NZD drifts lower on dovish RBNZ and USD and AUD strength; USD outperforms on Trump's promised tax package and meetings with global leaders; AUDUSD encounters strong resistance at the 0.7700 level, unable to extend gains despite 6.5% rise in iron ore price

By Howard Willcox*:

Equity markets continue to rally on the back of the return of risk. US markets were at record highs overnight, following Trump’s U-turn last week on ‘One China’ policy and his more realistic approach in dealing with Japan’s Abe over the weekend summit meeting. Good data from China released last week and heightened odds of a “phenomenal” tax cut deal in the US have spurred renewed demand for more risk-on trades. In the weekend Japan/US summit talks exchange rate concerns previously espoused by President Trump were not discussed and he did not demand a bilateral trade deal. Trump’s talks with Canada’s PM Trudeau have also gone smoothly with supportive comments from both leaders around bilateral trade. So with all Trump related news flow this week being risk positive look for the equity market rally to continue over the next few days. Also of note this week are inflation expectations, with CPI numbers for the UK out later tonight and data from the US on Wednesday night. Fed Chair Yellen is giving her 2 day Humphrey-Hawkins testimony in front of the US Congress from tomorrow and any suggestion that a March rate increase is still in the mix, would see further USD advances.

Major Announcements last week:

  • RBNZ leaves rates unchanged
  • Chinese Trade Balance 355b vs 295b expected
  • UK Manufacturing Production 2.1% vs 0.3% expected
  • US Consumer Sentiment 95.7 vs 97.9 expected
  • Japanese GDP 0.2% vs 0.3% expected
  • Chinese GDP 2.5% vs 2.4% expected

NZD/USD

The New Zealand dollar, after trading as low as 0.7154 yesterday, is marginally higher at 0.7180 as it continues to suffer the fallout from last week’s softer than expected RBNZ statement and the better USD sentiment. Next major support level is around 0.6860 last seen on 23rd December 2016, but given the still solid economic data we doubt this level will be threatened anytime soon. Immediate support is around 0.7115 but if Trump’s US tax plan disappoints, look for a bounce back to 0.7300 and above.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7181 0.7115 0.7260 0.7154 - 0.7374

NZD/AUD (AUD/NZD)

New Zealand dollar continues to underperform against the Australian dollar, now trading around 0.9363 (1.0680). Better GDP forecasts from the RBA and diminished chances of another AUD rate cut have given the Australian dollar a leg up on this cross. Minor support is at 0.9334 (1.0713) then 0.9280 (1.0661)

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9355 0.9280 0.9430 0.9368 - 0.9630
AUD / NZD 1.0689 1.0626 1.0661 1.0384 - 1.0675

NZD/GBP (GBP/NZD)

The New Zealand dollar still trading in a 0.5700-0.5800 (1.7543-1.7241) range against the UK Pound where it has spent the last 5 days. The New Zealand dollar still a little soft against a firmer GBP, if 0.5720 breaks look for a move back to the 0.5675 level.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5730 0.5720 0.5914 0.5739 - 0.5913
GBP / NZD 1.7453 1.7094 1.7482 1.6913 - 1.7426

 NZD/CAD

The New Zealand dollar continues to fall over this cross and is currently at 0.9381 (1.066) after the Canadian dollar has firmed on the back of the better than expected outcome of the Trudeau/Trump meeting. The 0.9550 1.0471) level looks far away for the NZD now after the RBNZ announcement last week and immediate support is now around the 0.9350 (1.0695) level. 0.9460 (1.0570) should check any NZD advances over the next few days.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9381 0.9350 0.9460 0.9388 - 0.9653

NZD/EURO (EURO/NZD)

The New Zealand dollar is still holding firm against the EUR now at 0.6772 (1.4765) within a weekly 0.6728-0.6837 range (1.4862-1.4626). Price action has been fairly flat over the last couple of nights but we still favour a move towards the 0.6900 level over the next week or so as concerns from within Europe continue to pressure the single currency.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6773 0.6730 0.6800 0.6739 - 0.6879
EUR / NZD 1.4765 1.4705 1.4858 1.4537 - 1.4838

NZD/YEN

The New Zealand dollar has recovered from last week's 80.64 low against the Japanese Yen and is currently sitting around 81.55.  Short term resistance is at 82.08 and we look for a test of this level over the next few days. The more positive news out of the Abe/Trump meeting should help the JPY stabilise, but underlying fundamentals continue to favour the NZD.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.64 80.65 82.45 81.22 - 82.49

