Concerns over China's property and credit sectors sees corrective shift in demand for NZ & Australian dollars

By Ian Dobbs*:

It has paid to be a little weary of the market conditions over the last week.

The US dollar has finally shown renewed signs of life against the Australasian pair, and in particular against the NZ dollar.

Increasing concerns over the property and credit sectors in China has seen the corrective shift in demand for the closely China aligned NZ and Australian dollars. Our view is that will be an increasingly relevant issue of market focus.

The NZ dollar has seen lower demand as a combination of factors appear to be taking pressure of the RBNZ’s projections for the cash rate hikes.

Of primary focus this week will be on the European Central Bank (ECB) at their monetary policy announcement on Thursday. With wide ranging expectations for further policy accommodation, exactly what steps will be taken remains the moot point.

Major Announcements last week:

·  US Durable Goods +.8% vs -.5% expected

·  US Consumer Confidence 83.0 vs 83.2 expected

·  NZ ANZ Business Confidence 53.5 vs 64.0 previous

·  NZ Fonterra GDT Auction results -1.8% on previous

·  AU Private CapEx -4.2% vs +3.2% expected (detail strong)

·  US preliminary GDP Q1 -1.0% vs -.6% expected

·  Canadian GDP m/m +.1% as expected

·  Australian Building Approvals -5.6% vs +2.1%

·  US ISM manufacturing 55.4 vs 55.7 expected

NZD/USD

The New Zealand dollar broke below key support at 0.8520 mid last week on the back of a drop in business confidence. The currency never managed to regain that level and as such the downside price action has continued. The broader themes of softening dairy prices and growth concerns in China have helped to drag the NZD down from levels above 0.8600 only a couple of weeks ago. These themes are likely to play out over the coming months and should help to limit any periods of further NZD strength. The immediate focus is on the next level of support around 0.8410. I suspect this will contain the downside for now and we may get a corrective bounce from somewhere near there over the coming days. But with 0.8520 now providing strong resistance I wouldn’t be expecting a recovery above there anytime soon. The New Zealand dollar is much more fairly priced around 0.8400 than it was around 0.8600, and it could easily head lower still if the USD finally starts to appreciate. To that extent from the US this week we have key data in the form of the trade balance, non-manufacturing PMI, and non-farm payrolls to draw focus.

NZD/AUD (AUD/NZD)

The past week has seen a healthy correction in this pair. The NZD has been weighed on by soft dairy prices recently and last week’s drop in business confidence accelerated the downside price action. This caused support at 0.9160 (resistance at 1.0917) to give away as the pair headed straight to a low of 0.9105 (high of 1.0983). We have seen a small bounce off that low helped by weak building consents data from Australia yesterday. This caused the AUD come under pressure, but the pair still remains below the key 0.9160 (1.0917) level, which now acts as NZ dollar resistance. While below there the risks are still skewed to the downside and a move toward 0.9000 (1.1111) cannot be ruled out. Key data this week could certainly play a part. We have the RBA rate statement this afternoon along with GDP and trade balance later in the week.

NZD/GBP (GBP/NZD)

Weakness in the New Zealand dollar has finally seen this pair break below the minor support at 0.5060 (resistance at 1.9763) that had contained the downside on a number of occasions over the past month. There hasn’t been a lot of follow through selling at this stage, although I would expect the pair to grind its way toward 0.5000 (2.0000) over the coming week. A number of factors have weighed on the NZD including softer dairy prices, concerns about Chinese growth, and last week’s fall in business confidence. This week there is plenty of key data to come from the UK and some strong readings from construction and services PMI would certainly help drive the pair toward 0.5000 (2.0000). The Bank of England also meet this week although no change is expected to current policy settings.

 NZD/CAD

Weakness in the New Zealand dollar over the past week has been the primary driver of this pair. The NZD has been weighed on by declining dairy prices and a drop in business confidence. This saw the cross trade down to 0.9168 late on Friday heading into Canadian GDP data. That data caused some selling of Canadian dollar and this halted the pairs decline. We have however, only seen a small recovery from the low and the risks are all still skewed to the downside. Only a break above resistance at 0.9240 will take the pressure off, in which case we could get a recovery back toward 0.9330. There is plenty of data later this week from Canada which could influence. The trade balance, BOC rate statement, building permits, and employment change are all set for release over the coming days.

NZD/EURO (EURO/NZD)

Weakness in the New Zealand dollar has seen this pair trade down towards 0.6200 (1.6129) over the past few days. Declining dairy prices and a fall in NZ business confidence have done the damage, although the Euro itself has seen some pressure lately. This is on the back of expectations for action from the ECB at this week’s meeting. This is the event that will dictate near term direction for the pair and we can expect a limited trading range heading into that announcement on Thursday. If the market is disappointed with the easing measures announced by the ECB we could see the Euro again find support. At the other end of the scale the Euro is likely to come under heavy pressure if the central bank undertakes outright quantitative easing. It will certainly be a very interesting meeting.

