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Biggest cut to Chinese reserve requirement ratio in 7-years; Australian employment data helps drive NZD/AUD back below 98c

Currencies
Biggest cut to Chinese reserve requirement ratio in 7-years; Australian employment data helps drive NZD/AUD back below 98c

By Ian Dobbs*:

The People’s Bank of China (PBOC) announced further easing’s over the weekend. This have only served to raise real doubts about the near term growth outlook for China.

The PBOC cut the reserve requirement ratio for all banks by 100 basis points - the biggest cut in seven years. This come just two months after a 50 point cut back on February 4th and enables the banks to lend more of their capital to stimulate growth.

China are also worried about the rapid appreciation of their stock market and over the weekend they announced a crackdown on margin financing and certain wealth management products. These contradictions highlight the complex nature of the Chinese economic strategy.

The Chinese stock market has seen a flood of retail activity recently, with some six million stock accounts opened last month alone, almost the same amount that was opened in the whole of 2014. Margin purchases now account for some 20% of daily turnover and this has rightly got the authorities concerned.

Major Announcements last week:

  • UK Core Inflation 1.0% vs 1.2% expected
  • US Retail Sales .9% vs 1.1% expected
  • Chinese GDP 1.3% vs 1.4% expected
  • Chinese Retail Sales 10.2% vs 10.9% expected
  • ECB leave Monetary policy unchanged as expected
  • BOC leave Monetary Policy unchanged as expected
  • Australian Unemployment rate 6.1% vs 6.3% expected
  • European Core Inflation .6% as expected
  • US Core Inflation 1.8% vs 1.7% expected
  • Canadian Core Inflation 2.4% vs 2.1% previous
  • NZ Core Inflation .1% vs .2% expected

NZD/USD

The New Zealand dollar made good gains against the USD last week driven by broad weakness in the U.S. dollar. The currency rallied up through resistance around 0.7700 heading into US data on Friday night, but when both inflation and consumer sentiment came in a touch stronger than forecast, the pair quickly fell back. The local currency did get a little boost at the start of this week from news of further easing’s from the Peoples Bank of China (PBOC), but again, gains over 0.7700 could not be sustained. New Zealand inflation data released yesterday had little market impact and attention now turns to a raft of U.S. releases set for later in the week. Existing home sales, unemployment claims, manufacturing PMI, new homes sales and durable goods orders are all set to hit the wires and these will likely determine the near term direction for the pair. There is support toward 0.7600 and this may well be tested in the coming days. If that level contains the weakness the pair could look to have another attempt at the topside and test levels above 0.7700 again.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7645 0.7500 0.7700 0.7439 - 0.7741

NZD/AUD (AUD/NZD)

Last Thursday’s much better than expected Australian employment data helped to drive this pair back to just below 0.9800 (above 1.0204). But as has been the case since early April there was good NZD support around that level and since then the New Zealand dollar has seen consistent appreciation over its Australian cousin. This has driven the pair back up over 0.9900 (below 1.0100) and after such a strong recovery a test toward parity may well now be on the cards. The RBA minutes released this afternoon offered little in the way of fresh insight into thinking at the central bank and as such the market reaction was muted. We have Australian inflation data set for release tomorrow and the market is looking for a result of 0.1% for the quarter.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9940 0.9800 1.0000 0.9785 - 0.9943
AUD / NZD 1.0060 1.0000 1.0204 1.0057 - 1.0220

NZD/GBP (GBP/NZD)

The past week has seen the New Zealand dollar outperform the UK Pound even in the face of encouraging UK employment data. The local currency also received boost at the start of this week from news of further easing’s from the Peoples Bank of China, and this helped the pair climb back to 0.5160 (below 1.9380) which marks the initial level of NZD resistance. The 0.5160 (1.9380) level has capped NZD gains on two previous occasions in the past month and last night the pair failed there again. So far we have only seen a small pullback with the market currently trading at 0.5135 (1.9475), but a further correction below 0.5100 (above 1.9610) looks likely. Uncertainty around the outcome of the upcoming UK election has helped drive the pair up to its recent highs, but the latest polls show the Conservative government gaining a small lead in the race and this might help ease some pressure on the Pound. The focus now turns to UK data in the form of retail sales and the minutes from the latest Bank of England (BOE) meeting.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5090 0.5000 0.5200 0.5048 - 0.5159
GBP / NZD 1.9646 1.9231 2.0000 1.9360 - 1.9698

