Move to a more realistic level for NZD happening quicker than many thought; pick up in FX volatility yet to hit other markets

By Ian Dobbs*:

Both the Australian and New Zealand dollars have had a tough week, driven lower by soft commodities and central bank releases. This has particularly been the case for the NZD that has seen dramatic falls on two separate occasions over the past week thanks to the RBNZ.

The currency remained stubbornly strong of much of this year, but since turning back in mid-July, the move to a more realistic level for the NZD is happening a lot quicker than many would have thought.

Interest rate hikes in the US and UK are also now on the horizon and this will only add fuel to the fire of exchange rate normalisation.

A notable pick up in foreign exchange rate volatility has yet to spill over into other markets, but the risk is certainly there for both equities and long term interest rates suffer a similar fate over the coming months.

Major Announcements last week:

• Canadian Retail Sales -0.6% vs 0.0% expected

• NZ Trade Balance -472m vs -1125m expected

• German IFO Business Climate 104.7 vs 105.9 expected

• US New Home Sales 504k vs 432k expected

• US Core Durable Goods order 0.7% as expected

• US Final GDP 4.6% as expected.

• RBNZ say the value of the NZD is “unjustifiable” and “unsustainable”

• RBNZ intervened in August selling NZ$521 million.

NZD/USD

NZD/AUD (AUD/NZD)

At this time last week the New Zealand dollar was trading right on resistance around 0.9150 (support around 1.0930) to the Australian dollar. Since then we have seen a dramatic reversal with the currency plunging nearly three cents to a low yesterday of 0.8867 (high of 1.1278). The move has been driven in large part by two releases from the RBNZ over the past week. Their report on Thursday that outline the ‘unjustifiable’ and ‘unsustainable’ level of the NZD caused a wave of selling, and then yesterday the revelation that the central bank had actually intervened by selling NZD’s in August saw the currency spiral lower again. The sharp rejection from 0.9150 resistance (1.0930 support) leaves the pair looking vulnerable. While there is some support around the 0.8850 level (resistance around 1.1300), it is likely to come under heavy pressure at some stage soon. A sustained move below 0.8850 (above 1.1300) will then target 0.8750 ahead of 0.8600 (1.1430 ahead of 1.1628). From NZ this week we have the latest Fonterra dairy auction to draw focus. While from Australia over the coming days we get retail sales, building approvals and the trade balance data to digest, along with the RBA’s testimony on housing market risks.

NZD/GBP (GBP/NZD)

For a while now I have suspected this pair wanted to target key support around 0.4750 (resistance around 2.1053). I did not expect it to happen so quickly. The New Zealand dollar has been under all sorts of pressure this week thanks in large part to the Reserve Bank of New Zealand. Their two releases over the past few days have caused dramatic selling of the local currency and this has driven the pair to its low so far of 0.4751 (high so far of 2.1049). With that target reached so quickly it would be reasonable to assume a period of consolidation will be seen between the parameters of 0.4750 and 0.4900 (2.1053 and 2.0408). The longer term risks are however still to the downside and selling into any period of strength is recommend for those looking to purchase UK Pounds. From NZ this week we have the latest Fonterra dairy auction to draw focus. While from the UK this week we have PMI’s from the manufacturing, service and construction sectors to digest.

 NZD/CAD

This pair has been in a significant down trend since peaking at 0.9480 back in mid-July. That down trend accelerated this week thanks to dramatic losses in the value of the New Zealand dollar. These losses came on the back of two key releases from the RBNZ. The first was a press release on Thursday that did a great job of talking the currency down. Then yesterday it was revealed that the central bank actually intervened in August by selling NZ$ 521 million. This spooked the market and saw the NZD spiral lower again. Trying to call a bottom to a move this strong is fraught with danger. So far support around 0.8600 seems to have contained it, but a move below there will target 0.8400. Look for resistance around 0.8780 to cap any potential strength in the near term. From NZ this week we have the latest Fonterra dairy auction to draw focus. While from Canada the economic calendar is pretty light again this week with just GDP tomorrow and the trade balance on Friday.

NZD/EURO (EURO/NZD)

The past week has seen the New Zealand dollar lose significant ground to the Euro. These losses have all be on the back of NZD weakness. Two key releases from the Reserve Bank of New Zealand have done the damage. Firstly we had last week’s press release stating how the level of the NZD was ‘unjustified’ and ‘unsustainable’ and that these were key considerations when deciding to intervene. Then yesterday we find out that the RBNZ did just that in August when they sold NZ$ 521 million. This spooked the market and sent the NZD spiralling lower. So far the pair has found support around 0.6080 (resistance around 1.6447), but looking further out a move toward 0.5900 (1.6950) looks likely. From NZ this week we have the latest Fonterra dairy auction to draw focus. While from Europe this week we get inflation, unemployment, German retail sales, and French consumer spending along with the ECB rate meeting.

