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Rate hikes getting pushed out further in part due to falling oil prices; little evidence zero percent interest rates benefit economy in long term

Currencies
Rate hikes getting pushed out further in part due to falling oil prices; little evidence zero percent interest rates benefit economy in long term
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By Ian Dobbs*:

Declining oil prices are helping to drag down inflation rates in most developed nations and this is seeing expectations for rate hikes from many central banks get pushed further into the future.

The question has to be asked whether this is a good enough reason to keep interest rates at, or close to, zero in countries like the US and the UK.

Zero percent interest rates are an emergency measure that have their place, but over the long term there is little evidence of a benefit to the economy.

Japan has had zero interest rates for nearly 20 years now and they are no closer to achieving sustainable growth or inflation rates.

At some point the financial risks and imbalances that this policy setting promotes start to outweigh the potential benefits and this should be in the forefront of central banker’s minds.

The scary fact is that out of the G7 nations, Bank of England Governor Carney is the only one to have ever raised interest rates. He did so when he was leading the Bank of Canada.

Major Announcements last week:

• Chinese Inflation 1.6% as expected

• UK Ave. Weekly Earnings 1.0% vs .9% expected

• UK Unemployment rate 6.0% vs 5.9% expected

• BOE lower Inflation expectations

• RBA leaves monetary policy unchanged

• European GDP +.2% vs +.1% expected

• Canadian Manufacturing Sales 2.1% vs 1.3%

• US (UoM) Consumer Sentiment 89.4 vs 87.3% expected

• NZ Retail Sales 1.5% vs .8% expected

• Japanese GDP -.4% vs +.5% expected

NZD/USD

The New Zealand dollar has continued to be a strong performer and recent gains against the USD have taken this pair to within a stone’s throw of 0.8000. The USD struggled to find support at the end of last week from better retail sales and consumer sentiment data, as the market instead focused on declining inflation expectations. This kept the big dollar under pressure and then the NZD received a boost yesterday in the wake of strong NZ retails sales numbers. That helped drive the pair up to its 0.7974 high, before a correction back to 0.7900 ensued. For now the focus is still very much on the topside, however, resistance around 0.8000 should continue to provide a touch barrier and selling ahead of there is recommended for those looking to purchase USD’s. In NZ the focus now turns to Fonterra’s dairy auction tonight which will be followed by producer prices data on Thursday. While from the US tonight we get producer prices data then later in the week the focus turns to building permits, the FOMC minutes, inflation data and the Philadelphia Fed manufacturing index.
 
DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7932 0.7800 0.8000 0.7715 - 0.7974

NZD/AUD (AUD/NZD)

The New Zealand dollar was struggling to overcome the 0.9050 resistance (1.1050 support) area against the Australian dollar in the latter stages of last week. That all changed yesterday morning however, after much better than expected NZ retail sales data hit the wires. That data gave the NZD a boost up through 0.9050 (down through 1.1050) and it went straight up to 0.9100 (1.0990). Minor resistance around 0.9100 (support 1.0990) has so far capped the NZD appreciation, but an extension toward 0.9150 (1.0930) can’t be ruled out. Sooner or later however, this move should run out of steam and a pullback toward 0.9000 (1.1110) is likely. I suspect 0.9150 (1.0930) will cap this move and selling NZD ahead of that level is therefore recommended for those looking to purchase Australian dollars. From New Zealand this week we have the Fonterra dairy auction and producer prices data to digest. While from the Australia we just have a speech from Governor Steven’s this evening to draw focus.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9103 0.9000 0.9150 0.8958 - 0.9107
AUD / NZD 1.0985 1.0929 1.1111 1.0981 - 1.1163

NZD/GBP (GBP/NZD)

This pair has continued its recent march higher and now trades up over 0.5050 (below 1.9800). Weakness in the UK pound in the wake of last Wednesday's BOE inflation report, has been relentless and this has combined with much better than forecast retail sales number from New Zealand to the break above 0.5050 (below 1.9800) in the early stages of this week. The next level of resistance comes in around 0.5100 (support 1.9610) and I expect that to cap the NZD gains for now. Selling ahead of that level is recommended for an eventual pull back toward, and possibly back under, 0.5000 above 2.0000). In NZ the focus now turns to Fonterra’s dairy auction tonight which will be followed by producer prices data on Thursday. While from the UK we have the BOE minutes and retail sales data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5070 0.4900 0.5100 0.4871 - 0.5074
GBP / NZD 1.9724 1.9608 2.0408 1.9708 - 2.0531

