sign up log in
Want to go ad-free? Find out how, here.

Expectations for rate hikes from Fed and BoE have been pushed back to end of 2015; lower oil prices offers stimulation to most economies

Currencies
Expectations for rate hikes from Fed and BoE have been pushed back to end of 2015; lower oil prices offers stimulation to most economies
<a href="http://www.directfx.co.nz/ApplyAccount?referral=00183">Contact Direct FX here ></a>

By Ian Dobbs*:

Low levels of global inflation are seeing expectations for changes in monetary policy pushed out.

Expectations of hikes from the US Federal Reserve (FED) and the Bank of England (BOE) are being shunted towards the end of 2015 as the shaky global growth profile eases pressure for increasing interest rates.

Both the Reserve banks of Australia and New Zealand also look poised to leave monetary policy settings unchanged for six months or more. The pushing out of expectation for monetary policy settings should offer some stability to the wider markets.

When the time comes, the exiting of the zero interest rate environments will likely see increased volatility.

Of material interest is the falling price of oil, especially if it can be sustained. Lower oil prices do offer stimulation to almost every economy as lower prices have an impact similar to a tax cut.

Major Announcements last week:

• Chinese GDP 7.3% vs 7.2% expected

• Chinese Industrial Production 8.0% vs 7.5% expected

• Australian Inflation +.5% vs +.4% expected

• US Inflation +.1% vs +.2% expected

• Canadian Retail Sales +.3% vs +.2% expected

• NZ Inflation +.3% vs +.5% expected

• Chinese HSBC PMI 50.4 vs 50.2 expected

• UK Retail Sales +.3% vs +.12% expected

• US Manufacturing PMI 56.2 vs 57.2 expected

• UK prelim. GDP +.74% as expected

NZD/USD

The New Zealand dollar lost ground to the USD in the second half of last week driven in large part by softer than forecast NZ inflation data. The NZD traded down to minor support around 0.7800 on Friday before staging a mild recovery. That recovery has been helped by a number of weaker than expected readings from the US, which have seen the USD lose ground across the board. With 0.7800 containing the downside for now there is potential for a drift higher ahead of the two central bank meetings on Thursday. Within a few hours of each other on Thursday morning we have the Fed and RBNZ rate statements and these will provide the main focus on the week. Key topside resistance comes in around 0.8050 and I expect this to contain any periods of strength in the near term. Also this week from NZ we get business confidence and building consents. While from the US we have durable goods orders, consumer confidence and GDP to digest.
 
DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7890 0.7800 0.8000 0.7806 - 0.8026

NZD/AUD (AUD/NZD)

Softer than expected New Zealand inflation data was the key to seeing this pair break back below 0.9050 (above 1.1050) on Thursday last week. The cross eventually fell toward 0.8900 (1.1235) which managed to contain the NZ dollar weakness heading into the weekend. We have seen a small NZD bounce from there over the past 24 hours, but the risks remain skewed to the downside for now. The 0.9050 (1.1050) level will now provide resistance and I expect that level to cap any periods of near term NZ dollar strength. On the downside, there is support around the recent cycle lows of 0.8850 (up at 1.1300) and buying ahead of that level is recommended for those looking to purchase NZD’s with AUD. The main focus in terms of releases this week comes from the RBNZ monetary policy statement on Thursday morning. Also from NZ we have business confidence and building consents this week, while from Australia we get import prices and producer prices to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8957 0.8850 0.9050 0.8907 - 0.9095
AUD / NZD 1.1164 1.1050 1.1300 1.0995 - 1.1227

NZD/GBP (GBP/NZD)

The only significant price action in this pair last week came in the wake of Thursday’s softer than expected NZ inflation data. That drove the cross down from levels above 0.4940 (2.0245) to a low of 0.4871 (high of 2.0530). Since then we have seen mostly sideways action with 0.49002.0410) capping any periods of NZ dollar strength. This keeps the focus on the NZD downside with nothing in the way of key support until 0.4750 (2.1050). However, we do have the RBNZ rate statement on Thursday morning and this will provide the main risk event on the week. Also out of NZ over the coming days we have business confidence and building consents, while from the UK net lending to individuals, mortgage approvals and the house price index will draw attention.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4894 0.4750 0.4900 0.4871 - 0.4977
GBP / NZD 2.0433 2.0408 2.1053 2.0091 - 2.0530

