By Ian Dobbs*:
The US Fed looks set to hike interest rates for the first time in nine years come September.
Nearly 70% of economists recently polled expect them to do just that.
The Fed’s target rate has remained static at zero to 0.25% since 2008, and with solid employment growth combining with a broader economic bounce back from the poor first quarter, there really isn’t any reason to keep it there.
We have a Fed meeting this week and expectations are they will signal a lift off in rates is close by. Just how the markets react to the start of ‘interest rate normalization’ will be interesting. We have already seen some extreme moves in long term interest rates over recent weeks and this may well be a precursor to broader market volatility over the coming months.
Equity markets for one look very overvalued and move higher in interest rates will only serve to undermine support for stocks.
The Fed are trying to minimise the potential damage by stressing interest rate rises will be very gradual, but this will be little comfort to markets if we start to see some disorderly moves.
Major Announcements last week:
- Japanese GDP 1.0% vs .6% previous
- Chinese Trade Balance +54.48 B vs 44.95B expected
- Chinese CPI +1.2% vs +1.3% expected
- European GDP 1.0% as expected
- UK Industrial Production 1.2% vs .6% expected
- RBNZ cuts cash rate 25pts to 3.25%
- Australian employment growth 42k vs 11k expected
- US Retail Sales +1.2% vs 1.0% expected
- European Trade Balance 24.3B vs 20.3 expected
- US Industrial Production -.2% vs +.3% expected
- US Capacity Utilisation 78.1% vs 78.3% expected
NZD/USD
The New Zealand dollar has remained on the back foot since last week's RBNZ interest rate cut. Fresh cycle lows at 0.6944 traded heading into the weekend and the pair may well have ended lower still had it not been for the US dollars inability to make gains on the back of better than forecast data on Friday night. The lack of USD buying may be an indication the market is overly long USD’s (bought USD positions) and these positions could see a clean out at some stage. That would allow the NZD to recover some ground, but solid resistance around 0.7080 will prove tough to overcome. Tonight we have another Fonterra dairy auction to digest then on Thursday we get NZ Q1 GDP data. From the States this week the FOMC statement on Thursday morning will draw the most attention although we also get building permits, inflation and the Philly Fed manufacturing index over coming days.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7004 | 0.6900 | 0.7080 | 0.6944 - 0.7232 |
NZD/AUD (AUD/NZD)
The New Zealand dollar has remained very heavy in the wake of last Thursday’s RBNZ interest rate cut. After collapsing toward 0.9040 (1.1062) in the immediate aftermath of that cut, the cross has failed to see any meaningful NZD bounce and has actually continued to grind out fresh NZD lows just below 0.9000 (above 1.1110). If we do happen to see a period of relative NZD strength the pair will run into strong resistance around the 0.9170 level (support 1.0900) which I suspect will cap it. The medium term target is now a test of support around 0.8850 (resistance 1.1300). We do have the RBA minutes out in the next hour to draw focus and these could provide some volatility. Tonight we also have another Fonterra dairy auction to digest then on Thursday we get NZ GDP data.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9020 | 0.8850 | 0.9170 | 0.8996 - 0.9332 |
| AUD / NZD | 1.1086 | 1.0905 | 1.1299 | 1.0715 - 1.1116 |
NZD/GBP (GBP/NZD)
This pair has continued to grind out fresh NZD lows in the aftermath of last Thursday’s RBNZ interest rate cut. Solid resistance around 0.4600 (support around 2.1739) should cap any periods of relative NZD strength over the coming weeks, with longer term focus firmly on further NZ dollar downside. Tonight we have another Fonterra dairy auction to digest, then on Thursday we get NZ GDP data. From the UK this week there are also plenty of data to digest. Inflation tonight will be followed by employment data and the BOE minutes on Wednesday, then later in the week we have a speech from Governor Carney and retail sales to absorb.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4490 | 0.4400 | 0.4600 | 0.4479 - 0.4685 |
| GBP / NZD | 2.2272 | 2.1739 | 2.2727 | 2.1346 - 2.2326 |
NZD/CAD
Like most New Zealand dollar crosses this pair collapsed lower last week after the RBNZ cut interest rates. Since then we have seen a consolidation of price action at these lower levels. If we happen to see any periods of relative NZD strength we can expect the pair to run into solid resistance around 0.8760. Longer term the focus remains on the downside and a move toward 0.8400. From NZ this week we have another dairy auction and GDP data to draw focus. While from Canada we get wholesale sales, inflation and retail sales numbers to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8625 | 0.8560 | 0.8760 | 0.8570 - 0.8868 |
NZD/EURO (EURO/NZD)
Much of the past week in the pairing has been spent consolidating the losses seen on the wake of Thursday’s RBNZ interest rate cut. The pair has mostly bounced around sideways just above the 0.6200 (1.6129) level. Initial resistance comes in around 0.6280 (support around 1.5924) and I would expect this to cap any near term NZ dollar strength. With the broader trend firmly to the downside we can expect to see further investigates below 0.6200 (above 1.6129) over the coming week. From NZ we have another dairy auction and GDP data to draw focus, while from Europe we get ZEW economic sentiment, the final reading of inflation and the Eurogroup finance ministers meetings. The big unknown, and risk factor for any outlook, remains the Greek situation which could see a significant move in the value of the Euro when some finality is reached.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6210 | 0.6080 | 0.6280 | 0.6189 - 0.6387 |
