Yield chasing investors supporting NZD; USD vulnerable to any negative news

By Sam Coxhead*:

It was an interesting period in the foreign exchange markets last week.

The US dollar was widely vulnerable, with all the focus on any negative news.

Yield chasing investors again pushed the NZ dollar and to the lessor extent the AUD, higher as a result. However, in the last few sessions the momentum has turned a little.

Certainly the NZ dollar looks lethargic, having set post float highs on a trade weighted basis, and the AUD has struggled to make higher ground on a number of pairings.

Geopolitical concerns still require weary observation, but the impact has been limited for the time being.

Major Announcements last week:

·  US Consumer Confidence 85.2 vs 83.5 expected

·  US Durable Good sales -1.0% vs 0.0% expected

·  US Q1 GDP -2.9% vs -1.7% expected

·  Japanese Inflation 3.4% as expected

·  Japanese Unemployment rate 3.5% vs 3.6% expected

·  Japanese Retail Sales -.4% vs -1.8% expected

·  UK Q1 GDP 3.0% vs 3.1% expected

·  European Consumer Confidence -7.5 vs -.67 expected

·  NZ ANZ Business Confidence 42.8% vs 53.5% last

·  European Inflation +.5% as expected

·  Canadian GDP +.1% vs +.2% expected

·  US Chicago PMI 62.6 vs 63.0 expected

NZD/USD

This pair has found itself consolidating gains above .8700 since Wednesday last week. However, the NZ dollar momentum has waned and this comes as further pressure was seen on the US dollar in the broader sense last night. Without doubt the US employment numbers represent the focus for the week and the result will likely dictate direction in the near term. Ahead of that number late Thursday, it seems likely that the .8720 - .8800 range will contain the price action. Overtime the current levels should prove to have offered good value buying of USD with NZ dollars, albeit the opportunity will be ongoing in the short term.

NZD/AUD (AUD/NZD)

This pair remains within its recent range, albeit up towards the high NZD end of that range. The primary focus for the week comes later today as the RBA makes its monetary policy statement. It seems unlikely we will see a shift in their neutral stance today, but the statement will be very closely followed. Expect the recent ranges to continue in the near terms at least. It seems unlikely the remaining Australian data in the form of the trade balance, building approval, or retails sales, will see the pair push outside the .9350 NZD resistance (1.0700 AUD support) this week. With this in mind current levels look to offer good value buying of AUD with NZD. Patience will likely pay off for those looking to buy NZD at lower levels.

NZD/GBP (GBP/NZD)

This pairing remains stuck in very familiar territory, having traded a relatively small range over the last week. The NZD momentum waned yesterday following a further pullback in the NZ business confidence survey. From here the focus shifts to the UK data in the form of the manufacturing, construction and services data. These releases will be watched, but should be of limited impact. Expect the current rates to continue in the short term at least. At some stage it seems likely that the GBP will be able to push on to higher levels as the BOE interest rate hiking cycle nears, but further patience will likely be required for those looking to buy NZ dollars at materially lower levels.

 NZD/CAD

This pair has spent nearly a month trading a .9250 - .9450 range. Last week saw fairly contained price action, with the initial resistance at .9400 enough to temper the demand for the NZD following the weak US GDP numbers. The NZD saw pressure yesterday after the business confidence numbers, but this turned around as the Canadian GDP number missed expectations. Direction from the current levels is not clear and current pricing sits close to the middle of the recent trading range. The Canadian trade balance on Thursday presents some further data focus, albeit the impact on price action should be limited. The wider market sentiment following the ECB meeting and the US employment numbers is more likely to provide the lead.

NZD/EURO (EURO/NZD)

The last week has been a game of two halves for this pair. The NZD saw the early appreciation as it ground up to set the highs for the week. However, the momentum was halted as the German inflation number printed above expectations. From there the EURO itself saw increased demand and forced the NZ dollar give up a portion of its recently gained ground. At current levels the pair is close to the middle of its recent trading range and direction is not clear. It will take a break of initial NZD support at .6350 (1.5750), in order to see further gains consolidated for the EURO. The ECB statement on Thursday remains the key to the near term direction.