 NZD/CAD

This pair remains contained within the now well established range of 88.00 to 92.00. New Zealand dollar outperformance last week saw the pair toward the top of that range, but as has been that case since mid-February the 92.00 level was never seriously challenged and the pair has since started to pull back. I would expect to see the cross drift back toward 90.00 over the coming week. There is little to get excited about in terms of data from either country this week with the highlight being Japanese trade balance.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9372 0.9300 0.9500 0.9295 - 0.9465

NZD/EURO (EURO/NZD)

The New Zealand dollar remains elevated against the Euro, although we have seen a pullback from the highs above 0.7160 (1.3966 lows) that traded yesterday. The NZD traded to that level yesterday thanks in large part to news of further easing’s from the Peoples Bank of China, but overnight the pair has moderated somewhat. Uncertainty around the Greek situation is keeping the Euro under pressure and with no agreement likely to be reached this week when finance ministers meet it’s hard to see the Euro finding much support. We do have a rash of Eurozone data out this week to draw focus, but the Greek situation will never be far from the headlines and any potential pullback in the NZD should find very good support just above 0.7000 (resistance 1.4285).

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.7130 0.7000 0.7200 0.7041 - 0.7169
EUR / NZD 1.4025 1.3889 1.4286 1.3949 - 1.4202

 NZD/YEN

This pair remains contained within the now well established range of 88.00 to 92.00. New Zealand dollar outperformance last week saw the pair toward the top of that range, but as has been that case since mid-February the 92.00 level was never seriously challenged and the pair has since started to pull back. I would expect to see the cross drift back toward 90.00 over the coming week. There is little to get excited about in terms of data from either country this week with the highlight being Japanese trade balance.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 91.30 88.00 92.00 89.05 - 91.80

AUD/USD

The Australian dollar made solid gains against the U.S dollar last week driven on two fronts. Broad based weakness in the USD certainly played a big part, but the local currency also received a boost from much better than forecast employment data. The pair traded all the way toward resistance around 0.7850 on Friday evening, but when US data in the form of inflation and consumer sentiment came in a touch stronger than forecast we saw a quick reversal. Tomorrow we have Australian inflation data to digest and then later in the week from the US we get existing home sales, unemployment claims, manufacturing PMI, new homes sales and durable goods orders. The rejection from 0.7850 and the relatively quick fall back below 0.7700 leaves the near term focus on the downside. There is minor support around 0.7660, with any move below there targeting 0.7600. The pair needs to recover back above 0.7740 to turn the focus back to the topside.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7692 0.7630 0.7850 0.7556 - 0.7842

AUD/GBP (GBP/AUD)                            

Like most Australian dollar crosses this pair snapped higher in the wake of last Thursday’s strong Australian employment data. The cross couldn’t sustain gains over 0.5230 (below 1.9120) however, thanks in large part to the UK releasing their own positive employment data on Friday. A significant pullback has now developed with the pair trading back down at 0.5160 (up to 1.9380). There is good support around 0.5100 (resistance 1.9610) and this should contain any further AUD downside over the course of this week. Tomorrow from Australia we have inflation data to draw focus. Attention will then turn to the Bank of England minutes and UK retail sales data.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5165 0.5100 0.5300 0.5138 - 0.5242
GBP / AUD 1.9361 1.8868 1.9608 1.9078 - 1.9462

AUD/EURO (EURO/AUD)

