Disappointing data across major economies; common theme is impact of low oil prices; recovery of each economy to drive respective currencies

By Ian Dobbs*:

Somewhat interestingly, the first quarter of this year proved to be a very disappointing one in a number of major economies.

Growth has come in well below what was previously forecast in the United States, the UK, Canada, China and most likely Japan as well.

Is this a result of random coincidence or is there a common driver? In the States the finger of blame has been pointed at the impact of the west coast port dispute and the severe winter weather, but that is certainly not the case in the UK.

The only common theme for each economy has been the impact of low oil prices. It may well be that the negative impact of weak oil prices to the energy sector is front loaded, and the resulting benefit to consumers will take longer to flow through into each economy.

Either way, what is going to be extremely interesting is how much of a recover/bounce each economy sees over the coming months.

The strength of each recovery, assuming we see them at all, will be a key driver of the relative currencies going forward.

Major Announcements last week:

• UK GDP +.3% vs +.5% expected
• NZ Business Confidence 30.2 vs 35.8 previous
• US GDP +.2% vs +1.1% expected
• RBNZ leave monetary policy unchanged as expected
• US Fed leave monetary policy unchanged as expected
• BOJ leave monetary policy unchanged as expected
• European Inflation +.6% as expected
• Japanese Inflation 2.3% vs previous 2.2%
• Canadian GDP 0.0% vs -.1% expected
• Chinese Manufacturing PMI 50.1 vs 50.0 expected’
• UK Manufacturing PMI 51.9 vs 54.6 expected
• US Manufacturing PMI 51.5 vs 52.0 expected
• European Manufacturing PMI 52.0 vs 51.9 expected

NZD/USD

NZD/AUD (AUD/NZD)

This pair continued is pullback from recent highs last week helped along by a somewhat dovish stance from the RBNZ. The pair traded all the way towards 0.9500 (1.0525) before staging a quick bounce back through 0.9600 (1.0420). Since then a very tight range has developed with the market now firmly focused on today’s Reserve Bank of Australia interest rate decision. There has been a growing expectation that we will see a rate cut and if that is the case the Australian dollar will see some pressure. This could easily drive the pair back up to 0.9700 (1.0310). If the RBA surprise the market and keep interest rates steady we will see a sharp fall in this pair with support around 0.9500 (resistance 1.0525) likely giving way to further NZD losses. With the RBA decision out of the way, attention will turn to tonight’s dairy auction and then employment data from NZ tomorrow and Australia on Thursday.

NZD/GBP (GBP/NZD)

After trading down to a low of 0.4913 (high 2.0354) in the wake of last Thursday’s RBNZ rate statement, this pair has managed a gradual recovery back toward 0.5000 (2.0000). The NZD recovery was helped by disappointing UK manufacturing PMI data on Friday which put the GBP under some pressure. Attention is now firmly focused on the outcome of Thursday’s UK general election. We do get PMI readings from the construction and service sector ahead of the election result, but their impact will be limited by election uncertainty. If the current Conservative coalition can regain power the GBP will react positively. This will likely drive the pair cross back down toward, or even under, 0.4900 (up over 2.0410). A hung parliament, or a Labour led coalition should see further pressure on the GBP and this will push the NZD cross back up toward 0.5100 (down to 1.9610). Tonight from NZ we have the latest Fonterra dairy auction to throw in the mix and then tomorrow we get employment data.

 NZD/CAD

This pair saw sharp losses in the wake of last Thursday’s RBNZ rate statement as the New Zealand dollar came under pressure. The pair has remained on the back foot since then thanks in part to Canadian dollar strength. A slightly better than expected result for Canadian GDP combined with improving oil prices has underpinned some CAD gains and as such the cross has recently tested support around 0.9100. Whether or not that level can contain the downside will largely depend on the outcome of data from both countries over the coming days. Tonight from NZ we have the latest Fonterra dairy auction to digest and then tomorrow we get employment data. From Canada we also have employment data set for release on Friday. Ahead of that we get the trade balance, Ivey PMI and building permits figures.

NZD/EURO (EURO/NZD)

The past week has seen significant fall for the NZD on this pairing as Euro strength has combined with weakness in the New Zealand dollar. The cross traded all the way down toward 0.6700 (up to 1.4925) helped along by a somewhat dovish statement from the RBNZ last Thursday. We have seen a small NZD bounce develop from just above 0.6700 (below 1.4925), and as long as that level contains the NZD downside a broader correction higher could well develop. I would expect a test back toward resistance around 0.6875 (support 1.4545) to unfold over the coming week. Tonight from NZ we have the latest Fonterra dairy auction to digest and then tomorrow we get employment data. The focus in Europe this week will be on services PMI, retails sales, German factory orders and French industrial production.

