By Ian Dobbs*:
The case for an interest rate cut in New Zealand in 2016 took a lift last week after data which showed annual inflation falling to just 0.1% in Q4 last year.
This number was well below the 0.4% forecast by the RBNZ in December.
The surprise for the Reserve Bank came in the form of the weak pricing seen for many tradeable goods, falling petrol prices were the main contributor but have been well flagged amidst the turmoil seen during 2015 in the oil and energy markets.
Another decline in dairy pricing last week adds to the argument for a change in the Reserve Banks bias towards lower rates although it remains to be seen whether emerging evidence of a cooling in the Auckland housing market is well enough advanced to encourage a shift in verbal rhetoric as early as this week.
Major Announcements last week:
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NZ NZIER Business Confidence 15%, -14% prior
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Chinese Q4 GDP 6.8% y/y on exp.
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UK Core inflation 1.4% vs. 1.2% exp. (Dec. y/y)
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German ZEW (Current situation, 59.7 vs. 54.0 exp.)
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NZ GDT Dairy price index, -1.4%
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NZ Inflation 0.1% vs. 0.4% exp. (Q4 y/y)
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UK ILO Unemployment rate 5.1% vs 5.2% exp. (3M/Yr, Nov.)
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UK Average Earnings 2.0% vs. 2.1% exp. (3M/Yr, Nov.)
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US Inflation ex. Food+Energy 2.1% as exp. (Dec. y/y)
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BOC Canadian Interest rate, 0.5% as exp.
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US Philly Fed, -3.5 vs. -5.0 exp. (Jan.)
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UK Retail Sales 2.6%, vs. 4.3% exp. (Dec. y/y)
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US Preliminary Markit Manufacturing PMI 52.7 vs. 51.1 exp. (Jan.)
NZD/USD
The New Zealand dollar has fallen in trade since our last report after peaking above .6550 last week as it rallied over 2c from its lows set earlier in the week. The declines last week were predicated on further losses in key commodities, a weak local inflation print, and ‘risk off’ selling. The week closed out with a sharp recovery in the oil price and global equities, and a correspondingly higher NZD/USD exchange rate. Trade this week will be dominated by the sentiment which emanates from Thursday’s RBNZ meeting where the market will be closely watching the statement for a shift in bias on the likelihood of further rate cuts. The likelihood of this bias moving towards one of further easing coupled with the renewed commodity currency selling has us maintaining a ‘sell rallies’ mentality (above .6550).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6429 | 0.6340 | 0.6600 | 0.6348 - 0.6558 |
NZD/AUD (AUD/NZD)
The New Zealand dollar has firmed marginally from its lows seen against the Australian dollar last week after the weak local Q4 inflation print. Direction this week will come from tomorrow’s Australian Q4 inflation numbers and the RBNZ interest rate decision on Thursday. Despite few in the market expecting a rate cut the meeting will be an important one as the market looks to the bias in the statement, especially in light of last week’s soft inflation numbers and the recent dairy price and Auckland housing market data. We favour selling rallies for now towards the above resistance level.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9270 | 0.9220 | 0.9400 | 0.9226 - 0.9398 |
| AUD / NZD | 1.0787 | 1.0638 | 1.0846 | 1.0640 - 1.0839 |
NZD/GBP (GBP/NZD)
The New Zealand dollar has given back much of its gains (~50% from recent high/lows) seen against the U.K. pound towards the latter part of last week. This comes about mainly on the back of the easing seen in the NZD/USD exchange rate (and other commodity currencies) since the highs. Thursday will be a key day this week for the cross with both the RBNZ interest rate decision and U.K. GDP data slated for release. We have no bias at current levels and see this cross staying well contained within last week’s range until Thursday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4525 | 0.4450 | 0.4650 | 0.4483 - 0.4609 |
| GBP / NZD | 2.2099 | 2.1505 | 2.2472 | 2.1697 - 2.2308 |
NZD/CAD
The New Zealand dollar sits off its lows seen last week against the Canadian dollar (~.9140) although also sits well off its highs (~.9455). An overnight sell-off in the oil price has again put the CAD under pressure and reinstates the dominant CAD- theme after last week’s strong bounce offered some respite. Less dovish than expected comments from the BOC Governor also played a part in the NZD/CAD decline last week (as the CAD rallied). It will be the turn of the RBNZ commentary this week (Thursday) to offer additional impetus for this cross over and above the key ‘oil-price’ and ‘risk’ drivers.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9185 | 0.9140 | 0.9455 | 0.9141 - 0.9455 |
NZD/EURO (EURO/NZD)
The NZD has eased from its recent highs against the Euro, like most of the other crosses covered this reflects the recent weakness seen in the NZD/USD exchange rate after the strong bounce last week. Commodity currency and risk sentiment continues to be a primary driver for these moves although this week’s RBNZ interest rate decision on Thursday will add additional cause for volatility. We favour selling towards last week’s highs (first resistance) in the current environment although see a move to this level prior to the RBNZ meeting as being very unlikely.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.5925 | 0.5800 | 0.6050 | 0.5791 - 0.6048 |
| EUR / NZD | 1.6878 | 1.6529 | 1.7241 | 1.6535 - 1.7269 |
NZD/YEN
