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Ongoing global growth concerns created volatility in the early part of last week but by the end nerves were calmed by better than expected US data

Currencies
Ongoing global growth concerns created volatility in the early part of last week but by the end nerves were calmed by better than expected US data
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By Ian Dobbs*:

Last week was a volatile one in financial markets as global growth concerns fed through into some wild moves in stocks and long term interest rates.

The action all kicked off mid-week with US and European stock markets down 3-4% at one stage, and US 10 year interest rates moving well below 2.0% for a time.

The second half of the week saw some better data out of the US and this helped to improve sentiment, but we can expect further volatility over the coming months as the transition away from ultra easy monetary draws closer.

Concerns about the Chinese economy are part of the reason for the lower global growth outlook and over the weekend the Chinese central bank has announced that it plans to inject liquidity in a number of large banks in an effort to shore up growth and counter the slowdown.

The other big concern is Europe where indicators are suggesting the third quarter could again see negative growth. German data has been worryingly weak and as the engine room of European growth at the moment, this is a bad sign.

Greece is again starting gain attention with its debt situation far from undercontrol, and the political landscape looking very shaky. Greek 10 year government bonds rose up toward 9% at one stage last week, before recovering slightly.

Major Announcements last week:

• UK Inflation 1.2% vs 1.4% expected

• ZEW German Econ. Sentiment -3.6vs +.2 expected

• China Inflation 1.6% sv 1.7% expected

• UK Unemployment rate 6.0% vs 6.1% expected

• US Retail Sales -.2% vs +.2% expected

• NZ Fonterra GDT Auction +1.4% vs -7.3% previous

• Canadian Manufacturing Sales -3.3% vs -1.6% expected

• US Industrial Production 1.0% vs .4% expected

• Canadian Inflation +.2% vs +.1% expected

• Prelim. UoM Consumer Sentiment 86.4 vs 84.3 expected

• PBOC inject liquidity into the 20 largest Chinese banks

NZD/USD

The New Zealand dollar made solid gains against the USD mid last week as concerns about global growth prospects morphed into wild market volatility. The NZD trade up close to 0.8000 before correcting lower. Although better US data in the second half of the week helped sentiment toward the USD, the local currency is still trading comfortably above 0.7900. Another test to the topside cannot be ruled out and there is potential for a test of resistance around 0.8050. Key to that however, will likely be the outcome from inflation data out of the US on Wednesday, and New Zealand on Thursday. On the downside there is minor support around 0.7850 ahead of the much stronger 0.7700 level. Other data to watch out from the US includes existing home sales, new home sales and weekly unemployment claims.
 
DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7950 0.7850 0.8050 0.7808- 0.7996

NZD/AUD (AUD/NZD)

Although there was no fundamental reason for it, the New Zealand dollar was a standout performer during the heightened market volatility mid last week. As a result the cross to the Australian dollar lept higher overcoming resistance at 0.9050 (support at 1.1050) and briefly trading over 0.9100 (under 1.0989). Since then trading has largely been confined to a tight range around 0.9050 (below 1.1050). While the market holds above that level there is potential for another test higher, but the weekend’s news of new liquidity injections by the Bank of China should support the AUD more than the NZD. This might see the market try to break back below 0.9050 (above 1.1050). As yet it hasn’t managed to do that. Inflation data from both countries is due for release this week and these will provide the main focus. The RBA minutes and NZ trade balance will also draw attention.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9055 0.8950 0.9150 0.8969- 0.9103
AUD / NZD 1.1044 1.0929 1.1173 1.1150 - 1.0986

NZD/GBP (GBP/NZD)

For much of last week the UK Pound saw pressure from the New Zealand dollar which was one of the best performing currencies during the heightened market volatility. The GBP itself was weighed on by much softer than forecast inflation data and increased concerns over growth in the Eurozone. Toward the end of the week however, the GBP found some support from a further decline in the level of UK unemployment. This week sees plenty of top tier economic releases from the UK starting with the BOE minutes on Wednesday. This will be followed by retail sales and GDP later in the week. From NZ we have inflation data and the trade balance to draw focus. Selling into strength is recommended with the outlook for a drift down towards minor support around 0.4900 (resistance around 2.0408) over the coming days.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4940 0.4750 0.5000 0.4875 - 0.5004
GBP / NZD 2.0243 2.0000 2.1053 1.9982 - 2.0513

