Many currency pairs expected to be range bound; still demand for NZD & AUD

By Ian Dobbs*:

Throughout the course of the last week conflicting market signals have led to some strange price action.

US Federal Reserve Chair Janet Yellen caused a stir at the Fed’s monetary policy announcement, as she indicated that actual hikes to the Fed funds rate would likely start six months following the conclusion of the quantitative easing program.

Adding to the mix is ongoing pressure on Chinese growth indicators, including yesterday’s larger than expected contraction in the important manufacturing sector. This comes as focus intensifies on the Chinese corporate debt sector, amid an increasing number of defaults.

Equity markets remain vulnerable as global interest rates consolidate at higher levels.

These themes will provide the lead for the wider markets again this week. This will likely see a continuation of the recent ranges for most pairings, albeit the Australasian pair remain in demand.

Major Announcements last week:

·  European Inflation .7% vs .8% expected

·  US Industrial Production +.6% vs +.1% expected

·  European Business Sentiment 61.5 vs 67.3 expected

·  US Inflation 1.1% vs 1.2% expected

·  BOE leave monetary policy unchanged

·  US Fed taper QE by 10 billion as expected

·  NZ GDP Q4 +.9% as expected

·  US Phila. Fed Manufacturing Index 9.0 vs 4.0 expected

·  Canadian Inflation +.7% vs +.5% expected

·  Chinese Manufacturing PMI 48.1 vs 48.7 expected

·  European Manufacturing PMI 53.0 as expected

·  US Manufacturing PMI 55.5 vs 56.5 expected

NZD/USD

The reality is that apart from a period mid last week when the NZD rallied toward 0.8640 and then sold off again, the currency has remained largely unchanged for much of the past two weeks. It seems the New Zealand dollar is very comfortable trading around the 0.8530/40 level where it has gravitated back to ever since it moved higher on the 13th March. The only data from NZ this week is the trade balance on Thursday, so focus will remain for the most part on offshore drivers. To that extent from the US we get durable goods orders tomorrow and later in the week we get pending home sales, final GDP, and personal spending data. Any break below 0.8500 would be a negative signal and likely precede a deeper correction towards support just above 0.8400. On the topside we can continue to expect moves above 0.8600 to prove temporary in nature for the time being.

NZD/AUD (AUD/NZD)

The main driver of this pair since late last week has been the relative strength in the Australian dollar. The NZD is largely unchanged from a week ago, however the AUD has put in some decent gains. There gains have come in the face of further soft Chinese data that would normally weigh on the currency. But for now the AUD seems largely unfazed. This has seen the NZDAUD cross continually grind lower (AUDNZD higher) and it now looks likely to test key support around 0.9330 (resistance around 1.0718). A break below there could well run into stop loss sell orders and see 0.9300 (1.0753) trade quite quickly. From NZ this week we have only the trade balance set for release on Thursday, while from Australia we have the RBA financial stability report and a speech from Governor Stevens tomorrow.

NZD/GBP (GBP/NZD)

There has been little overall direction for this pair since early last week with price action seemingly comfortable around the 0.5175 (1.9324) level. There is however, key data from the UK over the coming days starting with inflation data tonight and this result could set the tone for the coming week. A stronger than expected reading from CPI will see demand for the UK Pound increase and this would push the cross to the NZD below key support near 0.5160 (above resistance near 1.9380). After such a strong run from below 0.5000 (above 2.0000) at the beginning of the month, I favour a pullback in the cross and a correction back down through that NZD support level. A weaker reading on CPI however will no doubt see resistance above 0.5200 (1.9230) tested again. New Zealand trade balance data tomorrow will also draw focus as will UK retail sales figures on Thursday.

 NZD/CAD

After rallying strongly in the early stages of last week this pair has spent much of the past five trading days consolidating those gains in sideways action around 0.9580. A stronger than expected reading from Canadian inflation on Friday night caused some weakness in the pair although the impact has been minor. This is an especially poor reaction considering we also had the release of Canadian retail sales data that was better than expected. The only release of note from New Zealand this week is the trade balance tomorrow, while the economic calendar for Canada is even lighter. At this stage the focus remains on the topside. It will take a move below minor support at 0.9520 to change that view and warn of the potential for a deeper correction.