 NZD/YEN

This pair appears to have found a cap in its range at 89.50 for the time being. There have been a couple of attempts to break through, but none have been successful as yet. The NZD saw some pressure yesterday following the business confidence numbers, but this move has been reversed today after the BOJ’s Tankan report. Expect 87.50 - 89.50 to contain the range this week, barring a shock employment number from the United States, which could impact the wider markets.

AUD/USD

So far resistance at .9450 has managed to curb further appreciation from the Australian dollar. Pressure on the US dollar has been intense at times and this has kept the AUD close to the top of its recent range, in the absence of any material economic news. The RBA monetary policy statement later on today obviously offers the near term focus and it looks like the AUD will remain in demand ahead of that announcement. From there the focus shift is to a myriad of economic data releases in both economies. Undoubtedly the primary piece of news will be the US unemployment numbers. The result certainly will provide direction, with the .9450 resistance looking the vulnerable side in the near term.

AUD/GBP (GBP/AUD)                            

With little in the way of surprising economic news in either economy of late, this pairing remains contained by the tight recent range. The pair looks to be fairly priced as the RBA monetary policy announcement approaches later today. From there the Australian focus moves to the trade balance on Wednesday, and retail sales and building approvals numbers on Thursday. In the UK the latest manufacturing, construction and services numbers provide the focus. This week it is reasonable to expect the pair to be contained by the .5450 - .5650 (1.7700 - 1.8350) range that has been in place since mid March. However, increasingly the GBP looks to be building ascendency and it seems likely that over the time the current levels will prove to have offered good value buying of GBP with AUD.

AUD/EURO (EURO/AUD)

Over the last week this pair has continued to trade within the range that has established itself over the last month. The AUD looked to test resistance at .6950 through the middle of last week, before the demand for EURO returned. Direction from current levels looks uncertain as the RBA monetary policy statement later today offers the initial focus for the week. From there the focus moves to Europe for the most part, although Australian building approvals and retail sales data on Thursday will be watched. In Europe, ahead of the ECB monetary policy statement on Thursday, the unemployment and retail sales data will be closely monitored. It will take a material change in outlook from either central bank to break the resistance at .6950 (1.4400), albeit an unlikely proposition this week.

AUD/YEN

This pair has traded a relatively contained range over the last week. It does continue to trade close to the years highs, as the market remains poised for further BOJ stimulation if required. Todays BOJ Tankan survey results have helped keep the AUDJPY towards the middle of the weeks range. Expect the RBA monetary policy announcement later on today to be closely watched, albeit likely of limited impact. Expect the wider 94.50 - 96.50 range to contain the price action, even if we see increased volatility following the US employment numbers on Thursday. Over time the current levels could prove to have offered good value buying of YEN with Australian dollars.

AUD/CAD

Given the traditional volatility of this pairing, the last week has seen a contained trading range. Certainly the CAD looks to be in resurgent form with initial resistance now in place and the risk for further AUD weakness this week. The RBA monetary policy statement later today offers the primary focus of the week, following yesterdays Canadian GDP number. Much of the direction in the later part of the week will come from the release of the US employment numbers. The support at parity remains the key to direction in the short term at least. A consolidated break of that level would open up the way for another material move lower.

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Market commentary:

It was an interesting period in the foreign exchange markets last week. The US dollar was widely vulnerable, with all the focus on any negative news. Yield chasing investors again pushed the NZ dollar and to the lessor extent the AUD, higher as a result. However, in the last few sessions the momentum has turned a little. Certainly the NZ dollar looks lethargic, having set post float highs on a trade weighted basis, and the AUD has struggled to make higher ground on a number of pairings. Geopolitical concerns still require weary observation, but the impact has been limited for the time being.

