By Ian Dobbs*:
Focus for 2016 so far has centred on the spectre of a slowdown in the world’s second largest economy after concerns rose last week.
These came as the Chinese Yuan tumbled and Chinese equities crashed 10%, in the process twice triggering rules which shut the market and sent investors to the sidelines.
Weak Chinese and U.S. manufacturing data released early in the week contributed to the deteriorating market confidence.
This extended to global equity bourses and helped send the S&P 500 6% lower over the course of the week.
As is usually the case during periods of heightened market stress and volatility the JPY was one of the main benefactors, whilst the ‘risk’ currencies (NZD,AUD) had a forgetful start to the year that saw the NZD/USD and AUD/USD fall between 4.5-5% from closing 2015 levels.
Major Announcements last week:
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UK Manufacturing PMI (Dec. 51.9 vs. 52.7 exp.)
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Chinese Caixin Manufacturing PMI (Dec. 48.2 vs. 49.0 exp.)
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US ISM Manufacturing PMI (Dec. 48.2 vs. 49.0 exp.)
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NZ GDT Dairy price index -1.6%
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Chinese Caixin Services PMI (Dec. 50.2 vs. 52.3 exp.)
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US ISM Non-manufacturing PMI (Dec. 55.3 vs. 56.0 exp.)
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Australian Building Approvals (Nov. -12.7%)
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EU Inflation (Dec. 0.2% y/y vs. 0.3% exp.)
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US Nonfarm payrolls (Dec. 292k vs. 200k exp.).
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US Average Hourly Earnings (Dec. 0.0% m/m vs 0.2% exp.)
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Canadian Employment Change (Dec. 22.8k vs. 10.0K exp.)
NZD/USD
The New Zealand dollar has fallen heavily in the first week’s trade in 2016 and sits well down from highs set around .6880 after Christmas. The sharp declines observed have occurred on the back of the sharp deterioration seen in risk sentiment as concerns over the health of the Chinese economy resurfaced last week. Severe falls in Chinese equities were emulated around the globe during the week and contributed to a further decline in most commodity prices. With a quiet local data calendar offshore events are again set to dictate trade in the local currency this week. In this environment we see rallies capping ahead of prior support at .6600. The November lows around the .6425/30 level is the obvious downside target for this move initially.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6555 | 0.6420 | 0.6600 | 0.6510 - 0.6758 |
NZD/AUD (AUD/NZD)
The New Zealand dollar remains firm against the Australian dollar in the first days of 2016 ,although currently sits off its highs set last week near .9485 (1.0543). Again the AUD$ sensitivity to key commodity price weakness was seen driving the moves in the cross over the holiday break. The NZD peaked last week amid the heavy commodity selling which was seen on the back of the increased Chinese economic concerns and crashing Chinese equity markets. Australian employment data on Thursday will form additional focus for this cross, we favour selling NZ dollar out performances in this cross, although prefer levels near last week’s highs.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9385 | 0.9325 | 0.9520 | 0.9321 - 0.9487 |
| AUD / NZD | 1.0655 | 1.0504 | 1.0724 | 1.0540 - 1.0728 |
NZD/GBP (GBP/NZD)
The New Zealand dollar closed 2015 on highs not seen in over six months against the U.K. pound (.4650, 2.1505). In part on the back of a solid end of year rally in the NZD/USD exchange rate. However, the story so far for 2016 has been quite different as the NZD/USD reversed all of those end of year gains and fell through support around the .6600 level on the back of the sharp increase seen in risk aversion as Chinese economic concerns mounted last week. These concerns have placed further pressure on commodity prices (ex. Gold) and commodity linked currencies. The key U.K. data was soft last week however, and we expect this sell-off to be contained by .4450 (2.2472) for now. Immediate focus for this cross is the BOE interest rate meeting on Friday morning.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4510 | 0.4450 | 0.4650 | 0.4479 - 0.4591 |
| GBP / NZD | 2.2173 | 2.1505 | 2.2472 | 2.1783 - 2.2327 |
NZD/CAD
