By Ian Dobbs*:
The US dollar has been the biggest gainer over the past week, driven by a much better than expected result from non-farm payrolls data on Friday.
While this has increased the potential for sooner than expected rate hikes in the US, locally the Australasian duo have seen pressure on reduced expectations of future growth.
Last week’s surprisingly poor Australian GDP data has seen many forecasters now calling for rate cuts from the RBA next year.
From the RBNZ’s perspective, the slowdown in Australia combined with that in China must surely see them moderate their forecasts for growth and inflation when they release their monetary policy statement on Thursday morning.
In Europe policy makers seem far away from any consensus on outright sovereign quantitative easing and it looks like President Draghi will have an uphill battle on his hands trying to get it introduced next year.
Meanwhile the Eurozone stagnates further and perpetually low inflation isn’t helping the debt dynamics of many Eurozone states. The social consequences of continued austerity, as opposed to growth policies, is seeing a rise in popularity of fringe ‘anti-Euro’ parties which could dramatically change the landscape in a number of states.
Major Announcements last week:
- Chinese HSBC Manufacturing PMI 50.3 vs 50.5 expected
- UK Manufacturing PMI 53.5 vs 53.1 expected
- US ISM Manufacturing PMI 58.7 vs 57.9 expected
- RBA leaves monetary policy unchanged
- NZ GDT Auction prices -1.1%
- Australian GDP .3% vs .7% expected
- BOC leaves monetary policy unchanged
- ECB leaves monetary policy unchanged
- Canadian Jobs growth -10.7k vs +5.3k expected
- US Jobs growth 321k vs 231k expected
- Chinese Trade Balance 54.5b vs 44.3b expected
NZD/USD
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7630 | 0.7450 | 0.7660 | 0.7624 - 0.7890 |
NZD/AUD (AUD/NZD)
We have recently seen further confirmation of what looks to be a medium term top put in place for this pair just below 0.9300 (above 1.0753). Major trend support, that was around 0.9230 (1.0834) yesterday, finally gave way as the NZD underperformed the Australian dollar. The pair fell as low at 0.9201 (1.0868) before staging a less than convincing recovery and the focus remains on the downside over the near term. There are however, a number of key release this week that could significantly influence price action. From Australia we have consumer confidence and employment data set for release. While from NZ we are expecting Fonterra to revise their forecast payout over the coming days, and we also have the RBNZ monetary policy statement on Thursday morning. That event in particular could have a dramatic impact on the currency should the central bank significantly downgrade forecasts for GDP and inflation.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9240 | 0.9100 | 0.9300 | 0.9199 - 0.9294 |
| AUD / NZD | 1.0823 | 1.0753 | 1.0989 | 1.0760 - 1.0871 |
NZD/GBP (GBP/NZD)
The past few days have seen further losses for the New Zealand dollar against the UK Pound, and currently the pair is now trading just under 0.4900 (over 2.0408). Supportive data showing the manufacturing, construction and service sectors of the UK economy continue to expand at a healthy pace has helped the GBP of late. While the NZD is suffering on the back of expected downward revisions from Fonterra, in terms of their forecast payout for 2014/15, and from the RBNZ in relation to their projections for GDP and inflation. Fonterra’s announcement is expected anytime in the next 48 hours, while the RBNZ release their monetary policy statement on Thursday morning. These two releases will like be the driver of the cross over the course of this week. We do have UK manufacturing production data tonight to digest, along with the trade balance and an estimate of GDP on Wednesday. The risks remain skewed to the downside for the pair, and a move toward 0.4800 (2.0833) is possible over the coming weeks.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4880 | 0.4800 | 0.5000 | 0.4888 - 0.5015 |
| GBP / NZD | 2.0492 | 2.0000 | 2.0833 | 1.9939 - 2.0460 |
NZD/CAD
It was a mixed week for this pair, albeit within a wider environment that saw the NZ dollar underperforming. The initial break of the .8800 support level proved crucial as the one attempt to recover through that level was short lived. The support at .8700 looks to be the most vulnerable in the current market, with the lower than expected jobs growth on Friday in Canada on able to offer partial relief. This week the RBNZ Monetary Policy Statement provides the lead for domestic NZ. In Canada, the building approval numbers later today come ahead of a speech by BOC Governor Poloz.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8770 | 0.8700 | 0.8900 | 0.8730 - 0.8936 |