 NZD/YEN

There has been little overall direction for this pairing over the past six weeks. Prices swung, sometimes sharply, between the parameters of 89.00 and 92.00. We saw one of those sharp swings in the wake of last week’s RBNZ rates statement as the New Zealand dollar came under pressure. This caused prices to trade toward 90.00 which has contained the weakness for now. Those looking to purchase Yen should continue to take advantage of any periods of strength seen toward the 92.00 level. Tonight from NZ we have the latest Fonterra dairy auction to digest and then tomorrow we get employment data. The economic calendar is looking pretty light from Japan this week with just the Bank of Japan minutes of any note.

AUD/USD

The Australian dollar surged higher early last week trading to a high of 0.8071. Since then however, we have seen the pair retrace much of those gains and it now sits somewhat more comfortably just below 0.7850. The corrective pullback has been driven by increasing expectations for an interest rate cut from the Reserve Bank of Australia when they announce the result of their meeting later this afternoon. The US dollar has also seen some renewed buying interest despite some very mixed economic data. Near term direction is now in the hands of the RBA and the market believes there is an 80% chance of a cut to the cash rate. This would likely see the AUD back down toward support around 0.7700 initially. Whether or not the pair continues on the downside toward recent lows under 0.7600 will largely depend on the outcome of US data this week in the form of trade balance, ISM non-manufacturing PMI, and the all-important non-farm payrolls report. If, as the Fed believe, the economy will recover from the first quarter's growth ‘hiccup’ then the broad trend towards a strong USD will reassert itself. The market will however want to start to see hard data to support this case before further gains are made. On Thursday from Australia we also have employment change data and this could well add to potential volatility on the week. The market is looking for a more subdued gain in employment of +4.0K

AUD/GBP (GBP/AUD)                            

It has been another week of choppy price action for this pairing with a sharp swing from the highs of 0.5234 down to a low of 0.5122 (1.9106 up to 1.9524). Although that low breached support around 0.5140 (1.9455), it wasn’t sustained and we have since seen a decent recovery. A key factor in the recovery was disappointing UK manufacturing PMI data which pressured the GBP. This week may well see a lot more volatility with some key releases scheduled. The first is the RBA’s rate statement due out later this afternoon. Most of the market is expecting a rate cut from the central bank, and if that does happen it will pressure the AUD. Later in the week from Australia we have retail sales and employment data to digest as well. On the UK side of the equation we have the general election on Thursday and it has turned out to be a very close race. Ahead of that we get PMI readings from the construction and service sector, but their impact will be limited by election uncertainty. 0.5100 and 0.5300 (1.8868 and 1.9610) provide the initial board support and resistance parameters, but with so many important releases this week a much broader move through either of those levels could develop.

AUD/EURO (EURO/AUD)

After testing resistance just over 0.7300 (1.3700 support) early last week, this pairing has seen a very sharp turnaround. The move has been driven by a combination of strength in the Euro and weakness in the AUD. Pressure on the AUD increased throughout last week as expectations grew for a rate cut from the RBA after today’s meeting. That decision hits the wires later this afternoon and is the main risk factor on the week. Most in the market expect an interest rate cut, but they have expected that for the past two meetings and been disappointed each time. If we do get a cut a move toward support just ahead of 0.6900 (resistance 1.4495) should unfold. That level may contain the AUD downside and as such I wouldn’t get carried away expecting a move through there. Later in the week from Australia we have retail sales and employment data to digest, while the focus in Europe will be on services PMI, retails sales, German factory orders and French industrial production.

AUD/YEN

After surging to just under 96.00 mid last week, this pair quickly fell back to 94.00 as the market became more confident about a potential interest rate from the Reserve Bank of Australia. That central bank decision will be released later this afternoon and is the main risk event for the pair this week. A cut from the RBA will see the pair test lower, perhaps as far as 92.00 over the coming days. A ‘no change’ decision from the RBA would be a surprise and see the AUD jump significantly higher. Later in the week from Australia we have retail sales and employment data to draw focus. While the economic calendar is looking pretty light from Japan this week with just the Bank of Japan minutes of any note.

AUD/CAD

Ever since peaking at 0.9663 mid-last week, this pair has been under pressure with increasing expectations for an interest rate cut from the RBA weighing on the AUD. The Canadian dollar has also gained ground after a better than expected GDP result and further increase in the price of crude oil. These factors have driven the pair back below 0.9500 where it currently trades. Near term direction will now be in the hands of the RBA who release their interest rate decision in a few hours. If they do cut rates the AUDCAD cross will likely trade down to support around 0.9400. If the central bank leaves rates unchanged the AUD will see a sharp appreciation. Volatility is likely to remain high all week with a number of other key releases set for the coming days. Australian retail sale and employment change figures will draw focus later in the week, as will Canadian trade balance, Ivey PMI, building permits and employment data

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