Focus shifts to the next round of unemployment data; expect US strength to continue to years end; central banks in no hurry to hike

By Ian Dobbs*:

Central bank announcements last week provided market direction for a number of currency pairs with significant reactions to releases from the US Federal Reserve, the RBNZ and then the Bank of Japan.

Although we have both the Bank of England and European Central bank meetings later this week, along with the Reserve Bank of Australia today, they shouldn’t provide anywhere near the same sort of volatility.

The focus now turns to employment data set for release from New Zealand, Australia and the US over the coming days.

The overriding theme from all the recent volatility has been continued US dollar strength. This is expected to continue to dominate heading into the years end.

Declining oil prices and a lack of inflation pressure in many western countries means central banks are in no hurry to raise rates.

Countries like the US and the UK however, should be looking to start normalizing interest rates if only so they have room to cut again should we see another significant economic downturn.

With rates effectively at zero the only action the Fed or BOE could take now if needs be would be to turn the printing presses back on and undertake further QE. The diminishing returns of such policy suggest the downside of this action would outweigh any positives.

Major Announcements last week:

• US Durable Goods Sales -.2% vs +.5% expected

• US CB Consumer Confidence 94.5 vs 87.4 expected

• FED statement buoys outlook

• RBNZ confirms more neutral policy stance

• BOJ surprises with further policy stimulation

• US advanced GDP 3.5% vs 3.1% expected

• European Inflation +.4% as expected

• Canadian GDP -.1% vs 0.0 expected

• Australian Building Approvals -11.0% vs -.9% expected

• UK Manufacturing PMI 53.2 vs 51.5 expected

• US ISM Manufacturing 59.0 vs 56.5 expected

• Australian Retail Sales +1.2% vs +.3% expected

NZD/USD

NZD/AUD (AUD/NZD)

Both the New Zealand dollar and the Australian dollar have seen periods of pressure this week, but overall the NZD has underperformed. As such this pair has traded down toward key support around 0.8850 (resistance around 1.1300) on two occasions. So far that level has contained the downside and buying ahead of there is still recommended for those looking to purchase NZD’s with Australian dollars. The NZD suffered after last week’s move to a more neutral stance from the RBNZ and this initially drove the pair toward 0.8850 (1.1300). Since then both countries have seen much weaker than expected building consents data which has created a little volatility, but done little for overall direction. There is minor topside resistance around 0.8920 (support around 1.1211) and while the market holds below there we can expect further tests of 0.8850 (1.1300). A move above 0.8920 (below 1.1211) will likely see a broader correct toward 0.9050 (1.1050) develop. We have employment data from both countries on Thursday which could prove interesting. A head of that from Australia today we have the RBA rate statement to absorb, albeit this should be of limited impact.

NZD/GBP (GBP/NZD)

The New Zealand dollar has underperformed the UK Pound the past week and as such the cross has seen pressure trading down to 0.4823 (2.0734) last night. Weakness in the local currency was seen on the back of last Thursday’s RBNZ statement as the central bank struck a more ‘neutral’ tone. Recent soft building consents data also hasn’t helped the NZD, while from the UK last night we saw better than expected manufacturing PMI data which boosted the GBP. The pair looks like it will try and grind its way back down to key support at 0.4750 (resistance 2.1053), although I expect that to provide a formidable barrier to further NZD weakness. Buying ahead of there is still recommended for those looking to transfer GBP back into NZD. From New Zealand this week we have employment data and the latest dairy auction to digest, while from the UK there are also a number of key releases. Over the coming days we get constructing and service sector PMI’s along with manufacturing production data and the Bank of England monetary policy meeting.

 NZD/CAD

Price action in this pair over the past week has been dominated by the reaction of the NZD to last Thursday’s Fed and RBNZ rate statements. The local currency lost significant ground to the Canadian dollar in the wake of those releases trading down to support around 0.8700 before staging a mild recovery. That recovery peaked around 0.8840 on Friday night after disappointing Canadian GDP caused a spike in the pair. Since then however, the pair has come under further pressure and the risks remain skewed to the downside. If support around 0.8700 is broken the target will be a test of recent cycle lows at 0.8612. From New Zealand this week we have employment data and the latest dairy auction to digest, while from Canada we get the trade balance, building permits, Ivey PMI and employment change.

NZD/EURO (EURO/NZD)

This pair has seen some good volatility over the past week, but as has been the case since the end of September, there is little overall direction. Both currencies have seen periods of pressure, the most notable of which for the NZD was in the wake of Thursday’s RBNZ rate statement. While the Euro has struggled to find any support from economic data releases. The downside is support around 0.6150 (resistance around 1.6260), while resistance on the topside comes in just ahead of 0.6300 (support 1.5873). We can expect further ranging between those two levels over the coming week, however I favour buying weakness in the NZ dollar, with a view that the EUR should remain under pressure heading into year end. From New Zealand this week we have employment data and the latest dairy auction to digest. While from Europe we get service sector PMI’s over the coming days along with EU economic forecasts, German factory orders, French industrial production and the ECB rate meeting.

