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Federal Reserve’s statement and monetary policy announcement will be keenly watched as debate over the speed and extent of future rate hikes continues

Currencies
Federal Reserve’s statement and monetary policy announcement will be keenly watched as debate over the speed and extent of future rate hikes continues
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By Ian Dobbs*:

It has been an interesting past week in the wider financial markets. A medley of geopolitical risks, central bank influences and cyclical market turning points offered market watchers plenty of colour.

Expect the geo-political concerns to continue this week and the central bank focus turns to the all-important US Federal Reserve (FED). The Federal Reserve’s statement accompanying its monetary policy announcement is of particular importance as the prospect of increasing short end interest rates in the US approaches. Debate over the speed and extent of hikes from the FED in particular will be of note as the labour market continues to improve, albeit with a lag in earnings growth.

The Reserve Bank of New Zealand (RBNZ) certainly took the wind out of the NZ dollars sails last week with confirmation of a pause in its hiking cycle.

The NZ dollar vulnerability remains in place, albeit the interest rate differentials will offer some support once the apparent “bought NZD position” cleanout plays out.

The neutral stance from the Reserve Bank of Australia, coupled with the latest inflation numbers has seen the AUD reasonably well supported over the last week, helped along by better headline news from China.

Major Announcements last week:

·  US core Inflation 0.1% vs 0.2% expected

·  Australian Inflation 0.5% vs 0.5% expected

·  BOE vote 9-0 to keep policy unchanged

·  Canadian core Retail Sales +.1% vs +.3% expected

·  RBNZ hike cash rate to 3.50% as expected

·  HSBC China Manufacturing 52.0 vs 51.2 expected

·  European Manufacturing 51.9 vs 52.0 expected

·  UK retail Sales +.1% vs +.2% expected

·  UK preliminary GDP +.8% as expected

·  US Durable Goods Sales +.8* vs +.6% expected

·  Japanese Retail Sales +.6% vs -.4% expected

NZD/USD

Last week was another tough one for the New Zealand dollar with negative sentiment seeing further losses. The RBNZ’s strong words about the value of the currency along with a pause in the tightening cycle weighed heavily on the NZD. The currency has failed to put in any real bounce having traded to a 0.8530 low so far. This week is all going to be about the USD and whether it can start to make some meaningful gains. There are three key releases that could drive the big dollar. US GDP on Wednesday night will be followed by the FOMC rate statement a few hours later, then on Friday we have non-farm payrolls data. The market will want to see a good bounce back in GDP from the horrendous first quarter which was adversely affected by poor weather. From the FOMC it would be pleasing to see the start of debate around when to lift rates and if that does occur it will help to support the USD. Friday’s employment numbers should show another very strong result, especially considering the recent fall in weekly jobless claims to the lowest level since 2006. It’s hard to imagine all three of these events will line up perfectly to support the USD, but if they do, it could well signal the start of what should be a period of long term USD appreciation. It seems likely we will need to see this USD strength to push the NZD down in the low 80’s from its current level around 0.8550. Initial support comes in at 0.8520 with a move below there opening the way to 0.8400.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.8554 0.8520 0.8720 0.8530 - 0.8707

NZD/AUD (AUD/NZD)

The past two weeks have seen dramatic declines for this pair from levels around 0.9400 to a low of 0.9079 so far. The driving force has been weakness in the New Zealand dollar, although some Australian dollar strength has played a part. At the beginning of June the pair traded down to 0.9063 before recovering strongly, and so far that low has not been breached. This does leave the change of a corrective bounce intact, although I would suggest we are not likely to see gains to 0.9400 again anytime soon. There does seem to have been a tidal change in sentiment toward the NZD and this will likely limit any recovery in the pair to between 0.9160 and 0.9230. A break below 0.9060 will open the way for a test of the psychologically important 0.9000 level ahead of key support at 0.8920. I would not be getting carried away with losses below that level for now, as New Zealand still has a significant benefit in terms of interest rate differential and economic outlook to Australia.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9091 0.9000 0.9200 0.9079 - 0.9273
AUD / NZD 1.1000 1.0870 1.1111 1.0784 - 1.1015

NZD/GBP (GBP/NZD)