 NZD/YEN

The New Zealand dollar lost ground to the Yen last week weighed on by declining dairy prices and a drop in business confidence. The pair traded down to 85.87 before recovering slightly. I would expect gains to continue to be limited to resistance at 87.40 with the down side the more vulnerable. Since peaking at 89.92 back in early April we have seen a gradual but steady decline and this trend is still firmly in play. A move down through 85.80 would target the 84.00 level initially. There isn’t a lot to digest from NZ this week and from Japan we only have the leading indicators to draw focus. A number of events in the wider market could easily cause volatility however, with the ECB meeting and US employment data providing the primary focus.

AUD/USD

The Australian dollar currently trades close to where it was this time last week at 0.9245. Between then and now however, we have seen some good moves on the back of local data. Last week’s private capital expenditure release caused the AUD to rally strongly and the high of 0.9329 traded in the hours after that data. Those gains were then largely undone yesterday after building consents came in significantly below expectation. Support towards 0.9200 is likely to contain the downside for now although there is plenty of data this week that could influence. From Australia we have the RBA rate statement later today, GDP tomorrow, and the trade balance on Thursday. From the US the highlights includes the trade balance, non-manufacturing PMI, and non-farm payrolls.

AUD/GBP (GBP/AUD)                            

Last week saw this pair make solid gains that came largely on the back of a stronger Australian dollar. Capital expenditure forecasts for 2014/15 provided a boost for the local currency and this saw the pair trade up to 0.5574 (down to 1.7940) heading into the weekend. A large part of those gains have now been reversed after yesterday’s softer than expected building consents data which saw the AUD come under pressure. At this stage the risks are skewed to the downside, although there is a lot of data out this week that could influence. The RBA rate statement this afternoon provides the initial focus and this followed by GDP and the trade balance later in the week. From the UK we get PMI’s for the construction and service sectors along with the Bank of England rate meeting.

AUD/EURO (EURO/AUD)

The past week has seen some volatility in the pair thanks in large part to movements in the Australian dollar. Capital expenditure forecasts for 2014/15 provided a boost for the local currency last week and this saw the pair trade up to 0.6857 (down to 1.4584) heading into the weekend. A large part of those gains have now been reversed after yesterday’s softer than expected building consents data which saw the AUD come under pressure. We still have the RBA rate statement to come this afternoon and later in the week from Australia we get GDP and the trade balance. But the biggest focus for the pair will be on the ECB meeting on Thursday evening. This will likely dictate direction for the near term and there could be substantial volatility around that announcement.

AUD/YEN

This pair has seen rather muddled price action over the last week. The AUD saw some initial pressure from the YEN before staging a solid 100pt recovery. Yesterday the AUD took a knock lower after the building consent numbers, only to bounce again and the vulnerable side does not feel like the initial resistance at 95.30. The RBA monetary policy announcement a little later on this afternoon provides the near term focus, albeit little reaction to a no change decision is expected. The focus from there moves to the important Q1 Australian GDP data tomorrow and trade balance on Thursday. After the recent, and relatively positive Japanese data, there is little note for the remainder of the week.

AUD/CAD

This pair has seen a game of two halves over the last week. The AUD saw a strong bounce following the encouraging detail in the capital expenditure data. However, these gains were not to be maintained. Yesterday’s disappointing building approvals data undermined the AUD demand and this saw the pair pushed down to initial support at 1.0040 before a small corrective bounce ensued. The RBA meeting out this afternoon makes for the near term focus ahead of the GDP data Wednesday and then the trade balance on Thursday. The BOC monetary policy announcement on Thursday will off some focus, but the impact on the price action should be limited. From there the release the latest employment numbers on Friday becomes the next data release of note.

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Market commentary:

It has paid to be a little weary of the market conditions over the last week. The US dollar has finally shown renewed signs of life against the Australasian pair, and in particular against the NZ dollar. Increasing concerns over the property and credit sectors in China has seen the corrective shift in demand for the closely China aligned NZ and Australian dollars. Our view is that will be an increasingly relevant issue of market focus. The NZ dollar has seen lower demand as a combination of factors appear to be taking pressure of the RBNZ’s projections for the cash rate hikes. Of primary focus this week will be on the European Central Bank (ECB) at their monetary policy announcement on Thursday. With wide ranging expectations for further policy accommodation, exactly what steps will be taken remains the moot point.

