By Ian Dobbs*:
It’s been an interesting market reaction to last week’s Fed interest rate decision and dovish accompanying statement.
The knee-jerk reaction was to sell the USD as you would have expected, but since then the US currency has been broadly supported and is now trading at stronger levels than just before the announcement.
It’s a hard one to justify and something of a surprise, but it is what it is. We are now back to square one, looking at the October or December meeting for potential lift off dates.
In deciding to keep interest rates at zero, where they have been since December 2008, the Fed highlighted low inflation and uncertainty about the global outlook.
Inflation will tick up over the coming months as the base effects of previous oil price declines drop out of the data, but it’s hard to see the global environment improving much.
We get PMI readings from a number of countries this week including China, Japan and Europe, and these will be closely watched as leading indicators of broader economic activity.
Major Announcements last week:
- BOJ leaves monetary policy unchanged as expected
- UK Inflation +.2% MoM as expected
- US Retail Sales MoM +.2% vs +.3% expected
- US Industrial Production -.4% vs -.2% expected
- UK ILO Unemployment rate 5.5% vs 5.6% expected
- UK Ave. Earnings 2.9% vs 2.5% expected
- European MoM Inflation 0.0% as expected
- US Inflation Mom -.1% vs 0.0% expected
- NZ Q2 GDP 2.4% vs 2.5% expected
- US FOMC leave monetary policy unchanged (dovish)
- BOC Inflation 0.0% as expected
NZD/USD
The past week has all been about the US Fed’s interest rate decision. The initial response to the no change announcement, and dovish accompanying statement, seemed to be the right one with the USD losing ground, but it was very short lived. In fact the USD saw pressure on two occasions in the hours that followed the Fed announcement and both times the selling could not be sustained. Over the past 24 hours the USD has actually appreciated to stronger levels than it was before the Fed’s decision. It’s extremely hard to explain or justify the move, but here we are. Sometimes you just have to accept the price action for what it is, and at the moment it’s telling us the market is happy to buy USD’s. This big question is how much further, if at all, will this move go. The NZD traded down to 0.6300 last night and the recent cycle lows around 0.6246 are not a mile away. I would be surprised to see it down there but the past week has all been about surprising price action. There is minor resistance on the topside around 0.6410 and while below that level it’s very hard to get excited about any potential NZD strength.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6325 | 0.6250 | 0.6410 | 0.6293 - 0.6454 |
NZD/AUD (AUD/NZD)
There has been little overall direction in this pair over the past week with action in the wider market been the dominant driver. The New Zealand dollar has largely been languishing around in the lower reaches of the recent range and the downside continues to feel vulnerable. The next key support level comes in around 0.8750 (resistance 1.1430) and any break below there would be a NZD negative signal (positive AUD). There is little in the way of key data set for release from either country this week and as such the cross will continue to be driven by action in the wider market. A range of 0.8750 to 0.9000 (1.1110 - 1.1430) looks likely to contain trade over the rest of this week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.8870 | 0.8750 | 0.9000 | 0.8813 - 0.8921 |
| AUD / NZD | 1.1274 | 1.1111 | 1.1429 | 1.1209 - 1.1347 |
NZD/GBP (GBP/NZD)
Although the longer term charts continue to suggest the NZD downtrend against the GBP remains intact, the shorter term charts show less conviction. The New Zealand dollar has failed to break to fresh lows against the UK Pound over the past two weeks with support around 0.4060 (resistance 2.4630) containing any periods of NZD weakness. A break lower may eventually come, but in the meantime it would pay to keep an eye on topside resistance around 0.4125 (support 2.4240). A move through that level may well see the pair extend toward 0.4200 (2.38710). From the UK this week we have public sector net borrowing data to digest along with speeches from a number of BOE officials. While from NZ we just have the trade balance on Thursday of any note.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4077 | 0.4020 | 0.4220 | 0.4064 - 0.4157 |
| GBP / NZD | 2.4528 | 2.3697 | 2.4876 | 2.4057 - 2.4606 |
NZD/CAD
