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Recent data not strong enough to support rate hike in US; China trying to manage the downturn; Chinese stimulus measures boost local market, has the markings of a bubble

Currencies
Recent data not strong enough to support rate hike in US; China trying to manage the downturn; Chinese stimulus measures boost local market, has the markings of a bubble

By Ian Dobbs*:

The Federal Reserve is determined to raise interest rates in the US this year, but the timing of the move is very uncertain.

Recent data, employment results aside, hasn’t been strong enough to justify a lift off in June, and the market is now focusing on September or December as likely dates for the first hike.

In China the focus is on trying to manage the downturn. The People's Bank of China has acted a number of times since late last year to try and soften the impact of the massive over-investment seen in recent years.

Housing is a big concern with a vast inventory of unsold properties. China produced more cement between 2011 and 2013 than the US did during the entire 20th Century.

Premier Li Keqiang recently said China will achieve 7% growth this year, and while ‘official’ figures may come close to that, there are signs things are a lot worse.

Electricity usage has turned negative and rail freight has been falling at near double digit rates. Hardly conducive with 7% growth. The impact of this downturn is being felt around the world.

Japan’s exports to China are down 15% on a year ago. Last month alone car exports to China fell 50%.

From New Zealand the volume of whole milk powder exported to China in April 2015 was a third of what it was in April 2014.

Chinese stimulus measures have boosted their stock market which recently hit a seven year high. Somewhat concerning however is the explosion of unsophisticated investors using margin trading accounts to invest in stocks. A record 3.3 million new trading accounts were opened in one week alone recently. This has all the markings of a bubble in the making.

Major Announcements last week:

  • NZ Global Dairy Trade Price Index -2.2%
  • Japanese GDP 0.6% vs 0.4% expected
  • Bank of England leave rates unchanged
  • Canadian Wholesale Sales 0.8% vs 0.9% expected
  • UK Retail Sales 1.2% vs 0.4% expected
  • Philly Fed Manufacturing Index 6.7 vs 8.1 expected
  • German IFO Business Climate 108.5 vs 108.3 expected
  • Canadian Core Inflation 0.1% as expected
  • US Core Inflation 0.3% vs 0.2% expected

NZD/USD

The New Zealand dollar was under pressure from the USD for much of last week. Key support just under 0.7300 contained the downside on numerous occasions however and this provided the NZD the chance to stage something of a recovery. The NZD managed a rally to a high of 0.7394 on Friday evening before US inflation data and comments from Fed Chair Yellen, once again saw the USD dominate. The local currency quickly fell back to 0.7300 and the last couple of days has seen quiet trading around that level. Once again however, support just below 0.7300 has contained the downside and this does keep alive the chance of a renewed bounce. The deciding factor will likely come from the release of US data tonight. Durable goods orders and CB consumer confidence are set to hit the wires and if they disappoint, the New Zealand dollar may well test back toward 0.7400. Later in the week from NZ we have building consents and business confidence numbers to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7305 0.7280 0.7420 0.7282 - 0.7443

NZD/AUD (AUD/NZD)

After a prolonged period of sideways trading around 0.9280 (1.0776), the New Zealand dollar managed to break out of its increasingly tight range against the Australian dollar with a move to the topside on Friday afternoon. So far the pair has made it toward minor resistance at 0.9360 (support at 1.0684), but quiet trading conditions in the early stages of this week has seen that level cap. There is still potential for a move toward the stronger resistance level of 0.9420 (support level of 1.0616), as long as the market can hold above support now seen at 0.9310 (below resistance at 1.0741). Any move down through 0.9310 (up through 1.0616) would be a weak signal and negate the current bullish outlook. Still to come this week from Australia we have private capital expenditure and construction work done data, along with a speech from RBA deputy governor Lowe. While from NZ we have building consents and business confidence numbers to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9345 0.9310 0.9420 0.9218 - 0.9354
AUD / NZD 1.0701 1.0616 1.0741 1.0690 - 1.0849

NZD/GBP (GBP/NZD)

The past week has seen largely sideways trading for this pair around the 0.4710 level (2.1231). The UK pound did put some sharp gains in late last week after much better than forecast retails sales data, but the dip to 0.4655 (2.1482) could not be sustained. This keeps alive the chance of a recovery back toward 0.4800 (2.0833). Price action this week could well be driven by the release of data from NZ in the form of building consents and business confidence, and UK data in the form of GDP, preliminary business investment and GFK consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4725 0.4620 0.4800 0.4655 - 0.4782
GBP / NZD 2.1164 2.0833 2.1645 2.0914 - 2.1482

