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Better-than-expected US data and US$ strength were the main themes over the past week but there was a lack of follow through buying

Currencies
Better-than-expected US data and US$ strength were the main themes over the past week but there was a lack of follow through buying
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By Sam Coxhead*:

There were a number of key events that drove markets over the past week. 

Announcements from the European Central Bank (ECB) and the Bank of England (BOE) had big impacts as they both did their best to talk down interest rates that moved higher in line with the US.

This talk helped to weaken both the EUR and the GBP against most other currencies.

Concerns over Greece and Portugal have subsided in recent days which has helped the EUR to a certain extent.

Out of the US we have seen better than expected employment data. This has cemented the markets view that the first round of Fed tapering will occur at the September meeting.

US dollar strength has continued for much of the past week, although a lack of momentum and follow through buying has seen a small retracement over the last two days.

China is still on the radar even though the central bank has stepped in to ease funding pressures in the banking sector. The risks are there for a wider Chinese banking crisis, and they are continuing to get plenty of coverage.

However it’s most likely that this issue will play out over the longer term time horizon.

Major Announcements last week:

·  Chinese Manufacturing 50.1 as expected

·  US Manufacturing 50.9 vs 50.6 expected

·  RBA leave cash rate unchanged at 2.75%

·  Australian Retail Sales +.1% vs +.4% expected

·  UK Services PMI 56.9 vs 54.6 expected

·  BOE leave Monetary Policy unchanged as expected

·  ECB leave monetary policy unchanged as expected

·  Canadian Employment growth -.4k vs -4.2k expected

·  US Employment 195k vs 163k expected

NZD/USD 

The recent theme of volatility continued throughout last week’s trade, albeit within a relatively contained range. Initially the pair saw muddled price action as the market hurdled the 4th July holiday in the US, that came ahead of the important US employment numbers on Friday. The stronger than expected number garnered a strong move from the market. Demand for the US dollar jumped as the likelihood to early tapering of monetary stimulation from the FED increased.  The pair bounced off support at .7860 and the start to this week has seen the NZD reverse a good portion on Friday’s losses. Today’s positive NZ business sentiment numbers are the highlight of this week’s NZ economic calendar. In the US the FED’s monetary policy meeting minutes are due for release on Wednesday. These come ahead of important consumer sentiment numbers late on Friday. Easing of tensions in Europe has boosted equity markets and this has supported the NZD so far this week.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7802 0.7680 0.7860 0.7688 - 0.7859

NZD/AUD (AUD/NZD)

The recent trend of the NZ dollar outperforming the AUD remained in place last week. Given its performance over the last few months, it seems likely that the current momentum will start to wane a little around the current levels. The pair has moved towards upper end of the range for the NZDAUD (lower end of range AUDNZD), and around the .8580 (1.1655) the NZD. The weak Australian economic news continues to support the recent AUD underperformance. The focus for the pair this week will be the Australian employment numbers on Thursday. Today’s positive NZ business opinion numbers were the highlight of economic news in NZ this week.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8550 0.8380 0.8580 0.8453 - 0.8582
AUD / NZD 1.1696 1.1655 1.1933 1.1652 - 1.1830

NZD/GBP (GBP/NZD)

Last week proved to be an interesting one for this pair. New BOE Governor Carney made his mark with his first monetary policy announcement. Unusually there was an accompanying statement, with it’s clear intent to reverse the recent move higher in the interest rate market. An intended consequence of the pushing down of interest rate expectation is to undermine demand for the GBP. Following the statement, the recently buoyant GBP has come under renewed pressure. Today’s positive NZ business opinion survey is the NZ highlight for the week, with UK manufacturing and trade numbers proving this week’s focus in the UK. The push lower from the GBP has been curtailed by the .5250 (1.9050) level for the time being. It seems that further GBP underperformance will require a concerted effort from those looking to push it lower from current levels against the NZ dollar. Certainly the issues in China, and weak news from Australia are likely to temper any major increased demand for the NZD in the short term at least.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5220 0.5050 0.5250 0.5063 - 0.5253
GBP / NZD 1.9157 1.9050 1.9800 1.9037 - 1.9753

 NZD/CAD

The NZ dollar has outperformed the Canadian dollar over the last week, but the price action last been volatile at times. Friday saw better than expected Canadian and US employment numbers push the pair from its weeks highs to its lows within a few hours. But the start of this week saw that ground recovered as the tensions surround Greece and Portugal have eased. There is little news of material impact for either economy this week, so the lead will continue to come mainly from the wider market and particular the fortunes of the US dollar.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8235 0.8150 0.8350 0.8139 - 0.8266

