By Ian Dobbs*:
After two days of talks in Turkey the G20 released they communique over the weekend pledging to avoid depreciating their currencies to gain competitive advantage as the fallout from China’s slowing economy continues to be a drag on global growth.
A potential ‘currency war’ has gained plenty of attention recently in the wake of China’s Yuan devaluation last month.
The recent release of forex reserves data show China’s reserves declined by the most on record for any month in August as the country is forced to sell USD’s (and US treasury holdings) in order to prop up the Yuan.
The pace of capital outflow from China is breath taking and the rate they are burning through reserves is unsustainable in the long run.
This is a big reason many forecasters expect they will be forced to devalue further over the coming months.
Emerging markets are also feeling the pressure from China and an eventual interest rate hike from the Fed will not help them either.
An increasingly large amount of emerging market debt in recent years has been denominated in USD’s and the dollar's appreciation along with an impending interest rate hike is very bad news.
Emerging market are going to be a real area of concern heading into next year.
Major Announcements last week:
- European Core Inflation 1.0% YoY as expected
- Australian Private Sector Credit +.6% vs +.5% expected
- Canadian Q2 Current Account -17.4B vs -16.9B expected
- RBA leave monetary policy unchanged as expected
- ECB leave monetary policy unchanged as expected
- European Manufacturing PMI 52.3 vs 52.4 expected
- UK Manufacturing PMI 51.5 vs 52.0 expected
- Canadian GDP Jun +.5% vs +.2% expected
- US ISM manufacturing 51.1 vs 52.6 expected
- Australian Q2 GDP +.2% vs +.4% expected
- Australian Retail Sales MoM -.1% vs +.4% expected
- US Unemployment rate 5.1% vs 5.2% expected
- Canadian Unemployment rate 7.0% vs 6.8% expected
NZD/USD
The New Zealand dollar has lost further ground to the USD this past week with sharp losses coming in the wake of Friday’s US employment report. Although the headline gain in non-farm payrolls wasn’t as strong as many had expected, the overall tone of the report was positive. It certainly muddies the waters even further in regard to the Fed's interest rate meeting late next week. The immediate focus is now on the RBNZ’s monetary policy statement set for release on Thursday morning. This is keeping the NZD under pressure and last night the currency dipped below 0.6250 for a time. Initial topside resistance is now seen around 0.6320 and that should cap potential gains ahead of the RBNZ rate statement. The direction of the currency in the wake of that statement will largely depend on the degree to which the RBNZ lowers growth and inflation forecasts.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6262 | 0.6200 | 0.6400 | 0.6246 - 0.6415 |
NZD/AUD (AUD/NZD)
Both the New Zealand dollar and the Australian dollar are seeing across the board pressure at the moment and as such the cross rate between the two countries continues to range between some increasingly familiar levels. Key resistance on the topside around 0.9160 (support 1.0920) has contained any periods of NZD strength since the pair broke through that level in early June. On the downside there is minor support around 0.9000 (upside resistance 1.1110) , but more importantly we have 0.8850 (1.1300) and then 0.8750 (1.1430) containing any NZD weakness. At this stage there seem little market motivation to severely test those boundaries. We do have the RBNZ monetary policy statement to digest on Thursday morning and this should create some volatility. Australian data in the form of business confidence, consumer sentiment and employment change will also draw attention.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9020 | 0.8850 | 0.9160 | 0.8909 - 0.9134 |
| AUD / NZD | 1.1086 | 1.0917 | 1.1300 | 1.0949 - 1.1224 |
NZD/GBP (GBP/NZD)
Gains for this pair through the middle of last week petered out ahead of resistance around 0.4220 (support 2.3700) and in recent days the NZD has seen renewed losses. Broad based New Zealand dollar weakness ahead of Thursday’s Reserve Bank monetary policy statement has played a part, as has some recent strength in the UK. The pair traded sub 0.4100 (above 2.4390) last night and is currently only just through that level. The longer term trend is firmly to the NZD downside and there has been nothing recently to say this is drawing to a close. If minor support around 0.4085 (resistance 2.4480) gives way a test below 0.4000 (above 2.5000) may well be on the cards. The Bank of England also meet this week and the market will be keen to see a confirmation that an interest rate hike is looking much less likely in the first half of next year.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4100 | 0.4020 | 0.4220 | 0.4086 - 0.4203 |
| GBP / NZD | 2.4390 | 2.3697 | 2.4876 | 2.3794 - 2.4471 |
NZD/CAD