 NZD/CAD

This pair saw solid gains last week as the New Zealand dollar completely outperformed its Canadian counterpart. We did get a quick dip to 0.8900 on Friday evening after better than expected manufacturing sales data came out of Canada, but it was short lived and the pair made further gains in the early stages of this week on the back of solid NZ retail sales data. Levels around 0.9000 provide the initial resistance and it may be a step too far for the pair to overcome that in the near term. Support is seen toward 0.8900 and a pullback toward there is a very real risk over the coming days. From New Zealand this week we have the Fonterra dairy auction and producer prices data to digest. While from Canada we have to wait until Friday to get wholesale sales and inflation data.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8960 0.8800 0.9000 0.8788 - 0.8989

NZD/EURO (EURO/NZD)

This pair has seen a relentless march higher from the NZ dollar over the past week touching a high last night of 0.6375 (low 1.5685). The most recent gains came after the New Zealand dollar received a boost from much better than forecast retail sales numbers yesterday, and for the time being the risks are still skewed towards further NZD outperformance. GDP data out of Europe at the end of last week was a touch better than expectation, although this only provided temporary relief for the Euro which has remained broadly under pressure recently. There is minor resistance around 0.6375 (1.5685) and while this caps further NZ dollar appreciation, there is potential for a pullback to support now seen around 0.6300 (rally to 1.5875). But as long as the market hold above that level further NZD gains are likely. In NZ the focus now turns to Fonterra’s dairy auction tonight which will be followed by producer prices data on Thursday. While from Europe we get German ZEW economic sentiment numbers tonight then later in the week the focus will turn to manufacturing and service sector PMI data.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6365 0.6200 0.6400 0.6220 - 0.6375
EUR / NZD 1.5711 1.5625 1.6129 1.5685 - 1.6078

 NZD/YEN

The march higher in this pair has continued unabated over the past week. Further Yen weakness has combined with New Zealand dollar strength to see the pair trade up over 92.50. Just three weeks ago this cross was around 84.50. We can expect all sorts of further volatility from the Yen in the near term with reports of PM Abe about to call a snap election along with delaying the next planned sales tax increase. Although some momentum indicators suggest a waning of topside price pressure, it would be unwise to try and pick a top in this move. For that reason the focus remains on the topside and only a move below trend support at 91.50 will bring that into question. From New Zealand this week we have the Fonterra dairy auction and producer prices data to digest. While from Japan the focus will be on any announcements from PM Abe along with the BOJ rate meeting tomorrow.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 92.52 91.50 93.50 88.98 - 92.77

AUD/USD

The Australian dollar continued to make gains against the USD heading into the closing stages of last week. The USD struggled to find support on Friday from better retail sales and consumer sentiment data, with the market instead focusing on declining inflation expectations. This helped lift the pair back up over 0.8750 after earlier trading down to 0.8650. Key support now comes in around 0.8680 and while the market holds above there, the focus remains on the top side. The RBA minutes released in the past hour haven’t held any real surprises and as such the impact on the AUD has been muted. The only other release of note from Australia this week will be a speech from RBA Governor Stevens tonight. While from the US tonight we get producer prices data then later in the week the focus turns to building permits, the FOMC minutes, inflation data and the Philadelphia Fed manufacturing index. Initial resistance is seen toward 0.8800 and if the market manages to overcome that the pair could extend the rally to 0.8900.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.8715 0.8600 0.8800 0.8592 - 0.8793

AUD/GBP (GBP/AUD)                            

This pair broke above the top of its recent range at 0.5520 (below support at 1.8115) last week and quickly moved through to 0.5600 (1.7860). The move was largely on the back of further weakness in the UK Pound. The GBP has remained under pressure ever since Wednesday’s Bank of England inflation report. There is plenty of resistance just over 0.5600 (support 1.7860) and I expect this to provide a tough barrier to further AUD gains. After a relatively strong run from a low of 0.5360 (1.8660 highs) just two weeks ago, the AUD momentum should now be starting to wane and a pull back to 0.5520 (rally to 1.8115), now seems likely. The only other release of note from Australia this week will be a speech from RBA Governor Steven’s tonight. While from the UK this week we have the BOE minutes and retail sales data to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5570 0.5420 0.5600 0.5424 - 0.5599
GBP / AUD 1.7953 1.7857 1.8450 1.7861 - 1.8437

AUD/EURO (EURO/AUD)

Gains for this pair in the first half of last week stalled around the 0.7000 (1.4285) level and we have seen mostly sideways action since then. Some slightly better than expected second tier data out of Australia last week was countered by Eurozone GDP that also came in a touch above expectation. As a result the pair seems content to range between 0.6970 and 0.7030 (1.4225 - 1.4350) for the time been. A sustained break above 0.7030 (below 1.4225) would open the way for further progress toward 0.7100 (1.4085). The only other release of note from Australia this week will be a speech from RBA Governor Stevens tonight. While from Europe we get German ZEW economic sentiment numbers tonight, then later in the week the focus will turn to manufacturing and service sector PMI data.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6990 0.6900 0.7100 0.6926 - 0.7027
EUR / AUD 1.4306 1.4085 1.4493 1.4231 - 1.4439