NZD/EURO (EURO/NZD)

Gains for the NZD in this pair have stalled over the past week, capped by resistance around 0.6210 (support around 1.6103). This has left the cross trading in range between there and 0.6160 (1.6234) on the NZD downside. Recent releases from Europe have been somewhat supportive of the gradual recovery and this is helping to limit further appreciation for the NZD. We could well see further range trading in the near term with the immediate focus turning to tomorrow’s trade balance data from NZ. This is followed by the German business climate index tomorrow night and consumer climate index the night after. Any break below support at 0.6160 (above 1.6234) would be a negative signal for the NZD, and warn a deeper correction is underway that would likely test 0.6100 (1.6393) initially.

 NZD/YEN

The lack of overall direction in the New Zealand dollar recently has paired with a similar result in the Japanese Yen to see this pair trading in an increasingly tight sideways range. We can expect more of the same in the near term with only data from NZ this week being the trade balance tomorrow. We may finally get some direction on Friday after the release of a raft of Japanese data. Household spending, inflation, unemployment, and retail sales are all set to hit the wires on Friday afternoon.

AUD/USD

The most surprising thing for the Australian dollar has been the relentless strength seen since late last week. The move over the last 24 hours in particular has raised eyebrows as it comes on the back off a further weakening in Chinese manufacturing that would normally pressure the AUD to the downside. The currency has been testing the key level of 0.9150, above which are rumoured to be larger stop loss buy orders. Sometimes in currency markets you have to put fundamental data aside and just respect the price action. The price action in the AUD at the moment is telling us the topside is the risk, and markets are always attracted to large collections of stop loss orders. A move up though 0.9150 could quickly turn into a test 0.9200. The only release from Australia this week is the RBA financial stability report out tomorrow. Focus will then turn to the US and the release of durable goods orders, pending home sales, final GDP, and personal spending data.

AUD/GBP (GBP/AUD)                            

Strength in the Australian dollar since mid-last week has been the driving force for this pair. The AUD has made gains even in the face of yesterday’s weaker than expected Chinese manufacturing data. This has seen the cross to the GBP break higher above resistance at 0.5515 (below support at 1.8132) that had previously capped it. Gains above there have now consolidated around the 0.5535 (1.8067) level and this warns that further upside is likely. A move up toward 0.5600 (down toward 1.7857) could well eventuate over the coming sessions. Key to this near term outlook however, will be tonight’s UK inflation data. A strong reading there should see demand for the UK pound increase materially and this will limit potential upside for the AUD. Later in the week from the UK we get retail sales, current account, and GDP data. In Australia the focus turns to tomorrow’s financial stability review and a subsequent speech from Governor Stevens.

AUD/EURO (EURO/AUD)

Although we have seen somewhat supportive data coming out of Europe recently, this pair has continued to appreciate on the back of strength in the AUD. The strong performance of the Australian dollar over the past few days has been even more impressive considering the soft Chinese manufacturing data that was released yesterday. The move could extend further too as the AUD has shown no signs of turning around at this point. A test of resistance around 0.6650 (support around 1.5038) could easily be on the cards in the near term. From Australia tomorrow we get the RBA’s financial stability review and a subsequent speech from Governor Stevens. This is followed by the German business climate index tomorrow night and consumer climate index the night after.

AUD/YEN

This pair was driven higher in the second half of last week on the back of Australian dollar strength. This outperformance by the AUD continued yesterday in the face of another soft reading from Chinese manufacturing data. The pair now trades around 93.30 and further gains toward 94.00 cannot be ruled out. Downside support is now seen at 92.80 with only a break below there warning the strength has run its course. From Australia tomorrow we get the RBA’s financial stability review and a subsequent speech from Governor Stevens. Later in the week we have Japanese data in the form of household spending, inflation, unemployment, and retail sales.

AUD/CAD

Much of the past week has seen continued grinding appreciation of the Australian dollar against the CAD. These gains have gone against all fundamental economic data that would suggest a correction lower for the pair. Firstly we has stronger than expected inflation and retail sales figures from Canada late last week, then yesterday we got another soft reading on Chinese manufacturing. The AUD has largely ignored that Chinese data and continues to outperform the CAD. You have to respect price action this strong and on that basis we could see further gains before any correction lower eventuates. There is resistance between 1.0250 and 1.0270 and this band should cap further strength in the near term. From Australia tomorrow we get the RBA’s financial stability review and a subsequent speech from Governor Stevens. There is little else set for release from Canada this week.

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Market commentary:

Throughout the course of the last week conflicting market signals have led to some strange price action. US Federal Reserve Chair Janet Yellen caused a stir at the Fed’s monetary policy announcement, as she indicated that actual hikes to the Fed funds rate would likely start six months following the conclusion of the quantitative easing program. Adding to the mix is ongoing pressure on Chinese growth indicators, including yesterday’s larger than expected contraction in the important manufacturing sector. This comes as focus intensifies on the Chinese corporate debt sector, amid an increasing number of defaults. Equity markets remain vulnerable as global interest rates consolidate at higher levels. These themes will provide the lead for the wider markets again this week. This will likely see a continuation of the recent ranges for most pairings, albeit the Australasian pair remain in demand.