In the past 24 hours the New Zealand dollar has traded back down to recent lows against the Canadian dollar just shy of the 0.8300 level. This latest bout of weakness was triggered by better than expected US and Canadian employment data released on Friday night. The local currency is also under pressure in the lead up to this week’s RBNZ monetary policy statement, set for release on Thursday. That statement will likely provide the main driver for the pair over the near term. A 0.25% interest rate cut is well factored into the market so the NZD will focus on the predicted path of interest rates from there. From Canada this week we also have the Bank of Canada’s rate statement to digest, although it seems likely they will continue to be optimistic about the economies prospect for the second half of this year.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8335 | 0.8300 | 0.8500 | 0.8307 - 0.8458 |
NZD/EURO (EURO/NZD)
After the sharp declines of late last month this pair has seen sideways consolidation between the broad parameters of 0.5580 and 0.5780 (1.7300 - 1.7920). A bout of Euro weakness in the wake of last Thursday’s ECB meeting saw the upper end of that range tested, but with the prospect of an impending interest rate cut from the RBNZ this week, there was little motivation to take the pair further. Since then it has been the NZD that has underperformed with the pair testing back down to the support level just below 0.5600(above 1.7860). With the longer term trend firmly negative the risks to the current range are certainly to the downside and a sustained break below 0.5580 (above 1.7920) would open the way for a test toward 0.5400 (1.8520). However, the RBNZ’s monetary policy statement on Thursday will largely dictate near term direction.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.5610 | 0.5580 | 0.5780 | 0.5587 - 0.5769 |
| EUR / NZD | 1.7825 | 1.7301 | 1.7921 | 1.7335 - 1.7899 |
NZD/YEN
In the wake of the extreme volatility seen late last month, trade in this pairing has been defined by a series of lower highs and lower lows. The New Zealand dollar was a big underperformer on Friday night after the US employment report hit the wires and this helped drive the latest leg of weakness with the cross trading down toward 74.50. We have so far seen little in the way of a recovery off that level. Initial resistance comes in around 75.60 and while below that level the risks remain skewed to the downside. We have the RBNZ monetary policy statement out on Thursday morning and expectations around that release are keeping the local currency under pressure. That central bank statement is most likely going to be the main driver of the cross this week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 74.82 | 73.60 | 75.60 | 74.47 - 77.23 |
AUD/USD
The Australian dollar has seen relentless pressure from the USD recently. Friday’s release of US employment data failed to provide any respite with the overall tone of the report reasonably positive. This helped to drive the AUD down toward 0.6900, and while that has contained the weakness for now, it only seems a matter of time before we test lower again. Initial topside resistance comes in around 0.7000 and it would take a move above that level to alleviate the immediate downside pressure. From Australia this week we have business confidence, consumer sentiment, inflation expectations and employment data to digest. While from the US we get import prices, producer prices and University of Michigan consumer sentiment.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.6948 | 0.6800 | 0.7000 | 0.6902 - 0.7147 |
AUD/GBP (GBP/AUD)
The Australian dollar has underperformed the UK Pound this week, with move as low as 0.4529 (high 2.2080) in the past 12 hours. The latest leg lower was driven by strength in the GBP which is something of a turnaround as it too has seen selling pressure for much of the past week or so. There was nothing in particular you could point the finger at as a driver of GBP strength in the early stage of this week, but it has certainly served to reinforce the broader trend recent trend for this pair. Initial topside resistance now comes in around 0.4600 (support 2.1740) and it would take a move through that level to suggest the immediate Australian dollar downside pressure has abated.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.4547 | 0.4400 | 0.4600 | 0.4529 - 0.4642 |
| GBP / AUD | 2.1993 | 2.1739 | 2.2727 | 2.1541 - 2.2080 |
AUD/EURO (EURO/AUD)
A brief period of strength in this pair after last Thursday’s ECB meeting saw a high of 0.6349 (low 1.5750) trade, but since then the Australian dollar has largely underperformed. The sharp turnaround from that high, and subsequent decline back to 0.6200 (1.6130), keeps the focus for the AUD on the downside. This would certainly be in keeping with the longer term trend which has been negative since late April this year. We are unlikely to see a repeat of the scale of declines seen in recent weeks however, and price action should be choppy, but the downside continues to look like the path of least resistance. From Australia this week we have business confidence, consumer sentiment, inflation expectations and employment data to digest. While from Europe this week the mostly second tier data will only draw passing attention.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6220 | 0.6200 | 0.6400 | 0.6183 - 0.6349 |