AUD/YEN

It has been another week of relentless gains for this pair, which has been largely driven by further Yen weakness. There is potential for volatility over the coming days with the market primed for an announcement from Japanese PM Abe. Speculation is that along with delaying the next planned sales tax hike, he will call a snap election for mid-December. The past four weeks have seen a strong uptrend develop in this pair and this keep the immediate focus on the topside. That will remain the case until the market break below trend support that is currently around 100.00. Tonight we have a speech from RBA Governor Stevens to digest and tomorrow we have the Bank of Japan rate meeting.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 101.60 100.00 103.00 98.99 - 102.37

AUD/CAD

The Australian dollar traded up over 0.9900 to the CAD toward the end of last week. It was however short lived and we saw a quick pullback to 0.8830 after better than forecast Canadian manufacturing sales data was released. The pair now trades back toward the middle of the 0.9750 to 0.9950 range that is expect to dominate for the rest of this week. With only a speech from RBA Governor Stevens to digest from Australia the focus will turn to Canadian data on Friday in the form of wholesale sales and inflation.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9842 0.9750 0.9950 0.9793 - 0.9929

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Market commentary:

Declining oil prices are helping to drag down inflation rates in most developed nations and this is seeing expectations for rate hikes from many central banks get pushed further into the future. The question has to be asked whether this is a good enough reason to keep interest rates at, or close to, zero in countries like the US and the UK. Zero percent interest rates are an emergency measure that have their place, but over the long term there is little evidence of a benefit to the economy. Japan has had zero interest rates for nearly 20 years now and they are no closer to achieving sustainable growth or inflation rates. At some point the financial risks and imbalances that this policy setting promotes start to outweigh the potential benefits and this should be in the forefront of central banker’s minds. The scary fact is that out of the G7 nations, Bank of England Governor Carney is the only one to have ever raised interest rates. He did so when he was leading the Bank of Canada.

Australia

Encouraging signs last week from business confidence, consumer sentiment and inflation expectations all helped to support the Australian dollar to a degree. RBA deputy Governor Kent tried to talk the AUD down a touch late last week when he suggested the central bank hadn’t ruled out intervening in the currency markets, but the impact was short lived. There was no market impact from the G20 meetings held in Australia over the weekend, with the most notable point that tensions between Russia and the West are as frosty as ever. In the past few hours we have seen the minutes from the last RBA meeting although these held no surprises. Although the central bank believes the AUD is still above fundamental value, they also suggest the Bank of Japan stimulus and Japanese pension fund flows could keep the AUD there for some time. The see the housing market supported by very low interest rates and population growth, and they also note that lending to home investors is rising faster than to owner occupiers. Governor Steven’s is set to speak tonight and that pretty much wraps up the scheduled releases for the week.

New Zealand

The focus last week in New Zealand was on the RBNZ’s Financial Stability Report. The main point to come out of that was that with still very positive migration flows the central bank does not feel comfortable adjusting the LVR restrictions at this stage. Yesterday we got the latest reading from retail sales and it showed the consumer is good spirits. Sales jumped +1.5% from the previous reading against an expectation of just +0.8%. There were solid increases in supermarket and grocery store sales, possibly helped by the strong population growth from positive migration, but also good increases in discretionary spending areas like cafes and restaurants. This is a positive sign for the economy going forward and is certainly boosted the value of the NZD in the hours after the release. The focus now turns to Fonterra’s dairy auction tonight which will be followed by producer prices data on Thursday.

United States

We saw some decent data from the United States last week, although the USD remained on the back foot heading into the weekend. Pressure on the currency came as a survey of US inflation expectations declined to its lowest level since early 2009. That release seemed to outweigh the better than forecast readings that were seen on Friday night from retail sales and consumer sentiment. The market may be getting hung up on the weaker inflation outlook, but comments from some Fed governor are starting to suggest low inflation may not be a hindrance for rate hikes. The Fed’s Bullard said low inflation doesn’t justify keeping interest rates near zero, and the Fed’s George suggested financial stability risks warrant hiking rates to curb excesses in lending and financial markets. She said although financial stability doesn’t appear to be an issue today, it didn’t appear to be an issue in 2007 or 2008, and it turned out to be a terrible problem. She’s right about that and there are once again signs of excesses in the financial sector. Subprime auto loans (auto loans to people with tarnished credit) have risen more than 130 percent in the last five years. This explosive growth is been driven by some of the same dynamics that were at work in subprime mortgages, i.e. the demand for securitized debt with good rates of return. History is destined to repeat itself, but are people’s memories really this short?! Tonight we get producer prices data then later in the week the focus turns to building permits, the FOMC minutes, inflation data and the Philadelphia Fed manufacturing index.