| EUR / NZD | 1.6103 | 1.5924 | 1.6447 | 1.5657 - 1.6159 |
NZD/YEN
We have seen largely sideways consolidation in this cross since it broke lower in the wake of Thursday’s RBNZ interest rate decision. For the time being support around 86.00 has contained the downside, but I would expect that to come under increasing pressure. On the topside there is now solid resistance around 88.00 which I would expect to cap any periods of New Zealand dollar strength over the coming weeks. From NZ the week we have another dairy auction and GDP data to draw focus. While from Japan the BOJ monetary policy statement on Friday will the main highlight.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 86.40 | 86.00 | 88.00 | 85.93 - 89.00 |
AUD/USD
The Australian dollar has spent much of the past week ranging between 0.7700 and 0.7800 against the USD. Both countries have seen generally positive economic releases recently, although it is the USD that has failed to take advantage of the data. Friday night in particular proved interesting after the USD couldn’t sustain gains made in the wake of better than forecast producer price and consumer sentiment data. This may be an indication the market is overly long USD’s (bought USD positions) and these positions could see a clean out at some stage. If that were to develop the AUD could well break back above 0.7800 for a time. We have the RBA minutes to digest in the coming hour and then on Thursday from the US we have the FOMC rate statement. Also from the US this week we have building permits, inflation and the Philly Fed manufacturing index to draw focus.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7765 | 0.7600 | 0.7800 | 0.7641 - 0.7785 |
AUD/GBP (GBP/AUD)
The Australian dollar continues to grind its way lower against the UK Pound, with the target a test of support at 0.4925 (resistance at 2.0305). Trading has been relatively choppy however, and we can expect more of the same over the coming week with a number of key releases from the UK to digest. Inflation data tonight will be followed by employment data and the BOE minutes on Wednesday, then later in the week we have a speech from Governor Carney and retail sales figures. Locally the main focus will be on the RBA minutes set for release in the next hour. Selling into any periods of strength remains the favoured play with resistance at 0.5040 and then again at 0.5100 (support at 1.9841 and then 1.9608) likely to cap further AUD appreciation.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.4980 | 0.4925 | 0.5040 | 0.4959 - 0.5038 |
| GBP / AUD | 2.0080 | 1.9841 | 2.0305 | 1.9847 - 2.0164 |
AUD/EURO (EURO/AUD)
The Australian dollar has managed to outperform the Euro this week, trading up to resistance around 0.6930 (support around 1.4430). However, that level has capped the market so far and the failure to overcome it leaves the near term picture a little less positive. We could easily see the pair drift back towards 0.6800 (1.4706) over the coming days. If the 0.6930 (1.4430) level is overcome the market will run into more resistance at 0.6980 (support at 1.4327). The immediate focus now turns to the RBA minutes set for release in the next hour. Attention will then turn to Europe where we have ZEW economic sentiment, the final reading of inflation and the Eurogroup finance ministers meetings to digest over the coming days.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6890 | 0.6800 | 0.6930 | 0.6772 - 0.6926 |
| EUR / AUD | 1.4514 | 1.4430 | 1.4706 | 1.4438 - 1.4766 |
AUD/YEN
We have seen some decent price swings in the pair over the past week, but the reality is the market is little changed from where is was trading two weeks ago. A period of heightened volatility in the wake of Japanese officials comments last Wednesday saw the cross trade to its lows at 94.54, but these were short lived. Look for 94.50 to 96.00 to provide the likely range over the coming week. The risks to that outlook are to the topside with a break above 96.00 opening the way for a move to 97.00. We have the RBA minutes to digest in the next hour, then later in the week we have the Bank of Japan monetary policy statement to draw focus.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 95.85 | 94.50 | 96.00 | 94.54 - 96.03 |
AUD/CAD
The Australian dollar has made some gains against the Canadian dollar this week after trading to a low of 0.9437. The recovery off those lows was helped by some disappointing Canadian manufacturing sales data released last night. That saw the pair test up toward minor resistance around 0.9600 which has so far capped the gains. I would expect to see further range trading between 0.9400 and 0.9600 over the coming week. The immediate focus is on the RBA minutes due in the next hour. Later in the week from Canada we get wholesale sales, inflation and retails sales numbers to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9580 | 0.9400 | 0.9600 | 0.9437 - 0.9594 |
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Market commentary:
Australia
Data out of Australia last week was largely supportive of the economic outlook going forward. Improving business confidence and a big (albeit somewhat suspect) jump in employment suggest we may see a small improvement in the over the coming months. RBA Governor Stevens also suggested last week that although the central bank are prepared to cut rates again if needed, he’s not convinced it would be of much benefit to the economy. The focus this week will be on the RBA minutes that are set for release in the next few hours. These are from the meeting held earlier this month where the bank left rates unchanged at 2%, following May’s 0.25% rate cut. Later in the week we get new vehicle sales data, the MI leading index and the RBA bulletin.