The New Zealand dollar has eased against the Japanese Yen in recent trade after peaking ahead of 77.60 in trade last week. The sharp bounce from the lows seen near 73.70 occurred after a solid improvement in risk sentiment, in part helped by a rebound in the oil price from multi-year lows. This week is again likely to be a volatile one for this cross as the RBNZ and BOJ meetings collide with the continued volatility seen in financial and commodity markets. We favour selling rallies above 77.50 for the time being.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 75.92 | 73.70 | 78.00 | 73.66 - 77.54 |
AUD/USD
The Australian dollar reprieve seen during the latter part of last week against the USD has once again faded in trade overnight. Weaker equity markets and lower oil pricing once again asserted their dominance on investor sentiment, this has once again meant the AUD/USD has failed to break the now key .7050 level. It will be a busy week for this pair with Australian inflation data scheduled for tomorrow and the U.S. FOMC meeting on Thursday. We continue to heavily favour selling rallies in the current environment, especially should we see levels near .7050 again.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.6940 | 0.6820 | 0.7050 | 0.6829 - 0.7042 |
AUD/GBP (GBP/AUD)
The Australian dollar has fallen from its highs against the U.K. pound seen last week. Risk sentiment and commodity pricing has once again (via the AUD/USD exchange rate declines) been the primary driver of the changes in pricing for this pair. Australian inflation numbers tomorrow and U.K. GDP data on Thursday add to the picture this week. Whilst favouring selling rallies in this environment given the significant recent volatility observed we prefer to wait for levels close to resistance and last week’s highs for entry.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.4885 | 0.4780 | 0.4960 | 0.4803 - 0.4945 |
| GBP / AUD | 2.0471 | 2.0161 | 2.0920 | 2.0224 - 2.0819 |
AUD/EURO (EURO/AUD)
The Australian dollar has fallen against the Euro from last week’s highs and like the other AUD pairs we cover is representative of the declines seen in the AUD/USD exchange rate as commodity price and risk concerns weigh on sentiment. These issues will continue to dominate this pair during the week although the Australian inflation data tomorrow adds to the picture. We favour selling rallies in this environment and see little in the way of support until nearer .6200 (1.6129), especially should the prevailing bearish AUD sentiment continue to dominate.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6395 | 0.6215 | 0.6520 | 0.6230 - 0.6514 |
| EUR / AUD | 1.5637 | 1.5337 | 1.6090 | 1.5352 - 1.6051 |
AUD/YEN
The Australian dollar has fallen from its highs against the Japanese Yen seen last week; these were set near the 83.50 level. A solid recovery was noted in this pair during the week, this was helped by the lift in risk sentiment and key commodity pricing towards the end of the week, sentiment which also saw the Yen decline in tandem as its ‘safe haven’ appeal waned. Flow in this cross this week will again be heavily influenced by these themes, Australian inflation data tomorrow and the BOJ meeting on Friday add additional cause for volatility. We favour selling rallies in this environment.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 82.00 | 79.20 | 83.50 | 79.23 - 83.49 |
AUD/CAD
The Australian dollar is trading with a soft tone against the Canadian dollar in current trade and presently sits well below the highs from last week. The surging AUD/USD exchange rate seen towards the latter part of week derived from the improvement in risk sentiment, whilst the CAD also experienced solid gains on the less dovish than expected comments from BOC Governor Poloz and strong oil price rally. Australian inflation data tomorrow and Canadian GDP data on Saturday morning are additional factors to consider for the pair this week. We favour selling rallies as the strong upside momentum seen in the last two months of 2015 now appears to have finished.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9921 | 0.9820 | 1.0090 | 0.9883 - 1.0085 |
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Market commentary:
The case for an interest rate cut in New Zealand in 2016 took a lift last week after data which showed annual inflation falling to just 0.1% in Q4 last year. This number was well below the 0.4% forecast by the RBNZ in December. The surprise for the Reserve Bank came in the form of the weak pricing seen for many tradeable goods, falling petrol prices were the main contributor but have been well flagged amidst the turmoil seen during 2015 in the oil and energy markets. Another decline in dairy pricing last week adds to the argument for a change in the Reserve Banks bias towards lower rates although it remains to be seen whether emerging evidence of a cooling in the Auckland housing market is well enough advanced to encourage a shift in verbal rhetoric as early as this week.
Australia
The AUD, like the NZD, has drifted lower in trade since Friday after rallying nearly 2.25c against the USD from last week’s lows. Focus for the week aside from the dominant prevailing global risk theme will be on the Australian Q4 inflation print tomorrow. Forecasts centre on a moderate 0.3% rise in the headline number for the quarter whilst the core number is likely to see annualized inflation running near the bottom of the RBA’s 2-3% target band. The export price index released the following day will be of some interest and is forecast to show a further deterioration in pricing over Q4 which will put pricing running at levels some 10% lower than a year ago. A stubborn AUD/USD exchange rate over the quarter (-0.7% from Q3 only) is likely to see the terms of trade post a further decline (~-12% from a year ago). Data released yesterday showing a decline from the month prior in NAB Business confidence failed to garner any market traction.