Europe

ECB President Draghi, along with many other Eurozone officials, will have breathed a sigh of relief on Friday after GDP data didn’t print negative and actually came in a touch above the expectation at +0.2%. However, this was only a small piece of good news and there is no room for complacency on boosting the recovery. Draghi himself said last night that the economic outlook in the Eurozone is ‘increasingly sobering’.  He said early indications are that their credit easing package is delivering tangible benefits, although they need to remain alert for possible downside risks to their inflation projections. He added that growth momentum had weakened over summer and risks to their outlook continue to be on the downside. For the first time he also mentioned that the expanded asset purchase programme could include government bonds, although he added the ECB want’s more time to assess the effects of the measures already announced. Tonight we get German ZEW economic sentiment numbers then later in the week the focus will turn to manufacturing and service sector PMI data.

United Kingdom

The UK Pound has remained under pressure in the wake of last week’s Bank of England’s (BOE) inflation report. With the central bank having slashed its inflation outlook there are now no forecasters predicting a rate hike from the BOE before the second half of next year. Some have even pushed their forecasts for the first hike out until quarter one of 2016. But is low inflation such a bad thing? Not if it’s driven by declining oil prices, which a good portion of this is. Cheaper petrol prices act like a tax cut on the economy, allowing more funds to be spent on other goods and services. Central banks will also ‘look through’ inflation moves that are temporary or driven by one off factors. The Bank of England did exactly that throughout 2010, 2011 and 2012 when inflation got as high as 5 percent. Another positive for the UK economy came in the form of last week’s average earning data. Wage gains increased by 1% and we may well be close to a time once again where wage gains outstrip inflation. That is a key metric for long term sustainable growth in the economy. Tonight we get the latest reading of inflation and the market is expecting a reading of 1.2%. The BOE minutes are out on Wednesday and these are followed by retail sales on Thursday.

Japan

Japanese Prime Minister Abe’s plan to re-inflate the economy, commonly referred to as Abenomics, is in real trouble. It was dealt a serious blow by yesterday’s GDP data that showed the economy has fallen back into recession in the third quarter. GDP fell by -0.4% against expectations for a rise of +0.5%. This comes on the back of the second quarters -1.9% decline after the sales tax increase in April. A big chunk of the recent GDP decline came on the back of inventory adjustment which does have some positive aspects. A glut of inventories was holding back production, but those inventories have now been cut back and this should have a positive effect on production down the line. That is however, as good as it gets. Newspaper reports suggest PM Abe will hold a press conference today where he will announce a delay of second sales tax increase planned for October 2015. That seems like a no brainer, but the problem for Japan is they are facing a demographic time bomb. An rapidly aging population is going to put a real strain on public finances and Japan already has the world highest debt to GDP ratio at 227%. If confidence is lost in the government’s ability to get that under control, then a catastrophe is around the corner. The rumours are that at today’s press conference PM Abe will also dissolve parliament and call fresh elections for December. As if all this wasn’t enough we have the Bank of Japan (BOJ) rate meeting to digest on Wednesday and the trade balance on Thursday.

Canada

Last week was a reasonably light one in terms of economic released from Canada. The most notable outcome came from manufacturing sales data on Friday which printed at +2.1% versus expectations of +1.3%. This helped to support the Canadian dollar to a degree, as did an improvement in existing home sales and a investment flow data that came in better than expected. There is little else to digest until the end of this week when we get wholesale sales and inflation data. The market is looking for core inflation to remain stable at +0.2% on the month, whole wholesale sales are expected to increase 0.7%.

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

 

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1 Comments

'It's the Leverage, 

Cecchetti & Schoenholtz

It's the leverage, stupid!: In the 30 months following the 2000 stock market peak, the S&P 500 fell by about 45%. Yet the U.S. recession that followed was brief and shallow. In the 21 months following the 2007 stock market peak, the equity market fell by a comparable 52%. This time was different: the recession that began in December 2007 was the deepest and longest since the 1930s.

The contrast between these two episodes of bursting asset price bubbles ought to make you wonder. When should we really worry about asset price bubbles? In fact, the biggest concern is not bubbles per se; it is leverage. And, surprisingly, there remain serious holes in our knowledge about who is leveraged and who is not. ...

All of this leads us to draw two simple conclusions. First, investors and regulators need to be on the lookout for leverage; that’s the biggest villain. In the United States and many other countries, mortgage borrowing has been at the heart of financial instability, and it may be so again in the future. But we should not be lulled into a sense of security just because banks’ real estate exposure has declined. If leverage starts rising in real estate or elsewhere – on or off balance sheet – then we should be paying attention.

 

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