By Ian Dobbs*:
Greek negotiations continue to draw a lot of attention at the moment as a potential Greek exit (Grexit) provides the biggest near term risk factor for markets.
There were some positive signs in the wake of an emergency meeting last night, but no final deal as yet that would allow the release of badly needed bailout funds.
If an agreement is reached in the coming days the market can then then get back to focusing on other risk factors.
For Australia and New Zealand one of those risk factors is the health of the Chinese economy.
Last week proved to be a very tough one for the Chinese stock market that can only be described as one epic bubble.
Gains over the past year have been phenomenal as anyone and everyone, including peasant farmers and high school dropouts, opened margin trading accounts.
Reality kicked in hard in the past seven days however with the market falling 10%.
On Friday alone at one stage the market was down 6.5%. Credit has once again started to flow more freely in China spurred on by recent interest rate cuts, and even house price declines have abated in some cities. Business sentiment has also improved, but an ugly stock market correction could undo much of this recent progress.
Major Announcements last week:
- UK Inflation +.2% for month as expected
- UK Unemployment 5.5% as expected
- UK Ave. Earnings +2.7% vs +2.1% expected
- European Inflation +.2% for month as expected
- US Fed leave monetary policy unchanged
- NZ Q1 GDP +.2% vs +.6% expected
- UK Retail Sales 4.4% vs 4.5% expected
- European labour Costs +2.2% against 1.2% previous
- US Inflation 0.0% vs +.2% expected
- Canadian Inflation on month +.9% vs +.8% expected
- Canadian Retail Sales -.1% vs +.7% expected
NZD/USD
The New Zealand dollar has remained under pressure in the wake of last week’s disappointing GDP data. A broadly stronger USD has also played a part, helped by positive signals from the housing and employment markets, although softer than forecast US inflation has limited USD gains somewhat. The trend for the pair is firmly to the downside and any potential periods of strength in the NZD will run into strong resistance around 0.7030. Selling ahead of that level is recommended for those looking to buy US dollars. From New Zealand this week we only have the trade balance on Friday to draw focus. While from the US we get durable goods orders, manufacturing PMI, GDP, personal spending and consumer sentiment data.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6865 | 0.6800 | 0.7030 | 0.6862 - 0.7010 |
NZD/AUD (AUD/NZD)
The New Zealand dollar remains under pressure since last week’s GDP data. In the past 24 hours this pair has once again tested levels toward key support around 0.8850 (resistance 1.1300). There was a real lack of momentum in the move however, and as such the level was never seriously threatened. We have now seen two failed attempts toward that level in the past week and this may encourage some buying which could easily see a broader correction toward 0.9000 (1.1110) develop. I do favour something of a corrective NZD bounce unfolding over the coming week. There is no key fundamental data from either country scheduled for release that is likely to provide enough drive to cause a break below 0.8850 (above 1.1300).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.8900 | 0.8850 | 0.9170 | 0.8854 - 0.9031 |
| AUD / NZD | 1.1236 | 1.0905 | 1.1299 | 1.1073 - 1.1295 |
NZD/GBP (GBP/NZD)
The New Zealand dollar has continued to trade heavily in the wake of last week’s poor GDP data. The losses have only been very gradual in recent days, with the NZD just managing to grind out a fresh cycle low in the past 12 hours. The longer term trend for the NZ dollar is certainly down, with the UK Pound supported by better than forecast wage and retail sales data in the second half of last week. However, immediate NZD downside momentum is waning and this increases the odds of a corrective bounce over the coming week. There isn’t much in terms of data for the market to trade of this week with only the trade balance from NZ, and a speech from BOE Governor Carney on Friday or any note.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4342 | 0.4300 | 0.4500 | 0.4336 - 0.4492 |
| GBP / NZD | 2.3031 | 2.2222 | 2.3256 | 2.2260 - 2.3064 |
NZD/CAD
The New Zealand dollar has underperformed the Canadian dollar this past week, weighed on by softer than forecast GDP data. The pair managed to trade down to fresh cycle lows last night at 0.8408, although momentum seems to be waning and as such these recent losses were quickly reversed. This does increase the risk of a corrective bounce which could see a move back toward 0.8600 develop. The longer term trend is firmly to the downside and selling into periods of NZ dollar strength is the favoured strategy. There is very little on the economic calendar this week for the market to digest with only the trade balance from New Zealand of any note.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8462 | 0.8400 | 0.8600 | 0.8408 - 0.8634 |
NZD/EURO (EURO/NZD)
The past 12 hours have seen fresh cycle lows trade for this pair as the New Zealand dollar remains on the back foot in the wake of last week’s GDP data. The move down to 0.6031 (up to 1.6581) last night was however largely driven by strength in the Euro as reports of progress in Greek negotiations filtered out on the news wires. A deal is not done yet and there is very little time left, but neither side wants to see a Greek default and potential EUR exit in the near term. That may be enough motivation to see some sort of agreement reached in the coming days. For now the focus for the pair remains on the NZ dollar downside. Any periods of near term strength will run into initial resistance at 0.6130 (support 1.6315). From New Zealand this week we just have the trade balance on Friday to digest. While from Europe, aside from continued Greek negotiations, we get manufacturing and service PMI data along with German business climate and consumer confidence indicators.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6060 | 0.5930 | 0.6130 | 0.6031 - 0.6238 |
