sign up log in
Want to go ad-free? Find out how, here.

Subdued inflation data and disappointing trade figures behind PBOC rate cut; Fed rate hike still on cards; rapid change in sentiment has NZD under pressure

Currencies
Subdued inflation data and disappointing trade figures behind PBOC rate cut; Fed rate hike still on cards; rapid change in sentiment has NZD under pressure

By Ian Dobbs*:

Recent disappointing data out of China has prompted further action from the Chinese central bank.

The People Bank of China (PBOC) cut benchmark lending rates by 0.25% over the weekend, which marks the third cut since November.

Subdued inflation data and disappointing trade figures were the trigger for the move and most analysts suspect growth targets are now starting to look tough to achieve.

In the US it seems that although a interest rate hike may well still be on the cards for this year, it’s likely to get pushed out into sometime in the fourth quarter.

Looking close to home, the rapid change in sentiment toward the New Zealand dollar seen over the past couple of weeks has kept the currency under pressure.

Many economists are suggesting an interest rate cut as soon as June could be seen. Some heat has also come out of the Australian dollar which saw solid gains in the days after the Reserve Bank of Australia (RBA) cut interest rates last week.

Major Announcements last week:

  • Canadian Trade Balance -3.0b vs -0.8b expected
  • US ISM Non-Manufacturing PMI 57.8 vs 56.2 expected
  • Global Dairy Trade Index -3.5%
  • NZ Employment Change +0.7% vs +0.8% expected
  • NZ Unemployment Rate 5.8% vs 5.5% expected
  • Australian Retail Sales 0.3% vs 0.4% expected
  • UK Services PMI 59.5 vs 58.6 expected
  • Australian Employment Change -2.9k vs +4.5k expected
  • Australian Unemployment rate 6.2% as expected
  • US Non-Farm Payrolls 265k vs 277k expected
  • US Unemployment Rate 5.4% as expected
  • Canadian Employment Change -19.7k vs -4.5k expected
  • Canadian Unemployment Rate 6.8% vs 6.9% expected

NZD/USD

The New Zealand dollar has seen relentless pressure over the past week, driven lower by increasing expectation of a rate cut from the RBNZ. ANZ economists released a report in early trade yesterday that suggested a 0.25% interest rate cut in June and July was likely. This only added to the downside pressure on the currency and fell further overnight. Tomorrow we have the RBNZ financial stability report to digest which could make for interesting reading. If the central bank is going to cut interest rate they will surely want to implement further macro prudential tools to try and counter any positive impact on the housing market. Thursday’s NZ retail sales will also draw focus with the market expecting a gain on the quarter of 1.6%. From the US this week we also get the latest reading on retail sales along with producer prices and University of Michigan consumer sentiment. At this point 0.7200 is looking like a potential target for the pair over the coming days. Any periods of strength will run into resistance at 0.7420 and then again at 0.7500.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7340 0.7200 0.7420 0.7337 - 0.7575

NZD/AUD (AUD/NZD)

It has been largely one-way traffic for this pair over the past week as the intense selling pressure remains. Ever since last week’s NZ employment data the calls for an interest rate cut from the RBNZ have been growing. This has kept the New Zealand dollar on the back foot and it’s currently trading close to the week’s low. We have now seen close to a 7% fall in the past three weeks and further losses seen last night suggest the downside may not be done yet. The next level of support come in around 0.9260 (resistance around 1.0799) and the pair may try to stage something of a corrective NZD bounce from there. On the topside 0.9420 now provides the initial resistance (downside support at 1.0616) level. In NZ the focus now turns to tomorrow’s RBNZ financial stability report and then Thursday’s retail sales data. While from Australia this week we have the Annual budget release tonight followed by tomorrow’s wage price index.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9295 0.9260 0.9420 0.9295 - 0.9658
AUD / NZD 1.0758 1.0616 1.0799 1.0354 - 1.0759

NZD/GBP (GBP/NZD)