 NZD/YEN

The dominant factor for this pair over the past week has been Friday’s surprise BOJ announcement. No one was expecting further easing from the central bank, but that is exactly what they delivered. The market’s reaction was swift with the Yen coming under intense pressure. This has driven the cross to the New Zealand dollar up over 88.00, where it currently trades. The Yen is likely to remain on the back foot and further gains in the pair seem likely. The 89.91 high set back on the 1st April look like a very achievable target over the coming weeks. From New Zealand this week we have employment data and the latest dairy auction to digest. While from Japan the market will be keen to see the BOJ minutes set for release on Thursday.

AUD/USD

The Australian dollar has seen relentless pressure from the USD over the past week and the pair looks like it wants to test recent cycle lows at 0.8641. The USD has gained support from better than expected data and a somewhat more positive tone from the Fed after their rate meeting last Thursday. The Australian dollar itself has seen some pressure after softer than forecast building approvals and disappointing Chinese manufacturing data. The firm rejection from resistance around 0.8900 mid last week keeps the focus on the downside and reaction at 0.8640 will be key. If that level can contain the downside for now, a bounce back toward 0.8800 could easily develop. A sustained break below 0.8640 however, will open the way for a broader move down toward 0.8100 over the coming weeks. Data out this week will be key in deciding what happens on a test of the key 0.8640 level. From Australia today we still have retail the RBA rate statement to digest after today’s solid retail sales numbers. On Thursday we have employment change data to digest. From the US this week we have the trade balance, ISM non-manufacturing PMI, non-farm payrolls data and a speech from Fed Chair Janet Yellen.

AUD/GBP (GBP/AUD)                            

The Australian dollar remains largely range bound against the UK Pound between the parameters of 0.5420 and 0.5520 (1.8450 and 1.8116). The  AUD top of that range was tested late last week, but held firm and we have seen a sharp decline since then thanks to some recent data releases. Weaker than expected Chinese manufacturing data weighed on the AUD in early trade on Monday, and poor Australian building consents data further pressured the local currency. Add to this the better than forecast result from UK manufacturing data last night and the pair is now close to testing the bottom end of the recent range. Direction from here will largely depend on the result of key releases from both countries over the coming days. From Australia remaining today we have the RBA rate statement to digest. Then on Thursday we have employment change data to draw focus. While from the UK this week we have construction and service sector PMI’s, along with manufacturing production data and the BOE rate meeting. Any break below 0.5420 (above 1.8450) will open the way for a test of cycle lows around 0.5350 (highs around 1.8692).

AUD/EURO (EURO/AUD)

The Australian dollar saw consistent appreciation against the Euro last week trading up over 0.7000 (under 1.4286) for at time on Friday. With nothing to cheer in the way of encouraging data out of Europe, the EUR is continuing to struggle and I expect this to remain the case heading into year end. In the early stages of this week however, the AUD has retraced some of last week’s gains thanks to softer than forecast Chinese manufacturing data and a poor result from Australian building approvals. This pullback will likely provide a buying opportunity, with weakness not expected to extend past 0.6900 (1.4493). There is some key data over the coming days however that could easily influence. From Australia remaining today, we have the RBA monetary policy statement. Then on Thursday we have employment change data to digest. While from Europe we get service sector PMI’s over the coming days along with EU economic forecasts, German factory orders, French industrial production and the ECB rate meeting.

AUD/YEN

The Australian dollar was seeing only gradual gains against the Yen up until Friday last week when the Bank of Japan surprised the market. No one was expecting further easing from the central bank, but that is exactly what they delivered. The market’s reaction was swift with the Yen coming under intense pressure. This drove the cross to the Australian dollar up over 99.00 and the Yen is likely to remain on the back foot in the near term. Further gains are therefore possible, however we have some key data out over the coming days that could easily influence. From Australia remaining today the RBA rate statement to draw focus. Then on Thursday we have employment change data to digest. While from Japan the market will be keen to see the BOJ minutes set for release on Thursday.

AUD/CAD

The past three weeks has seen price action in this pair largely range bound between the parameters of 0.9800 and 0.9950. The lower end of that range was tested in the wake of Thursday’s Fed rate statement, but a quick recovery ensued. The pair then traded toward the top of the range in Friday evening after disappointing Canadian GDP data hit the wires. In the early stages of this week the pair has turned back down thanks to weakness in the Australian dollar after disappointing Chinese manufacturing data and poor Australian building consents figures. Direction from here will largely depend of the outcome of key data set for release this week. From Australia remaining in the calendar today we the RBA rate statement. Then on Thursday we have employment change data to digest. While from Canada we get the trade balance, building permits, Ivey PMI and employment change. Selling into strength remains the favoured strategy for an eventual test back down toward 0.9700.

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