Australia

Data from Australia last week was supportive of the economic outlook going forward. Figures on construction work done came in above expectation and the estimate of private capital expenditure for 2014/15 contained strong detail. Both these results helped to support the AUD heading into the weekend. However, a lot of that good work was undone yesterday after the release of building approvals data which printed at -5.6% vs expectations of +2.1%. The driver was a sharp pullback in apartment approvals with that segment off nearly 30% in the last three months. Private sector house approvals showed a more modest decline of -0.3%. These results pressured the currency and raise some questions about the strength of the ‘rebalancing’ in the economy. In the last few hours we have also seen the latest retail sales data and this came in close to expectation at +0.2%. Later this afternoon we have the RBA rate statement to digest, although the market isn’t expecting any big surprises from the central bank. Tomorrow sees GDP data hit the wires and this is followed by the trade balance on Thursday.

New Zealand

There has been little in the way of fresh data since last week’s business confidence numbers that saw the New Zealand come under some pressure. We did get better than expected building consents data on Friday but the impact on the market was very limited. The outlook for the NZ economy remains very upbeat, however the New Zealand dollar has now pulled back significantly from what were very elevated levels a few weeks ago. The currency is certainly much more fairly priced around current levels, although that doesn’t discount further weakness in the near term. Pressure on the NZD has come from weaker dairy prices, the expectation of a pause from the RBNZ after hiking next week, and a down grading of growth prospects in China as its housing market finally looks to be unravelling. These are developing themes that will likely play out over the coming months.

United States

Last week provided a mixed bag of data from the US. Strong results from durable goods orders, services PMI, and unemployment claims, were countered by the downward revision to first quarter GDP and softer than expected result for pending home sales and personal expenditure. Last night release of the ISM manufacturing index proved to be a debacle with the result having to be released three times before they got it right. In the end the result was close to expectation at 55.4, which is an increase over the prior reading of 54.9. Comments from officials have been reasonably consistent and suggest the Fed is not worried about the weakness in the first quarter. They believe growth will snap back in quarter two. The Fed’s Evans said any interest rate increase in 2015-16 depends on the economy. There is plenty of top tier data still to come this week with the trade balance, non-manufacturing PMI, and non-farm payrolls drawing focus.

Europe

It’s hard to isolate any bright spot in data from Europe over the past week. The best result came in the form of private loans that only declined -1.8% vs expectation of a -2.1% fall. Every other data point has come in on the soft side. Most notable was last night’s release of German inflation that fell -0.1% vs expectation of a +0.1% rise. This will be especially concerning for the ECB who meet on Thursday evening to decide on what further easing action, or combination of actions, to undertake. For months ECB officials have denied deflation is a threat in the Eurozone, then last night the ECB’s Nowotny all but admitted to deflationary pressures when he said the key difference is whether deflation is a one off or a trend. It’s hard to know exactly what the ECB will do on Thursday, but one thing is for sure, half measures are not going to achieve much. If there was ever a time for outright quantitative easing this is it, but that is a much more difficult proposition to undertake for the ECB than for other countries. Whatever they do they will want to see the Euro weaker as a result. Whether they get that or not is completely up to them. We do have other data ahead of the ECB decision on Thursday, including Eurozone inflation tonight, but to be honest, this week is all about the central bank.

United Kingdom

Last week was a relatively quiet one for data from the UK with mortgage approvals and CBI realized sales both coming in a touch below expectation. These were countered to a degree by consumer confidence on Friday that was a little better than forecast. Last night we saw the release of manufacturing PMI that came in bang on expectation at 57.0, and this will be followed by construction and services PMI’s later in the week. The Bank of England (BOE) meet on Thursday night although the market isn’t expecting any change in policy settings. What will prove interesting over the coming months are the BOE minutes with the expectation for divisions to develop within the MPC (monetary policy committee) around the timing of future rate hikes.

Japan

Japan released a raft of data at the end of last week that made for interesting reading. The effects of the April sales tax hike are now very evident in the figures with retail sales collapsing -4.4%, household spending falling -4.6%, and even industrial production printing at -2.5%. Although these falls have been bigger than expected, their impact has been muted as the market knows this was going to be a touch period for the economy. On a more positive note, Friday also saw the release of inflation data that jumped to a 23 year high at +3.2%. This was also largely expected and a good chunk of it is as a result of the sales tax increase, but even if you account for that, the underlying trend seems to suggest the BOJ are on target to achieve their long term inflation target of 2.0%. It is starting to look very unlikely that the central bank will undertake any further easing measures in the near term, as some in the market had expected. Yesterday we saw capital spending figures that were certainly encouraging. The +7.4% gain was well above expectation for a +5.7% increase, and a significant jump from the previous reading of +4.0%. In the last few hours we have also seen average cash earnings data which beat expectation coming in at +0.9%. This will make pleasant reading for the government and Bank of Japan (BOJ).

Canada

The only release of note from Canada last week came on Friday when their GDP data hit the wires. The March result came in on expectation at +0.1% but there were negative revisions to January and February data and this weighed on the currency do a degree. We are in for a much more interesting week this week with a number of key releases on Thursday and Friday. The trade balance, Bank of Canada (BOC) rate meeting, building permits, Ivey PMI, and employment change are all set for release.

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