US employment data failed to raise pulses; central bank focus turns away from US and we could see some excitement from BoE and BoJ announcements

By Ian Dobbs*:

Market focus last week centred largely around some key US releases and the belief that strong data could see rate hike expectations brought forward.

In the end it wasn’t to be, even though GDP for the second quarter was much better than forecast. The Fed provided little reason to get excited after their rate meeting with no indication that there was any real debate around when to start hike rates.

Then on Friday key US employment data also failed to raise pulses come in a touch below expectation at 209k. The rest of this week will again see central banks in focus with rate meetings in Australia, the UK, Europe and Japan.

We don’t expect any policy changes to come from these meetings although there could be some excitement around the Bank of England meeting and possibly the Bank of Japan’s as well.

In the UK we must be getting very close to some dissenters within the policy committee voting for a hike, while in Japan there is going talk of further stimulus from the BOJ over the coming months.

Major Announcements last week:

·  US CB Consumer Confidence 90.9 vs 85.5 expected

·  US Advanced Q2 GDP  4.0% vs 3.1% expected

·  US Federal Reserve taper QE further as expected

·  European Inflation +.4% vs +.5% expected

·  Canadian Monthly GDP +.4% vs +.3% expected

·  China HSBC Manufacturing PMI 51.7 vs 52.0 expected

·  UK Manufacturing 55.4 vs 57.2 expected

·  US Employment growth 209k vs 231k expected

·  IS ISM Manufacturing Survey 57.1 vs 56.1 expected

·  Australian Retail Sales +.6% vs +.3% expected

NZD/USD

The recent downward momentum of the NZD seems to have waned over the past week thanks in large part to the USD that failed to make further gains. Although last week’s US GDP data was very supportive, the Fed meeting provided little impetus for further buying and Friday’s payrolls data was also a touch disappointing. It wasn’t that the employment numbers were soft, they were in fact very consistent with the ongoing economic recovery, but they just weren’t strong enough to put pressure on the Fed to start thinking about when to raise rates. On the back of Friday’s release the NZD managed to recover back above resistance at 0.8520 and this bodes well for further gains in the near term. A nice technical target for this recovery would be the 0.8650 area and selling ahead of that level is recommended. Tomorrow we get NZ employment data while from the US this week we have manufacturing PMI, factory orders, the trade balance, weekly unemployment claims and productivity data.

NZD/AUD (AUD/NZD)

This pair saw the NZ dollar recover strongly off the 0.9050 (1.1050 resistance) area last week, although the NZD upside momentum seem to have run out of steam in the last couple of days. The cross seems comfortable trading around the 0.9130/40 (1.0950) area at the moment, however we have a number of releases over the coming days that could impact. First up is today’s RBA monetary policy statement. This should hold few surprises, with little change expected in the bank's assessment of the economy. The real chance for action in the pair will come with the release of employment data from New Zealand tomorrow and Australia’s on Thursday. Topside resistance comes in around 0.9200 (1.0870) while the downside continues to be support around 0.9060 (1.1040).

NZD/GBP (GBP/NZD)

Some relative weakness in the UK Pound has seen this pair recover nicely off support around 0.5000 (resistance around 2.0000) over the past week. The pair has traded right up to resistance at 0.5060 (support at 1.9763), but has so far has failed to overcome that level. GBP weakness was driven by a bigger than expected decline in manufacturing PMI on Friday, although last night’s construction PMI made for better reading. There are a number of key releases over the rest of this week that could easily drive prices. From the UK tonight we get the services PMI figure and this will be followed on Thursday by the Bank of England rate meeting. From New Zealand tomorrow we have employment data to digest. While 0.5060 (1.9763) caps the NZD topside, the risks are the pair will turn back down and have another crack at 0.5000 (2.0000). However, a move above 0.5060 (below 1.9763) would open the way for gains back toward 0.5100 (1.9608).