We have seen a brutal fall from the NZD in this pairing over the past week. The surprising UK election outcome underwrote some significant UK Pound gains, and these have combined with broad based New Zealand dollar weakness to see the NZD pressed to the lowest level since March 2011. Support around 0.4750 (resistance around 2.1053) gave way last night, with the pair trading to a low of 0.4707 (high of 2.1245). This does open the way for further losses with the next level of support at 0.4620 (resistance at 2.1645) looking a likely target. We have the Reserve Bank of New Zealand’s financial stability report to digest tomorrow and then on Thursday we get retail sales figures. From the UK this week we have manufacturing production and employment data along with a speech from Governor Carney and the Bank of England’s inflation report.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4714 0.4620 0.4800 0.4707 - 0.4997
GBP / NZD 2.1213 2.0833 2.1645 2.0012 - 2.1246

 NZD/CAD

Weakness in the New Zealand dollar has been the driving force for this pair over the past week. The local currency has seen a sharp turnaround in sentiment with many forecasters now calling for interest rate cuts from the Reserve Bank as early as June. This has helped to drive the pair to the lowest levels seen since early December. We will hear from the RBNZ tomorrow when they release their financial stability report and this provides the immediate focus for the pair. The market is starting to look a little oversold, but that doesn’t mean we won’t see further losses. Trying to pick the bottom of a move this strong is fraught with danger and not recommended. For the time being the risks are still skewed to the downside. Also from NZ this week we have retail sales numbers to digest, while from Canada we get the new house price index, the Bank of Canada review, and manufacturing sales data.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8880 0.8800 0.9000 0.8877 - 0.9150

NZD/EURO (EURO/NZD)

The New Zealand dollar has been under all sorts of pressure since last weeks employment data was released. Sentiment toward the local currency has turned sharply negative as more and more forecasters suggest interest rate cuts are just around the corner. We may get a better idea of what the central bank is actually thinking with the release of their financial stability report tomorrow. Although the RBNZ are inflation focused, they can’t ignore the risks of a rampant Auckland housing market. It seems likely the bank will want to minimise the risk of an interest rate cut with the use of further macro prudential tools. If the bank announces the implementation of such tools tomorrow the NZ will see more pressure as interest rate cut expectations increase. Weakness in the pair has so far been contained by minor support around 0.6560 (resistance around 1.5244), but any breach of that level will open the way for losses toward 0.6400 (1.5625). Also from NZ this week we have retail sales data to digest, while from Europe we get GDP data from France, Germany, Italy and EU as a whole.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6588 0.6560 0.6760 0.6559 - 0.6790
EUR / NZD 1.5179 1.4793 1.5244 1.4728 - 1.5245

 NZD/YEN

There has been little in the way of Japanese data to drive the Yen recently. That hasn’t however stopped this pair from making significant losses on the back of weakness in the New Zealand dollar. As calls grow for interest rate cuts from the RBNZ as early as June, the local currency has struggled with sharp losses across the board. The pair traded down close to 88.00 overnight and there is little to suggest we have seen the end of the selling. The immediate focus now turns to tomorrow's RBNZ financial stability report and this will be followed on Thursday by NZ retail sales data. From Japan this week we get leading indicator, the current account, economy watchers sentiment, and consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 88.17 88.00 90.00 88.14 - 90.78

AUD/USD

The Australian dollar has lost a little ground to the US dollar the past week, weighed on by some softer than expected data releases and a trimming of growth forecasts by the central bank. Although Friday’s release of US employment data added some volatility to the pair, the overall impact was negligible. A range of 0.7800 to 0.8000 looks likely to contain the pair in the near term with the favoured play being selling toward the upper end of that band. Tonight’s Australian budget release will draw focus as will tomorrow’s wage price index. From the US this week we get the latest reading on retail sales along with producer prices and University of Michigan consumer sentiment.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7898 0.7800 0.8030 0.7800 - 0.8030

AUD/GBP (GBP/AUD)                            