Like many New Zealand dollar crosses this pair moved sharply lower in the wake of last week’s RBNZ rate statement. Strong words from the central bank re the level of the currency and a pause in the tightening cycle did the damage and although the losses have moderated, we have yet to see any significant bounce. Key resistance comes in at 0.5060 (support at 1.9763) and this level has capped the NZD topside since the pressure on the NZD started last week. With only building consents data out in NZ this week, the focus will turn to the UK where we get net lending to individuals, the Nationwide house price index and manufacturing PMI. There is plenty of support for the pair around the 0.5000 level (resistance around 2.000) and at this stage we will need to see some further UK Pound appreciation if we are to trade though this level. Strong UK data this week would certainly help that cause.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5035 0.5000 0.5200 0.5022 - 0.5108
GBP / NZD 1.9861 1.9231    2.0000 1.9575 - 1.9911

 NZD/CAD

The New Zealand dollar has been under considerable pressure for much of the past two weeks. The latest down leg came on the back of the last Wednesday’s RBNZ rate statement and this drove the cross to the Canadian dollar to it’s 0.9188 low. We have however seen a decent bounce from the low thanks to weaker than expected core retail sales data released from Canada at the end of last week. This caused the CAD itself to come under pressure and as such the pair traded back up to 0.9260. There is potential for this corrective recovery to extend toward 0.9300, although resistance around that level should cap it for now. Data from both countries is a little light this week with only building consents from NZ and the raw materials price index and monthly GDP data from Canada.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9236 0.9100 0.9300 0.9188 - 0.9339

NZD/EURO (EURO/NZD)

Last Wednesday’s RBNZ rate statement has been the driving force for this pair over the past week. The New Zealand dollar traded dramatically lower in the wake of that release thanks to a pause in the tightening cycle and some strong words from the bank with regards to the level of the currency. The pair traded to a NZD low of 0.6349 (high of 1.5751). Although the losses have now moderated, we are yet to see any meaningful bounce. The Euro itself has seen some selling pressure recently, although it has been a very gradual affair and it was completely overrun by last week’s NZD losses. Support for the pair around 0.6350 (resistance around 1.5748) has yet to be broken and this would suggest we could still see a recovery. If we do get a move below 0.6350 (above 1.5748), then further NZ dollar losses to 0.6300 (1.5873,) and possibly even 0.6200 (1.6129) are on the cards. From NZ this week we only have building consents data set for release, while from Europe the focus turns to German and Eurozone inflation, French consumer spending, and unemployment data.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6365 0.6300 0.6500 0.6349 - 0.6466
EUR / NZD 1.5711 1.5385 1.5875 1.5466 - 1.5751

 NZD/YEN

The New Zealand dollar moved sharply lower in the wake of last Wednesday’s RBNZ rate statement. Strong words from the central bank re the level of the currency and a pause in the tighten cycle where the driving forces which saw this pair trade down to a 86.39. We have yet to see any meaningful bounce and while resistance at 87.50 caps the topside the risk are still skewed to further losses. There is little data out of NZ this week that could materially alter current sentiment with only building consents set for release on Wednesday. From Japan however we have a raft of data including household spending, retail sales, industrial production and average cash earnings.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 87.12 85.50 87.50 86.89 - 88.36

AUD/USD

The Australian dollar has been a solid performer over the past week making gains across the board. Slightly stronger than expected inflation data was the key driver as the currency traded up to 0.9470 against the USD. The AUD has moderated a touch from there although it still trades above 0.9400 for now. This week from Australia we get building approvals and producer prices data to digest, however the real focus will be on the United States. It could well be a big week for the USD with a number of releases keenly awaited. US GDP on Wednesday night will be followed by the FOMC rate statement a few hours later, then on Friday we have non-farm payrolls data. The market will want to see a good bounce back in GDP from the horrendous first quarter, which was adversely affected by poor weather. From the FOMC it would be pleasing to see the start of debate around when to lift rates and if that does occur it will help to support the USD. Friday’s employment numbers should show another very strong result, especially considering the recent fall in weekly jobless claims to the lowest level since 2006. It’s hard to imagine all three of these events will line up perfectly to support the USD, but if they do, it could well signal the start of what should be a period of long term USD appreciation. That is something the market has been waiting to see for months now, but has yet to materialize.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9409 0.9250 0.9450 0.9361 - 0.9470

AUD/GBP (GBP/AUD)                            

The Australian dollar snapped higher last week driven by slightly stronger than expected inflation data. This combined with a UK Pound that was under pressure to see the cross trade up over 0.5550 (under 1.8018). There wasn’t any really negative data out of the UK last week, but what was released also failed to spark further buying and as such the Pound drifted lower. With the pair now holding comfortably above the 0.5500 support (below 1.8182 resistance) level, the risks are skewed to further AUD gains. Only a move below 0.5500 (above 1.8182) would change that outlook. The Australian dollar upside target is a test of resistance just above 0.5600 (just below 1.7857). This week from Australia we get building approvals and producer prices data to digest, while from the UK we get net lending to individuals, the Nationwide house price index and manufacturing PMI.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5540 0.5450 0.5650 0.5483 - 0.5559
GBP / AUD 1.8051 1.7699 1.8349 1.7689 - 1.8238

