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Geopolitical tensions prevent Doha resolution; volatile week ahead for commodity-linked currencies; strong correlation between oil price and equities continues

Currencies
Geopolitical tensions prevent Doha resolution; volatile week ahead for commodity-linked currencies; strong correlation between oil price and equities continues

By Sam Coxhead*:

Trade in the commodity based currencies got off to a wild start this week after Sunday’s energy meeting in Doha between 16 of the key oil producer nations failed in its bid to produce an agreement to cap oil production.

Geopolitical tensions between Saudi Arabia and Iran would appear to have prevented a successful outcome.

This came after the Saudi’s insisted that Iran would also need to be included in the agreement, an outcome that had previously been ruled out by Iran as they ramp production to pre-sanction levels.

Early losses in oil and the commodity currencies have quickly unwound as oil rallied on news that a Kuwaiti oil worker strike would knock 60% (~1.7 million barrels per day) of Kuwait’s oil production offline.

The oil rally was once again embraced by the equity markets in a continuation of the theme of a strong link between equities and oil which has prevailed in 2016.

Look for commodity based currencies like the CAD, AUD, NZD and NOK to continue to have a volatile week as the speculative positioning in oil unwinds this week in the aftermath of the Doha impasse.

Major Announcements last week:

  • UK Core Inflation, 0.4% m/m vs. 0.3% exp. (Mar.)
  • NZ Food Price Index, 0.5% m/m vs. -0.6% prior (Mar.)
  • US Retail Sales, -0.3% m/m vs. 0.1% exp. (Mar.)
  • BoC Cash Rate, 0.5% as exp.
  • Australian Employment, 26.1k vs 18.5 k exp. (Mar.)
  • Australian Unemployment Rate, 5.7% vs. 5.9% exp. (Mar.)
  • BoE Cash Rate, 0.5% as exp.
  • US Inflation, 0.1% m/m vs. 0.2% exp. (Mar.)
  • Canadian Manufacturing Shipments, -3.3% vs. -1.5% exp. (Feb.)
  • US Industrial Production, -0.6% m/m vs. -0.1% exp. (Mar.)

NZD/USD

The New Zealand dollar is sitting on its yearly highs in current trade. Resistance from late March has broken after the NZD/USD enjoyed a sharp bounce after yesterday’s earlier sell-off post the Doha oil meeting disappointment. There has been evidence of stop loss buying after the resistance was breached. Commodity drivers have again been a key factor behind the move although the USD (DXY index) has fallen since the middle of last week, local inflation data yesterday has also helped somewhat. Look for a quiet data week locally and the NZD to derive its sentiment from offshore events, although tonight’s dairy auction should provide a passing interest.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6991 0.6820 0.7050 0.6824 - 0.6995

NZD/AUD (AUD/NZD)

The New Zealand dollar has enjoyed some relief against the Australian dollar in trade this week after last week’s falls. Flow in the pair helped drive the NZD to lows around .8880 (highs 1.1261) last week, although the story has been very different this week after the NZD opened sharply higher yesterday on the back of the Doha oil meeting impasse. A strong rebound in the oil price has helped moderate the gains in recent hours however. Attention for the cross now turns to this afternoons RBA minutes before overnight events of interest which include a speech from the RBA’s Governor and the latest GDT dairy price auction. The pair remains very mid-range and somewhat directionless as expected.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8982 0.8830 0.9050 0.8897 - 0.9073
AUD / NZD 1.1131 1.1050 1.1325 1.1021 - 1.1240

NZD/GBP (GBP/NZD)

The New Zealand dollar has edged higher against the UK pound since our last report. Both the GBP and NZD have enjoyed solid gains this week against the USD, although a strong rebound in commodities (led by oil) and a break of prior March resistance in the NZD/USD exchange rate in recent hours have helped fuel the momentum. For now we continue to expect this NZD to move higher targeting .5000 (2.0000) over the days and weeks ahead, led by continued enthusiasm for commodities. Data considerations of interest this week for the cross include the GDT dairy price auction tonight, UK employment data tomorrow and UK retail sales data on Thursday.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4887 0.4825  0.4900 0.4805 - 0.4899
GBP / NZD 2.0460 2.0408 2.0725 2.0414 - 2.0810

