Geopolitics dominates currency market moves with risk appetite rising, Australia's growth outlook downgraded

by Raiko Shareef

NZ Dollar

The NZD/USD managed to (once again) keep its head above the 200-day moving average into the close, losing 0.2% to sit at 0.8460.

The NZD was kept fairly range-bound on Friday, with dips lower toward 0.8400 (inspired by risk aversion) rejected.

The area from 0.8640 down to 0.8400 continues to frustrate NZD bears, and this week’s data calendar would provide them with little cause for encouragement.

We suspect that a sustained break below 0.8400 will need to be inspired by the USD side of the equation.

On the crosses, NZD/EUR lost 0.5% to close at 0.6310, finishing the day below its 100-day moving average for the first time since early March.

NZD/JPY slid 0.2% to slip through its 200-day moving average for the first time since September.

While downside momentum for NZD/USD might be fading, these technical signals suggest that the overall negative tone for NZD remains intact.

But patience may be required this week. The local calendar is light, with just the PMI for July and Q2 retail sales (both due Thursday) looking likely to inspire any movement.

For today, we see initial support at 0.8430, and resistance at 0.8520.

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Majors

Geopolitics dominated market moves into the weekend, with risk appetite deteriorating on news of US airstrikes in Iraq, and then reversing course as Russia reportedly stepped back from the brink of an invasion of Ukraine.

On Friday, US President Obama announced the authorisation of limited airstrikes on ISIS militants, in order to protect 40,000 trapped Yezidi refugees. The first of multiple airstrikes took place on Friday, with more over the weekend.

Later on, Russia’s defence ministry announced that all troops and military hardware amassed near the Ukrainian border were returning to base following the completion of field exercises.  This was as previously announced, but confirmation of the retreat from the border was nevertheless greeted with relief. Investors had been concerned by the prospect of a Russia invasion, under the guise of a humanitarian mission.

This news helped to reverse what was shaping up to be another very negative day for equity markets. The Euro Stoxx 50 still ended lower for the day at -0.2%, but was well off intraday lows. US indices saw strong gains, with the S&P 500 up 1.2%. Currencies were much more mixed, with the Bloomberg Dollar Spot Index (BBDXY) off by 0.1%.

Understandably, economic data played second fiddle to other events on Friday, but a few points are worth noting.

In Australia, the RBA surprised analysts by modestly downgrading its growth outlook, blaming a delay in the economy’s eventual re-balancing away from mining investment. This sparked a short-lived sell-off in AUD/USD, which closed unchanged for the day at 0.9280. In the UK, the trade balance for June printed wider than expected (-£9.4b vs -£8.9b exp.). This helped GBP extend its slide south, losing 0.4% against the USD to 1.6780.

In the week ahead, we expect that geopolitics will remain a key focus, especially whether or not Russia’s de-escalation continues or reverses. As this note goes to print, Ukraine’s military have resumed action against pro-Russian separatists, after discussions of a truce failed to make traction.

The absence of top-tier data will help keep the focus on current affairs. Highlights of the calendar will be: US retail sales and industrial production; euro-zone GDP and CPI; and Chinese industrial production, retail sales, and fixed asset investment data.

Other news:
* Canadian employment very disappointing at +200 vs +19,000 exp.
* China July CPI at +2.3% y/y as expected

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