AUD/USD

The Australian dollar is now at 0.7665 having had a better few days against the USD. The 0.7688 level is proving a tough level to break but the better GDP forecasts and higher base metal prices have added confidence to AUD trading. Positive Chinese inflation data later today may boost AUD momentum, however changes in the USD situation carry more weight at the moment.
DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7672 0.7605 0.7710 0.7608 - 0.7688

AUD/GBP (GBP/AUD) 

Currently around 0.6123, the Australian dollar has marginally strengthened against the UK Pound over the last few days. Overall it continues to trade within a 0.6067-0.6170 range (1.6482-1.6207). Although the news has been more positive for the GBP of late we still favour the AUD in this cross and look for consolidation at current levels with the risk of a break above 0.6170, targeting 0.6230.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6125 0.6050 0.6150 0.6088 - 0.6171
GBP / AUD 1.6327 1.6260 1.6528 1.6204 - 1.6424

AUD/EURO (EURO/AUD)

Now trading around 0.7235 (1.3820) the Australian dollar is still grinding higher against the Euro, up from the 0.7153 (1.3980) level seen only 4 days ago. Not surprising given the better economic data now emerging from Aussie. Given the political uncertainty increasing weekly as French elections creep closer and Greek problems re-emerging we look for the EUR to remain under pressure.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7236 0.6998 0.7312 0.7130 - 0.7224
EUR / AUD 1.3820 1.3676 1.4288 1.3842 - 1.4026

AUD/YEN

The Australian dollar continues its bounce on the JPY now at 87.20, up from 85.34 seen 4 days ago, although the JPY made up some losses on the back of the better Japan/US summit meeting, these gains appear limited and we look for a target of 87.50 over the next few days.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 87.22 87.00 87.50 85.40 - 87.13

AUD/CAD

Currently at 1.0020 (0.9980) the  Australian dollar is marginally lower against the CAD which received a boost from the more positive outcome of the Trump/Trudeau meeting. However, given the better GDP forecasts the fundamentals continue to look more attractive for the Aussie and we favour a move back to the 1.0080 (0.9920) level over the next few days.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 1.0022 0.9995 1.0050 0.9998 - 1.0067

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Market commentary:

Equity markets continue to rally on the back of the return of risk. US markets were at record highs overnight, following Trump’s U-turn last week on ‘One China’ policy and his more realistic approach in dealing with Japan’s Abe over the weekend summit meeting. Good data from China released last week and heightened odds of a “phenomenal” tax cut deal in the US have spurred renewed demand for more risk-on trades. In the weekend Japan/US summit talks exchange rate concerns previously espoused by President Trump were not discussed and he did not demand a bilateral trade deal. Trump’s talks with Canada’s PM Trudeau have also gone smoothly with supportive comments from both leaders around bilateral trade. So with all Trump related news flow this week being risk positive look for the equity market rally to continue over the next few days. Also of note this week are inflation expectations, with CPI numbers for the UK out later tonight and data from the US on Wednesday night. Fed Chair Yellen is giving her 2 day Humphrey-Hawkins testimony in front of the US Congress from tomorrow and any suggestion that a March rate increase is still in the mix, would see further USD advances.

Australia

A surge in iron ore prices of around 6.5% helped extend its rally on increasing demand from the Chinese market. The AUD failed to follow through as it has encountered strong resistance around the 0.7700 level against the USD and the market is perhaps a little nervous pushing the currency too far, ahead of Thursdays January employment data. The RBA forecasts released on Friday confirmed earlier expectations showing a bounce back in economic growth of 2% in the year to June 2017 to 3% in the year to December. One of the factors responsible for a large part of the boost is an increase in liquid natural gas exports as projects are completed and come into production. These have the ability alone to boost GDP growth by 0.5% in both 2017 and 2018 years.

The 0.5% drop in GDP in the September quarter was largely attributed to “temporary” factors, disruptions to coal supply and bad weather that caused a delay in construction. The chances of any further RBA rate cuts are starting to look even more remote, which will over the medium term be AUD supportive.

New Zealand

The New Zealand dollar has continued to drift lower over the last few days, a knock-on effect from the more dovish than expected RBNZ statement last week and reflection of the stronger US unit. The New Zealand economy is still solid and dairy prices on the uptrend, which to some extent will continue to underpin the New Zealand dollar. However the USD will hold sway over the Kiwi and at the moment all the news is positive for the US and any increase in the US Fed’s tightening profile will pressure the NZD. But, if President Trumps “Phenomenal” tax deal disappoints the New Zealand dollar may well regain its wings and head towards the 0.7500 level.

United States

The US market has opened the week on a very positive note with US equities again making record highs. This is still attributed to the promises of the “phenomenal” tax package by President Trump. The risk of course is that if this is further delayed or disappoints any market retracement could be sharp and brutal. Also adding to the positive sentiment were the outcomes of Trump’s meetings with both the Japanese PM Abe and Canadian PM Trudeau. Both of these meetings ended on a positive note with little mention of contentious trade or currency issues that were a feature of Trump’s campaign rhetoric. Markets will also be watching for any signs of a March date for another rate hike from the Fed when Fed Chair Yellen gives her semi-annual testimony before the US Congress starting from tomorrow. Any deviation from that previously advised would see a USD spike.

Europe

More confirmation over the weekend that Greece is back on the front burner with comments from EC President Jean-Claude Junker, that the Greek bailout program may fall apart. This helps to reaffirm recent IMF comments that more debt write-off for Greece was needed to restore debt sustainability. This will no doubt be one of the key subjects at this week’s Eurogroup finance ministers meeting, starting February 20th where the Greek bailout will be discussed. The IMF wants other eurozone countries to offer debt relief to Greece, writing off some of their loans in a bid to stop its debts running out of control once again. But there is a firm pushback from other EU members on this, with arguments from Germany’s finance minister that it violates the terms of the Lisbon Treaty. Greek PM Tsipras has rejected any suggestion of further austerity for Greece commenting that other EU nations need to be “more careful towards a country that has been pillaged and people who have made, and are continuing to make, so many sacrifices in the name of Europe".........so much for European unity..!!
In other news, IMF Christine Lagarde at a conference in Dubai warned that political instability also threatens the continent and that she was worried about the outcome of several of the upcoming European elections and the threat they pose to Eurozone unity. The EUR dropped to 1.0607 on Friday, the lowest level since mid-January and capping off a week of the worst declines since November. It has opened today even lower around the 1.0590 mark.

United Kingdom

A slew of economic data due on Tuesday night is expected to show higher petrol and food prices lifting inflation to 2% in January compared with a year earlier, up from 1.6% in December. This would be the first time consumer prices inflation has hit the Bank of England’s target of 2% since December 2013, with Office for National Statistics data predicted to show the rate of price growth has doubled in four months. Further price rises are expected to flow through given the substantial drop of the GBP after the Brexit result acts to push up import costs. The GBP was more resilient to a firmer USD as December data for Industrial and manufacturing production more than doubled forecasts with the first up 1.1% (yoy 4.3%) and the second 2.1% (yoy 4%) when compared to the previous month. Also encouraging was the goods trade balance for the same month which showed a smaller deficit than was expected. With this more resilient data, we may be starting to see the GBP’s overall decline at an end.

Japan

The Japan/US summit appeared to go well over the weekend with Japanese PM Abe commenting that he was optimistic that a good outcome could be achieved in later trade talks. Initially the USD rose against the JPY back over the 114.10 level as the leaders delegated the task of overseeing economic discussions to the vice president and deputy prime minister. Overshadowing the talks were heightened security concerns, after North Korea conducted a test missile firing, but this prompted a solid statement of support from the US president.

The latest release of Japanese GDP data for Q4 was slightly lower-than expected at 0.2% QoQ vs 0.3% exp and 0.3% previous. While annualized GDP (seasonally adjusted) YoY was 1% vs 1.1% exp and 1.3% previously. Although the headline data was disappointing, inflationary trends were marginally higher, which is encouraging given the efforts by the Bank of Japan and government to increase inflation.

Canada

News out for Canada that ratings company, Fitch Ratings, is warning that the country’s prized standing in the eyes of creditors may suffer because of protectionist measures proposed by U.S. President Donald Trump. In a report last Friday, a Fitch research team commented that nations with close ties to the world’s largest economy, such as Canada, are “most at risk” of damage to their credit fundamentals. Although most of Trump’s rhetoric has centred on Mexico, Canada’s reliance on US trade is huge, with around 75% of Canadian exports going to the US and concerns were mounting that Canada could end up as collateral damage in any trade action against NAFTA. Yesterday’s meeting between Trump and the Canadian PM Trudeau appear to have been positive, allaying Canada’s fears that they may be lumped into the same unfair trade assertions levelled at Mexico. The ending press conference was respectful and benign with nothing particularly negative or positive for the Canadian dollar.  Trump simply said in regards to NAFTA, they will tweak trade with Canada - commenting that it's a much less severe situation than on the Southern Border, which is an extremely unfair situation.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »

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