NZD/EURO (EURO/NZD)

Last week proved to be an interesting one for this pair. The EURO gave up significant ground following the long awaited ECB monetary policy statement. ECB president Draghi instigated a forward guidance policy. This was in direct response to the interest rate markets move to price higher rates in response to moves in the US. The EURO reacted appropriately at the time, but much of the lost ground was regained on Friday following the US employment numbers. Positive US data will negatively impact the NZD more than the EURO. This factor tempers the opposing force of the ECB’s commitment to low interest rates for an extended period. On the balance the pair remains in the increasingly comfortable .5950-.6150 (1.6250 - 1.6800) range. Weaker German industrial production numbers yesterday were balanced by positive progress in Greece and Portugal.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6068 0.6000 0.6200 0.5943 - 0.6094
EUR / NZD 1.6480 1.6129 1.6667 1.6409 - 1.6827

 NZD/YEN

The NZ dollar has made grinding appreciation over the Japanese YEN throughout the course of the last week. The stimulus for the rise is less than clear. Certainly the YEN has seen sustained pressure from the US dollar and this will have been a factor. The start of this week has seen a subsidence in fears surrounding Greece and Portugal and this will have also contributed. However the pair remains within the expected range. This week sees todays positive business opinion numbers the primary focus in NZ. The BOJ monetary policy announcement on Thursday rounds out the focus for the week, albeit no change to policy expected. Further gains for the NZD are not guaranteed, as any resurgence in risk aversion win the wider market would see its recent gains easily given up.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 78.90 77.50 80.00 76.90 - 79.03

AUD/USD

The end of last week saw the Australian dollar head back toward its recent cycle lows. this came in the wake of a better than expected US employment report. It did however fail to make fresh lows, and with a lack of follow through selling the AUD has turned around. So far this week it has recovered much of those losses seen on Friday. The bounce is anything but convincing, having failed so far to attack the first line of resistance around 0.9180. It will take a break above there before we could even start to get excited about a potentially bigger correction. Until then the focus remains on further losses. However, it looks like downside momentum is starting to wane a little, and losses will prove harder work from here in the near term. Key releases to watch this week will be consumer sentiment and employment data.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9125 0.9050 0.9250 0.9037 - 0.9190

AUD/GBP (GBP/AUD)                            

Last week may well have proved a turning point for this pairing, at least in the near term. The impact of new Bank of England governor Mark Carney on the GBP has been sharp. In an effort to stamp his mark and reverse the recent increase in interest rates. He has undermined demand for the GBP, which had been performing well in line with recent data. This saw the AUDGBP put in a solid bounce off recent lows and it has so far traded up to 0.6143 (1.6279).. A move up through resistance at 0.6160 (support 1.6234) would confirm the improving picture for the AUD over the GBP. However, AUD gains won’t come easy and we may drift sideways heading into Australian employment figures on Thursday. That data could well determine near term direction for the pair. Before that we get readings on consumer sentiment tomorrow.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6108 0.6000 0.6160 0.5938 - 0.6143
GBP / AUD 1.6372 1.6234 1.6667 1.6280 - 1.6841

AUD/EURO (EURO/AUD)

The US employment report at the end of last week added a little volatility to this pair, but this has done little to change the overall picture. In the wake of the data the pair traded up to 0.7129 (down to 1.4028) before the AUD retreated sharply. ECB president Draghi’s calls to keep rates low for a long is required last week should continue to cap EUR strength in the near term. He is due to speak again this week, and he will no doubt be singing the same tune. Support for the pair comes in around 0.7000 (resistance 1.4286), which I expect to contain the AUD downside heading into Australian employment data on Thursday. If resistance around 0.7130 (support 1.4025) can be overcome, the picture will look considerably brighter for the AUD against the EURO heading forward.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7097 0.7000 0.7200 0.6947 - 0.7129
EUR / AUD 1.4090 1.3889 1.4286 1.4028 - 1.4395

AUD/YEN

The last couple of weeks have seen the Australian dollar slowly but surely grind out gains against the Japanese Yen. That trend has continued in the early part of this week, with the pair trading up to 92.34 on Monday. It has yet to have a real test of resistance at 92.50 and until that is overcome there is still the risk of further downside. Above 92.50 and the outlook does brighten. In that case the risks will be skewed to the upside with the next target being 95.00. There is plenty of data out of both countries this week that could impact the pair. The key events are the BOJ policy meeting and Australian employment, both out on Thursday.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 92.20 90.50 92.50 90.16 - 92.42