 NZD/CAD

The New Zealand dollar has rallied against the Canadian dollar in choppy trade so far this week. Prices in the cross initially spiked higher yesterday on the news that the Doha oil producer meeting had failed to secure a production cap. A recovery in the oil price led by news of a Kuwaiti oil strike has since moderated the gains. Local inflation data released yesterday was largely overlooked after it printed near consensus forecasts. Look for oil prices to again have a strong influence this week. Canadian data of interest includes inflation and retail sales numbers on Friday.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8920 0.8850 0.9000 0.8788 - 0.8988

NZD/EURO (EURO/NZD)

The New Zealand dollar has enjoyed solid gains against the Euro since our report on Friday. These come on the back of the sharp reversal in commodity currencies in recent hours which initially fell heavily yesterday in response to the Doha oil meeting impasse. A strong rebound in the price of oil noted since has been helped by news of a Kuwaiti oil strike. This week should be an interesting one for the NZDEUR, as we look into the ECB meeting outcome (overnight Thursday). Tonight’s GDT dairy auction should provide some interest also. For now momentum in this cross is higher. A break of .6200 (1.6129) opens .6310 (1.5848).

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6175 0.6060 0.6200 0.6008 - 0.6183
EUR / NZD 1.6195 1.6129 1.6502 1.6175 - 1.6643

 NZD/YEN

The New Zealand dollar has continued to extend its rally against the Japanese YEN since our report on Friday. The move up is in sharp contrast to pricing yesterday which took a knock after the commodity currencies opened lower in response to the oil price falls which occurred after the weekend’s Doha oil producer meeting. A sharp recovery in commodities led by oil has occurred since which has also helped boost sentiment for risk as evidenced by broadly firmer global equity bourses yesterday and overnight. Look for external events to drive pricing this week given the light data calendars due from both countries.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 76.22 74.00 78.20 74.22 - 76.35

AUD/USD

The Australian dollar has continued to rally against the USD since our last report. The move comes on the back of mildly weaker US data since and continued support for commodity and risk currencies which comes despite an initial Doha oil meeting setback yesterday. Again look for commodity prices to have a strong influence this week (and risk). Of interest also will be the US data flow, the RBA minutes this afternoon and a speech by the RBA Governor tonight. We continue to favour buying dips overall.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7771 0.7620 0.7850 0.7605 - 0.7783

AUD/GBP (GBP/AUD)                            

The Australian dollar is largely unchanged against the UK pound since our report on Friday. A failure at the Doha oil producer meeting over the weekend saw the AUD move sharply lower in initial trade this week although news of Kuwaiti oil strikes has seen the oil price recover its declines and move higher so far on the week. A sharp rally by the GBP against the USD has meant that so far the cross has only marginally lifted on the week. Look for commodity pricing to continue to have a heavy influence on the AUDGBP this week. Data events of note are today’s RBA minutes and the UK employment and Retail Sales releases.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5430 0.5300 0.5600 0.5343 - 0.5462
GBP / AUD 1.8411 1.7857 1.8868 1.8308 - 1.8717

AUD/EURO (EURO/AUD)

The Australian dollar has edged higher against the Euro since our last report. Recent trade has seen last week’s high eclipsed and comes after yesterday’s initial heavy sell down of the AUD after Sunday’s Doha oil producer meeting failed to reach a production cap agreement. We expect more volatile trade this week ahead of the ECB meeting on Thursday and as speculative positions in the oil market continue to unwind over the week. We favour buying dips while the sentiment towards commodities continues to improve

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6865 0.6750 0.6910 0.6668 - 0.6877
EUR / AUD 1.4565 1.4472 1.4815 1.4541 - 1.4996

