By Ian Dobbs*:
Chinese economic concerns and weak oil prices are the two overriding themes of 2016 so far.
The past week has provided little respite from either of these major influences and global financial markets are exceptionally nervous about the weeks and months ahead.
Oil prices have seen fresh weakness thanks largely to the lifting of sanctions on Iran.
This news couldn’t have come at a worse time for oil, and we now have the prospect of new supply coming onto an already saturated market.
Talk of $20 a barrel, which only months ago seemed a little far-fetched, now seems incredibly realistic.
The Chinese authorities’ attempts to avoid a ‘hard landing’ for their economy are starting to look very reactionary and confidence that they have control over the situation is rapidly declining.
All this is weighing on global equity markets and threatening the prospects of global growth for the year ahead. The one thing the Chinese authorities seem to have too much control over is economic data releases. There have long been concerns about the validity of economic numbers coming out of China, and today’s fourth quarter GDP numbers will draw a lot of attention and be closely scrutinized.
Major Announcements last week:
-
UK Manufacturing Production -0.4% vs 0.1% expected
-
Australian Employment Change -1.0k vs -11.0k expected
-
Bank of England leave interest rates unchanged at 0.5%
-
US Core Retail Sales -0.1% vs 0.2% expected
-
US Producer Prices Index -0.2% as expected
-
US UoM Consumer Sentiment 93.3 vs 92.7 expected
NZD/USD
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6450 | 0.6230 | 0.6500 | 0.6382 - 0.6589 |
NZD/AUD (AUD/NZD)
Action in the wider market has been the main driver of this cross for much of this year. Both the New Zealand dollar and the Australian dollar have been under pressure on the back of global market turmoil and it’s the timing of flows out of each currency that has been the dominant factor in driving this pair. Domestic releases from either currency have had only minimal impact so far, although we do have data this week that could influence. On the NZD side of the equation we have a dairy auction tonight and inflation data tomorrow, while from Australia we get consumer sentiment on Wednesday and inflation expectations on Thursday. We still expect a broad range of 0.9000 to 0.9500 (1.0525 - 1.1111) to dominate over the coming months, and as such any periods of strength in the NZD over 0.9400 (under 1.0638), will likely provide a good selling opportunity (good buying of AUD).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9385 | 0.9250 | 0.9500 | 0.9252 - 0.9425 |
| AUD / NZD | 1.0655 | 1.0526 | 1.0811 | 1.0610 - 1.0809 |
NZD/GBP (GBP/NZD)
Both the New Zealand dollar and the UK Pound have been under pressure so far this year and as a result the cross rate between the two currencies has been choppy. This has been particularly true over the past couple of weeks with a number of swings between 0.4450 and 0.4560 (2.1930 - 2.2470). It’s hard to have a firm view on direction from here. The NZ dollar was certainly overvalued late last year when it was trading well above 0.4600 (below 2.1740), but it seems unlikely we are heading back below 0.4200 (above 2.3800) any time soon. With no threat of a Bank of England interest rate hike on the immediate horizon and the uncertainty of Britain's EU referendum, the GBP is likely to remain much softer than we saw it through middle of last year. Key support comes in around 0.4450 (resistance 2.2470) and while above that level the pair will likely range between there and 0.4600 (2.1740).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4525 | 0.4450 | 0.4650 | 0.4451 - 0.4560 |
| GBP / NZD | 2.2099 | 2.1505 | 2.2472 | 2.1928 - 2.2466 |
NZD/CAD
Although the New Zealand dollar has seen pressure since the start of this year, it pales in comparison to the losses the Canadian dollar has seen over the past couple of months. As such the cross rate remains well supported above support now seen around 0.9200. In the early stages of this week oil prices have taken another dive on the back of the removal of Iranian sanctions. This has kept pressure on the CAD and driven the cross against the NZD back up toward 0.9400. The big questions now is will the Bank of Canada react to renewed oil price weakness and cut interest rates when they meet this week. It’s a very close call, and as such we should see some further volatility in the CAD. Ahead of that decision we have a dairy action and NZ inflation data to digest. While the pair remains above 0.9200 support, the risks remains skewed to the topside.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9380 | 0.9200 | 0.9400 | 0.9243 - 0.9454 |
NZD/EURO (EURO/NZD)
It has been a wild ride for this pair so far in 2016. Wider market risk aversion has seen the dual drivers of New Zealand dollar weakness and Euro strength force the cross rate to a low of 0.5839 (above 1.7126) from the 0.6300 (1.5873) level it started the year. It’s hard to say if the worst is behind us and for the time being at least the risks remain skewed to the NZD downside. The pair would need to break above resistance, now seen around 0.5980 (support 1.6722) to alleviate the immediate NZ dollar downside pressure. We have plenty to digest this week that could influence including a dairy auction tonight and NZ inflation data tomorrow. Attention will then turn to Thursday’s ECB meeting and just what the central bank has to say about recent Euro strength.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.5920 | 0.5840 | 0.5980 | 0.5839 - 0.6093 |
| EUR / NZD | 1.6892 | 1.6722 | 1.7123 | 1.6412 - 1.7126 |
NZD/YEN