New Zealand
Last week’s decision by the Reserve Bank of New Zealand (RBNZ) to cut interest rates certainly created some fireworks in the currency market with the NZD dropping like a stone on the announcement. Tough conditions in the dairy sector played a big part in the convincing Governor Wheeler to reduce the cash rate and this week we have another dairy auction from Fonterra to digest. We have seen dairy prices decline at all of the past six auctions and farmers are bracing for a very tough season in 2015/16. The New Zealand Institute of Economic Research (NZIER) released the consensus forecasts yesterday and they show forecasters have pared back growth expectations a touch since March. GDP in the March quarter, which is set for release on Thursday, is expected at 0.6%, while average growth in 2016 is now seen at 2.8%. The NZIER said activity indicators have been mixed with continued falls in dairy prices offset by strong household spending.
United States
Last week saw mostly positive data released from the United States which has only served to reinforce expectations of a September lift off in interest rates. The data highlights included better than forecast core retail sales, producer prices and consumer sentiment. Last night’s data dump was a little less encouraging with declines in the Empire State Manufacturing Index, capacity utilization and industrial production. However, the NAHB housing market index did improve to its best level since the onset of the financial crises. The Empire State index was probably the most eyebrow raising of last night’s releases. It is the first manufacturing index released each month and is used as an early gauge for the national numbers. The sharp decline to -1.98 from +3.09 prior does raise some doubts the broader manufacturing sector. There are still plenty of economic releases to digest this week. The Fed conclude their latest rate meeting on Thursday morning and release a rate statement which will be closely analysed. Building permits, inflation and the Philly Fed manufacturing index will also hit the wires over the coming days.
Europe
With little in the way of key European data out over the past week, Greek headlines have continued to draw focus. Unfortunately we are as far from an real agreement as ever. Greek talks scheduled for this past weekend only lasted 45 minutes before they were abandoned as it looked like there was no possibility of progress. Attention now turns to the Euro-area finance ministers meeting (Eurogroup) on Thursday to try and move negotiations forward. In the meantime plans for a Greek exit are been drawn up as officials admit for the first time that preparation for the worst case scenario was under way. Last night we heard from ECB President Draghi who said the bank has all the tools to manage a Greek exit. In terms of the economy he said the latest data points to a recovery at a moderate pace. Trade balance data out last night showed the impact of a weaker Euro with the trade surplus growing to 24.3b from 19.9b prior. Still to come this week we have ZEW economic sentiment, the final reading of inflation and those Eurogroup meetings.
United Kingdom
Last week saw some mixed data from the United Kingdom. A big reduction in the trade balance boosted hopes for improved growth in the second quarter, while a drop in manufacturing production was largely offset by an increase in Industrial production. This week should prove interesting with a number of key data points set for release. First up is inflation data which is set to hit the wires tonight. Expectations are that the UK’s dip into deflation last month will prove very temporary with the CPI (consumer price index) returning to +0.1% this month. Attention will then shift to employment data due Wednesday, and in particular the outcome for average cash earnings. Real wages are expected to have grown at the fastest pace since 2007 with the market expecting earnings to have increased by 2.5%. That being said, wages growth has taken a long time to recover and real wages were actually negative for an extended period after the financial crisis, so there is a lot of ground to make up. Following the employment data we have the Bank of England (BOE) minutes and then on Thursday we get the latest reading of retails sales. One of the biggest risks to the UK economy going forward is the EU referendum and potential for a UK departure from the EU. Standard and Poor's recently signalled just that when they downgraded the UK to AAA negative, from AAA stable. David Cameron’s Conservative Party has promised to hold an “in/out” referendum by the end of 2017 and S&P said they cut the country's credit rating if they concluded a departure from the EU was likely over the medium term.
Japan
We have seen some mixed data from Japan recently. Better than expected core machinery orders and industrial production have been countered by softer readings on consumer confidence, manufacturing and tertiary industry activity. A recent article in the Japanese press suggested that capital expenditure plans of domestic demand reliant companies were set to increase as business performance and personal spending improve. This would certainly be a positive step for the economy. The Japanese government also see signs of improved investment upgrading their outlook from “capex is flat” to “shown signs of recovery”. The added that growth is spreading to small firms as corporate earnings feed into higher wages, higher capital expenditure and a tighter labour market. Despite these positive developments some 12 out of 19 economists recently polled expect the Bank of Japan (BOJ) to expand monetary stimulus at their October 30th meeting. The other 7 economists also all expect further stimulus, but at later dates. The BOJ meet this week on Friday and release their monetary policy statement. The market will be looking for signals that they too are leaning toward further stimulus.
Canada
The past week has seen some positive readings from the Canadian housing market. Housing starts, building permits and existing home sales all came in stronger than forecast. Countering these have been weaker than expected readings from capacity utilization and manufacturing sales. Bank of Canada (BOC) Governor Stephen Poloz remains optimistic that the worst of the oil induced downturn is behind them and he’ll be keen to see improved readings from wholesale sales, inflation and retails sales over the rest of this week.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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