China's PBoC surprises market with rate cut; BoJ the closest of the major central banks to making an interest rate decision; US Fed almost certain to hold and RBNZ expected to follow suit

By Ian Dobbs*:

The People’s Bank of China surprised the markets late on Friday with another interest rate cut, it’s sixth since last November.

This action by the PBOC would suggest the downward pressure on China’s economy is not abating even though recent GDP data for the third quarter came in a little stronger than forecast. The cut is just another ominous sign about the near term outlook for global growth.

Recent reports from the likes of Caterpillar and Whirlpool, both large manufacturers whose sales figures provide a good proxy for world growth, have suggested downside risks for the global economy driven by weakness in emerging markets.

The European Central Bank (ECB) last week gave a strong signal that further easing measures will come in December and this week we have meetings from the Bank of Japan (BOJ), the US Fed, and the Reserve Bank of New Zealand (RBNZ) to digest.

The BOJ meeting is a close call with many forecasters expecting further easing at some stage over the coming months, although perhaps not as soon as this week.

The US Fed are almost certain to remain on hold. Despite assurances from some Fed officials that all meetings remain ‘live’ it seems extremely unlikely they will hike rates this week.

The RBNZ will probably its powder dry for now, with stronger potential for a cut in December. This too however, might be a close call with the bank less than impressed about the elevated level of the NZD over recent weeks.

Major Announcements last week:

• US Global Dairy Trade Price Index -3.1%

• Bank of Canada left rates unchanged at 0.5%

• UK Retail Sales 1.9% vs 0.3% expected

• European Central Bank leaves rates unchanged at 0.05%

• Canadian Core Retail Sales 0.0% vs 0.2% expected

• Canadian CPI 0.2% vs 0.3% expected

• NZ Trade Balance -1222m vs -822m expected

NZD/USD

NZD/AUD (AUD/NZD)

The New Zealand dollar outperformed its Australian cousin for much of last week trading up to a high of 0.9456 (low 1.0575) on Friday afternoon. Increasing expectation for a RBA interest rate cut, to counter the out of cycle rate hikes by the major retail banks, certainly weighed on the Australian dollar. But, the currency did perform better than the NZD in the wake of the Chinese surprise rate cut announcement. This caused the cross to pull back to 0.9320 (rally to 1.0730) where it eventually ran out of steam. We have two key releases this week that could both influence the cross. Tomorrow sees Australian inflation data hit the wires, then on Thursday morning the RBNZ release their rate statement. The key NZD downside level to watch comes in around 0.9260 (resistance 1.0800). A breakthrough there may well open the way for a much broader correction for the NZD lower. If the pair remains contained above 0.9260 (below 1.0800), another rally toward 0.9450 (sell off to 1.0580) will likely develop.

NZD/GBP (GBP/NZD)

The New Zealand dollar remains wells supported against the UK Pound, although down from the 0.4456 high (low 2.2440) seen on Friday evening. That NZD high traded in the immediate aftermath of the Chinese rate cut announcement, which initially saw the NZD marked higher. The gains didn’t last long however, as the move raised concerns about global growth and put pressure commodity prices. Attention now turns to the release of UK GDP data tonight, and then the RBNZ rate statement on Thursday morning. There is good support on the downside around 0.4340 (resistance 2.3040), while any further topside price action will again run into resistance ahead of 0.4460 (support 2.2420).

 NZD/CAD

The Canadian dollar has been seeing relentless pressure from the New Zealand dollar ever since late September. Gains in the pair over the past week have been driven by weakness in the Canadian dollar on the back of the dovish Bank of Canada rate statement and disappointing retail sales and inflation data. The cross traded to a high of 0.8966 on Friday before moderating a touch. There is little sign the uptrend has run its course yet and while the pair holds above key support, now seen around 0.8790, the risks remain skewed to the topside. The main focus this week will be on the RBNZ’s rate statement set for release on Thursday morning. Although the central bank is expected to hold off cutting interest rates at this time, it’s certainly not a forgone conclusion. As such we can expect some volatility around the announcement.

