Expect geo-political tensions to continue along with a flight to safe haven currencies such as the US dollar and Japanese Yen

By Ian Dobbs*:

Throughout the last week the main theme emerging from the markets has been one of caution.

The medley of the escalating situation around the Gaza strip and the inconceivable shooting down of Malaysian flight MH17 has provided the safe haven appetite.

For the most part the move has seen many pairings remain in what are increasingly familiar ranges.

Expect the geo-political tensions to continue to temper any market enthusiasm in the short term at least, with the US dollar and the Japanese Yen being the primary beneficiaries in such environments.

The exception to the range trading, has been the NZ dollar that saw a determined reversal of the hefty demand that has been apparent for most of 2014.

A further plunge in the  important global dairy prices were joined by lower than expected Q2 inflation numbers. This saw pressure build on the NZ dollar across the board ahead of this week’s Reserve Bank of New Zealand (RBNZ) monetary policy announcement.

Major Announcements last week:

·  BOJ leaves monetary policy unchanged as expected

·  UK Inflation 1.9% vs 1.6% expected

·  German Economic Sentiment 27.1 vs 28.9 expected

·  US Retail Sales +.4% vs +.5% expected

·  NZ Inflation .3% vs .4% expected

·  Chinese GDP 7.5% vs 7.4% expected

·  UK Unemployment rate 6.5% as expected

·  BOC leave monetary policy unchanged as expected

·  European Inflation +.5% as expectedEuropean Inflation +.5% as expected

·  Canadian Inflation  (monthly) +.1% as expected

NZD/USD

The New Zealand dollar saw significant losses last week weighed on by falling dairy prices and softer than expected inflation. The currency broke down through some key support levels the most notable of which was 0.8720. That level now provides resistance on the topside and as such it has so far capped any potential bounce. The NZD has recovered back to there on three separate occasions and been rejected each time. This keeps the focus on the downside and another test of support at 0.8650. We may find those two levels contain trade heading into Thursday’s RBNZ rate meeting which provides the main focus for the week. The outcome of that meeting will likely dictate near term direction. Any sustained break below 0.8650 will open the way for move to 0.8520 ahead of 0.8400. US data will also bear watching this week with Wednesday’s inflation figure followed by existing home sales, new homes sales, and durable goods orders on Friday.

NZD/AUD (AUD/NZD)

This pair has been under pressure ever since last Tuesday’s Global Dairy Trade auction. The much weaker than expected dairy prices weighed on the New Zealand dollar and these were followed a few hours later by softer than forecast NZ inflation. As a result the cross declined from just under 0.9400 (1.06.38) to a low so far of 0.9239 (high 1.0824). A NZD small bounce from there at the start of this week has seen the pair trade quietly around the 0.9270 (1.0790) level ever since. Tomorrow from Australia we get inflation data that will be closely watched, although the biggest driver for the pair this week is likely to be the RBNZ rate announcement on Thursday. Although many still expect the central bank to hike rates to 3.5% it is not a foregone conclusion, and even if they do hike they are likely to signal a pause in the tightening cycle through to the end of the year. For the time being the risks remain to the NZ dollar downside with a move below 0.9230 (above 1.0835) targeting 0.9160 (1.0920) and then 0.9060 (1.1040).

NZD/GBP (GBP/NZD)

This pair saw a significant pull back from the 0.5160 (1.9380) level early last week. A number of factors lined up to drive the move including weak dairy prices, softer than expected NZ inflation and stronger than forecast UK inflation. So far the pair has traded to a low of 0.5062 (high of 1.9755) with the 0.5100 (1.9608) level capping any periods of strength since then. This keeps the focus on the down side for the time being with any move below 0.5060 (above 1.9763) opening the way for a test toward 0.5000 (2.0000). We do have the RBNZ rate meeting on Thursday morning and this event provides the main focus for the week. From the UK we have the BOE minutes, retail sales and GDP data to digest all of which could also influence.

 NZD/CAD

Like many New Zealand dollar crosses this pair lost significant ground last week as declining dairy prices and soft inflation data weighed on the NZD. This contrasts with Canadian inflation which increased to 2.4% from the previous 2.3% reading on Friday evening. That data helped the pair trade to its 0.9296 low and although we have seen a small bounce from there, the risks remain to the downside. From Canada this week we get retails sales data, but the main driver of the pair is likely to be the RBNZ rate meeting on Thursday. This event could well dictate near term direction. The central bank is still expected to hike rates to 3.5%, but they are also very likely to signal a pause in the tightening cycle for the rest of the year. A failure to signal that from the RBNZ could well see the NZD gain much of the lost ground.

NZD/EURO (EURO/NZD)

Although the Euro has seen some pressure recently thanks to continued soft data and Portuguese banking concerns, it has none the less outperformed the New Zealand dollar. The local currency has seen a significant fall from recent highs thanks to weak dairy prices and softer than expected inflation. Minor support around 0.6400 (resistance around 1.5625) has so far contained the NZ dollar downside and it will take a move below there to confirm that a medium term top has been put in place. Until then we could easily see a recovery back up toward the recent highs at 0.6489 (1.5411). A sustained break below 0.6400 (above 1.5625) will target 0.6340 and then 0.6180 (1.5773 and then 1.6181). The key focus on the week comes from the RBNZ rate meeting on Thursday morning. This event could well dictate near term direction. From Europe we get manufacturing and service PMI’s along with German IFO business climate index.

 NZD/YEN

This pair suffered last week at the hands of a declining New Zealand dollar. The NZD was driven lower by weak dairy prices and softer than expected inflation. We also saw a bout of risk aversion as news of the Malaysian Airline crash hit the wires and this saw the pair trade to its 87.53 low. That low didn’t last long however and a recovery to the 88.00 level ensued which is where we are currently trading. The main focus for this week revolves around the RBNZ rate meeting on Thursday. The central bank is still likely to hike rates to 3.50%, although they may well signal a pause in the tightening cycle through the end of the year. For now the risks are still skewed to the downside with a move below 87.50 targeting support around 86.00.

AUD/USD

The Australian dollar has been capped around the 0.9400 level for much of the past two weeks and that continues to mark the first level of resistance. On the downside dips have been limited to 0.9330 and with no current overall direction, we can expect those two levels to continue to dominate in the near term. We do get Australian inflation data tomorrow and this could easily influence if it prints significantly away from the markets 0.5% expectation. The USD has strengthened a small amount recently but we are far from seeing the broad upward trend many would have expected by now. Data from the US this week could help with readings on inflation, existing home sales, new home sales and durable goods orders all set for release.

AUD/GBP (GBP/AUD)                            

Although this pair is currently trading close to where is was this time last week, we have seen some volatility on the back of changes in the value of the UK Pound. Last Tuesday’s UK inflation data saw demand for the GBP increase and as such the cross to the AUD came under pressure. The pair traded a 0.5446 low (1.8362 high) before poor UK wage growth data helped turn the tide around. Since then the GBP has been slowly giving back much of the gains made against the AUD. On the topside, the 0.5500 (1.8182) area continues to provide resistance and while below there the risk of further dips remains. We do get Australian inflation data tomorrow which could easily influence while from the UK this week we get the BOE minutes, retail sales, GDP and a speech from Governor Carney.

AUD/EURO (EURO/AUD)

Over the past week we have seen a small amount of Euro weakness thanks to continued soft data and Portuguese banking concerns. This was the main driver in pushing the pair back up toward recent highs around 0.6960 (lows 1.4370) on Friday. Since mid-June that level has capped the AUD topside and it continued to do its job this week as well. On the downside there is support around 0.6860 (resistance at 1.4580) and these two levels look likely to contain near term trade. Tomorrow we get Australian inflation data which will be closely watched. The market is expecting a reading of 0.5% and any significant deviation from that will elicit a response from the currency. From Europe we get manufacturing and service PMI’s along with German IFO business climate index.

AUD/YEN

Apart from a period of risk aversion in the immediate aftermath of the Malaysian Airlines crash this pair has been very range bound over the past week. Resistance around 95.50 has capped the topside, while support just below 95.00 has contained a number of downside attempts, excluding the ‘risk off’ spike to 94.40 which was short lived. This week the focus turns to Australian inflation data out tomorrow. A result significantly away from the 0.5% expectation could easily impact the currency. From Japan this week we also get inflation data along with the trade balance and manufacturing PMI.

AUD/CAD

This pair has been very range bound for the past ten days. 1.0040 to 1.0100 seems to have contained price action and at this stage it’s hard to see what could change that. We did get a slightly stronger reading from Canadian inflation on Friday, but it wasn’t enough to see the range threatened at all. Tomorrow’s Australian inflation release could spark a move if it prints significantly away from the 0.5% expectation. A downside breakout is probably the slight favourite with a move below 1.0040 opening the way for a move back to Julys 0.9939 low.

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Market commentary:

Throughout the last week the main theme emerging from the markets has been one of caution. The medley of the escalating situation around the Gaza strip and the inconceivable shooting down of Malaysian flight MH17 has provided the safe haven appetite. For the most part the move has seen many pairings remain in what are increasingly familiar ranges. Expect the geo-political tensions to continue to temper any market enthusiasm in the short term at least, with the US dollar and the Japanese Yen being the primary beneficiaries in such environments. The exception to the range trading, has been the NZ dollar that saw a determined reversal of the hefty demand that has been apparent for most of 2014. A further plunge in the  important global dairy prices were joined by lower than expected Q2 inflation numbers. This saw pressure build on the NZ dollar across the board ahead of this week’s Reserve Bank of New Zealand (RBNZ) monetary policy announcement.

Australia

Last Tuesday’s RBA minutes provided the main focus for the Australian dollar, although they were very much in line with previous releases from the central bank. As such, there was little overall market impact. At this point the RBA are on hold through to the end of the year. Other second tier data released last week will have failed to impact that expectation, with strong motor vehicle sales offset to a degree by a fall in business confidence. This week we have inflation data that will be closely watched. The market is expecting a reading of 0.5% which would mark a small decrease from the prior result of 0.6%. This sort of outcome should have no impact on the RBA current policy and allow them the ability to maintain ‘a period of stability’ in interest rates. We are also expecting to hear from both the RBA Deputy and Governor today, and if history is anything to go by they won’t miss a chance to try and jawbone the Australian dollar lower.