 NZD/CAD

After breaking the initial resistance at .8820 early last week, this pair saw the NZ dollar outperform strongly as the wild ride played out through the belly of last week. After touching the resistance at .9000, more ordered trading followed. Current levels look to offer reasonably fair value in the current environment. A Canadian focus starts the week, with Wholesale Sales later on today, and the Retail Sales and BOC monetary policy announcement on Wednesday. In NZ the quarterly inflation number on Thursday offers the primary focus. Barring another explosion of volatility like last week, the .8850 -.9050 band seems likely to contact the price action for this week.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8960 0.8850 0.9050 0.8798 - 0.9006

NZD/EURO (EURO/NZD)

This pair has continued to trade in a sideways range over the past week, despite increasing concerns about European growth. The 0.6180 to 0.6240 (1.6181 to 1.6026) range has contained the majority of price action with the pair looking like the top of that range will be tested early this week. I see little reason to believe the Euro will strengthen over the coming weeks, and in fact the risks of another significant down leg in the Euro must have increased. This could well see the NZD break above 0.6240 (below 1.6026) and a move up over 0.6300 (under 1.5873) eventuate. This week from NZ we have inflation and trade balance data to digest. While from Europe manufacturing and service PMI’s will draw attention.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6230 0.6100 0.6300 0.6157 - 0.6242
EUR / NZD 1.6051 1.5873 1.6393 1.6020 - 1.6241

 NZD/YEN

This pair has seen some wild price action within its relatively contained trading range over the last week. Given the recent pressure on the NZ dollar from the Japanese YEN, support was always likely to come at some level. Support around 83.50 held on a couple of occasions and a nice corrective bounce has ensued. Look for initial resistance at 85.75, ahead of 86.50 above. The initial support comes in at 84.50, ahead of 83.00 below. The main focus of the week will be the quarterly NZ inflation numbers on Thursday. Aside from that expect the lead to come from the dynamics in the wider market.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 85.25 84.50 86.50 83.39 - 85.34

AUD/USD

The past week has seen plenty of volatility for this pair, but little overall direction. The week’s highs traded during a period of heightened volatility across all markets as the USD came under heavy selling pressure in the wake of big declines in US stock markets and long term interest rates. US sentiment then improved in the later stages of the week after a number of better than forecast data releases and this helped to calm the markets. The Australian dollar could drift a touch higher ahead of tomorrow’s RBA minutes thanks to news out of China over the weekend of fresh liquidity injections by the Peoples Bank of China, but expect levels around 0.8850 to continue to provide a tough barrier on the topside. Domestically the focus will then turn to inflation data out on Wednesday. From the US this week we also have inflation data along with existing home sales, new home sales, and weekly unemployment claims.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.8780 0.8650 0.8850 0.8677- 0.8852

AUD/GBP (GBP/AUD)                            

The Australian dollar made gains against the UK Pound last week briefly trading up over 0.5500 (under 1.8182), before correction to the more comfortable 0.5450 (1.8349) level. The GBP was weighed on by much softer than forecast inflation data and increased concerns over growth in the Eurozone. Toward the end of the week however, the GBP found some support from a further decline in the level of UK unemployment. This week sees plenty of top tier economic releases from the UK starting with the BOE minutes on Wednesday. This will be followed by retail sales and GDP later in the week. From Australia this week we have the RBA minutes, inflation and a speech from Governor Stevens to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5455 0.5300 0.5500 0.5410 - 0.5521
GBP / AUD 1.8332 1.8182 1.8692 1.8112 - 1.8485

AUD/EURO (EURO/AUD)