The New Zealand dollar has eased significantly from its highs set against the Canadian dollar prior to the New Year (~.9570). Both the NZD and the CAD have been under pressure in 2016. The declines seen in the NZD/USD exchange rate on the back of ‘risk-off’ selling have outweighed the additional losses seen by the CAD as the oil price continues to plumb fresh cyclical lows. Quiet data calendars from both regions this week will mean risk aversion (NZD) and commodity price movements will drive pricing. Whilst both pressures are significant we favour the ‘risk aversion’ theme to slightly outweigh the weak oil pricing over the week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9330 | 0.9000 | 0.9575 | 0.9233 - 0.9420 |
NZD/EURO (EURO/NZD)
The New Zealand dollar closed 2015 on highs not seen in over six months against the U.K. pound (.4650, 2.1505). In part on the back of a solid end of year rally in the NZD/USD exchange rate. However, the story so far for 2016 has been quite different as the NZD/USD reversed all of those end of year gains and fell through support around the .6600 level on the back of the sharp increase seen in risk aversion as Chinese economic concerns mounted last week. These concerns have placed further pressure on commodity prices (ex. Gold) and commodity linked currencies. The key U.K. data was soft last week however, and we expect this sell-off to be contained by .4450 (2.2472) for now. Immediate focus for this cross is the BOE interest rate meeting on Friday morning.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6040 | 0.5900 | 0.6320 | 0.5938 - 0.6257 |
| EUR / NZD | 1.6556 | 1.5823 | 1.6949 | 1.5981 - 1.6840 |
NZD/YEN
The New Zealand dollar has fallen sharply against the Japanese Yen in 2016 posting the largest falls of the NZD crosses covered by us. Key support around 79.65 broke easily last week as the Yen rallied on the back of safe haven demand and the NZD/USD exchange rate became a victim of the sharp Chinese inspired increase in global risk aversion. Periods of heightened risk aversion always pose a high risk to the NZD/JPY pair, which typically falls heavily during these periods. Commodity price weakness fuelled by Chinese growth concerns placed further pressure on commodity currencies over the week. We favour this cross to trade heavily this week; first selling is likely to be seen around 77.60.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 77.15 | 76.00 | 79.20 | 76.11 - 80.80 |
AUD/USD
The Australian dollar has fallen sharply against the USD in 2016. This has occurred against a back-drop of heightened global risk aversion and a continued weak commodity price environment (ex. Gold) as concerns over the Chinese economy flared up again last week. The outlook for this cross will again be heavily influenced by ‘risk’ flows this week, Australian employment data on Thursday and the U.S. dataflow on Friday will also influence, although perhaps to a lesser extent. We favour selling rallies in this environment above the .7050 level.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.6980 | 0.6900 | 0.7080 | 0.6929 - 0.7215 |
AUD/GBP (GBP/AUD)
The Australian dollar sits well below its highs set against the U.K. pound over the holiday period (~.4955, 2.0182). This comes against the back-drop of the sharp falls seen in the AUD/USD exchange rate last week as ‘risk-off’ flows and commodity price declines weighed after significant falls were seen in Chinese and global equities. These themes should continue to heavily influence pricing on this cross this week. Australian employment data on Thursday and the BOE meeting on Friday morning should also be noted. We marginally favour selling AUD near .4850 (2.0619) while risk sentiment is poor.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.4802 | 0.4750 | 0.4850 | 0.4767 - 0.4903 |
| GBP / AUD | 2.0825 | 2.0619 | 2.1053 | 2.0395 - 2.0978 |
AUD/EURO (EURO/AUD)
The Australian dollar has lost significant ground against the Euro in 2016 on the sharp sell-off seen last week on the back of the surge in global risk aversion which occurred as concerns over Chinese growth hit Chinese and global equities. Some recovery has been seen overnight on the back of the easing EUR/USD and partial AUD/USD exchange rate recovery. The risk aversion theme, commodity pricing and Australian employment data on Thursday will be key to movements in this cross this week. We favour selling AUD in moves towards .6500 (1.5385) in this environment.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6432 | 0.6310 | 0.6510 | 0.6319 - 0.6678 |
| EUR / AUD | 1.5547 | 1.5361 | 1.5848 | 1.4975 - 1.5826 |
AUD/YEN