AUD/EURO (EURO/AUD)

A combination of Euro weakness and Australian dollar strength saw the AUD make solid gains over the past week. Largely uninspiring data from Europe, along with recent easing’s from the ECB are starting to weigh on the Euro and we are now seeing a period of gradual declines in the value of the EUR. Of contrast was the Australian dollar that saw good buying after last week’s slightly better than expected inflation data and this help drive the pair to its 0.7035 high (1.4215 low). The risks are still skewed to the AUD topside and a continuation of the broad uptrend that started back in mid-March. Only a move below support at 0.6960 (resistance 1.4370) would bring that outlook into question. This week from Australia we get building approvals and producer prices data to digest, while from Europe the focus turns to German and Eurozone inflation, French consumer spending, and unemployment data

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7000 0.6900 0.7100 0.6922 - 0.7035
EUR / AUD 1.4286 1.4085 1.4493 1.4214 - 1.4446

AUD/YEN

Gains in the value of the Australian dollar after last week’s strong than expected inflation data saw this pair trade up to 96.17 before moderating a touch. Since then direction has been lacking to a degree with a period of consolidation above 95.50 ensuing. This keeps the focus on the topside for the time being. Data from Japan has been largely uninspiring with Friday’s core inflation number a little disappointing. This should only serve to underpin further topside price action for the pair. However, there is a major band of resistance between 96.10 and 96.50, which will prove very difficult to overcome. As such the near term will likely see at 95.50 to 96.50 range dominate. This week from Australia we get building approvals and producer prices data to digest, while from Japan we have a raft of data including household spending, retail sales, industrial production and average cash earnings.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 95.84 94.50 96.50 94.95 - 96.17

AUD/CAD

We have seen some good swing in this pair over the past week, however the overall trend has most certainly been to the topside. Stronger than expected inflation in Australia has coupled with soft Canadian core retail sales to see the cross driven back up over 1.0160. The focus remains on the topside and further gains are likely. Only a move down through 1.0100 would negate this. This initial topside target is a test of resistance around 1.0240. This week from Australia we get building approvals and producer prices data to digest, while from Canada we get the raw materials price index and GDP.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 1.0160 1.0100 1.0300 1.0055 - 1.0180

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Market commentary:

It has been an interesting past week in the wider financial markets. A medley of geopolitical risks, central bank influences and cyclical market turning points offered market watchers plenty of colour. Expect the geo-political concerns to continue this week and the central bank focus turns to the all-important US Federal Reserve (FED). The Federal Reserve’s statement accompanying its monetary policy announcement is of particular importance as the prospect of increasing short end interest rates in the US approaches. Debate over the speed and extent of hikes from the FED in particular will be of note as the labour market continues to improve, albeit with a lag in earnings growth. The Reserve Bank of New Zealand (RBNZ) certainly took the wind out of the NZ dollars sails last week with confirmation of a pause in its hiking cycle. The NZ dollar vulnerability remains in place, albeit the interest rate differentials will offer some support once the apparent “bought NZD position” cleanout plays out. The neutral stance from the Reserve Bank of Australia, coupled with the latest inflation numbers has seen the AUD reasonably well supported over the last week, helped along by better headline news from China.

Australia

The Australian dollar had a positive week last week helped in large part by solid inflation data. The headline result was right on expectation, but the trimmed mean figure which the RBA like to focus on, came in a bit stronger than expected. This give the currency a boost and it traded as high as 0.9470 to the USD on the week. This data will have done nothing to alter the central banks current ‘neutral’ stance and it is likely they will stay that way into early next year. We also saw some encouraging Chinese manufacturing data last week. Recent targeted stimulus measures are obviously having an impact, at least for the time being. These stimulus measures are really only plastering over the deeper economic issues associated with massive credit expansion and a housing market that is starting to suffer from elevated prices and oversupply. This week in Australia the focus turns to building approvals and producer prices data, along with figures on new home sales and import prices.