| EUR / NZD | 1.6502 | 1.6313 | 1.6863 | 1.6032 - 1.6581 |
NZD/YEN
New Zealand dollar weakness has kept this pair under pressure over the past week. Disappointing GDP data on Thursday has dramatically increased the chance of another interest rate cut from the RBNZ next month, and as such the local currency has underperformed. There is always the potential for a corrective bounce to develop after such a sharp down leg, and if we do see that over the coming week the pair will run into solid resistance around 86.00. I would look for a range of 84.00 to 86.00 to contain trading this week. From New Zealand we only have the trade balance on Friday to digest. While from Japan the focus will be on household spending, inflation and unemployment data, also out on Friday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 84.82 | 84.00 | 86.00 | 84.55 - 86.54 |
AUD/USD
We have seen close to a 200 point (two cent) range in this pair over the past week. Overall however, the Australian dollar is currently trading close to the level it was at the beginning of last week. The lows of 0.7661 traded in the lead up to Thursday morning FOMC statement, but the AUD quickly jumped from that level after the market was disappointed by a lack of signal from the Fed about a potential September interest rate hike. Less than 24 hours later the week’s high of 0.7847 traded, but since then the pair has moderated back toward 0.7730. There is little from Australia this week to drive price action and the lead will therefore come from offshore. To that end from the United States this week we have get durable goods orders, manufacturing PMI, GDP, personal spending and consumer sentiment data. Support on the downside comes in at 0.7600, while 0.7850 may well continue to contain any near term strength.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7720 | 0.7600 | 0.7850 | 0.7661 - 0.7847 |
AUD/GBP (GBP/AUD)
The Australian dollar has underperformed the UK Pound this past week. Fresh cycle lows traded at 0.4869 (high’s 2.0538) in the wake of stronger than forecast UK wage data that boosted the GBP. Since then the pair has been consolidating recent AUD losses with price action bouncing around 0.4900 (2.0410). While the market holds below 0.4925 (above 2.0300) the risks remain skewed to the AUD downside and further tests of recent Australian dollar lows look likely. There is little on the economic calendar from Australia this week to draw attention, while from the UK we get mortgage approvals, CBI realized sales and a speech from Bank of England Governor Carney to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.4880 | 0.4800 | 0.4925 | 0.4869 - 0.4984 |
| GBP / AUD | 2.0492 | 2.0305 | 2.0833 | 2.0064 - 2.0539 |
AUD/EURO (EURO/AUD)
We have seen choppy price action in this pair over the past three weeks, but little overall direction. Greek negotiations continue to be the focus in Europe and some positive signals from officials last night saw the EUR outperform. The next couple of days will be critical however, as time is rapidly running out to reach an agreement on the release of badly needed bailout funds. Support for the pair comes in around 0.6780 (resistance 1.4750) while on the topside 0.6930 (support 1.4430) should cap any potential AUD strength in the near term. There is little on the economic calendar from Australia this week to draw attention and so offshore events will dominate. To that end from Europe, aside from continued Greek negotiations, we get manufacturing and service PMI data along with German business climate and consumer confidence indicators.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6812 | 0.6730 | 0.6930 | 0.6786 - 0.6920 |
| EUR / AUD | 1.4680 | 1.4430 | 1.4859 | 1.4451 - 1.4737 |
AUD/YEN
We have seen no overall direction in this pair for nearly three weeks now. Price action has largely been contained between 94.50 and 96.30 and this week will likely see more of the same. With little scheduled for release from Australia, attention will turn to Japanese data in the form of household spending, inflation and unemployment figures.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 95.35 | 94.50 | 96.00 | 94.96 - 96.30 |
AUD/CAD
Choppy sideways price action has dominated in this pairing for just over two weeks now. Support toward 0.9400 has contained the downside while resistance around 0.9600 has never really been threatened on the topside. Some very mixed data out of Canada has certainly played a part in this sideways price action, and with little scheduled for release from either country this week we are likely in for more of the same.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9505 | 0.9400 | 0.9600 | 0.9433 - 0.9576 |
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Market commentary:
Australia
There has been nothing released from Australia over the past week to materially impact the current outlook. A small fall in the leading index released last Wednesday may signal a further loss of momentum in the economy, but it’s only a second tier indicator and one small piece of a much bigger picture. The Reserve Bank of Australia (RBA) maintains something of an easing bias, although comments from Governor Stevens a couple of weeks ago suggest the bar for further action is set quite high. It seems he’s not convinced of the benefits of cutting rates further with households largely unable to increase borrowing further to dive spending. Any real boost to the economy needs to come from increased business spending and investment, which is something recent capital expenditure data suggest is some way off.