| EUR / AUD | 1.6077 | 1.5625 | 1.6129 | 1.5749 - 1.6173 |
AUD/YEN
The Australian dollar has continued to underperform the Japanese Yen with a series of lower highs and lower lows over the past two weeks. There is little to suggest the downtrend is coming to an end and it would take a move above resistance around 83.70 to alleviate immediate downside pressure. Until then, expect to see further weakness and a test below 82.00. From Australia this week we have business confidence, consumer sentiment, inflation expectations and employment data to digest. While from Japan this week we get the final reading of GDP, consumer confidence and core machinery orders.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 82.95 | 81.00 | 83.70 | 82.00 - 86.39 |
AUD/CAD
The Australian dollar has remained under pressure from the CAD and in the wake of Fridays US and Canadian employment data the pair traded to a low of 0.9155. We have seen a decent bounce from those lows, with the market currently trading around 0.9240, but we are far from threatening key resistance around 0.9300. Only a break above that level would suggest the immediate downside pressure has abated. From Australia this week we have business confidence, consumer sentiment, inflation expectations and employment data to digest. While from Canada we have the Bank of Canada rate statement set for release on Wednesday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9240 | 0.9100 | 0.9300 | 0.9155 - 0.9391 |
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Market commentary:
After two days of talks in Turkey the G20 released they communique over the weekend pledging to avoid depreciating their currencies to gain competitive advantage as the fallout from China’s slowing economy continues to be a drag on global growth. A potential ‘currency war’ has gained plenty of attention recently in the wake of China’s Yuan devaluation last month. The recent release of forex reserves data show China’s reserves declined by the most on record for any month in August as the country is forced to sell USD’s (and US treasury holdings) in order to prop up the Yuan. The pace of capital outflow from China is breath taking and the rate they are burning through reserves is unsustainable in the long run. This is a big reason many forecasters expect they will be forced to devalue further over the coming months. Emerging markets are also feeling the pressure from China and an eventual interest rate hike from the Fed will not help them either. An increasingly large amount of emerging market debt in recent years has been denominated in USD’s and the dollar's appreciation along with an impending interest rate hike is very bad news. Emerging market are going to be a real area of concern heading into next year.
Australia
Last week’s disappointing data, in the form of GDP and retail sales, pressured the Australian dollar and it has remained on the back foot ever since. The currency traded to fresh cycle lows against the USD last night around 0.6900 and is currently not far from that level. Over the coming days we have more data to digest in the form of business confidence, consumer sentiment, inflation expectations and employment change. The Australian economy is having a very tough time ‘transitioning’ away from mining and as such concerns around China will continue to weigh. Chinese stock market volatility seems to have abated, for now at least, helped by a public holiday there on Thursday and Friday. But the broader outlook for the Chinese economy is not improving at all. Although the Reserve Bank of Australia have sounded very much like they are comfortably ‘on hold’ recently many in the market expect they will be forced to cut interest rates again over the coming months. For these reasons the Australian dollar is likely to continue to remain broadly under pressure.New Zealand
For New Zealand this week is all about the outcome of the Reserve Bank's (RBNZ) interest rate meeting on Thursday morning. The bank is universally expected to cut interest rates by 0.25% to 2.75% and this is well priced into the market. The real interest will be to what degree they signal further cuts. Most in the market believe another cut to 2.50% is likely, but after that things are a lot less certain. Close attention will be paid to the RBNZ forecasts on growth and inflation to give clues as to the potential forward path for interest rates. Their assessment on global growth and the outlook for China will also draw attention. The New Zealand dollar has seen across the board pressure in recent weeks and the extent of any further losses in the near term will be dependent on the RBNZ’s forecasts and overall tone. The RBNZ will likely maintain some sort of easing bias after this week’s meeting, but the big fall in the New Zealand dollar in recent months will eventually boost inflation and this suggests the case for cutting past 2.50% is not that strong.
