By Ian Dobbs*:
The market has one focus this week, the Federal Open Market Committee meeting on Wednesday 17th.
The result will be released very early on Thursday morning (Australasian time) and it’s one of the more anticipated central bank announcements for a very long time.
The Fed haven't moved interest rates in six years, and they haven’t hiked interest rates in nearly ten.
To make this even more interesting the market is divisively split between those who feel the will hike and those who don’t.
The broader implications for the global economy are also significant. There is a lot of concern about the impact on emerging markets who now hold much higher levels of US dollar denominated debt.
Total debt ratios for emerging markets are also now much higher than they were at the peak of the last credit cycle in 2007.
That story will play out over the long run, but in the meantime with no clear indication of just which way the Fed will go, we could see some real volatility in all markets.
Since 2008 there is a long list of central banks who have hiked interest rates, only to be forced to turn around and cut them again within 12 months.
The big question is will the US Fed be in the same boat?
Major Announcements last week:
- European Q2 GDP .4% vs .3% expected
- RBNZ ease OCR to 2.75% as expected
- Australian Unemployment 6.2% as expected
- BOE leave monetary policy unchanged as expected
- US Producer Prices -.8% vs -.9% expected
- European Industrial production 1.9% vs .6% expected
NZD/USD
We have seen the New Zealand dollar recover ever so slowly off the low of 0.6258 that traded in the wake of the RBNZ’s monetary policy statement last Thursday. To be fair, most of the gains have come as a result of USD weakness on the back of disappointing consumer sentiment data and the unwinding of long (brought) USD positions ahead of this week's Fed meeting. We could easily see the USD depreciate a little more as we approach Thursday morning's release, but it’s hard to get too excited about the prospects for the NZD until the outcome of that meeting is known. By far and away the Fed meeting is the main event this week, but we do have a diary auction tonight and then NZ GDP data on Thursday to digest as well. From the US retail sales and inflation data will also draw attention over the coming days. The bigger surprise from the Fed will be if they do decide to hike interest rates. This will see the knee jerk reaction of NZD weakness, potentially down through recent cycle lows. There would likely be a lot of profit taking into this move however, as many long term players have purchased USD waiting for the eventual Fed hike.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6335 | 0.6200 | 0.6400 | 0.6258 - 0.6421 |
NZD/AUD (AUD/NZD)
It has been mostly one-way traffic for this pairing in the wake of last Thursday's RBNZ monetary policy statement and the better than forecast Australian employment data. The cross traded down to targeted support around the 0.8850 (resistance 1.1300) last night and is currently not far from that level. If we were to see a sustained break through 0.8850 (1.1300), it would open the way for a test of 0.8750 (1.1430). I would expect that level to contain this period of NZ dollar underperformance. Broadly speaking, there is no indication that the pair is going to break out of the range that has dominated for much of the past three months. As such, those looking to sell AUD and buy NZD should take advantage of current levels, or any further dips to 0.8750 (rally through to 1.1420), and take some risk off the table. Things may well get a little choppy on Thursday morning as the US Fed interest rate decision has the potential to create volatility across all currency pairs, and the wider financial markets in general.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.8850 | 0.8850 | 0.9160 | 0.8841 - 0.9136 |
| AUD / NZD | 1.1299 | 1.0917 | 1.1300 | 1.0946 - 1.1311 |
NZD/GBP (GBP/NZD)
The New Zealand dollar has remained broadly under pressure in the wake of last Thursday’s RBNZ monetary policy statement. Against the UK Pound the local currency has managed a small recovery off the lows of 0.4060 (high 2.4630) seen late last week, but the NZD bounce has been less than encouraging. I can’t get excited about potential NZD upside until we see a move above 0.4170 (below 2.3980). Only then will the immediate downside pressure have abated. Until then the risks remain skewed to further NZD weakness. Tonight we have another Fonterra dairy auction then on Thursday we get NZ GDP data. From the UK this week we have inflation, wage and retail sales data to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4105 | 0.4020 | 0.4220 | 0.4060 - 0.4177 |
| GBP / NZD | 2.4361 | 2.3697 | 2.4876 | 2.3940 - 2.4631 |
NZD/CAD
This pair traded down toward recent cycle lows in the wake of last week's BOC and RBNZ rate meetings. There was little in the way of follow through selling however, and in recent days the NZD has managed something of a bounce from the 0.8300 level. Minor resistance around 0.8400 has managed to contain this recovery so far and this keeps the risks focused on the downside side for now. A sustained break above 0.8400 would open the way for a move toward 0.8520. Key to near term direction will be the US Feds interest rate decision on Thursday morning. It’s too close to call which way the FOMC will go but we can certainly expect heightened volatility in the wake of the announcement. 0.8300 and 0.8520 provide the key support and resistance levels to watch out for.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8390 | 0.8300 | 0.8500 | 0.8294 - 0.8492 |
NZD/EURO (EURO/NZD)
The past three weeks has seen this pair gyrating around between the broad parameters of 0.5560 and 0.5780 (1.7300 - 1.7985). Last Thursday's dovish RBNZ monetary policy statement pressured the NZD to the lower bounds of that range, but there was has been little in the way of follow through selling so far. The market may well look to tread water ahead of this week's key US Fed meeting, although locally we do have another dairy auction from Fonterra tonight to digest. Any sustained break below 0.5560 (above 1.7985) would be a negative signal and likely open the way for a test down toward 0.5400 (1.8520). Other data to watch out for this week includes NZ GDP and ZEW economic sentiment from Europe.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.5605 | 0.5550 | 0.5750 | 0.5555 - 0.5765 |
| EUR / NZD | 1.7841 | 1.7391 | 1.8018 | 1.7347 - 1.8000 |
NZD/YEN
This pair has carved out an increasingly tight range in recent days around the 76.00 level. Direction from here is a tough call and the market may well look to consolidate further ahead of Thursday’s key US Fed meeting. There is all sorts of potential for volatility in the wake of that announcement and if wider market risk sentiment takes a hit as a result, it will be negative for this pairing.