Price action in this pairing over the past week has been contained within the 0.8300 to 0.8500 range that has dominated since the beginning of September. We saw some volatility around Friday’s Fed announcement with the NZD initially outperforming, but in the early stages of this week a solid gain in oil prices and seen the CAD claw back any losses against the New Zealand dollar. The pair is now trading unchanged from where it was this time last week. There is little set for release from either country that is likely to see the current range tested. Retail sales from Canada will draw the most attention while from NZ we just have the trade balance of any note.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8380 | 0.8300 | 0.8500 | 0.8330 - 0.8471 |
NZD/EURO (EURO/NZD)
We have seen some very choppy and unpredictable price action in the wake of Friday’s US Fed interest rate decision. The New Zealand dollar has seen sharp swings between 0.5550 and 0.5680 (1.7605 - 1.8020) to the Euro as both currencies have seen periods of underperformance. This leaves the near term outlook very confused and we may see further sideways ranging before a clear picture develops. A sustained break above 0.5680 (below 1.7605) will open the way for a recovery back toward 0.5770 (1.7330). While on the downside 0.5550 (1.8020) looks like it will continue to provide NZD support. With both the RBNZ and the ECB expected to ease monetary policy further over the coming months we can expect more choppy price action and perhaps little overall direction.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.5650 | 0.5550 | 0.5770 | 0.5551 - 0.5684 |
| EUR / NZD | 1.7699 | 1.7331 | 1.8018 | 1.7593 - 1.8016 |
NZD/YEN
There has been no direction to speak of in this pair over the past week with action in the wider market causing volatile trading between the parameters of 76.00 and 77.50 in recent days. With little to get excited about in terms of economic releases from either country this week we may well continue to see sideways price action. Look for 77.50 to continue to cap the topside with the risks been skewed toward a test below 76.00 over the coming days.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 76.19 | 75.50 | 77.50 | 75.37 - 77.56 |
AUD/USD
Over the course of the past two weeks the Australian dollar has made significant gains against the USD, with a healthy correction higher developing. It has therefore been somewhat surprising that in the wake of Friday’s no change Fed announcement the gains have stalled, and in fact the USD has ended up a touch stronger than where it was before the announcement. In the immediate aftermath of the Fed decision the AUD twice rallied strongly toward 0.7275, but on both occasions the gains were short lived. Although it’s hard to justify, in the early stages of this week the USD has seen broad based support and as such the pair is now trading around 0.7130. I continue to believe there is room for some USD depreciation but recent price action certainly doesn’t support that. There is minor support around 0.7100 and if the Australian dollar want’s any chance of recovering it needs to hold above that level. Data wise there isn’t much from Australia to get excited about this week, while from the US we have durable goods orders, new home sales, and the final reading of GDP to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7133 | 0.7100 | 0.7300 | 0.7086 - 0.7277 |
AUD/GBP (GBP/AUD)
The past week has seen some choppy price action in this pairing, but little overall direction. Minor AUD support around 0.4590 (resistance 2.1785) has contained the AUD downside and this keeps the hopes of renewed gains alive for the time being. A break through 0.4590 (2.1785) however, would turn the near term picture negative and the cross would then target 0.4560 (2.1930) ahead of 0.4525 (2.1000). If we do see some strength there is initial resistance around 0.4650 (2.1505). The economic calendar is pretty light from both countries this week with UK public sector net borrowing and the Australian house price index the main highlights.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.4599 | 0.4400 | 0.4600 | 0.4593 - 0.4681 |
| GBP / AUD | 2.1744 | 2.1739 | 2.2727 | 2.1361 - 2.1770 |
AUD/EURO (EURO/AUD)
The broad parameters of 0.6200 to 0.6400 (1.5625 - 1.6130) have largely contained this pair since late August and this week has been no exception. There does seem to be a slight AUD upside bias in recent days with levels around 0.6380 (1.5675) tested on repeated occasions. A break up through 0.6380/6400 (1.5625-1.5675) would open the way for gains toward 0.6540 (1.5290) From Australia this week we only have the house price index of any note, while from Europe we have manufacturing and service sector PMI’s to digest along with the German IFO business climate index and results of the targeted LTRO.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6370 | 0.6200 | 0.6400 | 0.6267 - 0.6384 |