United States
The release of key US employment data on Friday night hasn’t done much to influence either way the prospect of an interest rate increase by the Fed come September 17th. The headline number for non-farm payrolls change was at the lower end of expectation coming in at 173k. Aside from that the report painted a picture of a reasonably healthy employment market. There were positive revisions to prior numbers totalling +44k, the unemployment rate dropped to 5.1%, and wages growth came in stronger than expected with average hourly earnings +2.2%. Opinion is still massively divided around the prospect for the Fed's first interest rate hike in nearly 10 years. If you were looking at employment alone, they should have hike rates a long time ago, but the Fed has a dual mandate and the other component is inflation. Inflation remains extremely low and while the Fed don’t actually have to see inflation pick up before they hike, they have to be confident it will eventually pick up. The issue here is the global environment. The Chinese economy, problems in emerging markets, soft commodities and lower global growth in general all suggest inflation will remain subdued for some time yet. Add to this the fact the Chinese are now being forced to sell around 100bln a month in US treasuries in order to maintain the Yuan’s valuation. If this continues it will put upward pressure on longer term US interest rates and provide a kind of ‘quantitative tightening’ in itself. The Fed have a lot to think about some their September 17th meeting and it’s shaping up to be a very interesting decision. Still to come this week we have import prices, producer prices and University of Michigan consumer sentiment.
Europe
The European Central Bank (ECB) did a good job of weakening the Euro after their meeting last week. Their downgraded growth and inflation forecasts have suggested the potential for further easing measures over the coming months and they certainly made it clear they would act again if needed. The biggest hurdle to increasing or extending their quantitative easing programme at some point in the future is the supply of applicable bonds they can buy. This issue was largely acknowledged at last week’s meeting when they increased the amount of any single issue they purchase from 25% to 33%. Over the weekend we heard from the ECB’s Noyer who repeated a theme often heard from President Draghi himself. He said that monetary policy alone cannot sustain activity and that other channels are needed to boost investment. The comments are aimed at Euro area governments who need to do more of the heavy lifting to stimulate economic growth. They have largely fallen on deaf ears however and this issue remain a big stumbling block toward a much broader economic recovery in the region. The mostly second tier data from Europe this week will only draw passing attention.United Kingdom
PMI readings from the UK last week were a little soft and this will only have added to the recent pressure the UK Pound has seen. Against the USD the GBP suffered a nine day losing streak which was only broken last night when it put in a solid bounce. There was no economic data or specific news to trigger the turnaround and it seems the market may have just gone a little too far too fast. We do have the Bank of England (BOE) interest rate meeting this week and these are now a lot more interesting. We get the result of the meeting, the voting pattern, a rate statement and the minutes all at the same time. The market has slowly been pushing out expectation of an eventual interest rate hike from the BOE well into next year and it will be interesting to see if this fits with the central bank's own view. Ahead of that meeting we get manufacturing production and trade balance data to digest.
Japan
Canada
Data from Canada last week was mostly positive and supportive of the Canadian dollar. A better than forecast GDP result for June was a nice surprise, although it wasn’t enough to stop the economy falling into a technical recession in the first half of the year. Friday’s release of employment data was also a bit stronger than forecast. Employment change came in at +12.0k versus -4.5k expected and there was also a big swing toward full time work and away from part time employment. Tempering this was the unemployment rate however, that increased to 7.0% from 6.8% prior. Friday also saw the release of Ivey PMI which jumped sharply to 58.0 from 52.9 prior. This jump was much bigger than expected although it can be a volatile indicator so caution is warranted when reading too much into one outcome. A bank holiday on Monday has seen a quiet start to this week, although things liven up over the coming days with building permits data and the Bank of Canada rate statement to digest.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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