The strong downtrend seen in this pair since the beginning of 2016 remains well intact. If the pair could sustain a break back above 76.00 it may signal a broader correction higher is unfolding, but until then the risks remain skewed to the downside. Support comes in around 74.50 and that has contained the weakness for now. Tonight’s dairy auction and tomorrow’s NZ inflation data will draw attention, and both could easily influence the value of the NZD. There is little of significance set for release from Japan this week. Any periods of weakness in global equity markets will continue to pressure this pair and keep risk aversion the dominant theme.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 75.72 | 74.50 | 76.00 | 74.63 - 77.95 |
AUD/USD
The Australian dollar has remained under all sorts of pressure this past week, eventually smashing below the 2015 low of 0.6893. The key drivers remain concerns around China and global commodity prices and today’s Chinese GDP data will be of particular interest. Largely disappointing data out of the US has had little impact while local data, in the form of better than forecast employment numbers, provided only temporary respite for the pair. The 0.6900 area is now the first line of resistance and while below that level the risks are all still skewed to the downside. The one thing that is certain is that conditions will remain volatile.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.6870 | 0.6700 | 0.6900 | 0.6831 - 0.7048 |
AUD/GBP (GBP/AUD)
It has been a choppy week of trading for this pairing with both the Australian dollar and the UK Pound seeing periods of pressure. There is good AUD support on the downside around 0.4780 (resistance 2.0920), while initial topside resistance comes in around 0.4880 (support 2.0492). The outlook for China, and commodity prices in general, will continue to be a major factor for the Australian dollar and of particular interest will be this afternoon release of Chinese GDP for the fourth quarter. Over the coming days from Australia we also have consumer sentiment and inflation expectations data to digest. While from the UK attention will turn to the key releases of inflation, employment and retail sales.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.4820 | 0.4780 | 0.4880 | 0.4781 - 0.4880 |
| GBP / AUD | 2.0747 | 2.0492 | 2.0921 | 2.0490 - 2.0915 |
AUD/EURO (EURO/AUD)
It’s been a brutal start to 2016 for this pair as Australian dollar weakness has combined with strength in the Euro, causing the cross to collapse to levels last seen in September. Wider market risk aversion has played a huge role in driving the pair and it’s far too early to say if the worst is behind us. Only time will tell if the Chinese authorities can manage to avoid a hard landing for their economy and in the meantime volatility is more than likely here to stay. Of particular interest will be this afternoon’s release of Chinese GDP for the fourth quarter. Look for a range of 0.6200 to 0.6400 (1.6129 to 1.5625) over the coming week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6310 | 0.6200 | 0.6400 | 0.6225 - 0.6518 |
| EUR / AUD | 1.5848 | 1.5625 | 1.6129 | 1.5343 - 1.6065 |
AUD/YEN
Much like the AUDEUR cross, this pair continues to suffer on the back of wider market risk aversion. The past week saw fresh lows of 79.57 trade as a bout of Australian dollar selling swept the market. Initial resistance is now seen coming in around 81.25 and while below that level the focus remains on the downside. We have Chinese fourth quarter GDP data to digest this afternoon and the result is likely to impact the Australian dollar. There is little to get excited about from Japan this week, while from Australia we get consumer confidence and inflation expectations. The main focus however will remain on China, commodities and global equities.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 80.65 | 79.50 | 81.25 | 79.62 - 83.38 |
AUD/CAD
The Canadian dollar has seen relentless selling for much of the past two months as oil price declines suck the life out of large parts of the Canadian economy. In the first two weeks of this year a sharp fall in the value of the Australian dollar saw the AUDCAD cross pull back from the highs around 1.0170 to a low of 0.9815. In the past week however the Canadian dollar has again underperformed and this has driven the cross rate back above parity. The latest bout of CAD weakness comes amid the lifting of Iranian sanctions which has pressured the price of oil even further. We can expect continued volatile trading over the coming weeks with the risks still skewed to the topside for the pair. Today’s GDP result from China will draw attention, but the biggest impact of the week could come from the Bank of Canada’s interest rate meeting. It’s a very close call whether they cut interest rates or not in response to the latest down leg in oil. Expect choppy trade between the broad parameters of 0.9800 and 1.0200.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9990 | 0.9800 | 1.0200 | 0.9897 - 1.0063 |
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Market commentary:
Chinese economic concerns and weak oil prices are the two overriding themes of 2016 so far. The past week has provided little respite from either of these major influences and global financial markets are exceptionally nervous about the weeks and months ahead. Oil prices have seen fresh weakness thanks largely to the lifting of sanctions on Iran. This news couldn’t have come at a worse time for oil, and we now have the prospect of new supply coming onto an already saturated market. Talk of $20 a barrel, which only months ago seemed a little far-fetched, now seems incredibly realistic. The Chinese authorities’ attempts to avoid a ‘hard landing’ for their economy are starting to look very reactionary and confidence that they have control over the situation is rapidly declining. All this is weighing on global equity markets and threatening the prospects of global growth for the year ahead. The one thing the Chinese authorities seem to have too much control over is economic data releases. There have long been concerns about the validity of economic numbers coming out of China, and today’s fourth quarter GDP numbers will draw a lot of attention and be closely scrutinized.
