ECB, BoE and RBA announcements and respective actions well signalled ahead of time; Australasian pairing seeing periods of pressure despite volatility being low

By Ian Dobbs*:

The central bank focus over the last week has provided little in the way of new found insight.

The European Central Bank (ECB) made its stimulatory moves as largely expected, whilst leaving itself the option of quantitative easing down the track.

Certainly the prospect of negative deposit rates for banks cash reserves should be an incentive to lend, more of an issue maybe borrower appetite.

The Bank of England (BOE) held policy steady as expected and the Reserve Bank of Australia (RBA) remain steadfastly neutral, with rates unlikely to altered in 2014.

US employment numbers on Friday were close to expectation with 217,000 jobs added in May.

Volatility has remained surprisingly low in the wider market, whilst the Australasian pairings, and the New Zealand dollar in particular, have seen periods of pressure throughout the last week.

Major Announcements last week:

·  Australian Building Approvals -5.6% vs 2.1% expected

·  UK Manufacturing 57.0 vs 57.1 expected

·  US Manufacturing 55.4 vs 55.7 expected

·  Australian Retail Sales +.2% vs +.3% expected

·  RBA leaves Monetary Policy unchanged as expected

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

·  Australian GDP +.1% vs +.9% expected

·  BOC leave Monetary Policy unchanged as expected

·  BOE leaves Monetary Policy unchanged as expected

·  ECB introduces negative deposit rates, and targeted lending schemes to boost lending

·  US jobs Growth 217k vs 214k expected

·  Canadian Housing Starts 198k vs 185k expected

NZD/USD

The New Zealand dollar ended its recent decline late last week and put in a solid bounce off key support around 0.8410. That recovery saw the market rally up through 0.8520 resistance in the hours ahead of US employment data on Friday evening. But when the payrolls figures confirmed the expectations for a solid result above 200k, the USD gained support and this pushed the NZD back down just under 0.8500. A quiet start to this week has seen very little action of the past 30 hours or so, and the markets focus is now firmly on the RBNZ monetary policy statement set for release on Thursday morning. This event is likely to dictate NZD direction in the short and medium term. If the bank continues to signal rates are headed toward 4.50% or higher within the next 2 years, the currency could easily see levels over 0.8600 again. If the bank signals a pause after this hike and a slightly more moderate path of future hikes, the NZD could slowly drift a little lower. Also this week from the US we have retail sales, producer prices, and consumer sentiment to draw focus.

NZD/AUD (AUD/NZD)

The New Zealand dollar recovered some ground against the Australian dollar in the middle of last week, but the bounce was largely corrective and as such a resurgent AUD has again taken the lead. The AUD benefited from a stable RBA outlook and better than expected GDP data and this has driven the pair back down below 0.9100 (above 1.0989). The key resistance level of 0.9160 (support level of 1.0917) was never seriously tested with the market only briefly trading to 0.9150 (1.0929) before being rejected. This price action leaves the focus firmly on the downside for the time being and I still expect a test of 0.9000 (1.1111) at some stage. The big unknown on the week comes in the form of the RBNZ monetary policy statement on Thursday. A 0.25% hike is fully baked in, and the focus will turn to whether or not the central bank now signals a pause in the tightening cycle. Expect 0.9000 to 0.9160 (1.1111 to 1.0989) to contain trade ahead of the RBNZ decision, with price action after that largely in their hands. Also from Australia this week we have business confidence, consumer sentiment, and employment change data to draw focus.

NZD/GBP (GBP/NZD)

There has been little to get excited about in this pair over the past week. Some relative New Zealand dollar strength through the middle of last week saw something of a recovery in pair but it looks to have run out of steam around 0.5080 (1.9685). The cross has now turned back down and another test toward 0.5000 (2.0000) could well be on the cards. The big risk over the coming days comes in the form of the RBNZ monetary policy statement on Thursday. Near term direction will likely be dictated by whether or not the central bank signals a pause in the tightening cycle. Ahead of that decision we get UK employment data on Wednesday evening which should lend support to the GBP. The UK job market has been a strong performer throughout the economic downturn and with the economy now well on the recovery track there seems no reason to suspect a soft result.