 NZD/CAD

The past week and a half has seen largely directionless trade for the pair. We did see a dip toward 0.8900 mid last week, but the New Zealand dollar managed to recover quickly and the pair traded back toward 0.9000 where is seems more comfortable. At this stage the risks look evenly balanced and near term direction may well be decided by data releases over the coming days. From NZ this week we get building consents and business confidence numbers. While from Canada we have the Bank of Canada rate statement, the raw material price index and monthly GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9005 0.8900 0.9100 0.8900 - 0.9041

NZD/EURO (EURO/NZD)

Last week’s increase in NZ inflation expectations helped to turn this pair around after a month of losses. The pair eventually managed to gain a foothold above 0.6600 (below 1.5152) and this has encouraged further gains to 0.6667 (1.4999) so far. For the time being the focus remains on the topside with the target being a test of resistance around 0.6760 (support around 1.4793). While Greek negotiations will continue to draw focus we also have German consumer climate, German retail sales, French consumer spending and Spanish CPI to look forward to in coming days. While from NZ this week we have building consents and business confidence numbers to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6665 0.6560 0.6760 0.6508 - 0.6667
EUR / NZD 1.5004 1.4793 1.5244 1.4999 - 1.5367

 NZD/YEN

The past week has seen this pair trading sideways in an increasingly tight range around 88.80. The broader support and resistance levels of 88.00 and 90.00 haven’t come close to being tested and we may well see those two levels contain trade again this week. From Japan over the coming days we have the BOJ minutes, retail sales, household spending and inflation data to digest. While from NZ this week we get building consents and business confidence numbers.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 88.88 88.00 90.00 88.32 - 89.38

AUD/USD

The Australian dollar has seen relentless pressure from the USD over the past week. The AUD tried to bounce from minor support around 0.7860 on Friday afternoon, and made it as far as 0.7931, before a combination of US inflation data and comments from Fed Chair Yellen saw the USD once again dominate. This drove the AUD back down through support at 0.7860, trading to a low of 0.7805. The start of this week has seen quiet trading conditions with holidays in much of Europe and the United States. Things could well liven up again tonight however with key US data in the form of durable goods orders and consumer confidence set for release. 0.7860 now provides resistance on the topside and while the market holds below there the risks are skewed to further losses. The next level of downside support comes in at 0.7740 and this will provide the initial target should we see further USD strength. Still to come this week from Australia we have private capital expenditure and construction work done data, along with a speech from RBA deputy governor Lowe.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7820 0.7740 0.7860 0.7805 - 0.8009

AUD/GBP (GBP/AUD)                            


The Australian dollar saw pressure from the UK Pound last week, with particularly sharp declines seen in the wake of strong UK retail sales data. Although the pair has managed to bounce from its lows, it has so far failed to overcome minor resistance around 0.5060 (minor support around 1.9763). This keeps the risk skewed to the downside in the near term. Look for a range of 0.5000 to 0.5100 (2.0000 to 1.9608) over the coming week. Still to come this week from Australia we have private capital expenditure and construction work done data, along with a speech from RBA deputy governor Lowe. While from the UK we get data in the form of GDP, preliminary business investment and GFK consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5058 0.5000 0.5200 0.5023 - 0.5149
GBP / AUD 1.9771 1.9231 2.0000 1.9423 - 1.9910

AUD/EURO (EURO/AUD)

The Australian dollar has managed some gains against the Euro this week. Trading conditions have been choppy however with periods of weakness in both currencies causing volatility. The Euro has however underperformed with continuing concern about the lack of progress toward a Greek deal. Look for 0.7000 to 0.7200 (1.4286 to 1.3889) to contain trade again this week. From Australia over the coming days we have private capital expenditure and construction work done data, along with a speech from RBA deputy governor Lowe. While from Europe we have German consumer climate, German retail sales, French consumer spending and Spanish CPI to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7135 0.7000 0.7200 0.7042 - 0.7143
EUR / AUD 1.4015 1.3889 1.4286 1.4000 - 1.4200