NZD/EURO (EURO/NZD)
The past week has seen significant losses for this pair driven on two fronts. Firstly the NZD has been under pressure on the back of falling dairy prices and the expectation that Fonterra will revise down their forecast payout for 2014/15. That announcement is likely to come out in the next 48 hours, but we also have RBNZ monetary policy statement on Thursday morning and they too are expected to revise down their forecasts for GDP and inflation. The degree to which they revise that down could have a big impact on the level of the NZD. On the Euro side of the equation there was some disappointment at the lack of concrete plans for QE released at the ECB meeting last week, and this prompted some short covering of sold EUR positions. It seems likely that any near term buying of Euro’s will quickly dissipate and this should at least slow the downside momentum in the pair. The current move could however easily trade down toward 0.6150 (up toward 1.6260) before finding support. In Europe this week the focus will turn to Thursday’s targeted LTRO announcement. While from NZ we await the announcements from Fonterra and the Reserve Bank.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6200 | 0.6150 | 0.6350 | 0.6211 - 0.6328 |
| EUR / NZD | 1.6129 | 1.5748 | 1.6260 | 1.5803 - 1.6120 |
NZD/YEN
Throughout last week this pair saw a relatively contained trading range. However, this changed to start this week as the JPY has seen a dramatic increase in demand. This comes in the face of materially lower than expected final GDP result. The driver seems to be profit taking on USDJPY pair that has spread through to others. Triggers for this profit taking seem likely to be the Japanese snap election due for Sunday. In New Zealand we get the years final RBNZ Monetary Policy Statement coming on Thursday. The inability of the pair to hold gains above 93.50 points towards further downward pressure. Consolidation down through 92.00 is key if the further support at 91.50 is to be tested.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 92.20 | 91.50 | 93.50 | 92.32 - 93.98 |
AUD/USD
The Australian dollar has seen relentless pressure from the USD over the past week. Very poor GDP data has weighed on the AUD and we now have a number of forecasters calling for rate cuts from the RBA next year. Then the USD saw broad based gains on the back of some stellar employment gains on Friday evening which has increased the risk of rate hikes in the US coming sooner than expected. This pair has now seen a strong downside leg that started from just under 0.8800 in the middle of November and there are no signs of it abating yet. Further losses toward 0.8100 could easily eventuate heading into year end. Later this week we do have Australian employment data to draw focus. Ahead of that we get consumer sentiment and inflation expectations. From the US this week we have retail sales, producer prices and consumer sentiment data to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.8258 | 0.8100 | 0.8300 | 0.8261 - 0.8541 |
AUD/GBP (GBP/AUD)
The Australian dollar has continued to lose ground to the UK Pound this past week, driven lower by poor GDP data and increased expectations of rate cuts by the RBA in 2015. Supportive data from the UK showing the manufacturing, construction and service sectors of the economy continue to expand at a healthy pace have also helped the GBP make gains of late. The pair has managed to break below support around 0.5350 (resistance around 1.8692) and now trades just below 0.5300 (above 1.8868). The January 2014 low of 0.5209 (high of 1.9198) looks like a reasonable target at this stage with little indication that the downside momentum is waning. We have UK manufacturing production data tonight to digest, along with the trade balance and an estimate of GDP on Wednesday. While from Australia we have consumer confidence and employment data set for release.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5280 | 0.5209 | 0.5350 | 0.5296 - 0.5431 |
| GBP / AUD | 1.8939 | 1.8692 | 1.9198 | 1.8412 - 1.8881 |
AUD/EURO (EURO/AUD)