 NZD/CAD

Both the NZD and the CAD were under pressure for the majority of last week and as a result this pair saw mostly sideway action around 0.9210. Late in the week however, the NZD staged something of a recovery while data from Canada continued to weigh on the CAD. As a result the cross started to make gains on Thursday that continued into the weekend. The high of 0.9352 traded in the wake of Friday evenings disappointing Canadian employment data. In the last 24 hours we have since seen a decent pullback from there after better than expected Canadian housing starts number provided some relief for the CAD. The focus now turns to the RBNZ monetary policy statement on Thursday which will likely dictate direction in the near term. 0.9150 to 0.9350 provide the parameters that are likely to contain trading ahead of that release.

NZD/EURO (EURO/NZD)

Although last week’s ECB meeting provided some volatility, it has only had muted overall effect on the Euro. Gains in this pair over the past week have largely come on the back of New Zealand dollar strength as the local currency has staged something of a corrective bounce from recent lows. I suspect the effects of a negative deposit rate at the ECB will gradually weigh on the Euro and this should see the NZD grind higher over the medium term. Shorter term however, the risks are all centred around this week’s RBNZ monetary policy statement set for release on Thursday. If the central banks signals a pause after hiking on Thursday, and perhaps even a slightly lower path of future hikes, the NZD itself could drift lower. On the other hand a largely unchanged projection for hikes to 4.50%, or higher, could see a sharp appreciation in the currency. 0.6150 and 0.6350 (1.6260 and 1.5748) mark the key support and resistance levels heading into that announcement.

 NZD/YEN

The New Zealand dollar has outperformed the Japanese Yen recently with most of the gains coming toward the end of last week. The gains were driven by a recovery in the NZD after some recent weakness. The pair rallied to test the initial resistance level of 87.40 which has so far managed to contain the topside. As is often the case Japanese data out yesterday has had little impact on the level of the Yen and the focus now turns to the RBNZ monetary policy statement on Thursday. This event will likely dictate direction in the near term. Any move above 87.40 will open the way for further gains toward 89.00. The downside is protected by support around 86.00.

AUD/USD

The Australian dollar performed well last week helped by a stable outlook from the RBA and better than expected GDP numbers. But as much as anything the AUD is benefiting from its failure to break below key support around 0.9200 that was tested on numerous occasions in late May and the early stages of this month. With 0.9200 providing a strong floor the market is now finding the path of least resistance is to the topside. Solid US employment figures on Friday evening saw a sharp correction lower, but its effect was short lived and the AUD has recovered in the early stages of this week. A test of 0.9400 looks likely at this stage and we will wait to see reaction at that level before looking further into the future. Morgan Stanley on the other hand are making a very big call predicting the AUD will head back to parity with the USD by the end of 2014. This call is based on demand for higher yielding AAA rated bonds, something the Australian government will be issuing plenty of the coming year. This afternoon we get business confidence data from Australia and later in the week we have consumer sentiment and employment change figures to draw focus. From the US we get retail sales, producer prices, and consumer sentiment.

AUD/GBP (GBP/AUD)                            

The past week has seen a relentless grind higher for this pair, driven largely on the back of Australian dollar strength. The AUD has benefited from a stable outlook from the RBA and better than forecast GDP data. Data from the UK has been supportive of the continued recovery, although it’s failed to boost the GBP to any real degree. That could change this week with key employment data set for release. The UK job market has been a strong performer throughout the economic downturn and with the economy now well on the recovery track there seems no reason to suspect a soft result. This afternoon we also get business confidence data from Australia and later in the week we have consumer sentiment and employment change figures to draw focus. Continued AUD topside price action in the pair will run into minor resistance around 0.5590 (support around 1.7889) ahead of the 2014 highs of 0.5636 (lows of 1.7743).