AUD/YEN

The past week has seen a tight range in this pair, interrupted only by a period of Australian dollar weakness on Friday evening. That helped to dive the pair to its 94.94 low and we have only seen a small recovery since then. Look for a range of 94.00 to 96.00 over the remainder of this week, with attention now turning to Australian releases in the form of private capital expenditure and construction work done data, along with a speech from RBA deputy governor Lowe. While from Japan over the coming days we have the BOJ minutes, retail sales, household spending and inflation data to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 95.12 94.00 96.00 94.94 - 96.05

AUD/CAD

The Australian dollar has lost ground to the CAD this week helped lower by better than forecast Canadian retail sales data. That data helped to drive the pair down to support around 0.9600 on Friday evening. We have seen small bounce develop from that low, but it has so far been less than convincing. The pair needs to overcome initial resistance around 0.9660 to alleviate the current downside bias. While below 0.9660 the focus remains on further tests of 0.9600. From Australia over the coming days we have private capital expenditure and construction work done data, along with a speech from RBA deputy governor Lowe. While from Canada we have the Bank of Canada rate statement, the raw material price index and monthly GDP data.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9633 0.9600 0.9740 0.9600 - 0.9722

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Market commentary:

The Federal Reserve is determined to raise interest rates in the US this year, but the timing of the move is very uncertain. Recent data, employment results aside, hasn’t been strong enough to justify a lift off in June, and the market is now focusing on September or December as likely dates for the first hike. In China the focus is on trying to manage the downturn. The People's Bank of China has acted a number of times since late last year to try and soften the impact of the massive over-investment seen in recent years. Housing is a big concern with a vast inventory of unsold properties. China produced more cement between 2011 and 2013 than the US did during the entire 20th Century. Premier Li Keqiang recently said China will achieve 7% growth this year, and while ‘official’ figures may come close to that, there are signs things are a lot worse. Electricity usage has turned negative and rail freight has been falling at near double digit rates. Hardly conducive with 7% growth. The impact of this downturn is being felt around the world. Japan’s exports to China are down 15% on a year ago. Last month alone car exports to China fell 50%. From New Zealand the volume of whole milk powder exported to China in April 2015 was a third of what it was in April 2014. Chinese stimulus measures have boosted their stock market which recently hit a seven year high. Somewhat concerning however is the explosion of unsophisticated investors using margin trading accounts to invest in stocks. A record 3.3 million new trading accounts were opened in one week alone recently. This has all the markings of a bubble in the making.

Australia

Last week from Australia we saw consumer sentiment data increase 6.4%, thanks in large part to the recent interest rate cut from the RBA and a well-received Federal Budget. We also saw inflation expectations increase by 0.2% to 3.6% from 3.4% prior. There have been a number of reports released recently that suggest the bounce we have seen in commodity prices recently is unlikely to be sustained. The underlying fundamentals for commodities remain negative with world growth expectations looking pretty sluggish over the remainder of this year. The outlook for China isn’t much better with many researchers suggesting China’s economic downturn may be much deeper than ‘official’ numbers suggest. If this bounce in commodity prices does turn out to be temporary then we can expect that to once again weigh on the Australian dollar over the coming months. Still to come this week we have private capital expenditure and construction work done data, along with a speech from RBA deputy governor Lowe.

New Zealand

Data from New Zealand late last week was supportive of the economic outlook going forward. Migration hit another record high and credit card spending was also strong increasing 7.1%. ANZ consumer confidence for May came in at -3.8% with the index falling to 123.9 from 128.8. Although that’s the lowest reading in six months, the index is coming off a very high peak and overall it’s still a strong reading. Earlier this morning we saw the latest trade balance data for April and this came in better than forecast at +123m. Expectations were for a result of +98m. Still to come this week we have building consents and business confidence data to digest.

United States

The US dollar finished last week on a relatively firm footing thanks to a couple of releases. The first was inflation, and while the headline reading remains pretty tame, the core rate, which strips out volatile food and energy, rose by 0.3% in April. That was higher than the 0.2% expected. In a signal of the underlying appetite for US dollars, this data caused a significant increase in demand as the USD made solid gains across the board. Fed Chair Yellen also released a speech on Friday evening in which she said she expects the bank to begin raising rates ‘at some point this year’. She added that the economy still shows some room for improvement with the current 5.5% unemployment rate not factoring in some of the joblessness. She believes the soft start to 2015 is the result of transitory factors and some ‘statistical noise’ and that we should see moderate growth over the remainder of the year. Still to come this week we have durable goods orders, CB consumer confidence, weekly unemployment claims and GDP data to digest.