Australia
There hasn’t been much, in terms of market moving data, released from Australia since last Thursday’s better than forecast employment numbers. The market has remained volatile however, with continued concerns around China and commodity prices weighing on the Australian dollar. Over the coming days we have Westpac consumer sentiment and inflation expectations data to digest, along with some key releases from China. Although the global market volatility seen so far this year raises concerns on a number of levels, it won’t have impact the Reserve Bank of Australia’s (RBA’s) current stance, which is firmly ‘on hold’ for the foreseeable future. The bank will in fact be very comfortable with the decline of the Australian dollar from the elevated levels seen late last year.
New Zealand
The New Zealand dollar has continued to see pressure this past week as risk aversion remains the theme of 2016. Concerns about China and weak global equities have resulted in a very nervous start to the year for the financial markets and the road ahead continues to look bumpy. Domestic data was sadly lacking last week, but tonight we have another Global Dairy Trade auction to digest and tomorrow we get the latest reading of inflation. It’s very hard to see any positive surprises to dairy prices in the current environment, and with every passing auction that fails to impress, the forecasted payout for the season becomes harder to achieve. Inflation for the fourth quarter of 2015 hits the wires tomorrow morning and is expected to print at -0.2% q/q and 0.3% y/y, well below the central bank's mid-point of 2.0%. While the latest fall in the price of oil won’t be included in this data it certainly suggests there is limited upside potential for inflation over the coming months.
United States
Data from the United States last week was for the most part disappointing. The only positive surprise was consumer sentiment which improved a touch from 92.7 to 93.3. Countering this were weaker than expected readings from industrial production, the Empire State manufacturing index and retail sales. The soft data has caused a number of forecasters to revised down their GDP estimates for the fourth quarter. Throw into the mix the global market turmoil, declining equity markets and continued weakness in the price of oil, and you could easily conclude that the Fed tightening cycle, which kicked off in December, is starting to look like it will be even more gradual than forecast. Recent speeches from Fed officials have downplayed the impact of market turmoil on the US economy, but investors are starting to cut their bets that we will see a further four rate hikes this year. A US bank holiday yesterday has meant it’s been a slightly quieter start to this week, but data over the coming days will draw plenty of attention. Inflation numbers will be the main focus but we also have building permits, housing starts, oil inventories, the Philly Fed manufacturing index and unemployment claims to digest.
Europe
A number of second tier data releases from Europe last week were of little consequence with attention firmly on global market volatility and declining equities. The Euro has been one of the big winners throughout the turmoil so far in 2016, which would suggest it has become one of the funding currencies of choice for the carry trade. The ECB are unlikely to be happy with the Euro’s recent strength and President Draghi may well try to jawbone the currency lower when the central bank meet on Thursday. The ECB meeting will provide the main focus for the week, although there is little expectation for any action so soon after the bank announced further easing measures back on December 3rd. Other releases to watch out for this week includes inflation data, manufacturing PMI and services PMI.
United Kingdom
The UK Pound has suffered a terrible start to 2016 as expectations of any potential Bank of England (BOE) interest rate hike get pushed out until early 2017. Data released last week was largely disappointing with softer than forecast outcomes from manufacturing production, industrial production and construction output. The BOE voted 8 to 1 to keep rates on hold at Thursday’s meeting, which was no surprise. It’s going to a tough year for the Pound which also has to deal with the uncertainty of a referendum on Britain's membership of the EU. No date has yet been set for the vote, but it’s likely to be around mid-year sometime. The implications are huge for the UK economy and current polls suggest it’s far from a certain outcome. This week we have some key data to draw focus starting with inflation numbers tonight. That will be followed by employment and earnings data on Wednesday night, and the week is rounded out with retails sales figures on Friday.
Japan
Japanese Yen gains on the back of safe haven demand has been the story of 2016 so far, and the past week was no different. Recent data has for the most part been disappointing, but it’s had little impact on the currency as wider market concerns have dominated. Further declines in oil prices and concerns about Chinese growth are only going to make the Bank of Japan’s (BOJ) 2% inflation target even harder to achieve. Governor Kuroda was speaking in parliament yesterday and he said they will continue to ease until inflation is stable. There is little in the way of domestic data to get excited about this week. China will remain firmly in focus, particularly the GDP result set for release later this afternoon.
Canada
The Canadian dollar has had a volatile week losing ground across the board. Continued declines in oil prices have done the damage, and with Iranian oil about to hit an already oversupplied market, the near term prospects don’t look encouraging. Domestic data releases were of no consequence last week, although this week should be a different story. Manufacturing sales, inflation and retails sales will all draw attention but the real focus will be on the Bank of Canada’s (BOC) rate meeting early on Thursday morning. It’s a very close call whether they cut interest rates at this meeting in response to renewed oil price weakness with markets pricing in around a 50% chance. An interest rate easing has been fully priced in by March however.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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