New Zealand

This week should prove to be very interesting for the New Zealand economic outlook. The main event is Thursday’s RBNZ monetary policy announcement where the central bank is still expected to hike another 25 points taking the cash rate to 3.50%. Data over the past week will certainly give the bank something to think about and the decision is not a foregone conclusion. A very high New Zealand dollar, falling dairy prices and weaker than expected inflation are all reasons to suggest if the bank does hike again, they may well signal a pause for the rest of the year. This is probably the base case scenario that is now baked into the market. Yesterday we saw the latest migration data for June which showed 4,300 net migrants arrived in June. This is the second highest number on record behind February’s 4,700 and it will only serve to add to the RBNZ’s case for higher rates. Strong migration puts upward pressure on demand and inflation and is one of the reasons the central bank has sighted in justifying this tightening cycle. Other data this week in the form of the trade balance and business confidence will take a back seat to the central bank decision on Thursday morning.

United States

The main focus in the United States last week was Fed Chair Janet Yellen’s semi-annual testimony to a congressional committee. Although she did suggest if the employment market continues to improve faster than expected rate hike could come soon than forecast, she was very cautious and her review of the economy was carefully hedged at every turn. On the data front we saw some regional manufacturing surveys that came in above expectation and suggest the recovery from the shocking first quarter is continuing. We also saw weekly jobless claims fall a touch and if maintained at this level it is consistent with another good monthly payrolls figure. There were some disappointments however, and these came in the form of retail sales, building permits, housing starts and consumer confidence. The USD has seen increased demand on the back of developments in Gaza and the Ukraine, and long term interest rates have dropped recently with ten year Treasuries now trading back under 2.50%. This week we get the latest readings on inflation, existing home sales, new home sales and durable goods orders.

Europe

Last week saw continued disappointing data from the Eurozone with declines in industrial production, German economic sentiment, the trade balance and the current account. To add to this there were concerns around the Portuguese banking sector and although they have moderated, it just goes to show how fragile the entire situation still remains throughout large parts of Europe. In recent days the Bank of Italy have slashed GDP forecasts for 2014 to just 0.2% from 0.7% previously. These factors have seen the Euro weaken a touch over the course of the week. Geopolitical concerns remain heightened in the wake of the downed Malaysia Airline flight, however posturing from Europe will likely amount to nothing. They are too reliant on Russian gas supplies to instigate any meaningful sanctions.

United Kingdom

There were two key releases from the UK last week that will no doubt cause some debate within the Bank of England’s (BOE) Monetary Policy Committee. The first was inflation that came in at 1.9%. This was much stronger than the expectation of 1.6% and is only just below the BOE’s 2% target. The second was the claimant count change (unemployment claims) which saw a significant drop of -36.3k. Again this was much stronger than expectations which centred around a -27.1k fall. The UK employment market has surprised many, not least the BOE, with its strength throughout the GFC and these were again good numbers. The problem however, is that although overall employment is solid, wage growth has failed to find much traction. Average earnings at only +0.3% are running well below the level of inflation and this has been another feature of the UK since late 2007. The market chose to focus on this aspect when the data hit the wires and as a result the GBP failed to make gains in the wake of the release. Yesterday saw the release of the Rightmove House Price Index which actually decline in July. The -0.8% was the first fall this year and it takes the annual rate of growth to 6.5% from 7.7% previously. The housing market remains very strong however and one month’s data is not enough to signal a change in trend. The average time to sell actually fell from 75 days this time last year to 65 days now and this would suggest there is still plenty of heat in the market. Still to come this week we get the BOE minutes, retail sales, GDP and a speech from Governor Carney.

Japan

There have been no releases of significance from Japan since last Tuesday’s BOJ monetary policy statement. To be fair even that release was very much as expected with the bank maintaining its current policy stance and economic outlook. The big question at the moment is just how quickly will the economy recover from the impact of April's sales tax increase. The negative impact has been significant and officials are hoping for a gradual recovery but only time will tell. A bank holiday in Japan yesterday means it has been a very quiet start to the week although we do have the trade balance, manufacturing PMI and inflation data to digest over the coming days.

Canada

The Bank of Canada (BOC) were very direct in their monetary policy statement last week specifically stating they are ‘neutral’ with regard to the outlook for rates. The timing and direction of the next change will depend on how new information influences the economic outlook. They also acknowledged that the “temporary” rise in inflation may be stronger and more persistent than expected. This certainly seems to be the case with Friday’s CPI data coming in at +2.4% vs the +2.3% expected. The monthly figure of +0.1% marks the eighth gain in the last nine months and one starts to wonder just how “temporary” the rise will be. Also last week we saw better than forecast readings from manufacturing sales and wholesales sales. The only data this week comes in the form of retail sales on Wednesday.

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