Strong gains in the value of the UK Pound in the wake of the surprising UK election result have been the main driver of this pair over the past week. The Australian dollar has seen a little pressure on the back of very tepid data and this has certainly added to the downside, but it’s really been a story of GBP strength. The pair smashed through support around 0.5085 (resistance around 1.9666) last night and this opens the way for further losses toward the 0.5000 level (2.0000). Tonight’s Australian budget release will draw focus as will tomorrow’s wage price index. While from the UK this week we get manufacturing production and employment data along with a speech from Governor Carney and the Bank of England’s inflation report.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5070 0.5000 0.5200 0.5059 - 0.5268
GBP / AUD 1.9724 1.9231 2.0000 1.8982 - 1.9766

AUD/EURO (EURO/AUD)

The past week has seen choppy trading for this pair as both currencies have seen periods of relative strength and weakness. In recent days the Australian dollar has managed to grind out some gains over the Euro testing the 0.7100 (1.4085) level last night. Momentum on the move is far from encouraging however, and the pair may well struggle to overcome resistance around 0.7130 (support around 1.4025). The most likely scenario is a further period of ranging between that level and 0.6960 on the downside (1.4368 on the topside). Greek developments will continue to draw focus in Europe with some sort of outcome likely in the next couple of week. If only because Greece will have by then completely run out of money. Tonight from Australian we have the annual budget release and tomorrow we get the wage price index.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7085 0.6960 0.7130 0.6969 - 0.7128
EUR / AUD 1.4114 1.4025 1.4368 1.4028 - 1.4350

AUD/YEN

With little in the way of economic releases from Japan over the past week, price action in this pair has been driven by movements in the value of the Australian dollar. In the first half of last week the Australian dollar squeezed higher taking the AUDJPY cross close to 96.00. Since then however the AUD has given back a good portion of those gains thanks to some less than inspiring data. Over recent days the pair has traded sideways around the 94.80 level. 94.00 to 96.00 still looks like a reasonable range to contain the pair in the near term, although we do have Australia’s annual budget release tonight to draw focus. This will be followed tomorrow by Australian wage price index data. From Japan this week we get leading indicators, the current account, economy watchers sentiment, and consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 94.87 94.00 96.00 93.72 - 95.90

AUD/CAD

There has been little in the way of overall direction for this pairing over the past week. A squeeze higher in the AUD in the first half of last week helped to dive the pair up to 0.9637, but since then the AUD has moderated and so has the cross to the Canadian dollar. We head into tonight’s Australian budget release with the slight downside bias still in play. If minor support around 0.9540 gives way the pair would then target the 0.9420 level. Tomorrow from Australia we get the wage price index, while from Canada this week we have the new house price index, the Bank of Canada review, and manufacturing sales data.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9552 0.9420 0.9620 0.9451 - 0.9637

-------------------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

Email:  

--------------------------------------------------------------------------------------------------------------------------

Market commentary:

Recent disappointing data out of China has prompted further action from the Chinese central bank. The People Bank of China (PBOC) cut benchmark lending rates by 0.25% over the weekend, which marks the third cut since November. Subdued inflation data and disappointing trade figures were the trigger for the move and most analysts suspect growth targets are now starting to look tough to achieve. In the US it seems that although a interest rate hike may well still be on the cards for this year, it’s likely to get pushed out into sometime in the fourth quarter. Looking close to home, the rapid change in sentiment toward the New Zealand dollar seen over the past couple of weeks has kept the currency under pressure. Many economists are suggesting an interest rate cut as soon as June could be seen. Some heat has also come out of the Australian dollar which saw solid gains in the days after the Reserve Bank of Australia (RBA) cut interest rates last week.

Australia

Data released since the RBA cut interest rates last Tuesday suggests the economy still has a long way to go in ‘rebalancing’. Retail sales at +0.3% were a little weaker than forecast, as was employment change data which showed the economy lost 2,900 jobs last month. Full time employment actually fell by 21,900, with a rise in part time jobs of 19,000 offsetting much of that decline. The unemployment rate also ticked up to 6.2%. Yesterday we saw the latest reading of business confidence which remained unchanged at 3. The sub components didn’t make great reading with a drop in business conditions, the capex index, and the employment index. The RBA’s statement on Monetary Policy was released on Friday and it said the latest rate cut was to reinforce ‘encouraging trends’ in consumer demand. The bank has trimmed GDP forecasts for 2015 and they believe the Australian dollar is not offering enough support to the economy. They said further falls seem likely and necessary. Tonight we have the annual budget release to digest and tomorrow we get the wage price index.