The Australian dollar has fallen very sharply against the Japanese Yen in 2016. This is typically the case when investors chase the safe haven appeal of the Yen and abandon ‘risk’ currencies like the AUD during periods of heightened global risk aversion and market volatility like those experienced so far in 2016. Concerns over the Chinese growth outlook have driven the concerns and added further to the heavy selling seen in commodities which persisted through 2015. We favour selling rallies towards 84.00 while this theme plays out. Australian employment data on Thursday is also of note.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 82.15 | 80.85 | 83.00 | 80.91 - 86.35 |
AUD/CAD
The Australian dollar peaked against the Canadian dollar at the end of 2015 on a surge that took it from ~.9150 in early September to highs near 1.0170. The AUD has fared poorly so far in 2016 against its Canadian counterpart however, on the back of the heavy ‘risk off’ flows seen as concerns mount over the health of the Chinese economy. These concerns have continued to weigh on commodity prices (ex. Gold), this has seen the oil price plumb fresh cyclical lows overnight below $US 31 a barrel (WTI). These themes will continue to dominate sentiment towards this cross over the week ahead, although the Australian employment data release on Thursday will add additional interest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9935 | 0.9820 | 1.0170 | 0.9824 - 1.0036 |
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Market commentary:
Focus for 2016 so far has centred on the spectre of a slowdown in the world’s second largest economy after concerns rose last week. These came as the Chinese Yuan tumbled and Chinese equities crashed 10%, in the process twice triggering rules which shut the market and sent investors to the sidelines. Weak Chinese and U.S. manufacturing data released early in the week contributed to the deteriorating market confidence. This extended to global equity bourses and helped send the S&P 500 6% lower over the course of the week. As is usually the case during periods of heightened market stress and volatility the JPY was one of the main benefactors, whilst the ‘risk’ currencies (NZD,AUD) had a forgetful start to the year that saw the NZD/USD and AUD/USD fall between 4.5-5% from closing 2015 levels.
Australia
The recent story for the AUD has been all about offshore events, this has seen the local currency fall heavily so far in 2016. Heightened global risk aversion on the back of concerns over the health of the Chinese economy has seen global equities follow the Chinese lead and fall significantly since trade began last week. The Chinese government let the Yuan depreciate during the week which was seen as an acknowledgement that the world’s second largest economy faces greater challenges this year. Australian data releases last week took a back seat to the unfolding offshore events, although of note was the November building approvals data which fell 12.7%, much worse than expected. Retail sales was seen matching expectations on Friday and later this week the market will look forward to the local December employment data on Thursday. Weak Chinese manufacturing and services data last week did little to bolster the poor investor sentiment in China. The sombre mood has seen commodities (ex. Gold) continue in 2016 where they left off in 2015, this has seen WTI oil trade to lows not seen since 2003.
New Zealand
It has been an ominous start for the NZD in 2016 which has seen it fall over 3.5c against the USD from its highs seen over the Xmas period. The NZD/USD traded significantly lower each day last week on the back of a severe bout of global risk aversion, which saw global equities fall heavily during the week. In the U.S. the S&P 500 fell 6%, in the U.K. the FTSE fell 5.3%, whilst in Germany the DAX declined more than 8%. In China the Shanghai composite fell 10%. The source of the heightened risk aversion (which was exacerbated by the thin market liquidity) was an increase in the concern of slowing global growth and its impact on the Chinese economy. Beijing’s growing tolerance of a weaker currency also served to intensify capital flight concerns. Trading on Chinese equity bourses was called off twice during the week after the markets fell more than 7%. This triggered the newly installed mechanisms which were designed to limit volatility; the mechanisms were removed later in the week after regulators recognised that they were contributing to the fear selling as investors became concerned about becoming locked out of the market. Commodity prices have understandably begun 2016 poorly, this has seen oil fall to fresh lows not seen since 2003. In NZ the only event of note last week was the release of the latest Global dairy trade index auction data which experienced an average decline of 1.6%. Weaker than expected building consents data yesterday took a backseat to the unfolding international events which look set to dominate trade this week.