Europe

PMI readings from Europe last week were somewhat mixed. Manufacturing saw a small improvement, but the service sector reading declined. Data later in the week was a little more encouraging with French business confidence coming as forecast at 97.0 and the German IFO business climate index improving a touch to 108.5. German GDP for the first quarter also printed right on expectation at +0.3%. The Euro has seen some pressure recently amid ongoing reports of tough talk from both sides of the Greek negotiations. The IMF looks to be taking a strong stance and as they are one of the three main creditors any deal must win their approval. Reports are that the IMF are unhappy as they believe Greece is going back on reforms and they want assurances that the country will pay what it owes over the next 12 months. An article from Greece’s Interior Minister over the weekend blamed creditors for the impasse and threatened not to fulfil an upcoming payment to the IMF on June 5th. A holiday in much of Europe yesterday meant a quiet start to this week, but we do have data in the form of German consumer climate, German retail sales, French consumer spending and Spanish CPI to look forward to over the coming days.

United Kingdom

The past week has been a reasonably positive one for the United Kingdom. Although we have seen inflation turn negative for the first time in more than 50 years, it’s no major surprise and should prove temporary. The UK consumer seems to be making the most of the extra money in their pockets with booming retail sales figures. UK public sector net borrowing in the year ended March 2015 was 11% less than it was the year before. This comes even as GDP in the first quarter fell to just 0.3%, which is the slowest pace since late 2012. The UK government seems to have mix of austerity and growth policies just right and this is helping to reduce their deficit. At just under 5% it’s still one of the highest in the developed world and so they still have a long way to go. The recent election outcome was a big vote of confidence in the government and this will not only keep the economy on the right track, but should result in improved readings from consumer and business confidence indicators. The main focus in terms of data this week will be on the second reading of first quarter GDP. There are some reports that suggest it could be revised higher to 0.4%.

Japan

Last week Japan released a better than expected result for GDP in the first quarter. The 0.6% outcome was significantly higher than forecasts which were for GDP of 0.4%. The positive sentiment continued on Friday with the Bank of Japan’s monetary policy statement. The bank made no changes to policy settings but they did revise up their assessment of the Japanese economy. They have improved their outlook on private consumption and on housing investment and say the economy continues to recover moderately. Inflation however is likely to remain around zero percent for the time being due to energy price falls. Japanese trade balance released yesterday came in better than forecast at -53.4bn Yen. Exports continue to grow, while the value of imports has fallen significantly thanks to softer energy prices. Still to come this week we have the BOJ minutes, retail sales, household spending and inflation data.

Canada

Canadian inflation came in a touch lower than forecast late last week. The annual pace of price gains eased to 0.8% in April, which is the smallest increase since late 2013. Forecasts were for a reading of 1.0% year on year. The big driver of the decrease continues to be energy prices. Canadian consumers however seem to be enjoying the windfall and increasing spending on cars, food and alcohol. Retail sales jumped +0.7% in March which is much higher than the +0.3% expected. Core retail sales, which strip out autos, rose a more modest +0.5% which was below the forecast of +0.7%. This week to draw focus we have the Bank of Canada rate statement, the raw material price index and monthly GDP data.

No chart with that title exists.

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

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2 Comments

Ian:

Rates will rise in the U.S. the only questions are when and from what, economic recovery or deteriorating U.S. creditability. You have to remember without the Fed Treasuries have to be sold on the open market would you buy one with your currency risk (as the dollar hovers near 12 year highs) in one hour more than your annual yield?

Sold on the open market means higher rates

If the Fed continues to print money and buy deteriorating U.S. creditability, look at the U.S in the Fed charts linked below the U.S. numbers are beyond ugly

https://peterknightadvisor.wordpress.com/2015/05/22/25070/

The big one is China’s currency becoming one of the world reserve currencies this October see the link below for Fed charts

https://peterknightadvisor.wordpress.com/2015/05/24/the-worlds-second-a…

Like to see more written about these

Regards,
Peter Knight

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Try and remember this money, is an IOU for work/energy. There will be no substantial US recovery at least in terms of back to growth for ever economics on a finite planet. ie to grow GDP 4% per annum takes 1~2.5% more fossil energy. We are now however in an era of declining oil output and ever increasing costs to extract until its gone by 2050. That spells death for the world's industrial economy as it stands.

Apart from that yet more "its the debt that did it I tell you" mantra.

PS The Fed isnt printing btw, its QEing.

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