 NZD/CAD

The Canadian dollar put pressure on the NZ dollar for sustained periods at times over the last week. The materially lower than expected NZ inflation number immediately saw the NZD under pressure and this was accentuated by the BOC monetary policy statement. The RBNZ monetary policy announcement on Thursday offers the primary focus ahead of the Canadian GDP number late Friday. Expect the .8800 - .9000 range to contain the price for the remainder of the week. Buying Canadian dollars with NZD up towards .9000 should prove to have offered good value over time.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8873 0.8800 0.9000 0.8768 - 0.9042

NZD/EURO (EURO/NZD)

For much of last week the New Zealand dollar was seeing grinding appreciation over the Euro. That all changed on Thursday however, in the wake of softer than forecast NZ inflation data. The NZD saw a dramatic fall that drove this pair back to 0.6170 (rally to 1.6207). We have seen a gradual NZ dollar recovery since then, with the market now trading around 0.6210 (1.6103). Further gains may well be seen toward 0.6240 (1.6026) ahead of Thursday’s RBNZ rate statement. This will provide the main focus for NZ on the week. From Europe we had the ECB stress test results out yesterday, but with no major shocks in the data the market took it all in its stride. Eurozone inflation data on Friday is the highlight of European data ahead of which we get German inflation, unemployment and retails sales, along with French consumer spending.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6212 0.6100 0.6300 0.6171 - 0.6286
EUR / NZD 1.6098 1.5873 1.6393 1.5908 - 1.6206

 NZD/YEN

This pairing has seen relatively low volatility over the last week. The NZ dollar did see pressure following the low NZ inflation number. The support at 84.00 contained the pressure and the subsequent bounce from that level has been quite orderly. Both central banks expected to announce unchanged monetary policy setting this week. The accompanying statements will offer fresh perspective and will be closely watched. Expect the wider trading band of 84.50 - 86.50 to contain the price action this week. The current levels look to be offering pretty fair value in the current environment.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 85.12 84.50 86.50 83.98 - 85.44

AUD/USD

The past week has seen the Australian dollar trade sideways within the increasingly familiar range of 0.8730 to 0.8830. The top of that range has been tested over the past 48 hours. This was on the back of some relative USD weakness, thanks to a number of softer than forecast data releases from the States, but so far 0.8830 has held firm. This week we have some key data set for release along with the Fed monetary policy statement, which hits the wires on Thursday morning. Durable goods orders and consumer confidence numbers are out tonight and on Thursday evening we get GDP data. All of these releases have the ability to significantly move the market and could provide the impetus for the AUD to break its recent range. A move below 0.8730 would target the recent cycle lows of 0.8643, while a break above 0.8830 will open the way for a test resistance at 0.8900.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.8805 0.8650 0.8850 0.8723 - 0.8831

AUD/GBP (GBP/AUD)                            

A range of 0.5400 to 0.5500 (1.8519 to 1.8182) has contained the majority of price action for this pair since early October. With no overall direction and the market currently trading near the middle of that range it looks like we are in for more of the same over the course of this week. This outlook is reinforced by the largely second tier economic releases out in both countries this week. From Australia we have import prices and producer prices, while from the UK we get net lending to individuals, mortgage approvals and the house price index along with a number of speeches from BOE officials.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5465 0.5350 0.5500 0.5427 - 0.5496
GBP / AUD 1.8298 1.8182 1.8692 1.8194 - 1.8425

AUD/EURO (EURO/AUD)

The Australian dollar managed some gains against the Euro last week, although for the time being they seem to have stalled at 0.6960 (1.4368). A generally sombre outlook for the European economy is weighing on the Euro and this is likely to remain the case heading into year end. However, some very recent releases have surprised on the positive side with manufacturing and service PMI’s coming in a touch better than forecast and the ECB stress tests not highlighting any major bank problems. These releases have helped the Euro regain some composure, although they are insufficient to change the broader trend toward further depreciation. The key release this week from Europe will be inflation figures on Friday. Ahead of which we get German inflation, unemployment and retails sales, along with French consumer spending. From Australia we only have import prices and producer prices of any note.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6935 0.6850 0.7100 0.6854 - 0.6962
EUR / AUD 1.4420 1.4184 1.4600 1.4364 - 1.4591