Australia

There has been little in the way of fundamental economic releases from Australia over the past week. The Conference Board released their leading index (designed to predict the direction of the economy) on Friday. The 0.2% result marks a significant fall from the previous reading of 0.8%. However, the impact in the market was very muted. Of more interest was yesterday’s HSBC manufacturing PMI for China. After posting a substantial fall the previous month the market was looking for a small improvement. Instead the index fell further to 48.1, well into contraction territory and an eight month low. The Australian dollar however, has shrugged this off and put in a strong performance over the past 24 hours. We will get comments from the RBA Deputy Governor today and tomorrow see the release of the RBA financial stability report.

New Zealand

There has been no data of significance since last week’s GDP result that printed bang on expectation. Visitor arrivals and credit card spending data release on Friday had no impact in the market. The economic calendar for this week is also looking very thin with on the trade balance set for release on Thursday. In the absence of data the NZD has remained relatively range bound on most crosses.

United States

Data released toward the end of last week continued to be supportive of the economic recovery in the US. Weekly unemployment claims fell further signaling the chance of a decent payrolls number next Friday. The Philly Fed Manufacturing Index (a leading indicator of broader economic health) improved sharply to +9.0 from -6.3 previously. Forecasters were expecting a result of +4.2. We also saw comments from the Fed’s Fisher who said the Fed has exhausted efficacy of QE policy. He expects asset buying to end by October at the current pace. This is well in line with market expectations. We have also seen nothing to refute Janet Yellen’s inference, after last weeks Fed meeting, that interest rate hikes could begin about six months after the end of QE purchases.  Last night the market was a little disappointed with a weaker reading on US manufacturing. The Markit Manufacturing PMI fell to 55.5 from 57.1 last month. Expectations had been for a smaller decline to around 56.5. Focus now turns to consumer confidence and new home sales data tonight. This is followed by durable goods orders tomorrow and later in the week we get pending home sales, final GDP, and personal spending data.

Europe

We have seen some positive releases from Europe over the past few days supporting the view that a very gradual recovery is taking place. At the end of last week data on the current account and consumer confidence beat expectations and improved from the previous month. Then last night we got readings on the manufacturing and service sectors from both Germany and France. The German results came in below expectation showing a small fall, but the French results both beat expectation jumping above the 50 level which denotes expansion in the industry. This data would suggest the Eurozone’s recovery is more widely based than previously thought. We have also seen Moody’s rating agency raise the government bond rating outlook for Cyprus to ‘positive’ from ‘negative’, and the Spanish PM was on the wires saying 2015 GDP could hit 1.8%. There is however, still a lot of work to be done in Europe and any recovery will remain very fragile. Later this week we get German business and consumer climate index’s, German CPI, and French consumer spending.

United Kingdom

There have only been a couple of second tier releases since last week’s BOE minutes and comments from Governor Carney. Those comments put some pressure on the UK Pound and although subsequent data on public sector net borrowing and CBI industrial order expectations both came in above expectation, their impact has been limited. Of more interest, and importance, will be tonight’s reading on inflation. The market is looking for the CPI to fall to 1.7% from last month’s 1.9%. A stronger than expected reading will support the GBP. Later in the week we get retail sales data, consumer confidence, current account, and the final reading of GDP.

Japan

There have been no releases of interest since last Wednesday’s trade balance and all industries activity index, both of which came in below expectation and down on the previous month. Bank of Japan (BOJ) Governor Kuroda has been on the wires although his comments offer little in the way of fresh insight. He believes the economy will be on track over the next 12 months and that domestic demand is stronger than expected. He has also warned that the BOJ could adjust monetary policy without hesitation. The focus now turns to inflation and retail sales data set for release on Friday.

Canada

In an interesting turn of events, Friday’s Canadian inflation data came in stronger than expected with the core number printing at 0.7% vs expectations of only 0.5%. And this is after Bank of Canada Governor Poloz suggested, only days earlier, that inflation and GDP were likely to disappoint. The Canadian dollar reacted positively to the release, although the gains were somewhat limited considering the result. This is especially surprising as Friday also saw retail sales data come in stronger than expected at +1.3% vs expectation of only 0.8%. With almost no Canadian data this week the market will be left scratching its head for near term direction in the CAD.

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