The Euro managed to make some gains against the Australian dollar last week despite an increase in concerns about growth prospects for the region. Australian data had little impact on the pair with volatility in the wider markets the main driver. That being said I see little reason for the Euro to appreciate over the coming weeks, with the risks actually skewed to another down leg in the currency. This should see the cross to the AUD regain recent lost ground and a move back up toward 0.7000 (down toward 1.4286). This week from Australia we have the RBA minutes, inflation and a speech from Governor Stevens to digest. While from Europe manufacturing and service PMI’s will draw attention.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6880 0.6800 0.7000 0.6801 - 0.6923
EUR / AUD 1.4535 1.4286 1.4706 1.4444 - 1.4704

AUD/YEN

In line with the wider market, this pair saw periods of intense volatility last week. The YEN held the upper hand for the half of the week, easily repelling the AUD on attempts to bounce. However, the support at 92.00 stemmed the flow and the following bounce has been healthy. The confirmation of liquidity support for banks in China has provided a positive environment for the AUD to start the week. The initial resistance at 94.50 looks likely to be tested, with the lead coming from the RBA monetary policy meeting minutes release tomorrow, and the 3rd quarter Australian inflation numbers on Wednesday.  In Japan we just have the Trade Balance data on Wednesday to offer passing interest.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 94.15 92.50 94.50 91.80 - 94.51

AUD/CAD

The Australian dollar saw sharp appreciation over the CAD through to the middle of last week. The increased volatility and pressure on the US dollar eased the way for the move. The resistance at 99.50 curbed the move and once the wider market volatility abated, the pair settled down into much more orderly price action. The Australian dollar has seen a positive spill over to start this week with the news of added liquidity from the PBOC to 20 of the nation’s largest banks. Both economies have some substantial economic news this week. The RBA meeting minutes tomorrow come ahead of the 3rd quarter inflation numbers on Wednesday. The NAB quarterly Business Confidence Survey on Thursday will also be closely watched. In Canada the Wholesale Sales data on Monday comes ahead of the Retails Sales numbers and BOC monetary policy statement on Thursday. No change is expected, but as usual the statement will be closely watched.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9890 0.9750 0.9950 0.9761 - 0.9958

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Market commentary:

Last week was a volatile one in financial markets as global growth concerns fed through into some wild moves in stocks and long term interest rates. The action all kicked off mid-week with US and European stock markets down 3-4% at one stage, and US 10 year interest rates moving well below 2.0% for a time. The second half of the week saw some better data out of the US and this helped to improve sentiment, but we can expect further volatility over the coming months as the transition away from ultra easy monetary draws closer. Concerns about the Chinese economy are part of the reason for the lower global growth outlook and over the weekend the Chinese central bank has announced that it plans to inject liquidity in a number of large banks in an effort to shore up growth and counter the slowdown. The other big concern is Europe where indicators are suggesting the third quarter could again see negative growth. German data has been worryingly weak and as the engine room of European growth at the moment, this is a bad sign. Greece is again starting gain attention with its debt situation far from undercontrol, and the political landscape looking very shaky. Greek 10 year government bonds rose up toward 9% at one stage last week, before recovering slightly.

Australia

Data from Australia last week had no major impact on the markets. A slight decline in business confidence was offset by a small improvement in consumer sentiment, while inflation expectations moderated a touch to 3.4% from 3.5% previously. The recent announcement from the Bank of China that they intend to inject further liquidity should help sentiment toward the Australian dollar this week. We also get the latest reading on Chinese GDP tomorrow, along with minutes from the latest Reserve Bank of Australia rate meeting. These will be followed by inflation data on Wednesday and a speech from Governor Steven’s on Thursday.