 NZD/CAD

This pair has seen a significant recovery off the lows around 0.9200 posted this time last week. The recovery has been driven in large part by a bounce in the New Zealand dollar that had been under pressure since turning down from recent highs in mid-July. Friday evening saw a better than forecast result for Canadian GDP, but its positive impact was outweighed by a somewhat disappointing US employment figure. This helped to drive the pair up to resistance around 0.9300, where it currently trades. A sustained move above here will open the way for a test back to 0.9400. The focus now turns to NZ employment data out tomorrow and then a raft of Canadian releases late in the week. These include the trade balance, building permits, Ivey PMI and employment change.

NZD/EURO (EURO/NZD)

This pair has remained largely directionless over the past week happily trading around the 0.6340 (1.5773) level. The low of 0.6317 (high of 1.5830) traded in the volatile period around Friday night’s US employment data, but it was short lived. If the pair can manage a move above 0.6360 (below 1.5723) this will open the way for further gains toward 0.6400 (1.5625). Tomorrow from New Zealand we get employment data and later in the week the ECB hold their regular rate meeting. Ahead of that meeting there is a raft of second tier Eurozone data scheduled which will likely continue to show a sluggish economy in the region.

 NZD/YEN

This pair recovered off recent lows at 86.70 early last week helped by a bounce in the New Zealand dollar that coupled with some poor economic data released from Japan that has put the Yen under pressure. So far the recovery has been capped by the 87.60 level, and while that remains the case there is potential for the pair to turn back down. A move above 87.60 however, would target the 88.30 area. Key to near term direction will be tomorrows NZ employment data and Friday’s Bank of Japan (BOJ) monetary policy statement. If the BOJ downgrade their current assessment of the economy the Yen will likely see further pressure.

AUD/USD

The recent downward momentum of the Australian dollar seems to have eased, and the local currency has put in a significant bounce from its 0.9276 low. That recovery was triggered in large part by the failure of the USD to continue to make gains. Although last week’s US GDP data was very supportive, the Fed meeting provided little impetus for further buying and Friday’s payrolls data was also a touch disappointing. It wasn’t that the employment numbers were soft, they were in fact very consistent with the ongoing economic recovery, but they just weren’t strong enough to put pressure on the Fed to start thinking about when to raise rates. Added to this was yesterday’s Australian retails sales data that came in stronger than expected and this helped boost the AUD a touch. The pair now trades right on resistance at 0.9335 and a move above here would likely see further gains toward 0.9400. This afternoon’s RBA rate statement should be a tame affair with no real change in the assessment of the economy expected from the bank. Thursday’s employment data could provide a better lead for the market with expectations for a gain of 13.5k.  From the US this week we have manufacturing PMI, factory orders, the trade balance, weekly unemployment claims and productivity data.

AUD/GBP (GBP/AUD)                            

This pair traded down to 0.5500 (up to 1.8182) in the middle of last week as the Australian dollar under performed in the wake of better US GDP data. That level managed to contain the Australian dollar downside and on Friday night we saw a sharp recovery back toward 0.5540 (1.8051) where the pair seems more comfortable trading. The bounce was driven on two fronts. A stronger Australian dollar combined with some weakness in the GBP after softer than forecast UK manufacturing PMI data was released. Direction from here will be determined by a number of key events over the next few days. First up we have the RBA rate statement later this afternoon, then on Thursday evening it’s the Bank of England’s turn to review policy settings. Other data to watch out for this week includes Australian employment change and UK service sector PMI. The range of 0.5440 to 0.5640 (1.8382 to 1.7730) has contained price action since mid-March and I expect that to continue over the coming weeks.

AUD/EURO (EURO/AUD)

The Australian dollar declined against the Euro in the middle of last week as the local currency under performed in the wake of strong US GDP numbers. The pair traded down towards 0.6920 (up towards 1.4451) before Friday’s softer than expected US employment figures caused a recovery. Since then the AUD has outperformed the EUR and the pair has recovered back toward resistance around 0.6960 (support around 1.4368). Direction from here will largely depend on the outcome of some key releases over the coming days. First up we have the RBA rate statement later this afternoon, then on Thursday we have Australian employment change data followed by the ECB rate meeting. Risks are slightly skewed towards a strong Australian dollar, although the pair will need to overcome the 0.6960 (1.4368) level, before a move back to 0.7000 (1.4286) can be considered.