| EUR / AUD | 1.5699 | 1.5625 | 1.6129 | 1.5664 - 1.5956 |
AUD/YEN
Price action in this part of the past week can be defined by volatile trade with no overall direction. The Australian dollar briefly traded above 87.00 Yen in the immediate aftermath of Friday’s Fed decision, but the move was short lived and since then the local currency has underperformed. If minor support around 85.70 contains the downside in the near term we could see the pair test higher back toward 87.00. Any break below 85.70 would however, turn the near term picture negative. The economic calendar is very light this week from both countries and as such events in the wider market may well continue to dominate.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 85.90 | 85.00 | 87.00 | 84.99 - 87.51 |
AUD/CAD
Like many Australian dollar crosses there has been little overall direction for this pair over the past week. The Australian dollar outperformed in the immediate aftermath of Friday’s Fed announcement, but the Canadian dollar has recovered in the early stages of this week, helped by stronger oil prices. 0.9400 to 0.9520 looks like a likely range for this week with the risks skewed to a break out on the topside at some stage. Retail sales data from Canada this week will draw attention, while from Australia we just have the house price index to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9447 | 0.9400 | 0.9520 | 0.9401 - 0.9517 |
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Market commentary:
It’s been an interesting market reaction to last week’s Fed interest rate decision and dovish accompanying statement. The knee-jerk reaction was to sell the USD as you would have expected, but since then the US currency has been broadly supported and is now trading at stronger levels than just before the announcement. It’s a hard one to justify and something of a surprise, but it is what it is. We are now back to square one, looking at the October or December meeting for potential lift off dates. In deciding to keep interest rates at zero, where they have been since December 2008, the Fed highlighted low inflation and uncertainty about the global outlook. Inflation will tick up over the coming months as the base effects of previous oil price declines drop out of the data, but it’s hard to see the global environment improving much. We get PMI readings from a number of countries this week including China, Japan and Europe, and these will be closely watched as leading indicators of broader economic activity.
Australia
Last week was a very quiet one for economic data out of Australia. However, we did get a change of PM with Malcolm Turnbull taking over the reins of government. Turnbull says the government is focussing on restoring economic confidence and today’s release of ANZ’s weekly consumer confidence indicator should give us a the first reading of how voters feel about the change. Reserve Bank of Australia (RBA) Governor Stevens spoke on Friday and he was reasonably upbeat about the prospect for the economy. He said Australia could weather a serious Chinese downturn and that much of the local media coverage was more negative than the facts actually warrant. In terms of other data this week we only have the house price index and the CB leading index to draw attention.
New Zealand
Last week’s second quarter GDP data may have been a bit weaker than expected, but looking at current migration figures it seems there is plenty of confidence in the broader economic outlook. NZ recorded a net gain of 60,300 migrants in the year to August 2015. PM Key says that’s a vote of confidence in the economy and that business activity levels remain strong. The record high migration figures will add pressure to the housing market and could also see unemployment actually tick up over the coming months. Most forecasters expect migration figures to peak over the coming months then gradually decline. One of the main reasons for the high levels of positive migration continues to be the lack of people leaving NZ for Australia and that may take a lot longer to pick back up with the Australian economy still having a long way to go in transitioning away from mining. It’s a quiet week ahead in terms of economic data with just the trade balance on Thursday of any real note.
