Data out of Europe over the past week has provided no new insight into the state of the economy. Inflation remains very subdued at 0.8% and this is the biggest concern for the ECB. It will only take a hint of further weakness in consumer prices to force the central bank to act again. There are already predictions from some commentators that the bank will cut rates again in March. At this point it seems ECB president Draghi is hoping that strengthening his forward guidance will be enough. He has made it very clear, and nobody doubts, that rates are going to stay low in the region for a long time. But despite all his efforts, many are still suggesting Europe could be heading into a Japanese style lost decade, or two. Over the coming days we have some key data to digest starting with tonight's German economic sentiment figures. These are followed later in the week by manufacturing and service PMI’s and the current account balance.

United Kingdom

Last week’s data from the UK held no real surprises until the release of retail sales on Friday. It seems retailers in December had a much better time of it that anyone was expecting. Sales were up 2.6% from November against an expectation for only a 0.5% rise. Against December the previous year the growth was 5.3%. These were very positive figures and could well be an indication of stronger growth in the overall economy in the final quarter of last year. Those figures are release next week and an improvement over the third quarters GDP of 0.8% would help to boost the GBP further. Concerns about the housing market are growing with the CEO of a leading insurance and investment giant calling for the governments ‘Help to Buy’ scheme to be scrapped in London. He argued that house prices in London and the South East had reached “absurd” levels, and the scheme was just stoking a price bubble. On Wednesday this week we get minutes from the latest Bank of England (BOE) rate meeting along with the unemployment rate. Both of these releases have the potential to move the market and will be closely watched.

Japan

Last week saw a mixed bag of data from Japan that had little overall impact on the current economic outlook. The current account deficit continues to balloon thanks to massive energy imports and some concerns are starting to be raised on the issue. Restarting nuclear power plants would certainly have a big impact on the deficit, although it’s likely not a very popular option. On Friday we saw the latest reading on Japanese consumer confidence which dropped in December to 41.3 from 43.4 the previous month. Readings below 50 mean pessimists outnumber optimists and the assumption from this latest result is that consumers are less confident due to the impending sales tax increase. Prime Minister Abe was on the wires saying he will seek to translate improvements in corporate earnings into wage increases in order to create a virtuous economic cycle. That is exactly what they need, but the reality is that it’s likely to be an uphill battle to implement. On Wednesday we have the Bank of Japan (BOJ) monetary policy statement and resulting press conference to draw focus. It is also the only major release this week.

Canada

Last week was a very quiet one for economic data out of Canada. There were no releases of note, and hence no real opportunity to improve the current negative sentiment weighing on the currency. The second half of this week however, is packed with key releases and there is potential for further large moves in the CAD. Tonight sees manufacturing and wholesale sales data, and this is followed by the Bank of Canada (BOC) monetary policy statement on Wednesday. One major investment bank is calling for the BOC to adopt an easing bias at this meeting. The week is rounded out with retail sales and inflation on Thursday and Friday respectively.

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