AUD/YEN

The Australian dollar saw some pressure from the Yen on Friday evening that took the pair down to its 95.30 low. This was short lived however, as the AUD outperformed in the wake of US employment data and the cross is now largely unchanged from where it was a week ago. Poor economic data from Japan recently is keeping the Yen on the back foot and this is expected to continue in the near term. This keeps the focus for the pair on the topside and a potential move back up over 96.00. First up however, we have the RBA rate statement to negotiate this afternoon and then on Thursday we get employment change data. The week will be rounded out by the Bank of Japan’s own monetary policy statement on Friday and a lot of attention will be paid to their current assessment of the economy.

AUD/CAD

This pair came under pressure late last week as the Australian dollar underperformed against the CAD. A better than forecast result for Canadian GDP help drive the pair to its 1.0118 low, however as we headed into the weekend we saw a sharp turn around. This bounce was triggered by softer than forecast US employment numbers and the AUD materially outperformed the CAD in the wake of that release. The pair has now recovered all its losses currently trading just below 1.0190. The focus now turns to the RBA rate statement later this afternoon and then Australian employment data on Thursday. From Canada there is also plenty to digest late in the week with the trade balance, building permits, Ivey PMI and employment change all set for release. The broad uptrend that started in early July is still in play and this keeps the immediate focus on the topside. Only a move below 1.0140 will alter that picture.

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Market commentary:

Market focus last week centred largely around some key US releases and the belief that strong data could see rate hike expectations brought forward. In the end it wasn’t to be, even though GDP for the second quarter was much better than forecast. The Fed provided little reason to get excited after their rate meeting with no indication that there was any real debate around when to start hike rates. Then on Friday key US employment data also failed to raise pulses come in a touch below expectation at 209k. The rest of this week will again see central banks in focus with rate meetings in Australia, the UK, Europe and Japan. We don’t expect any policy changes to come from these meetings although there could be some excitement around the Bank of England meeting and possibly the Bank of Japan’s as well. In the UK we must be getting very close to some dissenters within the policy committee voting for a hike, while in Japan there is going talk of further stimulus from the BOJ over the coming months.

Australia

Last week saw a mixed bag of data from Australia. Building approvals were disappointing coming in at -5.0% but this was offset to a degree by private sector credit data that came in better than forecast at +0.7%. On Friday we saw producer prices data and although the quarterly figure was softer than expected at -0.1%, compared to a year earlier the PPI was up 2.3%. None of these releases had a material impact on the currency. Yesterday however, we saw retails sales data and this did give the AUD a small boost. Sales for June were up 0.6% on the month which was better than the expectation for +0.3%. The prior result was also revised up a touch adding to the positive tone of the release. There is plenty more to come this week with the trade balance and RBA statement later this afternoon and employment data on Thursday. The RBA are likely to remain relatively neutral and I don’t expect a big change in the wording of the statement when it gets released later. We can expect them to suggest a period of stability in rates is expected and that the Australian dollar is high by historical standards.

New Zealand

Last week was a quiet one data wise for New Zealand. We did get building consents figures and they came in on the strong side largely reversing the previous months decline. The impact from that data was muted, however the same cannot be said for the only other news out last week which was Fonterra’s pay-out forecast for the 2014/15 season. At NZ$6.00 it was at the very low end of expectations and it weighed heavily on the currency. This was reinforced yesterday with the release of the ANZ commodity price index which showed the price of whole milk powder is down 53% year on year. As a whole the index for July was down 2.4%. This is a drop from the prior reading of -0.9% and the fifth consecutive month of decline. This point was not lost on the NZ Treasury who released their monthly economic indicator yesterday as well. They said July’s data releases showed that confidence in the economic outlook has slipped, that export growth weakened and housing market activity slowed. They added that although inflation remained moderate in the June quarter, price pressures are expected to intensify due to a lack of spare capacity in the economy. Tomorrow we have key employment data set for release along with the labour cost index. Employment change is expected to increase 0.7% with the unemployment rate falling to 5.8%.