New Zealand
Yesterday saw a number of second tier data releases from New Zealand which didn’t impact the currency at all, but do add to the broader picture of the current economic situation. Consumer sentiment fell to 113.0 from 117.4 prior. Although that is it’s lowest reading since early 2013, the overall level is still reasonably healthy. Any reading over 100 in the index indicates optimists outnumber pessimists. We also saw migration rise to a new annual record in May, the tenth month in a row it has done so. In the year to May 2015 57,822 people moved to NZ and forecasts are for migration to peak around the 60,000 level later this year. The growing population will continue to support house prices while also driving increased consumption. The New Zealand dollar has remained relatively heavy after last week’s disappointing GDP data. Most forecasters now expect the RBNZ to cut interest rates again next month, with a very high risk of a third cut later in the year. Goldman Sachs recently released a report calling for three more cuts from the RBNZ this year, which would take the cash rate all the way back to 2.5%. The only other data we have out this week is the trade balance on Friday. Expectations are for a trade deficit of 50m.
United States
Last week’s FOMC (Federal Open Market Committee) statement provided little in the way of clues or guidance as to when the first interest rate hike will be. Most in the market still believe September is the most likely time for a lift off in rates, although those expectations won’t have been helped by inflation data released late last week. Inflation came in a touch below forecast on both the headline and core readings. This won’t be putting any pressure on the more dovish members of the FOMC to vote for interest rate increases any time soon. The Fed’s Williams recently said while he still believes the Fed will raise rates this year, he is in ‘wait and see’ mode due to low inflation. The more hawkish members of the FOMC will point to the job market, which as the Fed’s Mester says is ‘at or nearly at’ full employment, to justify rate increases sooner rather than later. Weekly jobless claims fell again on Thursday to 267k which is consistent with very solid employment growth. Continued employment gains along the line of what we have seen over the past couple of months should eventually lead to wage, and inflation pressure. The other notable data point released on Thursday was the Philly Fed manufacturing index. It came in much stronger than forecast completely contradicting the much softer reading from the Empire State manufacturing index seen earlier in the week. Last night’s existing home sales data was also strong with sales jumping to a five and a half year high. Still to come this week we have durable goods orders, manufacturing PMI, GDP, personal spending and consumer sentiment.
Europe
European data has been all but completely side-lined by the ongoing and protracted Greek bailout negotiations. Time has almost run out for some sort of solution that would enable Greece to make its EUR 1.6bn payment to the IMF at the end of this month. There was little progress late last week, but hints of a potential deal after an emergency meeting last night have started to emerge. The Greeks submitted a proposal that the EU’s Moscovici described as ‘solid’. The Athens stock market rallied over 10% on the news and it can’t come soon enough for the Greek banking sector. Funds have been fleeing Greek banks over the past few weeks and the Greek banking system has only been kept alive by liquidity support from the European Central Bank (ECB). Nearly EUR 4bln was withdrawn from Greek banks last week alone and there was talk of capital controls being introduced to halt the exodus. They won’t be needed if a deal is reached, although from all accounts there is still plenty of work to be done over the next 48 hours. The risk is however, that any last minute deal will only have been cobbled together to avoid a default in the near term and won’t go far enough to address the long term sustainability of Greece’s debt. We could easily be back to square one in another 12-18 months. That has certainly been the pattern since 2010. Manufacturing and service PMI data will try to draw attention over the coming days, as will German business climate and consumer confidence indicators.United Kingdom
Japan
The Bank of Japan (BOJ) released their latest monetary policy statement on Friday. The central bank left policy settings unchanged after their meeting and said the economy continues to recover moderately. The BOJ’s reasonably upbeat assessment of the economy runs at odds to most economic forecasters who believe the bank will have to expand monetary stimulus later this year in order to help achieve their inflation target. Probably the most interesting thing to come out of the meeting was the announcement of a shakeup in the bank's communication policy. The bank is promising new transparency and will start punishing individual economic forecasts by its board members. They will be the first central bank in the world to do this. They will also cut the number of policy setting meetings from 14 to 8 next year and publish summary minutes a week after each meeting. The bank failed to clarify its view on the appropriate level of the exchange rate after recent conflicting comments from officials that caused significant volatility. This week to draw focus we have manufacturing PMI, household spending, inflation and unemployment data.
Canada
Last week provided some very mixed data from Canada. A fall in manufacturing sales was countered by an improvement in wholesale sales. Inflation came in stronger than forecast, but retail sales disappointed badly with a surprising fall. The retail sales number is however two months old, being the result for April, and as such it may just be an overhang from the very poor first quarter. The Bank of Canada (BOC) is confident about an economic recovery over the rest of the year and they will want to see a bounce back in retail sales over the coming months. The better than forecast inflation number, which was for May, will encourage the central bank, although slack in the economy will likely keep trend inflation below the 2 percent target for the foreseeable future. There are no releases of note scheduled for this week from Canada.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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