The Australian dollar has lost ground to the Euro over the past week, driven lower by very poor GDP data. This has raised the prospect of rate cuts from the RBA next year and as such the local currency has suffered. On the Euro side of the equation there was some disappointment at the lack of concrete plans for QE released at the ECB meeting last week, and this prompted some short covering of sold EUR positions. It seems likely however that any near term buying of Euro’s will quickly dissipate and this should at least slow the downside momentum in the pair. The next key support level comes in around 0.6650 (resistance at 1.5038) and this looks like a very achievable target in the near term. In Europe this week, the focus will turn to Thursday’s targeted LTRO announcement. While from Australia we have consumer confidence and employment data set for release.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6710 | 0.6650 | 0.6850 | 0.6730 - 0.6852 |
| EUR / AUD | 1.4903 | 1.4599 | 1.5038 | 1.4594 - 1.4858 |
AUD/YEN
This pair showed little in the way of overall direction for much of the past week, although in the past 24 hours a solid downside attempt has unfolded. This weakness in the pair comes in the face of a further negative revision to Japanese GDP released yesterday along with a drop in manufacturing confidence. It seems a bout of profit taking on the USDJPY has flowed over into other pairs and helped the AUDJPY to tentatively test levels below 100.00. Still to come this week from Japan we have consumer confidence, core machinery orders and tertiary industry activity data. While from Australia we have consumer confidence and employment data set for release. If we do see a decisive break below 100.00 there is potential for a broader pullback to develop toward the 98.50 level.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 99.70 | 98.50 | 101.50 | 99.90 - 101.37 |
AUD/CAD
The Australian dollar has been outperformed by the Canadian dollar this past week and this has driven the cross down to fresh cycle lows of 0.9462. Poor Australian GDP and a slightly more ‘hawkish’ tone from the Bank of Canada last week have been key influences on the pair and there is little sign that the downside has run its course. The pair could easily target support around the 0.9400 level in the near term. From Canada this week we have a speech from Governor Poloz on Thursday which will be followed by New House Price Index and capacity utilization data on Friday. While from Australia we have consumer confidence and employment data set for release.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9485 | 0.9400 | 0.9600 | 0.9462 - 0.9678 |
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Market commentary:
Australia
Data from Australia last week proved to be a mixed bag. There were better than expected results for company profits, building approvals, retails sales and the trade balance. But these were all overshadowed by a dramatically weaker than forecast GDP result. The quarterly reading of +0.3% was well below expectations of +0.7% and a number of banks are now forecasting rate cuts in 2015 on the back of the data. The Australian dollar has suffered as a result and the latest trade data from China, released yesterday, didn’t help either. Imports into China were much lower than forecast signalling weaker economic growth ahead for this major trading partner. In the past couple of hours we have seen the latest reading of business confidence. This showed deterioration from last month and has only reinforced calls for rate cuts. Still to come this week we have consumer sentiment, inflation expectations and employment change data.
New Zealand
Last week saw the latest Global Dairy Trade (GDT) auction results reveal a further softening in prices for New Zealand’s all important export sector. The index fall of another 1.1% will put further pressure on the season payout expectations that are due for release this week. The lowering of expectations to below average farm gate costs is of real concern to not only the farmers themselves, but also the wider economy. Finance Minister English acknowledged this last week, when he commented that given the fall in prices, that expected growth rates for 2016 maybe optimistic. This week’s focus is all about the RBNZ monetary policy decision on Thursday morning NZT. Whilst no change is expected, the accompanying Monetary Policy Statement will be closely watched. Later on that day, Governor Wheeler also makes his testimony on the economy to the Finance and Expenditure Committee.