New Zealand

Last week was dominated by the RBNZ rate announcement and subsequent New Zealand dollar sell off. Although the central bank hiked rates again to 3.50%, they also signalled a pause in the tightening cycle and had some stern words with regards to the level of currency. They would have been happy with the reaction as the NZD closed the week near its lows to the USD around 0.8550. Adding to the downside pressure on the currency on Friday was business confidence data that showed confidence continues to moderate from the extreme levels seen earlier in the year. This week should prove to be a lot quieter with only building consents data our on Wednesday.

United States

Last week provided some interesting data from the United States. The headline inflation figure was in line with expectations, but the core number was a touch weaker. Good existing home sales numbers were countered by a soft reading on new home sales, and weekly unemployment claims fell again to 284k. This bodes well for the key non-farm payrolls figure set for release on Friday. At the very end of last week we also saw durable goods orders and although the headline numbers were strong, there were big negative revisions to previous results and as such any positive impact was negated. As a result of the negative revisions we have even seen some forecasters revise down their GDP estimates. GDP data is set for release on Wednesday and it will be closely watched to see just how strong the economic bounce back was from the shocking poor first quarter. Expectations are for around 3.1%, which would completely recover the first quarters -2.9%, although still leave only very modest growth for the first half of 2014. This data will be followed a few hours later by the FOMC statement. No major change in policy is expected, although we could easily see the start of debate within the committee around the timing of future rate hikes. This combined with an expected strong payrolls figure on Friday could easily see the USD start to make some real gains. Dare I say, it could even be the start of a broad USD uptrend, something many expected to see months ago. Either way this looks to be a big week for the United States.

Europe

The Euro continued its gradual decline last week helped by less than inspiring data. A gain in German manufacturing PMI was countered by another decline from the French reading. Service PMI’s were a little better from both countries and this helped to lift the Euro wide result. But the German IFO business climate index on Friday came in below expectation and below the prior reading. This kept the Euro under some pressure and it traded to 2014 lows against the USD heading into the weekend. ECB vice president Constancio has been on the wires reaffirming that any additional measures are unlikely in the near term. He said the aggressive easing measures undertaken by the European Central Bank last month should address the problem of low inflation and that the impact from the targeted loans, which have maturities of four years, are still to come. This week we get German and Eurozone inflation, French consumer spending, and unemployment data to digest.

United Kingdom

The UK Pound struggled to find buyers for much of last week. Although there was nothing overtly negative in any of the economic releases there was also nothing in there to spark fresh buying and as such the GBP traded a little heavily. The BOE minutes showed a unanimous 9-0 vote to keep rates on hold. We can’t be too far away from one or two of the more ‘hawkish’ members of the committee voting for a hike, but we’re obviously not there yet. Concerns about negatively impacting the recovery seem to be the reason for the unanimous vote, but one has to ask just how appropriate 0.5% rates are for an economy like the UK’s at the moment? Declining unemployment, solid growth and a booming housing market would suggest rates should head higher sooner rather than later. Also last week we saw retail sales data that was a touch weaker than forecast and GDP data came in bang on expectation for the quarter at +0.8%. Year on year it came in at a very healthy 3.1%. This week we get data on net lending to individuals along with the Nationwide house price index, although the focus will be on Friday’s manufacturing PMI release.

Japan

The main focus from Japan last week was on inflation data for June release Friday. Core consumer prices, that strip out volatile fresh food prices, rose 3.3% y/y which is a touch slower than the previous reading of 3.4%. If you strip out the impact of the sales tax hike however, core inflation came in at just 1.3%, down from 1.4% in May and 1.5% in April. This will be concerning for the government and Bank of Japan (BOJ) who have set a target level 2.0%. A good chunk of the current rise has also come from energy with gasoline prices up 11% and significantly higher electricity bills due to Japan’s need to import expensive fossil fuels after the Fukushima crisis saw nuclear power plants shut down across the country. Japan is looking to turn back on some nuclear generation over the coming months and although this will help with the trade balance, it will put further downward pressure on inflation. The impact of the massive stimulus implemented by the BOJ will start to dwindle if Prime Minister Abe’s ‘third arrow’, that of reform, is not implemented soon. Data to watch out for this week includes household spending, unemployment, retail sales, industrial production and average cash earnings.

Canada

There was only one data release from Canada last week and that was retail sales. The headline figure was stronger than expected at +0.7%, but stripping out autos left the core sales somewhat softer at just +0.1%. The market was looking for a core reading of +0.3%. This data weighed on the Canadian dollar in the latter pair of the week along with soft oil prices and a general lack of risk appetite. This week we have two releases to draw focus. The Raw Materials Price Index and GDP both hit the wires toward the end of the week.

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

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