The Australian dollar traded up just shy of 0.7300 Euros (1.3700) late last week on the back of better than expected employment data. Since then we have seen a significant pullback helped by comments from RBA Governor Stevens last night. He did a good job of talking the currency down and as such the AUD fell and the pair is now back at 0.7170 (1.3950). On a longer term basis these are still very elevated levels for the AUD and with EUR under broad pressure on the back of Greek uncertainty and ECB quantitative easing, we are unlikely to see a significant pullback. Australian inflation data tomorrow will draw focus, as will Eurozone data later in the week in the form of German economic sentiment, IFO business climate, manufacturing PMI and service sector PMI.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7170 0.7130 0.7330 0.7135 - 0.7296
EUR / AUD 1.3947 1.3643 1.4025 1.3707 - 1.4016

AUD/YEN

The pair looks set to continue to see significant swings between the broad parameters of 90.00 and 94.00. The cross managed to briefly test levels over 93.00 late last week after better than expected Australian employment data, but a sharp pullback has ensued since then. RBA Governor Stevens did his best to talk the local currency down last night and this resulted in further losses. Near term risks are skewed to the downside and a potential test back below 91.00. We have Australian inflation data tomorrow to draw focus while from Japan the trade balance will also warrant attention.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 91.80 90.00 94.00 90.48 - 93.19

AUD/CAD

The past week has seen some very choppy trading in this pairing. A number of significant swings between 0.9420 and 0.9560 have ensued driven by data flow and central bank releases. The pair is currently at the lower end of that range and a test of the 2014 low of 0.9387 may well develop. There certainly seems potential for the Canadian dollar to see further appreciation thanks to improving data, a positive central bank outlook and something of a recovery in oil prices. On the AUD side of the equation the RBA are still trying to talk the currency down and comments last night from Governor Stevens managed to illicit a reasonable response. We do have Australian inflation data tomorrow to digest, along with Canadian wholesale sale and the annual budget release. The week is rounded out with a speech from Bank of Canada Governor Poloz on Friday.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9430 0.9400 0.9600 0.9413 - 0.9591

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Market commentary:

The People’s Bank of China (PBOC) announced further easing’s over the weekend. This have only served to raise real doubts about the near term growth outlook for China. The PBOC cut the reserve requirement ratio for all banks by 100 basis points - the biggest cut in seven years. This come just two months after a 50 point cut back on February 4th and enables the banks to lend more of their capital to stimulate growth. China are also worried about the rapid appreciation of their stock market and over the weekend they announced a crackdown on margin financing and certain wealth management products. These contradictions highlight the complex nature of the Chinese economic strategy. The Chinese stock market has seen a flood of retail activity recently, with some six million stock accounts opened last month alone, almost the same amount that was opened in the whole of 2014. Margin purchases now account for some 20% of daily turnover and this has rightly got the authorities concerned.

Australia

Last Thursday’s Australian employment data was positive in just about every respect. The headline number was stronger than forecast, revisions to prior numbers were positive and the unemployment rate dropped to 6.1%. This gave the Australian dollar a significant boost across the board, but the currency hasn’t been able to kick on with the gains. Then last night RBA Governor Stevens did a good job of talking the currency back down. He said rising house prices and high leverage should not dominate policy but cannot be ignored completely. He added the RBA has signalled its willingness to lower rates if needed and that the Australian dollar is likely to fall further yet over time. In the past couple of hours we have seen the minutes from the last RBA meeting. These offered little in the way of fresh insight into the central banks thinking and as such the market impact has been muted.

New Zealand

The only data of any real note from NZ this week was released yesterday in the form of inflation. The CPI (consumer price index) came in a touch weaker than forecast at -0.3% for the quarter and +0.1% year on year. That is the smallest annual increase since 1999 and it was driven in large part by falling petrol prices. If you excluded petrol prices the quarterly figure would have been +0.3% and the annual number +1.0%. Those are both still soft results with the annual figure at the bottom of the RBNZ’s target band. The central bank really has no room to react to these numbers due to the red hot nature of the Auckland housing market and most forecasters expect interest rates to remain on hold for the rest of 2015. Later this week we get visitor arrivals and credit card spending figures, although neither is likely to have much market impact.