United States
Over recent months there have been a number of employment indicators suggesting the US should be seeing some very strong payrolls gains, but the actual numbers while solid enough weren’t overly spectacular. That all changed on Friday evening with the latest non-farm payrolls data that blew expectations out of the water. The gain of 321k was miles above forecasts for 230k, and on top of this the previous result was also revised up by 29k. That’s the best reading in over four years. While the unemployment rate remained unchanged at 5.8%, average hourly earnings rose by +0.4% which was double the expectation for +0.2%. Make no mistake, this was very very good data that came on the back of strong PMI readings for the manufacturing and nonmanufacturing sectors earlier in the week. The data was so good in fact a number of Fed watchers have started calling for rate hikes earlier than expected. The Fed however, seem to be pouring cold water on that idea. In the past 24 hours two Fed officials, Lockhart and Williams, have been on the wires suggesting patience is needed for the lift off in rates, and that mid-2015 or even later is still appropriate. The Fed no doubt feel that the lack of inflation pressure means they can keep rates ultra-easy for longer. But focusing solely on inflation at this point is a mistake. Zero rates are not appropriate for an economy growing at around 3% and producing stellar jobs growth. The unintended consequences of this prolonged policy setting will start to outweigh the benefits. This week we have retail sales, producer prices and consumer sentiment to draw focus.Europe
The main focus in Europe over the past week was on the ECB rate meeting held last Thursday. It seems some in market were expecting something more concrete from President Draghi in terms of a sovereign QE programme and his failure to deliver saw the Euro make some gains. What the meeting did show is that there are big divisions within the governing council and that it is going to be very hard to get any consensus on plans to buy government bonds. The statement released talked about expanding the banks’ balance sheet to the levels it had at the beginning of 2012, but the decision to include that wording in the statement wasn’t even unanimous. The bank has revised its growth projections ‘substantially downward’ with 2015 GDP now seen at 1.0% from 1.6% previously, and inflation in 2015 expected at 0.7% down from 1.3%. Dramatic revisions like those would normally suggest further action is coming, but it’s all too clear that there is a lack of support, particularly from Germany, for full-blown QE. Since the meeting we have seen comments from the ECB’s Nowotny who said although QE was successful in the US and UK, those are individual countries and it is a whole different ball game across the 18 countries that make up the Eurozone. The Bundesbank’s Weidmann said the discussion over unconventional policies is difficult and that current monetary policy is too expansive for Germany. He added they cannot use the same formulas that were used in Japan and elsewhere. There will be further debate on the issue within the ECB in the first quarter of next year and it could well be the case by then that a further deterioration in economic data will force their hand, but at the moment it seems sovereign QE is far from certain. The economic calendar this week contains largely second tier data, although we do get the results of the target LTRO on Thursday evening which will be closely watched.
United Kingdom
Japan
Three weeks ago we had preliminary GDP data from Japan that showed the economy was in recession with a second quarter of negative growth, this time by -0.4%. Yesterday we got the final reading of that GDP data and it’s got worse, with a -0.5% decline now registered. The market was expecting a revision up to around -0.1%. In annual terms the economy contracted by 1.9% from July to September and it was driven by a big fall in business spending. The poor GDP result last month caused Prime Minister Abe to call a snap election, which is now only days away. He is seeking a fresh mandate to continue is “Abenomics” policies and also delay the next planned sales tax hike scheduled for 2015. All indications are he will again win a healthy majority. Adding to the negative tone of data we also saw the Reuters Tankan survey of confidence among manufacturers fall in December and expectations are for it to deteriorate further. Still to come this week we have consumer confidence, core machinery orders and tertiary industry activity data.
Canada
We have seen a rash of data hit the wires since the Bank of Canada left rates unchanged at 1.00% last Thursday. The Ivey PMI index came in much stronger than expected at 56.9, but gains in the Canadian dollar on the back of this data were short lived. Employment change figures on Friday evening disappointed printing at -10.7k vs expectations of +5.3K, with the unemployment rate ticking up to 6.6%. Weaker than expected results have also been seen for the trade balance, housing starts and building permits. Governor Poloz was quoted as saying he sees a larger drag from falling Canadian oil prices and we can look forward to further comments from him on Thursday when he is set to speak again. The week is rounded out with the New House Price Index and capacity utilization data on Friday.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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