United States

Last week saw a number of key releases from the United States and although it felt like the USD was poised to make some gains, in the end the data just wasn’t quite strong enough. Certainly the GDP figure for the second quarter was supportive coming in above expectation at +0.4%, but this was followed by the Fed rate statement that lacked any really indication that rate hike could come soon rather than later. It was then left to Friday’s key non-farm payrolls data to try and ignite some USD buying. Expectations were for a gain in payrolls of 230k and the market was positioned for a strong number. In the end however, the actual result came in at +209k with some small positive revisions to previous numbers. Although this wasn’t a bad number at all the market wanted to see something more encouraging and their disappointment was evident in the USD selling seen after the release. Adding to the negative sentiment was a small uptick in the unemployment rate to 6.2%, and a complete lack of wages growth on the month. Data like this won’t be putting any pressure on the Fed to consider bringing forward rate hike expectations which are currently centred on the second half of next year. The Fed believes the improving job market will bring more people back into the labour force and this will act to restrain wage inflation. All in all last week, although the USD failed find the sort of support many hoped for, the economic data is consistent with a solid recovery which should continue throughout the second half of this year. Tonight we have manufacturing PMI and factory orders data and later in the week we get the trade balance, weekly unemployment claims and productivity data.

Europe

Eurozone data last week failed to provide any real support for the Euro. There were a number of better than expected second tier releases but the key inflation figure again disappointed by dropping from 0.5% to 0.4%. On Friday we saw manufacturing PMI data which was a touch below expectation in the Eurozone at 51.8. Comments from the IFO head were also a little worrying. He said German economic growth could shrink towards zero in the second quarter due to the Ukraine crises and the economic sanctions imposed on Russia. Growth in the Eurozone has been largely driven by Germany and this will be of concern for the ECB. Last night’s Eurozone investor sentiment index highlighted the issues after it collapsed to 2.7 from 10.1 previously on the back of the Russian sanctions. The ECB meet later this week, although they have made it clear we are unlikely to see any further action until December at the earliest. Ahead of that meeting we retail sales data, German factory orders, and Italian GDP.

United Kingdom

The UK Pound has seen something of a correction recently, pulling back in line with slightly softer data. That trend continued on Friday with the release of manufacturing PMI which fell from 57.2 to 55.4. This is still a very healthy level and one that signals continued expansion in the industry at a robust pace. Last night we saw construction PMI data and it seems that sector has maintained the strong momentum seen in the first half of the year. The index came in at 62.4 which is only slightly below the previous 62.6 result. Services PMI data hits the wires tonight and later in the week we have the Bank of England (BOE) rate meeting. Although the last meeting failed to see any members of the committee vote for a hike, that may not be the case this time. There is plenty of talk that we will see one or two dissenters and if the result of the ‘shadow MPC’ is anything to go by rate hikes could come sooner rather than later. The Shadow MPC is a group of independent economists who meet once a quarter at the Institute for Economic Affairs (IEA) to monitor BOE committee decisions and make their own recommendations. Last night they recommended raising the bank rate by 50 basis points this month.

Japan

The downside pressure is starting to build within the Japanese economy as it struggles to hurdle the GST increase implemented in April. Last week saw retail sales, industrial production and average cash earning data all underperform expectations. We are in a critical period for the Japanese economic recovery and at this point the signs aren’t looking too good. There is now talk in the market that the Bank of Japan may have to increase stimulus over coming months. We have the BOJ monetary policy statement later this week and a lot of attention will be paid to their assessment of the economy.

Canada

Last week was a relatively quiet one for economic news in Canada. Just the monthly GDP numbers on Thursday offered any real focus. To that end the +.4% result was positive and provided a buffer for the Canadian dollar. This week sees a busier calendar started off by the trade balance results on Wednesday, building permit and manufacturing numbers Thursday, and the important employment report on Friday. The unemployment rate is expected to drop .1% to 7.0%. Any surprise below 6.9% will be gladly received as a post GFC cycle low. The employment data coupled with the fate of the US dollar which continues to provide a central theme for the wider financial markets, will provide the lead for the Canadian dollar.

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