AUD/YEN

The Australian dollar has lifted against the Japanese Yen since our report on Friday. The move comes after a large sell-off yesterday which occurred in the commodity currencies post the Doha oil producer meeting impasse. Oil prices which fell heavily on the open have since reversed in trade, on the news of supply cuts in Kuwait which will see over 60% of production cut as oil workers strike. The oil recovery has aided risk sentiment which has seen the AUD benefit at the expense of the Yen. With light data calendars out of both countries this week expect oil, risk and the commodity environment in general, to once again have a heavy influence on the AUDJPY cross.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 84.77 82.50 86.70 82.19 - 84.96

AUD/CAD

The Australian dollar has firmed against the Canadian dollar since our report on Friday. Resistance around .9970 has capped the gains so far this week. The move up has been helped this by a rally in commodity prices and a stronger AUDUSD exchange rate, which has reached fresh 9 month + highs overnight. Rallying oil prices should keep a lid on any further gains above .9970 during the week. Canadian inflation and retail sales data will feature at the end of the week. Stronger resistance is seen in the 1.0025/50 zone.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9927 0.9850 0.9970 0.9756 - 0.9962

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Market commentary:

Trade in the commodity based currencies got off to a wild start this week after Sunday’s energy meeting in Doha between 16 of the key oil producer nations failed in its bid to produce an agreement to cap oil production. Geopolitical tensions between Saudi Arabia and Iran would appear to have prevented a successful outcome. This came after the Saudi’s insisted that Iran would also need to be included in the agreement, an outcome that had previously been ruled out by Iran as they ramp production to pre-sanction levels. Early losses in oil and the commodity currencies have quickly unwound as oil rallied on news that a Kuwaiti oil worker strike would knock 60% (~1.7 million barrels per day) of Kuwait’s oil production offline. The oil rally was once again embraced by the equity markets in a continuation of the theme of a strong link between equities and oil which has prevailed in 2016. Look for commodity based currencies like the CAD, AUD, NZD and NOK to continue to have a volatile week as the speculative positioning in oil unwinds this week in the aftermath of the Doha impasse.

Australia

The AUD has recovered well from an early setback in trade so far this week. Fresh 2016 highs against the USD have been observed in recent trade come as oil prices and the CRB commodity index have recovered impressively to be trading higher on the week so far. Initial trade on the week saw oil and the AUD marked down after an agreement was not reached in Doha between the oil country producers to cap oil production. Last week saw the AUD trade higher over the course of the week on the back of commodity gains and better than expected March employment data. The jobs growth pushed the unemployment rate lower to 5.7%, although the trend monthly employment growth at 8k has fallen markedly from the highs of around 30k seen last year. Solid gains in the latest housing finance data for both owner occupiers and investors and a surge in business conditions to 8 year highs also helped bolster sentiment. Consumer confidence was seen falling in April, although overall last week’s data does little to add to the case for an RBA rate cut next month. Look for offshore events to drive trade this week given the quiet local data calendar. Also an overnight speech from the RBA Governor and the RBA minutes today will be of interest.

New Zealand

After finishing on a strong footing on Friday the NZD continues to remain well sought after in current trade despite yesterday’s sharp fall in early trade. There has been evidence of some stop loss buying as various resistance levels were breached. The 1% plunge near the open of the week came as oil prices sagged sharply after the weekend’s Doha oil producer meeting failed to produce an agreement to limit supplies. The impasse came about after Saudi Arabia insisted that Iran (who was not in attendance) should also be bound by the agreement. NZ inflation data for Q1 released yesterday has been the other notable event so far this week. The data was slightly higher than the expectations of many economists for the quarter, although at 0.2% matched that forecast by the Reserve Bank (RBNZ). The 0.4% annual number was the seventh consecutive quarter that the annualized number had failed to top 1% (the lower bound of the 1-3% RB target), although expectations for another rate cut at next week’s OCR meeting declined after the result. Interest from here will now turn to tonight’s dairy price auction. General commodity market movements will continue to have strong bearing over the remainder of the week.