AUD/EURO (EURO/AUD)

Although last week’s ECB meeting provided some volatility, it has only had muted overall effect on the Euro so far. Gains in this pair over the past week have largely come on the back of Australian dollar strength. The local currency has benefited from a stable outlook from the RBA and better than forecast GDP data. This has seen the pair trade up toward recent cycle highs and further gains look likely. I suspect the effects of a negative deposit rate at the ECB will gradually weigh on the Euro and this should support further gains in the pair over the medium term. This afternoon we get business confidence data from Australia and later in the week we have consumer sentiment and employment change figures to draw focus. Key support for the pair now comes in around 0.6815 (key resistance 1.4674) and as long as the market holds above there the risks are all skewed to the topside.

AUD/YEN

It has been a week of relentless gains for this pair driven in large part by strength in the Australian dollar. The AUD has benefited from a stable outlook from the RBA and better than forecast GDP data while the Yen has largely ignored yesterday’s economic releases. The pair has now seen a powerful rally that started from 93.03 on the 21st May. We are now approaching a band of resistance between 96.00 and 96.50 that has capped any gains since mid-last year. Further gains are going to prove to be a lot tougher to come by and we could well see a short term top develop somewhere ahead of 96.50 over the coming days. If that does develop a corrective pullback toward support around 94.50 could easily unfold. This afternoon we get business confidence data from Australia and later in the week we have consumer sentiment and employment change data to draw focus. While from Japan attention will turn to the BOJ monetary policy statement and press conference on Friday.

AUD/CAD

The past week has seen strong gains for this pair with the dual drivers of Australian dollar strength and CAD weakness powering the cross higher. The AUD has benefited from a stable outlook from the RBA and better than forecast GDP data while the Canadian dollar has suffered from a raft of softer than expected data including Fridays key employment numbers. Relief for the CAD finally came last night with the release of housing starts that beat expectation, although this has only caused a small pullback. This afternoon we get business confidence data from Australia and later in the week we have consumer sentiment and employment change data to draw focus. From Canada we have to wait to the end of the week to get manufacturing sales data and we also hear from BOC Governor Poloz. For the time being the risks are skewed towards further gains.

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Market commentary:

The central bank focus over the last week has provided little in the way of new found insight. The European Central Bank (ECB) made its stimulatory moves as largely expected, whilst leaving itself the option of quantitative easing down the track. Certainly the prospect of negative deposit rates for banks cash reserves should be an incentive to lend, more of an issue maybe borrower appetite. The Bank of England (BOE) held policy steady as expected and the Reserve Bank of Australia (RBA) remain steadfastly neutral, with rates unlikely to altered in 2014. US employment numbers on Friday were close to expectation with 217,000 jobs added in May. Volatility has remained surprisingly low in the wider market, whilst the Australasian pairings, and the New Zealand dollar in particular, have seen periods of pressure throughout the last week.

Australia

It has been a very quiet start to this week with a bank holiday in Australia yesterday. Later this afternoon we get business confidence data and tomorrow we’ll get the latest reading of consumer sentiment. Employment change figures on Thursday will also be a major focus on the week, with the market expecting a gain in employment of around +10.3k. The prior reading was +14.2k. Data last week provided a mixed bag, although overall it lent support to the currency. Soft building consents numbers were countered by a stronger than expected reading from first quarter GDP. Digging into the detail of both reports tended to moderate the headline figures and as such the market impact was somewhat muted. The RBA are looking increasingly comfortable with current policy settings and it is very unlikely there will be any adjustment this year. We could well be waiting until the second half of next year before they adjust rates, although a lot can happen between now and then.

New Zealand

The economic focus for New Zealand this week is all going to be on the Reserve Bank decision on Thursday morning. Forecasters are almost unanimously expecting a hike of 0.25%, taking the cash rate to 3.25%, but there is a lot less agreement on expectations from there. Many expect the central bank to pause until much later in the year, enabling them to see how the economy develops over the coming months. Arguments for this are supported by the still relatively high level of the New Zealand dollar, lower than expected inflation, and very recent indications that the housing market in Auckland seems to be cooling. The LVR’s implemented by the bank late last year seem to be doing their job nicely and they could well end up being an inspired move that keeps the peak of this interest rate cycle a lot lower than would otherwise have been the case. On the other hand, some economists suggest the RBNZ will reaffirm their commitment to hike 200 basis points over the next two years on the back of strong growth projections and near record positive net migration. Either way, I suspect we are likely in for some volatility in the level of the NZD.