AUD/YEN

This pair started last week bouncing along the support at 93.50. The slightly higher than expected Australian inflation number provided the lead for increased AUD demand. For the time being the resistance at 95.50 has contained the AUD. The Australian producer price index on Friday offers some interest ahead of the BOJ’s monetary policy decision, also on Friday. Any return of vulnerability in the global equity markets will see the AUD give up ground, and the support at 93.50 will become the likely target.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 95.05 93.50 95.50 93.57 - 95.41

AUD/CAD

This pairing has traded a relatively contained range throughout the course of the last week. Look for the resistance at .9950 to contain further AUD demand in the short term. With the limited economic news in both economies this week, the focus comes in the form of the Australian producer price index on Friday. This number comes ahead of the monthly Canadian GDP data, which is expected to be flat (0.0) for the month. If the equity markets see increased pressure, expect the AUD to underperform. Any selling on AUD and buying of CAD over the .9000 level will likely prove to have offered good value overtime.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9908 0.9750 0.9950 0.9795 - 0.9947

-------------------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

Email:  

--------------------------------------------------------------------------------------------------------------------------

Market commentary:

Low levels of global inflation are seeing expectations for changes in monetary policy pushed out. Expectations of hikes from the US Federal Reserve (FED) and the Bank of England (BOE) are being shunted towards the end of 2015 as the shaky global growth profile eases pressure for increasing interest rates. Both the Reserve banks of Australia and New Zealand also look poised to leave monetary policy settings unchanged for six months or more. The pushing out of expectation for monetary policy settings should offer some stability to the wider markets. When the time comes, the exiting of the zero interest rate environments will likely see increased volatility. Of material interest is the falling price of oil, especially if it can be sustained. Lower oil prices do offer stimulation to almost every economy as lower prices have an impact similar to a tax cut.

Australia

There has been no data of significance released from Australia since last Wednesday’s inflation numbers. We did see quarterly business confidence data late last week which came in unchanged, but as we also get monthly readings the quarterly one is considered old news and has little market impact. The Australian Prudential Regulation Authority (APRA) released a statement saying it has not yet decided on what action it might need to take to deal with risks in the housing market. The APRA oversees banks, credit unions, building societies etc and they could impose limits on certain types of loans or minimum deposit requirements for borrowers. The RBA have raised the issue of imbalances in the housing market a number of times over recent months and some sort of regulatory response is certainly preferable to raising rates. There is very little in the way of data from Australia this week as well. Import prices on Thursday and producer prices on Friday are the only releases of note.

New Zealand

The Reserve Bank of New Zealand (RBNZ) meet this week and their monetary policy announcement is due out on Thursday morning. No change is expected to interest rates, with the market focused on the tone of the statement. Expectations for the next round of tightening’s have been pushed back from March 2015 to sometime in the fourth quarter of 2015 and the market will be looking for confirmation from the central bank that is in line with their outlook. We saw two releases last week which the RBNZ will have paid close attention to. The first was net migration data which surged to new highs. This has implication for the housing market, and in particular Auckland, and suggests no let-up in pressure or demand for the time being. However, this was countered by inflation data that surprised to the downside, coming in unchanged at just 0.3% for the quarter and 1.0% year on year. With no broad based inflation pressure in the economy the RBNZ should be in no hurry to raise rates further. Friday saw the latest trade balance data which came in well below forecasts. The -1350m deficit was driven by a decline in exports, most notably dairy and logs, but also by a surge in imports on the back of some large aircraft purchased in the September quarter. Excluding these aircraft imports were little changed at +0.2%. Other data to watch out for this week includes ANZ business confidence and building consents.