United States

The USD has drifted lower since our report on Friday. Data released at the end of the week added fuel to the trend (that had been developing since mid week) after the latest industrial production and Michigan Consumer Confidence reads both disappointed. The Michigan 5-10 yr inflation expectations series also deteriorated after it again fell back to its all time 2.5% lows. Data earlier in the week was also underwhelming after both the retail sales and inflation numbers failed to live up to expectations. Evidence of strength in the labour market remains however, after the latest weekly initial jobless claims number fell to their lowest level since 1973 (a repeat of the week to 4 March). It will be another busy week this week in the US as various Fed members again speak. Data releases include building and housing numbers tonight; manufacturing reads will feature into the week’s end.

Europe

The EUR has edged higher against the USD in trade so far this week. The move has been aided by a marginally weaker USD in overnight trade and comes ahead of what will be a much busier week this week for local data. The ECB interest rate decision dominates the week. This will see investors eagerly await the degree of concern expressed by the ECB over the appreciation of the EUR that has occurred since the last meeting. Expect willingness by ECB head Draghi to respond to any downside risks to growth and inflation that should materialise, although expectations of any further easing on top of last month’s move are mixed. Data starts tonight with the ZEW Economic Sentiment survey and euro-zone current account and will conclude with euro-zone and regional PMI’s running into the week’s end. Data last week was lacking but included German and euro-zone inflation numbers that matched expectations and softer than expected EU Industrial Production numbers.

United Kingdom

The GBP has moved higher in trade against the USD so far this week. Early declines after the open were noted in line with an oil led risk off theme, although this theme quickly reversed in trade overnight after the oil price recovered from its early Doha failure slump. Events in the UK last week were dominated by the BoE central bank meeting which passed without much fanfare after both rates and the asset purchase target were left unchanged as expected. Inflation numbers released rose to 15 month highs, although remain well adrift on the BoE target and hence represent little threat to a change in monetary policy stance in the near future. Dominating this week’s calendar is tomorrow’s employment data which will be followed by retail sales numbers on Thursday. A scheduled speech by BoE Governor Mark Carney later today is also of note.

Japan

The JPY sits near last week’s closing levels in current trade against the USD. An initial jump was observed yesterday after the Doha failure, although these gains were quickly unwound on the back of an oil price rebound and rallies in the key global equity bourses. A second strong earthquake in a few days on the island of Kyushu saw the Nikkei 225 fall 3.4% in trade yesterday after Saturday’s shake. The earthquakes are likely to see heightened demand for JPY from insurers as funds are repatriated for the rebuild. Comments from the weekend G20 meeting which suggested that the recent JPY moves have been orderly also gave the JPY a stronger tone in initial weekly trade. Data of interest last week included a drop in Core Machinery numbers, a slight dip in bank lending and another decline in Industrial Production. Capacity Utilization data released on Friday also fell from the month prior. Comments from the BOJ Governor with the WSJ yesterday included ones which noted the monitoring of the recent JPY strength impact on the inflation dynamics and hints that a further move lower in rates is possible to achieve targeted inflation. Such comments will likely heighten interest around the next BOJ meeting on April 28th.

Canada

Like the other commodity currencies covered the CAD has recovered well in recent trade after the setback in early trade yesterday. An initial plunge in the CAD came on the open yesterday as the market reacted to news that the talks between the 16 countries at the Doha meeting had failed to reach an agreement on capping production. The breakdown came after Saudi Arabia insisted that Iran also be bound by the agreement and came despite Iran not being at the meeting and having recently continued to state that they will lift production to pre sanction levels. Prices have recovered in recent trade and now trade higher for the week on the back of supportive inventory data and an oil worker strike in Kuwait which has cut more supply from global markets than the Doha agreement ever promised to. This week is a quiet one in Canada with the key data of note coming at the end of the week (inflation and retail sales.  Wholesale Sales is scheduled for release on Wednesday and will come after an earlier speech from the BoC Governor Poloz. Last week in Canada was dominated by the BoC meeting which saw the central bank leave rates on hold as expected. New house price data marginally exceeded forecasts whilst the manufacturing sales number release on Friday which fell sharply on the month prior exceeded the drop forecast.

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Sam Coxhead is a currency analyst with Direct FX You can contact him here »

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