United States

The past week saw some key data out of the United States which all lent support to the current view that although the Fed should end asset purchases (quantitative easing) later this year, they won’t be hike rates anytime soon. A slightly weaker than expected reading from manufacturing PMI was countered by an decent improvement in non-manufacturing PMI. Then on Friday the all-important monthly employment data came in just a touch above expectation at 214k, with the unemployment rate holding steady at 6.3%. The equity market seemed to like this result and again made fresh all-time highs, while long term interest rates backed up a touch further and the USD gained a little ground. There seems to be growing confidence in the sustainability of the recovery, although the economy is far from threatening any theoretical ‘speed limits’. This week have retail sales, producer prices, and consumer sentiment to draw focus.

Europe

The main event late last week was the European Central Bank (ECB) meeting and the combination of measures they announced. A cut in interest rates was almost guaranteed, although taking the deposit rate negative was a bold move. Banks who deposit funds back at the ECB will now pay for the privilege. They also announced a liquidity programme tied to targeted lending and said they will continue to work on details for asset purchase programme. The overall impact on the Euro was limited, it actually strengthened a touch in the wash up, however the impact on long term interest rates was more significant. Ten year bond rates for Spain and Italy both fell close to 20 basis points. We have had a rash of comments from ECB officials over the weekend with Constancio saying that the talk of QE is not a bluff. Coeure’s statement was pretty blunt when he said “what’s clear is that for a very long period, several years, monetary conditions will be divergent in the Eurozone on one hand and in the US and UK on the other.” He added the ECB will “keep rates close to zero for an extremely long period.” The problem with extreme measures such as what the ECB (and other central banks) have undertaken is the complete mispricing of risk in the market. A good example of this is that Spanish 10 Government bonds are now trading at almost the same level as US Treasuries around 2.60%. At those levels I know who’s debt I’d rather own, and it’s not Spain’s for your guide. French and German holiday’s yesterday have made for a very quiet start to this week and we have to wait until Thursday to get the ECB monthly bulletin and industrial production data.

United Kingdom

The focus for this week in the UK will be on employment data set for release on Wednesday. The unemployment claimant count is expected to fall by around 25k which is in line with last month’s reading. We also have manufacturing production data and a speech from BOE Governor Carney to digest. The BOE provided no surprises after their rate meeting last week keeping policy unchanged. It will be interesting to hear Carney’s views when he speaks, although it’s increasingly evident that others on the Monetary Policy Committee are becoming a little more ‘hawkish’ than the Governor. The BOE’s quarterly inflation expectations survey released on Friday showed that 42% of Britons expect a rate rise in the next 12 months. That’s up from 40% in February and comes in the face of a small fall in inflation expectations to 2.6% from 2.8% previously.

Japan

Last week saw some pleasing results from Japan with capital spending and average cash earnings data both printing stronger than forecast. These were backed up by GDP data for the first quarter that came in yesterday at +1.6% vs expectations for +1.4%. All this really confirms is that there was a boost of consumer spending in the lead up to the sales tax increase, although it does seem companies are investing in equipment to help boost production. Over the weekend BOJ Governor Kuroda said the current policy has been having the intended effects leading to an improvement in financial markets, the real economy and prices. For the time being at least it does look like the economy will weather the impact from the sales tax hike a lot better than many had expected. Later this week we have the BOJ monetary policy statement and press conference to digest.

Canada

Last week proved to be a tough one for the Canadian economy and the Canadian dollar. Disappointing readings from the trade balance, Ivey PMI, building permits and employment change all weighed. Even the Bank of Canada struck a very cautious tone after their rate meeting saying underlying momentum in the economy could be less than previously thought. Friday’s employment data initially looked ok, printing just above expectation at +25.8k, but the breakdown of full to part time work took some of the shine off. Full time employment actually fell -29.1k and this comes on top of last months -30.9k result. The unemployment rate also ticked up to 7% from 6.9% previously. This week have housing starts, the house price index, manufacturing sales, and a speech from BOC Governor Poloz to digest.

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