Australia

There has been little in the way of economic news for Australia throughout the course of the last week. The improved Chinese manufacturing data was positive for sentiment, but the majority of the lead came from the wider market. The Reserve Bank of Australia’s (RBA) monetary policy statement later today offers the primary focus for this week. Expect the bias to remain steadfastly neutral for the time being. Of primary concern is the threat of increased credit tensions in China, and the capital expenditure transition from the mining sector to the wider economy.  Also of note will be the trade balance on Wednesday, and retail sales and building permit data on Thursday.

New Zealand

Last week saw a New Zealand Trade Balance released at 285m against a market expectation of a 250m number. The impact from this was limited, but the NZ dollar saw solid demand following the weak US Q1 GDP. This increased demand pushed the NZD higher across the board as investors chased higher yielding currencies.  However, there was an inability for the momentum to continue and this has seen a pullback in the last 24 hours. Yesterday saw the NZ data focus for the week in the form of the latest ANZ Business Confidence Survey result. Whilst coming off extremely elevated levels, the index saw a material pullback from 53.5% to 42.8%. Whilst this should be regarded as a healthy correction from overly energetic levels, the NZ dollar has suffered as a result. Material price reactions to this survey are rare, so this points to the NZ dollar “bulls” starting to get a little lethargic. This was highlighted as the NZD underperformed both the EURO and GBP following weaker than expected US regional manufacturing numbers.

United States

The economic data in the United States remained mixed last week. Taking the primary focus were the final Q1 GDP numbers that revealed the materially worse than expect fall in activity of 2.9%. This coupled with weak Durable Goods Sales data to undermine the US dollar and push longer term US interest rates lower. When the pressure is on a currency, the market seems to focus on any negative news. This happened again overnight, as the market focused on the under expectation Chicago PMI number, whilst ignoring strong new home sales news. However, This may well prove just to be a build up to the focus of the week in the form on Thursdays employment numbers. The expectation is for 211k worth of jobs growth and unchanged unemployment rate of 6.3%.

Europe

Manufacturing weakness in the core European member economies of Germany and France fed through to underperforming European manufacturing numbers last week. Last night revealed the European inflation numbers, with the core number of +.8% coming in a touch ahead of the .7% expectation. This will be of mild encouragement to the European Central Bank (ECB) as they prepare to make their monetary policy statement on Thursday. Ahead of then the employment and retail sales numbers are due, in what should be an interesting week. The pressure on the EURO has eased a touch over the last week, which will not be pleasing the ECB, as the strength of the EURO remains a material barrier to competitiveness for many member states.

United Kingdom

Last week was a relatively quiet one for news in the UK. New macro-prudential restrictions for residential lending were of note, albeit their impact to be limited in the short term unless further price appreciation is seen. Friday’s final Q1 GDP reading was uneventful, with the .8% result right on market expectations. This weeks focus comes from the monthly manufacturing, construction and services indexes. With the Bank of England poised to initiate a move away from the emergency low interest rates over the coming year, expect the Pound Sterling to remain supported on any softness.

Japan

In slightly contradictory evidence from Japan last week, a sharp fall in household spending of 8.0% was balanced by a less than anticipated fall in retail sales activity (-.4%). This week sees the primary focus come from the important BOJ “Tankan” survey results. These follow yesterdays weaker than expected preliminary industrial production results. The Tankan results showed  lower levels of activity for both larger manufacturers and non-manufacturers. This lower than expected numbers were somewhat balanced by the highest capital expenditure intentions number since June 2007.

Canada

There was nothing in the way of top tier economic data from Canada last week. The Canadian dollar has enjoyed its resurgence for the most part, maintaining its recent gains. Last night saw the monthly GDP numbers reveal .1% growth against an expectation of a .2% rise in activity. The lower than expected activity was attributable to lower levels of oil and gas output. Some analysts have suggested 2nd quarter growth of 2-2.2% and this may see BOC Governor revise down the current Q2 growth estimate of 2.5%, when he publishes the monetary policy report on July 16th.

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Sam Coxhead is a currency analyst with Direct FX You can contact him here »