United States

The past week has seen some softer than expected readings from a number of data releases and these have caused the US dollar to lose a little ground. Core inflation, unemployment claims, manufacturing PMI, new home sales, pending home sales and service PMI all missed expectations by a small degree. None of the data was weak enough to raise any real concerns about the US recovery, however it also won’t put any pressure on the Fed to signal rate rises could be around the corner. The central bank meet this week and the FOMC statement should prove interesting. It is widely expected that the asset purchase programme (quantitative easing) will be wound up completely and attention will then turn to the timing of any potential rate hikes. Previous statements have referred to a “considerable time” between the end of QE and rate hikes. A removal of that phrase from this statement would be taken as a signal hikes could come sooner than expected and this will have positive implications for the USD. However, the Fed may leave that wording in the statement on the back of recent global growth concerns and fears of rattling markets that have been volatile lately. Other data to watch out for this week includes durable goods orders, consumer confidence and GDP.

Europe

Late last week we saw some improved readings from manufacturing and service PMI’s out of Europe. While French PMI’s continued to decline, improvements in German and Spanish readings helped to lift the Euro wide figures to 50.7 for manufacturing and 52.4 for services. These were both better than forecast and have been the first real bright spots in European data from some time. Unfortunately those improvements haven’t flowed through into confidence readings. Consumer confidence remained unchanged at -11 and the German IFO business climate index declined in October to 103.2 from 104.7 last. The IFO’s chief economist said there were almost no bright spots in the German economy right now. This was backed up by German’s Chamber of Commerce who slashed GDP forecasts for 2015 to +0.8% from the previous +1.5% forecast in August. Over the weekend we have also had the release of the ECB’s bank stress tests. 25 banks failed the tests and need to raise a total of about EUR 25 billion. It seems 12 of them have already raised the necessary funds and the others are mostly smaller regional institutions which were widely expected to struggle. Overall the results are considered positive for sentiment toward the Eurozone with many forecasters expecting more dramatic shortfalls. Still to come this week we have German CPI, unemployment and retails sales data, along with French consumer spending and Eurozone inflation figures.

United Kingdom

Last week’s Bank of England (BOE) minutes highlighted concerns about the outlook for growth in Europe and the effect this would have on the UK. They also drew attention to the current lack of inflation pressure and these two factors have been key in forecasters pushing back their expectations for a rate hike from the BOE. Data released toward the end of last week only served to reinforce those expectations with retail sales coming in well below expectations. The -0.3% result was the weakest since January and was driven by a big drop in clothing and footwear. This was largely driven by mild September weather causing shoppers to put off purchases of winter clothes and as such it doesn’t raise any real alarm bells for the UK economy. This data was also countered by last night’s release CBI realized sales data which showed 48% of retailers reported sales volumes increases in October. Only 17% said volumes had fallen and this gives a net balance of +31 which was the same as the previous months result. GDP data released on Friday came in bang on expectation at +0.7% and as such had little market impact. Still to come this week we have a number of speeches from Bank of England officials along with data on net lending to individuals, mortgage approvals, the house price index and consumer confidence.

Japan

There was little to get excited about last week from Japan with only the trade balance of any real note. The familiar story of massive energy imports driving another large negative result, something we have seen since the 2011 Fukushima disaster. We also saw manufacturing PMI come in above expectation, although there was little market impact. There has been some speculation recently that the Bank of Japan (BOJ) could adjust their inflation outlook and this has caused some volatility in the Yen and its crosses. The reason for this speculation has been the recent rapid fall in oil prices which could drag Japanese inflation back below 1%. There is little the BOJ can do about the price of oil which is completely out of their control. Sustained declines however, could have serious implications for the banks 2% inflation target. Still to come this week we have retail sales, industrial production, household spending, inflation and the BOJ monetary policy statement.

Canada

Last week’s Bank of Canada (BOC) rate statement proved interesting with the central bank dropping its reference to being ‘neutral’ in the statement. However, this wasn’t signalling a change in policy stance with the bank deciding specific guidance on their stance is no longer valid. This was signalled ahead of time and although the bank may now not state they are ‘neutral’, overall the statement was just that. The BOC see underlying inflation pressure as muted and suggest spare capacity in non-energy exports is still an issue. Last week we also saw retail sales figures that were much weaker than forecast. Looking into the detail however, took much of the sting out of the headline number as the declines were driven by big falls in gasoline sales.

No chart with that title exists.

-----------------------------

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

 

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.