New Zealand

Calls for a near term rate cut from the Reserve Bank of New Zealand (RBNZ) have increased in the wake of last Wednesday’s employment data. It seems strong positive migration flows are making it difficult for the unemployment rate to come down, and just as hard for wages to go up. This low level of wage growth, combined with low inflation, declining dairy incomes and the relatively high level of the New Zealand dollar has been enough to convince a number of local banks we will see an interest rate cut in June, potentially followed with another soon after. That does seem a big call with the current state of the Auckland property market. The central bank may try to address that situation using further macro prudential tools and if they can take some of the heat out of it, then an interest rate cut may well come later. But June just seems a little too soon for my liking. The RBNZ release their Financial Stability Report tomorrow and it will no doubt focus on the state of the property market. This may well provide the opportunity for the bank to outline proposed restrictions on property investors. Later in the week we get the Business NZ manufacturing index and retails sales data to digest.

United States

US employment data released on Friday had a bit of something for everyone, depending on your view. Those with an optimistic outlook would have been pleased to see the solid headline employment gain of 223k and the unemployment rate tick down to 5.4%. Those not so convinced about the current state of the US economy would point out that prior number was revised down by 41k, to a total of just 85k, and that wage growth remains decidedly average at just 0.1%. There is certainly nothing in the report to suggest the Fed can hike interest rates in June, and to be fair, as a result of the data the market has slightly reduced the chance of a September hike to around 20%. Prior to the data the market had been pricing in around a 30% chance of a September hike. This week to draw focus we get the latest reading on retail sales, producer prices, and University of Michigan consumer sentiment.

Europe

The focus in Europe is once again on Greece with last night’s EU group meeting failing to come to any agreement. There were comments that progress has been made, but time is rapidly running out. It seems Greece cobbled the money together to pay the IMF EUR750 million due today, but even Greek officials admit they don’t have enough funds now to get through the end of the month. It seems the Greeks are really digging their heels in over the two key areas of pensions and collective bargaining. An article over the weekend in the British press quoted a Syriza party official as saying they won’t relent on those two areas whatever the consequences. EU finance ministers meet tonight and Greece will again be the main discussion point. Then tomorrow we get GDP data from France, Germany, Italy and EU as a whole.

United Kingdom

If the is one that is certain as a result of last week’s UK general election, it’s that polling companies will be taking a long hard look at themselves. They were all so far away from the actual outcome that their very existence needs to be questioned. A majority win by the Conservative's was always going to be the most market friendly result and as such the UK Pound made strong gains. The Bank of England (BOE) held their delayed interest rate meeting last night and as widely expected they left rates unchanged. Although an interest rate hike is certainly not just around the corner, if the economy can see something of and post-election recovery, a hike late this year could still be on the cards. This week to draw focus we have manufacturing production and employment data along with a speech from Governor Carney and the BOE’s inflation report.

Japan

The only release of note last week from Japan was the Bank of Japan monetary policy meeting minutes. These had little impact as there were no surprises and they were from a meeting that took place over a month ago. Next week the economic calendar looks a little better with leading indicator, the current account, economy watchers sentiment, and consumer confidence.

Canada

Last week saw a mixed bag of data from Canada. Very poor trade balance figures were countered by a significant jump in the Ivey PMI and building permits. On Friday Canadian employment data was released and this was a little disappointing. Canada shed 19.7k jobs in April, with part time employment declining by the most in four years. The unemployment rate stayed steady at 6.8% as nearly 19,000 people left the labour force. Still to come this week we have the new house price index, the Bank of Canada review, and manufacturing sales data to digest.

No chart with that title exists.

-----------------------------

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

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.