New Zealand
The NZD has drifted lower since our last report in quiet trade into the lead-up to this Thursday’s RBNZ interest rate decision. Some degree of underperformance against other ‘risk on’ currencies has been observed, perhaps in part due to reflection on last week’s soft local Q4 inflation print. Whilst there is almost no chance that the RBNZ will cut interest rates at Thursday’s meeting the data will no doubt contribute to the RBNZ’s thinking especially in light of the weak pricing observed for many tradable goods (other than petrol). This comes despite a lower exchange rate which the RBNZ has argued will push the price of tradable goods higher and see inflation push beyond 1% in 2016, well above last week’s 0.1% annualized print. Signs that the Auckland housing market is losing steam may also give the central bank additional confidence to acknowledge that the case for further cuts to the current 2.5% rate is now stronger. December trade data is also due for release on Thursday although is unlikely to trouble the markets once focus returns to the dominant global risk theme post the RBNZ meeting.
United States
Moves in the USD have been muted since our last report, data released on Friday included a strong rise in existing home sales which reversed November’s fall, new mortgage regulations delayed November closings however and bolstered December’s print giving the market little to go on in the way of a meaningful trend. Manufacturing PMI data which rose unexpectedly failed to induce any meaningful momentum in direction. Last week’s heavy data schedule was dominated by the latest inflation reading which showed a 2.1% core annual gain, other data included an easing in the latest housing starts and better than expected Philly Fed survey. Initial weekly jobless claims moved to their weakest level in six months although the primary focus for the markets was the inherent uncertainty in the financial and commodity markets which has many questioning the Fed’s ability to raise rates a further four times this year.
Europe
The EUR has lifted in trade so far this week having finished last week trading on a soft tone in part not helped by manufacturing PMI data which eased more than expected in France, Germany and in the euro-zone on Friday. The manufacturing prints underperformed the services prints and reflect the theme seen in other countries as they deal with the China and emerging market slowdown. Euro-area new orders despite easing still posted their 14th consecutive month of expansion however, whilst much of the weakness seen in the manufacturing data was in oil-related industries. German IFO business sentiment data released overnight missed the market’s expectations driven largely by a fall in the expectations series. Trade last week was dominated by the ECB meeting at which the potential for a further easing at the next March meeting was raised. It is a relatively quiet week for the remainder of the week which will feature business and consumer confidence data along with German inflation and retail sales numbers amongst others.
United Kingdom
The GBP has drifted lower in trade so far this week in line with the overall easing seen in the other more key risk currencies. December U.K. retail sales data released on Friday came in well below expectations and included a downward revision in the November data, the markets took the often volatile monthly data in its stride preferring instead to focus on the overall trend which saw Q4 post a 1.1% gain. CBI industrial trend data released overnight saw total orders slip further in January although the price series returned to a positive reading. Immediate focus will turn to another speech (on financial stability) by the BOE Governor Carney tonight, comments from him last week placed the GBP under pressure as he focussed on soft inflation and wages growth amidst an uncertain outlook looking forward. A speech by BOE member Forbes overnight also focussed on wage growth stagnation and reiterated the earlier Carney comments that the BOE will not be raising interest rates in the foreseeable future. Focus beyond tonight this week will turn to the U.K. Q4 GDP release on Thursday night.
Japan
There will be plenty of leads for the market this week in Japan with a heavy data calendar scheduled for release ahead of the key BOJ meeting on Friday. The BOJ is expected to remain on hold at the meeting, market expectations of an easing have intensified recently as the BOJ struggles with mundane inflation levels, although Governor Kuroda gave no hints of any further easing in an interview at the weekend in Davos. The BOJ will release an ‘Outlook for Economic Activity’ report after the meeting, one of only four this year under the new monetary policy meeting schedule which reduces the number of BOJ meetings going forward from 14 to 8 per year. Focus at the press conference will centre on the current state and outlook for exports, and the reasoning (excluding oil) should the inflation forecasts be lowered. The recent uncertainty in financial markets, capex trends, and the trend in wages are likely to be key items of influence. Data released on Friday showed a decline in the latest manufacturing PMI data, whilst trade data released yesterday showed y/y exports posting their largest decline since September 2012, imports fell more than expected in part likely due to waning internal demand.
Canada
The recovery in the CAD has paused in trade since our last report as pricing once again reflected the energy market dynamics in overnight trade after pricing fell on the back of news that Iraq’s oil output had reached record levels last month. The fall halted the two-day rally which saw prices post their largest percentage gains since 2008. Canadian data released on Friday saw inflation come in under expectations, the core number posted its second consecutive large decline in December and will likely cause concern for the BOC. The data comes on the back of optimistic comments last week from Governor Poloz at the BOC interest rate meeting. Retail sales data also released on Friday printed well above the market consensus forecasts. The Canadian data calendar is empty until Friday (Sat. morning NZ time) which will once again leave the CAD highly dependent on further oil market news.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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