United States
The data calendar for the first week of 2016 in the U.S. was a busy one and was dominated by Friday’s non-farm payrolls employment report. The number easily beat market expectations after 292k jobs were added, November’s number was revised higher (+41k) and bolstered the three month average to a very healthy 284k. The unemployment and underemployment rate remained steady. The only blemish on the otherwise solid report was the lack of growth in average hourly earnings. Earlier in the week the ISM manufacturing, non-manufacturing and services PMI data all missed the market’s expectations. Comments from the Fed’s Williams included those that he thought 3-5 rate rises was about right for the U.S. economy this year, well above the 2 then priced in by the market. The busy data calendar for this week will conclude with retail sales, industrial production, Michigan consumer sentiment and producer price data on Friday (amongst others).
Europe
The EUR/USD exchange rate sits near opening 2016 levels in trade presently, after it has been seen to be taking a back seat to developments in the JPY, AUD and NZD in the first week of trade for the year. Early weakness was initially observed through to the middle of last week in part on the back of the weakness seen in the latest euro-area inflation reading. The later releases included better than expected German and euro-area PMI data, a euro-area unemployment rate which fell to 4 year lows (10.5%), and an improvement in euro-area economic confidence. These all helped the EUR/USD drift higher towards the end of the week, this amid a market which was focussed mainly on risk aversion trades as global equities crashed on a Chinese lead. German and French industrial production data released late on Friday failed to meet the market’s expectations. This week is quiet for key data releases which should mean movements in the Euro will take their lead from U.S. data and evolving U.S. interest rate expectations.
United Kingdom
The GBP has had a poor start to 2016 which began with the release of weaker than expected manufacturing and services PMI data last week. The better than expected construction PMI read and Halifax price index data was overlooked in favour of the earlier data. This has seen many pushing out expectations for the when the BOE will begin its tightening cycle. Concern over the looming referendum on Britain’s membership in the EU also continues to weigh on investor sentiment. Trade data released on Friday was broadly in line with the market consensus and was seen narrowing on the back of an 18% fall in oil imports. Focus for the remainder of the week will now be on Friday mornings BOE interest rate meeting, economists expect no move and only a 0.5% lift in rates (to 1.0%) over 2016 as a whole.
Japan
Like the NZD and AUD it has been global events which have dictated trade in the JPY so far in 2016. A surge in global risk aversion on the back of heightened concerns over the health of the Chinese economy have seen the JPY appreciate almost 3% against the USD during the first days of trade in 2016. This came as investors sought the safety of the Yen. Global equities were seen following the Chinese lead last week as investors feared for the health of the Chinese economy. The release of poor Chinese manufacturing and services data combined with regulatory authorities which were seen to be happy to let the Yuan ease amid the market turmoil, (a de-facto acknowledgement of their concern for their economy) added to the sombre market mood. Japanese data released during the break included marginally worse than expected employment data, a decline in industrial production and wages data- which fell short of expectations. A summary of the BOJ minutes released on Friday noted downside (although not heightened) risks to the economy, steps taken by the board in December were seen as adjustments rather than as easing in response to those concerns.
Canada
Trading for the CAD so far in 2016 has been based on the now very familiar theme from 2015 of weaker pricing on the back of plunging oil prices. Latest pricing sees it trade near fresh cyclical lows at $US 31.25 (WTI). The oil price has experienced further sharp declines (~20%) this year as markets continue to struggle with an oversupply problem. A diplomatic crisis between the OPEC heavyweights Saudi Arabia and Iran has served to reduce the market’s expectations on the likelihood of an agreement between the OPEC members to reduce output in 2016. High gasoline inventory data over the Xmas break is also likely to mean less demand for oil in the near term by U.S. oil refineries. Canadian data over the break naturally has taken a back seat to the oil market developments. GDP and retail sales data released prior to Christmas disappointed. Manufacturing and building data, the Ivey PMI and the raw materials price index all failed to meet expectations last week. The only bright note was better than expected Canadian employment data released on Saturday morning; this was overshadowed however by the simultaneous releases of a strong U.S. employment report and the continued dour outlook for world oil and energy markets.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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