NZD/EURO (EURO/NZD)

The New Zealand dollar has been making solid gains against the Euro since the beginning of October. Those gains accelerated last week in the wake of the ECB rate meeting after President Draghi signalled further easing measures are likely in December. His dovish rhetoric pressured the EUR and it has remained on the back foot since. Although we could see a corrective bounce in the Euro at some stage, it will no doubt run into willing sellers on any period of strength and as such the cross to the NZD should remain supported. The key event this week will be the RBNZ’s rate statement on Thursday morning. An interest rate cut from the RBNZ would be something of a surprise to the market and would drive the pair lower, at least to support just below 0.6000 (resistance 1.6667). The central bank are likely to hold off cutting for the time being however, and as such any dip from the NZD will probably provide a good buying opportunity.

NZD/YEN

The New Zealand dollar remains well support against the Japanese Yen currently trading just below 82.00. The pair traded as high as 82.69 on Friday before the surprise Chinese interest rate cut put some downward pressure on the NZD. Key trend line support comes in around 81.50 and while the pair remains above that level the risks are skewed to further gains. This week could prove to be a decisive one however, with central bank meeting in both New Zealand and Japan. Neither decision is a forgone conclusion and as such there is every chance for some volatile price action. Be wary of a break below 81.50 support as this would open the way for a much broader pullback initially targeting 79.00.

AUD/USD

The Australian dollar has spent much of the past 10 days ranging between the broad parameters of 0.7200 and 0.7300. Growing expectation for an interest rate cut from the RBA, to offset the out of cycle mortgage rate increase from the major banks, is likely to keep the topside capped around 0.7300 in the very near term. However, we do have the US Fed meeting to digest this week along with Australian inflation data, both of which could easily influence. Look for dips under 0.7200 to continue to find buying interest for now. There is a significant risk that the AUD could find itself well undervalued if the Fed back away from a December rate hike, and the RBA hold off cutting rates next week. A sharp rally back toward 0.7600 could easily develop over the coming weeks if that scenario plays out.

AUD/GBP (GBP/AUD)                            

The Australian dollar lost ground to the UK Pound throughout much of last week, but the pair staged something of a turn around on Friday. The cross bounced from a low of 0.4656 (sold from high 2.1478), eventually trading to a high of 0.4738 yesterday (low 2.1106). There are many in the market who now expect the RBA to cut interest rates next week in order to offset the recent mortgage increases by the major Australian banks. This is not a forgone conclusion however, and as such the AUD may trade in a choppy range ahead of that meeting. Downside support around 0.4650 (resistance 2.1505) should contain any near term weakness with resistance seen near the recent highs just above 0.4800 (support 2.0835). Australian inflation data tomorrow will draw focus as will tonight’s UK GDP figures.

AUD/EURO (EURO/AUD)

The Australian dollar surged higher against the Euro late last week after ECB President Draghi laid the groundwork for further easing measures in December. His dovish rhetoric immediately pressured the Euro and it has remained on the back foot since. This has seen the pair trade as high as 0.6590 (low 1.5175) in the early stages of this week. We have Australian inflation data to digest tomorrow, after which the focus will quickly switch to next week’s RBA meeting. There have been growing calls for the RBA to cut rates in an effort to offset the recent mortgage increases put in place by the major retail banks. It’s far from a foregone conclusion however and as such we can expect plenty of choppy price action in the lead up to that announcement. Initial downside support comes in around 0.6500 (resistance 1.5385), while on the Australian dollar topside, any break above 0.6600 (below 1.5150) could open the way from a much broader correction toward 0.6780 (1.4750).

AUD/YEN

The Australian dollar bounced from support around 86.00 Yen on Thursday last week, eventually trading up over 88.00 late on Friday evening. Increasing expectation for further easing from the Bank of Japan after this week’s meeting has weighed on the Yen, and this has been a large driver of the crosses gains. The BOJ meeting is on Friday and ahead of that we have Australian inflation data to digest tomorrow. I would expect any dips toward 86.00 to continue to find support in the near term. On the topside there is resistance around 88.60 and then again around 89.20. With a key RBA meeting also looming large next week, look for one of those two topside levels to cap gains for now.

AUD/CAD

The Australian dollar made solid gains against the Canadian dollar last week. The move was driven largely by CAD weakness as dovish central bank rhetoric, soft economic data and declining oil prices weighed on the Canadian currency. The market is currently trading just under last week’s high at 0.9546. Support is seen just below 0.9500 and while above the level the risks remain skewed to the topside. Australian inflation data tomorrow will draw focus with attention then turning to Friday’s release of Canadian GDP.

-------------------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

--------------------------------------------------------------------------------------------------------------------------

Market commentary: