By Ian Dobbs*:
Odds for the second move up in US rates took a severe hit after the latest May Nonfarm payrolls employment release on Friday. The miss on expectations which was significant was below even the lowest forecast and saw expectations of a move this month fall by ~ 20% to under 5%. July expectations have also fallen greatly from around 55% to 27% after the miss which saw the headline number print at the addition of just 38k jobs vs. the 160k expectations. The data was the worst since September 2010 and was exacerbated by downwards revisions which totalled 59k over the previous two months. It remains to be seen how much should be read into one number in what is a volatile series, although a lack of comments on the timing of future hikes from Fed chair Yellen overnight appears to indicate that the markets discounting of near term rate hikes is warranted.
Major Announcements last week:
- Japanese Industrial Production, 0.3% m/m vs. -1.4% exp. (Apr.)
- NZ ANZ Business Confidence, 11.3 vs. 6.2 prior. (May)
- Australian Building Permits, 3.0% vs. -2.8% exp. (Apr.)
- US Personal Spending, 1.0% vs. 0.7% exp. (Apr.)
- Canadian Q1 GDP, -0.2% m/m vs. -0.1% exp. (Mar.)
- US Chicago PMI, 49.3 vs. 50.9 exp. (May)
- NZ Q1 Terms of Trade, 4.4% vs. -0.2% exp.
- NZ GDT Dairy Price Index, 3.4% vs. 2.6% prior.
- US ISM Manufacturing PMI, 51.3 vs. 50.4 exp. (May.)
- Australian Q1 GDP, 1.1% q/q vs. 0.8% exp.
- Australian Retail Sales, 0.2% m/m vs. 0.3% exp. (Apr.)
- ECB Deposit Rate, -0.4% as exp.
- US Nonfarm Payrolls, 38k vs. 160k exp. (May)
NZD/USD
The rally in the New Zealand dollar against the USD which began early last week has continued since our last report. Initial strength last week came from better than expected NZ and AU data and culminated on Friday with a large miss in the latest US nonfarm employment report which saw the USD lurch immediately lower. Sentiment towards the NZD this week will be dominated by the RBNZ interest rate decision and commentary on Thursday. This afternoon’s RBA cash decision will also interest, especially given the recent strong gains in the NZD/AUD cross. First resistance is now eyed near Friday’s highs in the .6960/.6970 area and then critically .7050/60. Look for buying interest to emerge in the .6835/50 zone.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6915 | 0.6850 | 0.6970 | 0.6709 - 0.6961 |
NZD/AUD (AUD/NZD)
The New Zealand dollar has eased against the Australian dollar since our last report although not before reaching highs around .9485 (1.0543) in the interim. Strong Australian data last week was unable to prevent further NZD gains initially although the cross has now fallen over 1c from its highs, perhaps in part due to re-positioning ahead of today’s RBA meeting. Critical to the cross also will be Thursday’s RBNZ rate call. The sharp fall from the highs has us favouring further downside although the falls mean resistance at the highs is now distant.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9378 | 0.9250 | 0.9485 | 0.9279 - 0.9496 |
| AUD / NZD | 1.0663 | 1.0543 | 1.0811 | 1.0530 - 1.0777 |
NZD/GBP (GBP/NZD)
The New Zealand dollar has continued to advance against the UK pound since our last report, although sits over 1% off its highs in current trade. The move continues to be a manifestation of the weak GBP (relative to the strong NZD) on the back of polls which are now showing a lead by UK voters who wish to leave the EU in the coming referendum. The NZD in contrast has felt the tail wind of the weaker USD since Friday’s US employment data miss. Resistance is now seen in the .4830/45 zone (2.0704/2.0640 support) whilst first support is now seen around .4735 (2.1119 resistance). Key events to watch this week are the RBNZ cash rate decision (Thursday), continued Brexit polling, and to a less extent UK manufacturing numbers tomorrow.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4782 | 0.4735 | 0.4830 | 0.4572 - 0.4819 |
| GBP / NZD | 2.0913 | 2.0704 | 2.1119 | 2.0750 - 2.1871 |
NZD/CAD
The New Zealand dollar has eased against the Canadian dollar since our last report although not before trading to highs near .9000 on the close last week. Both currencies benefitted markedly at the end of the week from the sharply weaker USD although gains earlier in the week were seen in the cross as the NZD rose after better than expected local data and a sharply higher data driven AUD. Losses have been seen this week on the back of the easing NZD/USD and firm CAD which continues to be bolstered from a strong oil price. This week’s RBNZ cash call looks to be the most critical event for the cross this week. We lack a view here.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8865 | 0.8700 | 0.9000 | 0.8759 - 0.9007 |
NZD/EURO (EURO/NZD)
The New Zealand dollar has edged lower against the Euro since our last report. Highs last week reached around .6150 (1.6260) and came ahead of the close as thin liquidity in the NZD drove it higher after the US employment report. Sentiment had already been positive towards the NZD over the week on the back of the sound local data and higher data driven AUD. The RBNZ interest rate decision and any fall-out from today’s RBA rate decision are the key events to watch for this cross this week. We continue to favour consolidation in the cross at present.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6088 | 0.5900 | 0.6150 | 0.6029 - 0.6160 |
| EUR / NZD | 1.6598 | 1.6474 | 1.6949 | 1.6234 - 1.6588 |
NZD/YEN
The New Zealand dollar has eased against the Japanese Yen since our report last week. Whippy trade which has largely been contained within 73.80/74.70 has been noted as both the JPY and NZD benefitted to a similar extent from the weaker USD. Liquidity considerations in the NZD have been a key driver of any moves in recent days although this week will be dominated by any fallout from Thursday’s RBNZ cash rate announcement. The pair appears relatively directionless for the time being although this could change on Thursday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 74.32 | 73.50 | 75.40 | 73.81 - 75.38 |
AUD/USD
The Australian dollar has continued to climb against the USD since our last report. Last week’s gains were driven initially by the better than expected local data although the positive sentiment extended on Friday after the large miss in the US employment numbers. This has seen the AUD leap to highs around .7380 so far ahead of weak resistance at .7400. Further resistance is noted at .7450 and .7480. Critical to whether this advance can extend further is today’s RBA cash rate decision and commentary. We favour higher levels given the reversal in USD sentiment and expect buyers to emerge towards .7300.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7370 | 0.7300 | 0.7400 | 0.7203 - 0.7380 |
AUD/GBP (GBP/AUD)
The Australian dollar remains on a solid footing against the UK pound in trade this week. Gains have continued since our last report and come on the back of further polls out of the UK which have showed a shift in favour of the UK leaving the EU. Many polls have now moved to the ‘leave’ vote leading and have undermined the short lived bounce that the GBP enjoyed from a weaker USD on Friday. Polling on the issue will continue to be critical this week for the cross although immediate attention now turns to today’s RBA cash rate announcement and commentary. Expect volatility to remain high in coming days. We favour buying dips below .5050 (1.9802) for now, although making calls on swinging polls is fraught with difficulty.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5095 | 0.4975 | 0.5120 | 0.4921 - 0.5116 |
| GBP / AUD | 1.9627 | 1.9531 | 2.0101 | 1.9546 - 2.0321 |
AUD/EURO (EURO/AUD)
The Australian dollar sits largely unchanged against the Euro in trade since our last report. Both currencies emerged as victors on Friday after the US employment report miss whilst little response was seen earlier from the EUR after Thursday’s (on expectations) ECB meeting. Immediate interest for the cross now turns to today’s RBA cash rate announcement and statement this afternoon. We lack any real bias and continue to see range trading as the most likely outcome this week especially should today’s RBA meeting turn out to be a non-event.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6491 | 0.6390 | 0.6560 | 0.6434 - 0.6561 |
| EUR / AUD | 1.5405 | 1.5244 | 1.5649 | 1.5241 - 1.5541 |
AUD/YEN
Volatility has been the order of the day for the Australian dollar against the Japanese Yen since our report last week. Both currencies rallied strongly on Friday after the US employment report shocker although the JPY outpaced the AUD and led to lows near 78.00 in the cross. Recent JPY weakness (against the USD) has seen the cross bounce from its lows however. Of immediate interest for the cross is this afternoon’s RBA cash rate decision and statement. We expect more choppy trade this week within 78.00/80.80 but note today’s RBA risk.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 79.26 | 78.00 | 80.80 | 78.05 - 80.77 |
AUD/CAD
The Australian dollar has eased against the Canadian dollar since our last report. A much weaker than expected US employment report on Friday has seen both currencies rally against the USD and the AUD reach highs above .9540 against the CAD after the data. Losses have been noted since as the CAD built on Friday’s momentum to extend its gains this week, on part on the back of continued support from the strong price of oil but also on the back of talk of decent trade flow USD/CAD selling. Of importance for the cross is today’s RBA cash rate decision this afternoon. We lack a clear view this week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9449 | 0.9300 | 0.9550 | 0.9426 - 0.9539 |
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Market commentary:
Odds for the second move up in US rates took a severe hit after the latest May Nonfarm payrolls employment release on Friday. The miss on expectations which was significant was below even the lowest forecast and saw expectations of a move this month fall by ~ 20% to under 5%. July expectations have also fallen greatly from around 55% to 27% after the miss which saw the headline number print at the addition of just 38k jobs vs. the 160k expectations. The data was the worst since September 2010 and was exacerbated by downwards revisions which totalled 59k over the previous two months. It remains to be seen how much should be read into one number in what is a volatile series, although a lack of comments on the timing of future hikes from Fed chair Yellen overnight appears to indicate that the markets discounting of near term rate hikes is warranted.
Australia
Trade in the AUD last week was dominated by a raft of key local data which beat expectations and a large miss in the latest key employment numbers out of the US. The latter has put the USD under heavy pressure in recent trade and all but eliminated the market’s pricing on the prospects for a June rate move in the US. Local data was dominated by the Q1 GDP report which outstripped expectations as the annual growth rate topped 3%. The latest retail sales numbers which were disappointing reflected soft demand and aggressive price discounting. Trade data for April was better than anticipated as rising export volumes, a rebound in the iron ore price and weaker imports helped the deficit shrink from March. Building permits numbers surprised to the upside on the back of a surprise resurgence in (the volatile) ‘high rise’ approvals data. Private sector credit numbers grew 0.5% in April, a number which matched the average of the opening quarter. The data showed a continued cooling in new lending to the housing sector. Focus for this week centres on today’s RBA interest rate decision where expectations are for rates to remain on hold.
New Zealand
The NZD advanced strongly at the end of last week on the back of a sharp USD sell-off after the latest US nonfarm payrolls jobs data. The numbers which failed to reach even the most pessimistic estimate saw the USD immediately marked lower after the announcement as it effectively eliminated the prospect of a US rate move later this month. The move up in the NZD backed up gains from earlier in the week on the back of strong Australian data and on the back of solid second tier local releases. These included a lift in the latest ANZ business confidence survey and strong building consents numbers for April. Other data included positive terms of trade numbers for the first quarter and another lift in the overall index for the latest GDT auction. Focus for this week is Thursday’s RBNZ rate decision where market expectations are weighted towards no move from the central bank. Expect dovish overtures and the signalling of future rate decisions being conditional on future developments.
United States
Sentiment shown towards the USD last week has been dominated by Friday’s nonfarm payrolls employment data release. The large undershoot of expectations in the report saw the market sell the USD heavily after the release and severely reduce the odds of rate hikes in the near term. A fall in the unemployment rate to 4.7% (from 5.0%) was driven by a drop in the participation rate as more workers abandoned their job search. The data also showed a decline in weekly hours worked although a minor positive was the lift in wages. Comments from the Fed’s Yellen overnight were upbeat in the assessment of the US economic outlook and indicated rate hikes were coming, although unlike her other recent comments failed to give any indication on the likely timing. Other data of interest last week included a miss in the ISM Non-manufacturing report which countered the gains seen in the earlier ISM Manufacturing release. Personal spending beat expectations although both the Chicago PMI and Dallas Fed manufacturing survey disappointed. Consumer confidence numbers were weak whilst data on personal income matched the consensus. Expect a much quieter week this week with key data points lacking.
Europe
Events critical to the Euro last week were dominated by the ECB interest rate decision and later numbers on US employment. The former created minimal fuss after the ECB left rates on hold as expected and stuck to their low inflation script. Forecasts on inflation edged marginally higher although if achieved would mean that the ECB would have missed its inflation goal for nearly six years. A large miss in the US employment numbers on Friday saw the EUR marked higher as the USD dropped immediately in response to the disappointment. Data released out of Europe earlier in the week was limited but included numbers on German inflation and EU confidence which edged their consensus. German unemployment was seen reaching post reunification lows whilst the manufacturing PMI numbers for the euro-zone met expectations and remained in expansionary territory. Data this week is again relatively light weight and starts with numbers on euro-zone Q1 GDP tonight.
United Kingdom
News from the latest polling on the issue of the UK referendum on EU membership continues to dominate sentiment displayed towards the GBP. The latest YouGov poll has indicated that 45% of Britons would vote to leave the EU compared with 41% who would vote to stay in. Polls from ICM and TNS both also showed more support for those in favour of leaving the EU. The growing concern over the UK leaving the EU has seen GBP volatility reach seven year highs and has contributed to the GBP being the only currency covered by us to lose ground against the USD since Friday’s large US employment data disappointment. Economic indicators of interest last week included mortgage lending and approvals numbers which missed the consensus. PMI indicators were mixed. The manufacturing and services numbers printed above the consensus whilst the construction print missed its estimate by a reasonable margin as it showed a decline from the month prior. Data of interest this week includes numbers on house prices, trade, and manufacturing/industrial production although again look for Brexit headlines to dominate.
Japan
External events dominated by news flow out of the US has been the dominant theme for trade in the JPY since our last report. These influences have seen the JPY advance on the sharply weaker USD sentiment that has pervaded since Friday’s large US May employment miss. Local data of note last week included retail sales numbers which fell less than expected and household spending and industrial production numbers which beat their consensus estimates. Other indicators included housing starts which built on March’s strong number and construction orders data which fell sharply from the month prior. Capital spending for Q1 declined from the quarter prior whilst the latest labour cash earnings numbers showed a sharp contraction from the month prior. Other events of interest included comments from PM Abe who indicated a plan to delay the scheduled sales tax. The data calendar this week is dominated by tomorrow’s current account and GDP numbers, other indicators of lesser interest includes data on bank lending, core machinery orders and producer prices.
Canada
Trade in the CAD like all the currencies covered was heavily impacted by the influence of a sharply weaker USD on Friday after the latest US nonfarm payrolls employment number miss. Oil prices remain CAD supportive as further slowdowns in Nigeria saw the price of Brent close at its highest level for the year today, a move which comes despite the OPEC oil cartel failing to conclude any production cap at its meeting in Vienna last week. Local data of interest last week included March GDP numbers which failed to meet expectations. The latest producer prices also came in under the market estimate whilst the Q1 current account which matched expectations failed to cause any stir. Data on Friday included labour productivity numbers which also matched expectations and April trade data which showed a small narrowing in the deficit from the month prior. The data was overwhelmed by the simultaneous release of the poor US data which saw the CAD immediately marked higher against its neighbouring currency. Of interest this week is today’s Ivey PMI, data on the latest building permits and housing starts/new house prices and employment numbers on Friday.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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