Tonight’s dairy auction from Fonterra will draw attention, as will NZ GDP data on Thursday. The Bank of Japan rate statement this afternoon shouldn't hold any real surprises, although it seems likely we are ever so slowly getting close to further easing from the BOJ.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 76.35 | 75.00 | 77.00 | 74.53 - 77.77 |
AUD/USD
The Australian dollar has been a solid performer over the past week, supported by better employment data and improving iron ore prices. Last night’s political shenanigans provided only a temporary hiccup for the currency which largely took the change of prime minister in its stride. Some broad based US dollar weakness has also helped the AUD which now looks set to test key downtrend resistance around 0.7175. I would expect that level to provide a tough topside barrier. A sustained break above there would open the way for a much broader move toward 0.7440 or potentially 0.7550. Whether the market has the momentum to make such a break ahead of Thursday’s key US Fed meeting remains to be seen, but I suspect not. It could be a very different story after that Fed announcement however and it seems likely we will see a period of heightened volatility.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7153 | 0.6975 | 0.7175 | 0.6932 - 0.7151 |
AUD/GBP (GBP/AUD)
The Australian dollar has had a solid week against the UK pound and is currently testing resistance toward 0.4650 (support 2.1500). Better than forecast employment data has helped to underwrite the gains, as has a broad improvement in iron ore prices. I suspect we may see these gains run out of steam soon, and then some consolidation is likely ahead of the one event everybody is waiting for this week, the US Fed meeting. This afternoons RBA minutes shouldn’t provide any real surprises and if 0.4650 (2.1500) caps the AUD topside a drift back toward 0.4600 (2.1740) is likely. From the UK this week we have inflation, wage and retail sales data to digest which could all easily influence.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.4639 | 0.4450 | 0.4650 | 0.4523 - 0.4645 |
| GBP / AUD | 2.1556 | 2.1505 | 2.2472 | 2.1528 - 2.2107 |
AUD/EURO (EURO/AUD)
Gains in this pair over the past week have been driven by Australian dollar strength. The local currency has benefited from better employment data and a broad improvement in iron ore prices. In the past couple of hours the pair has traded up to initial resistance around 0.6340 (1.5775). I suspect the market may struggle to kick on from here, at least ahead of Thursday’s key US Fed meeting. After that meeting it could be a different story and we can expect some real volatility. For the time being however, with the AUD close to resistance on a number of crosses, further gains should prove tough. A pull back and period of consolidation ahead of Thursday morning seems likely.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6330 | 0.6200 | 0.6400 | 0.6183 - 0.6337 |
| EUR / AUD | 1.5798 | 1.5625 | 1.6129 | 1.5781 - 1.6174 |
AUD/YEN
The Australian dollar has made significant gains against the Japanese Yen this week, driven higher by better employment data and a broad improvement in iron ore prices. We have the RBA minutes out in the coming hours along with the Bank of Japan monetary policy statement.
Neither release is expected to create any real surprise but they will both draw attention. What will create some volatility is the US Fed’s interest rate meeting early Thursday morning, and that makes any predictions of direction in this pairing especially difficult. Minor support toward 84.00 and resistance toward 87.50 market the key levels to watch in the wake of that release.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 86.30 | 84.00 | 87.50 | 82.53 - 86.08 |
AUD/CAD
The Australian dollar has outperformed the Canadian dollar this week, breaking above resistance around 0.9400. The move above that level spurred gains to just shy of 0.9500, but it seems likely the pair has run out for steam for now. The AUD has been driven higher by better employment data and a broad improvement in iron ore prices. But with the markets attention now firmly focused on Thursday morning’s release of the US Fed’s interest rate decision, a period of consolidation seems likely. However, we can expect some real volatility in the wake of that release and it will likely dictate the near term direction for this pair. We have the RBA minutes to digest in the coming hours, but the market isn’t expecting any real surprise from them. From Canada this week we have manufacturing sales and inflation data to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9480 | 0.9400 | 0.9600 | 0.9220 - 0.9480 |
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Market commentary:
The market has one focus this week, the Federal Open Market Committee meeting on Wednesday 17th. The result will be released very early on Thursday morning (Australasian time) and it’s one of the more anticipated central bank announcements for a very long time. The Fed haven't moved interest rates in six years, and they haven’t hiked interest rates in nearly ten. To make this even more interesting the market is divisively split between those who feel the will hike and those who don’t. The broader implications for the global economy are also significant. There is a lot of concern about the impact on emerging markets who now hold much higher levels of US dollar denominated debt. Total debt ratios for emerging markets are also now much higher than they were at the peak of the last credit cycle in 2007. That story will play out over the long run, but in the meantime with no clear indication of just which way the Fed will go, we could see some real volatility in all markets. Since 2008 there is a long list of central banks who have hiked interest rates, only to be forced to turn around and cut them again within 12 months. The big question is will the US Fed be in the same boat?