New Zealand

There were only two releases from New Zealand last week to draw any attention. Both were mildly positive, although their impact was negligible as volatility in the wider financial markets took centre stage. Dairy prices halted their decline, at least for now, and even managed a 1.4% recovery. However, we will need to see a much bigger bounce if Fonterra are going to be able to achieve their forecasted NZ$5.30 per/kg payout for the 2014/15 season. The manufacturing sector in New Zealand seems to be enjoying the recent fall in the NZD. The Business NZ manufacturing index improved from 57.0 to 58.1 which is consistent with healthy levels of activity in the sector. This week we turn our attention to inflation, due out Thursday, and the trade balance, out on Friday. Inflation is expected at 0.5% for the quarter which will be a pick up from the prior reading of 0.3%.

United States

Last week was a very volatile one for US financial markets. Poor retail sales numbers seemed to compound recent fears about the outlook for global growth and the markets went into a tailspin mid week. Stocks sold off dramatically and long term interest rates collapsed before a run of better than expected US data later in the week underpinned a recovery. Unemployment claims, industrial production and the Philly Fed manufacturing index, all came in better than forecast on Thursday evening. The run of supportive data continued on Friday with consumer sentiment showing a sold improvement. It jumped from 84.3 to 86.4 which is the highest level since 2007. The gains were largely led by improving expectations. Also on Friday we saw housing starts and building permits that were largely in line with expectations. With the markets now regaining composure on the back of somewhat better sentiment, the USD could well see some further strength this week. Data to watch out for over the coming days includes inflation, existing home sales, jobless claims, manufacturing PMI, and new home sales.

Europe

There was little to get excited about from Europe last week. A collapse in German economic sentiment was reinforced by cuts to growth forecasts by the German Economic Ministry. Industrial production was weaker than expected while the final reading of inflation affirmed the extremely low rate of 0.3% year on year. Over the weekend the ECB’s Nowotny said they may have to revise down Eurozone GDP forecasts for 2015, while Constancio said any additional hits to inflation expectations could be harmful. The ECB’s negative deposit rate is filtering through to institutions with several global banks now charging large clients to deposit their money in Euros. This week we have manufacturing and service sector PMI’s to draw focus along with the EU economic summit and the German Consumer Climate index.

United Kingdom

Much weaker than expected UK inflation data really undermined support for the GBP last week, as did the growing concerns about the outlook for the Eurozone. These two factors are the main drivers behind the market starting push back their expectations for the first rate hike from the UK. The third quarter of 2015 is now looking like a better bet and this view was backed up on Friday by the Bank of England’s chief economist Andrew Haldane when he said recent data favours a later interest rate hike. The other key data last week was that of employment. Although the claimant count (unemployment claims) fell by less than forecast, the unemployment rate still dropped to 6.0% from 6.1% previously. In an indication of just how far the UK economy has come, that rate is now a full 1% lower than the earlier forward guidance threshold (for considering rate hikes) which, a year ago, the bank did not expect to achieve until 2016. We get the BOE minutes this week which will help to give a better insight into their thinking, along with the key releases of retail sales and GDP.

Japan

The only data of note from Japan last week were revised industrial production numbers. This came in below expectation at -1.8% and over the weekend BOJ Governor Kuroda acknowledged as much saying production has shown some weakness, although private consumption has remained resilient as a trend. He still believes BOJ easings are having intended effects, and that the 2% inflation target can be reached around 2015. The Japanese stock market had some wild swings last week, but it looks like some support could be just around the corner. Rumors are that the GPIF (Government Pension Investment Fund) will have its weighting for domestic stocks increased from around 12% to around 25%. This could spur buying of eight trillion yen in Japanese stocks. This trade balance, due out on Wednesday,  is the only data of note this week.

Canada

There were two releases of note from Canada last week. The first was manufacturing sales that came in softer than expected at -3.3%. It seems a large chunk of that decline was driven by a decline in autos and parts which were down 11.6%. On Friday we got the latest reading on inflation. The core reading for September was a touch stronger than expected at 0.2%, but year on year is was bang on expectation at 2.1%. The Bank of Canada (BOC) targets a rate of 2.0%. With inflation largely in line with their target, it should have little impact on their rate meeting this week. This is particularly true considering the lower global growth outlook and declining commodity prices. Ahead of that meeting we get wholesale sales and retail sales data to digest.

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

 

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