 NZD/YEN

Dramatic falls in this pair over the past week have been driven almost exclusively by weakness in the New Zealand dollar. Two key releases from the Reserve Bank of New Zealand have done the damage. Firstly we had last week’s press release stating how the level of the NZD was ‘unjustified’ and ‘unsustainable’ and that these were key considerations when deciding to intervene. Then yesterday we find out that the RBNZ did just that in August when they sold NZ$ 521 million. This spooked the market and sent the NZD spiralling lower. Just over a week ago the NZD was trading at 89.00 to the yen and yesterday we touched 84.39. That is the third major rejection from 89.00 or above that the pair has seen in the past six months, and that could prove to be a game changer. Particularly considering this latest bout of weakness has smashed through support around 85.80. That level will now provide resistance on any bounce with all the risks still skewed to further weakness over the medium term. From NZ this week we have the latest Fonterra dairy auction to draw focus. While from Japan we have household spending, unemployment, retails sales, industrial production and the quarterly Tankan report to digest.

AUD/USD

The Australian dollar has seen continued pressure from the USD over the past week and currently trades close to cycle lows at 0.8875. US dollar strength was seen in the wake of last Thursday’s FOMC statement, but recent losses have come on the back of AUD weakness. A negative report from Roubini Economics and further concerns about the Chinese growth have both weighted on the local currency. There is some support around 0.8850 however, and while the market holds above there potential for a corrective bounce exists. The market has seen a significant sell off from the 0.9400 level that was trading less than three weeks ago and it looks like downside momentum could be starting to wane. If we do get a significant break of support around 0.8850 the market will quickly turn its attention to the 2014 low of 0.8658. The economic calendar is pretty light from Australia this week with the financial stability review and a speech by RBA Governor Stevens the main highlights. From the US we have new home sales, durable goods orders and weekly unemployment claims to digest.

AUD/GBP (GBP/AUD)                            

The past week has seen grinding appreciation of the UK Pound over the Australian dollar with the pair trading down to a low so far of 0.5355 (high of 1.8674). The risks are all still skewed to the down side with a move toward 0.5300 (1.8868) and then the 2014 low of 0.5209 (high of 1.9198) likely over the coming weeks. Bank of England Governor Carney has admitted we are getting closer to the time when interest rates in the UK will need to go up, and this week we get some key indicators of economic activity with the release of PMI’s for the manufacturing, construction, and service sectors. Some stronger than expected readings from those PMI’s might be enough to sway more members of the BOE’s monetary policy committee into the hawkish camp when they meet next week. The UK Pound should continue to appreciate as a trend in the lead up to an eventual rate hike. Over the coming days from Australia we get retail sales, building approvals and trade balance data to digest, along with the RBA’s testimony on housing market risks. Key resistance comes in around 0.5390 (support around 1.8553) and it would take a move above that level to suggest a broader correction higher is unfolding.

AUD/EURO (EURO/AUD)

Since peaking earlier this month at 0.7257 (1.3780) this pair has seen a dramatic pullback. Weakness in the Australian dollar has been the main driver and in the past few days we have seen the pair testing key support around 0.6850 (resistance around 1.4600). It the market can hold above that level we could easily see a recovery back toward 0.7000 (1.4286). A sustained move below 0.6850 (above 1.4600) however would open the way for further losses toward the next major support level of 0.6650 (resistance at 1.5038). The ECB meet this week and although it will be interesting to hear what they have to say, no further direct action is expected at this time. Ahead of that meeting we get Eurozone inflation, unemployment, German retail sales and French consumer spending data. Over the coming days from Australia we get retail sales, building approvals and trade balance data to digest, along with the RBA’s testimony on housing market risks.

AUD/YEN

The Australian dollar has lost ground to the Japanese Yen this week, weighed on to a degree by the dramatic losses seen in the New Zealand dollar. There hasn’t been much in the way of economic data from Australia to drive prices, although we do have some key releases coming up in the next few days. Retail sales, building approvals and trade balance data are all set for release along with the RBA’s testimony on housing market risks. From Japan we also have plenty of data to digest with household spending, unemployment, retails sales, industrial production and the quarterly Tankan report set for release. A move to support around 94.30 can’t be ruled out in the near term, however I would expect that level to contain weakness for the time being. On the topside 96.50 looks like it will cap any potential bounce and I would recommend selling into that strength.

AUD/CAD

There has been no data of significance from Canada since last Wednesday’s softer than forecast retail sales numbers. That result helped the cross to the Australian dollar trade up as high as 0.9859, but since then the Australian dollar has underperformed the CAD and we have traded to fresh cycle lows at 0.9706. Some dramatic weakness in the New Zealand dollar has also weighed on the AUD over the past few days and this has kept the focus on the downside. Attention now turns to Australian data in the form of retail sales, building approvals and the trade balance. We also have the RBA’s testimony on housing market risks to a senate committee to digest later in the week. From Canada the economic calendar is pretty light again with just GDP tomorrow and the trade balance on Friday.

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