Australia
The Australian dollar has been on a more solid footing this past week, helped by solid employment data and a broad improvement in iron ore prices. Even a change of Prime Minister after a late night coup yesterday failed to significantly dent the currency. In fact the AUD looks to have largely approved of Turnbull as the new PM due to the prospect of him providing more ‘economic leadership’. We have the RBA minutes set for release in the coming hours and these should provide some more insight into thinking with the central bank. The market isn’t expecting any surprises however, with the RBA firmly on hold for the time being.New Zealand
The New Zealand dollar has remained largely subdued since last week’s RBNZ monetary policy statement. The New Zealand Institute of Economic Research (NZIER) released their consensus forecasts and they said economic activity indicators have softened over the past quarter with the deterioration particularly apparent across confidence indicators. They see weaker household spending and weaker business investment partially offset by continued residential construction activity. They expect economic growth to track below 3% out to 2019. We get GDP data for the second quarter on Thursday and the market is looking for growth of around 0.6% which would be something of a bounce back from the first quarter’s soft 0.2% outcome. The first quarter was affected by a number of one off factors that should have mostly reversed in Q2. Ahead of that data we have another dairy auction from Fonterra to digest. The results will be released later tonight and it will be interesting to see if dairy prices can continue to recover after the two previous solid auctions.
United States
Although the focus in the US this week is firmly on Wednesday’s Fed meeting, with the results out early Thursday morning Australasian time, we do have some key data to digest ahead of that release. Retail sales tonight and inflation figures tomorrow will add to the overall picture of the economy that the Fed take into consideration. At the end of last week we saw a slightly stronger than expected reading from producer prices, but a much weaker than forecast consumer sentiment outcome. The University of Michigan Consumer Sentiment Index plunged from 91.9 prior to 85.7 in the latest reading. That’s the lowest level since September last year. The Fed have a very tough decision on their hands. A good case can be made for holding fire at this meeting, but giving a strong signal that a hike will come in December. However, the Fed are desperate to lift interest rates from the zero bound, where they have been for six years now. Zero interest rates are an emergency measure and no one envisaged that they would have to be maintained for so long. There are also big unwelcome side effects of extremely low interest rates, such as asset price inflation and the mispricing of risk, that only get bigger the longer you leave them. Global markets also feel very fragile at the moment though and the repercussions of a rate hike could well be significant.
Europe
Europe has been strangely absent from the headlines recently and the raft of second tier data released from the region last week provided only passing interest. This week we have ZEW economic sentiment from Germany, and the Eurozone as a whole, to digest along with the final reading of inflation. A recent poll of traders showed 11 out of 19 expect the ECB to expand or extend their quantitative easing programme, potentially before year end, in an effort to boost inflation expectations. That expectation should limit any Euro appreciation over the medium term, although the potential fireworks around this week’s US Fed meeting means there is a greater amount of uncertainty over price action in the very near term.United Kingdom
The Bank of England (BOE) didn’t dramatically change their economic outlook at last week's meeting, although they did suggest risk are skewed moderately to the downside thanks to concerns around activity in China and Europe. This week we get some more key pieces of the economic puzzle with inflation, wage and retail sales data all set for release. Inflation is expected to remain very subdued with a year on year outcome of 0.0% forecast. Wage growth in the other hand is expected to outpace price rises by the biggest margin since before the financial crisis. Expectations are for average weekly earnings, excluding bonuses, to have grown by 2.9% in the three months to July compared with a year ago. With extremely low inflation this ‘real wage’ growth is very welcome after workers saw a number of years of falling real pay in the wake the financial crisis. It’s also the reason the BOE are not overly concerned about the current low rate of inflation which is only serving to boost household’s real incomes. The UK economy does seem to have cooled a touch recently and this will allow the BOE to keep interest rates lower for longer, but the improving picture of household income suggests it’s not something to worry about at this stage.
Japan
Canada
There has been nothing of note released from Canada since last week’s Bank of Canada (BOC) rate statement. The bank seems comfortable with its current policy setting while it watches the effects of previous easing’s work their way through the economy. They also expect the continued US economic recovery to help underpin exports. This week we have manufacturing sales and inflation data to digest, although the main focus will be on the US Federal Reserve’s rate statement and the potential for volatility that could create.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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