United States
The US dollar was volatile in the wake of the Fed’s decision to leave interest rates unchanged, but once that volatility subsided there was broad support for the currency. This is a tough move to explain especially in light of the very dovish nature of the statement and subsequent press conference. The US stock market also failed to find any real support from the continuation of zero interest rates with many suggesting the Fed’s inaction has actually generated concerns about the US and global economy. The failure of the stock market to make further gains is more likely an indicator of how overpriced the market currently is and one can only imagine what sort of reaction stocks would have had if the Fed had actually raised rates. Over the past few days there have been a number of hawkish comments from Fed officials which have helped to support the USD, and to be fair, 13 out of the 17 Fed committee members still believe a rate hike will happen this year. Only a few months ago however, 15 out of the 17 were expecting a rate hike this year. At this stage the market is focused on December, as opposed to October, as the more likely date for a rate hike, but here is plenty of water to flow under the bridge between now and then. This week we have durable goods orders, new home sales, the final reading of GDP and a speech from Fed Chair Yellen to digest.
Europe
Mixed data from Europe last week had little impact as the market was firmly focused on the US Fed’s decision. After some volatility around that decision the Euro has seen pressure, which is something of a surprise. The Euro is expected to depreciate over the long run with many forecasters expecting further easing measures from the ECB, but there was some expectation for near term Euro strength in the wake of the dovish Fed announcement. It wasn’t to be however, with the knee-jerk response toward a stronger Euro only lasting hours. Since then the Euro has been on the back foot with significant declines over the past 24 hours. This week we have manufacturing and service sector PMI’s to digest along with the German IFO business climate index and results of the targeted LTRO.
United Kingdom
The highlight of last week's data was the the release of average earnings which came in much stronger than forecast. Although this would suggest there is less slack in the labour market and that inflation should start to pick up over the coming months. The prospect for an earlier than expected interest rate hike from the Bank of England (BOE) has been dealt a blow by the US Fed's decision to leave their rates unchanged. Their concerns about the global environment will no doubt be echoed by the Bank of England and as such they will also be in no hurry to raise interest rates. At this stage, expectations for a BOE hike range from late in Q1 2016 all the way out to the very end of 2016. There is little in the way of data this week that could influence. Public sector net borrowing will draw some attention and we also have a number of BOE officials set to speak.
Japan
There has been nothing of significance released from Japan since last week’s monetary policy statement. A bank holiday there for the first half of this week also means there is little to focus on until Friday when we get inflation data. There is a school of thought that says the Fed’s decision to leave interest rates unchanged will have made it easier for the Bank of Japan to take additional easing measures over the coming months. If the Fed had raised interest rates the JPY would have weakened significantly against the USD and that may well have been a barrier to further BOJ easing. But with the Yen largely unchanged is means the BOJ don’t have to worry about weakening the Yen too far should they ease further. The market currently sees a 50% chance of further easing by the BOJ before the end of this year.
Canada
Inflation data from Canada at the end of last week came in bang on expectation at 1.3% year on year. There was little impact on the Canadian dollar with the market more focused on digesting the Fed announcement. Somewhat surprisingly, the USD has appreciated against the CAD in the wake of that announcement and even a 4% gain in oil prices last night failed to see the CAD outperform it closest neighbour. Bank of Canada (BOC) Governor Poloz has been on the wires saying the lower Canadian dollar is cushioning damage from the oil price shock. He said it’s very hard to say what oil prices will do and he is confident Canada will continue to manage well the adjustments caused by lower commodity prices. Last night we also got wholesale sales data which missed expectation printing at 0.0%, down from 1.3% prior. Later this week we get retail sales figures 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 »
2 Comments
What data will the Fed see in the next month to change their opinion and justify a rate hike?
Quite frankly, I and I suspect almost everyone else, are absolutely tired of the Fed and their endless babbling about raising rates which they never do.
First they say, "we need higher employment".
Then they say, "we need higher inflation".
Now they say, "we need emerging markets to perform better."
It's a whole lot of cunning manipulated bullsh#t if you ask me.
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