United States

Data from the United States last week was largely disappointing and only served to reinforce fears that weak first quarter growth may last longer than expected. The only really positive result we got was from Friday’s consumer sentiment data which came in at 95.9 versus 93.8 expected. Unfortunately this numbers impact was largely outweighed by figures showing inflation expectations had fallen significantly. One year inflation expectations dropped to 2.5% from 3.0% previously. Five to ten year expectations were also down.  The current core US inflation is actually running at 0.2% month on month, and 1.8% year on year. This is a touch stronger than expected and is probably consistent with a lift off in interest rates later in the year, but there is a lot of water to go under the bridge between now and then. Still to come this week we have existing home sales, unemployment claims, manufacturing PMI, new homes sales and durable goods orders.

Europe

The uncertain outlook for Greece is continuing to draw attention in the Eurozone and weigh on the Euro. European Central Bank President Draghi has said they are now better equipped than in 2010, 2011 or 2012 to cope with a Greek exit, although they would still be entering into uncharted waters. Eurozone finance ministers meet this Friday although expectations of any deal are extremely low. Germany’s Schauble said he doubts there will be any Greek agreement reached this week. Negotiations are gathering pace and pressure is intensifying as Greece draws ever closer to default. The Greek government is scrambling for cash with large repayments due in May. Central banks in the south-eastern countries of Albania, Bulgaria, Cyprus, Macedonia, Romania, Serbia and Turkey have moved to protect their banking systems by instruction all subsidiaries of Greek lenders in their countries to exit all exposure to Greek state bonds and treasury bills. The exposure exit order also includes deposits in parent Greek banks and loans to Greece based lenders. Although Greece will continue to draw focus we do have other economic data this week to digest. German economic sentiment and IFO business climate readings are set for release along with manufacturing and service sector PMI’s from France, Germany and the Eurozone as a whole.

United Kingdom

Data at the end of last week showed Britain's unemployment rate dropped to the lowest level since 2008 at 5.6% and the total number of people in work hit a record high above 31 million. This data will be a positive for the Conservative government who are currently locked in a very tight battle for re-election. Unfortunately for them, and this has been a theme for the past few years, stronger than expected job growth isn’t feeding through into stronger wages. Average hourly earnings actually fell a touch to +1.7% from 1.9% previously. Granted, this is currently higher than the level of inflation, which means living standards should be improving, but that is largely due to weak oil prices and for much of the past 5 years inflation has been running above wage growth. Nothing in this data will have altered the outlook for the Bank of England (BOE) who are expected to remain on hold for the rest of 2015. Still to come this week we have the minutes from the latest BOE meeting and retail sales data.

Japan

Data out of Japan last week was all a touch better than forecast. Core machinery orders, producer prices, industrial production and consumer confidence all showed a slight improvement. That trend continued yesterday with tertiary industry activity printing at +0.3% versus -0.6% expected. Prime Minister Abe’s effort to revive the Japanese economy is at an important juncture. While there are some encouraging signs, we are yet to see whether a ‘virtuous cycle’ of economic growth spreading through small and medium sized business in the country. Still to come this week we have the trade balance and manufacturing PMI data to digest.

Canada

Although manufacturing sales data disappointed last week, all the other releases from Canada were actually pretty positive. The Bank of Canada (BOC) struck a surprisingly optimistic tone with the release of their monetary policy statement, and this was followed on Friday by stronger than expected inflation and retail sales data. Canadian retails sales jumped 1.7% versus 0.5% expected and inflation printed at +0.7% against expectation of 0.5%. Last night we head from BOC Governor Poloz again and he gave the strongest hint yet that he may be done cutting interest rates. He said it looks like the last interest rate cut was ‘the appropriate insurance amount’, that he doesn’t have a bias on interest rates and he expects the Canadian recovery to start in the second quarter. This is a sharp turnaround from Poloz who only six weeks ago was referring to the first quarter as been ‘atrocious’. Tonight we get wholesale sales data along with the annual budget release. The week is rounded out with another speech from Poloz on Friday.

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

 

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