AUD/CAD

Movements in the Australian dollar had been driving this pair for much of last week. However, on Friday night we got the release of Canadian employment data that come in a fair bit stronger than expected. This saw the CAD materially outperform the AUD as it coupled with the US employment data that also beat expectation. The pair fell around 100 points during that session, but has since recovered a good portion of those losses. This leaves direction less than clear, with more choppy trade expected. It could well be up to key Australian data this week to decide near term direction. To that end we have consumer confidence and employment.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9635 0.9550 0.9750 0.9511 - 0.9714

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Market commentary:

There were a number of key events that drove markets over the past week.  Announcements from the European Central Bank (ECB) and the Bank of England (BOE) had big impacts as they both did their best to talk down interest rates that moved higher in line with the US. This talk helped to weaken both the EUR and the GBP against most other currencies. Concerns over Greece and Portugal have subsided in recent days which has helped the EUR to a certain extent. Out of the US we have seen better than expected employment data. This has cemented the markets view that the first round of Fed tapering will occur at the September meeting. US dollar strength has continued for much of the past week, although a lack of momentum and follow through buying has seen a small retracement over the last two days. China is still on the radar even though the central bank has stepped in to ease funding pressures in the banking sector. The risks are there for a wider Chinese banking crisis, and they are continuing to get plenty of coverage. However it’s most likely that this issue will play out over the longer term time horizon.

Australia

The Australian dollar headed back to its recent lows after the release of the stronger than expected US employment report on Friday night. It has since recovered a little but not on the back of anything fundamental coming out of Australia. Jobs ads data on Monday had little impact and business confidence numbers today failed to excite. We have to wait for later this week to get consumer confidence and employment data, which will be closely watched. The resource/mining sector continues to slow and concerns over a potential bumpy road ahead for China are not going to help. The one bright spot of the Australian economy is the weakening AUD. This is exactly what they need to help bolster manufacturing, and improve export returns. It’s no wonder the RBA continue to talk it down as much as possible, and expect that rhetoric to continue.

New Zealand

Last week was a very quiet one on the data front for New Zealand, and this week is only marginally better. Today we had the release of the quarterly survey of business opinion which has shown business confidence continues to be optimistic, in line with last quarter’s solid increase. Credit card spending data was also positive showing growth over the last month. The NZD has recovered most of the ground it lost after Fridays better than expected US employment numbers, and further moves are likely to be led from offshore. Later in the week we get readings on the manufacturing sector and the food price index. Both of which should have limited impact.

United States

The big focus at the end of last week was on the US employment report. Markets were expecting an increase of about 165,000 but the actual number was substantially better coming in at 195,000. Although the unemployment rate stayed the same at 7.6%, there were upward revisions to the two previous reports to the tune of 70,000. So overall a pretty strong result and the markets reacted as you would expect. The USD was stronger across the board and interest rates moved higher. This data has cemented the markets view that the Fed will start the tapering they have signalled at the September meeting. Adding to this positivity, last night we saw readings on May consumer credit. It came in much stronger than expected and was the largest increase in a year. This suggests consumers are comfortable taking on debt and is a positive for growth going forward. The USD however seems to have come far enough for now. Overnight it has given back some of the gains made in the wake of the employment report. FED Chairman Ben Bernanke is speaking on Thursday and we also get the minutes from the Fed meeting. On Friday we get producer prices and consumer confidence numbers.

Europe

There has been a raft of second tier data out of Germany over the last couple of trading days that has all come in slightly below expectation. The market hasn’t reacted to it, instead choosing to focus on an easing of concerns over the Greek bailout and Portuguese government. It seems the next tranche the Greek bailout will be released after much sabre rattling from officials. The Portuguese coalition government also looks to have found its way through an internal crises after two key ministers resigned last week. This will mean the recovery plan will stay on track, at least for the time being. ECB President Draghi’s call last week to keep rates low for as long as it takes has also eased concerns about pressure on peripheral nations. Bond yields moved higher after the Fed tapering announcement increasing the cost of funding for these nations. Draghi is due to speak again tonight, where he no doubt reiterate his comments from last week’s ECB meeting. Later in the week we get readings on industrial production as well as French and German inflation.

United Kingdom

There has been no economic data, or news for that matter, to materially affect the economic outlook in the UK over the last few days. The improving data of the last few months has seen forecasters revising up projections for the economy going forward. UK analysts Capital Economics, who tend to be somewhat pessimistic, have said they now see the UK economy beating expectations and growing by 2.5% in 2015 and 4% in 2016.Mark Carney’s arrival at the Bank of England has capped the recent strength in the Pound, at least for now. The market will be eager to see what sort of forward guidance he will offer at the next monetary policy meeting. The rest of this week has manufacturing and industrial production, house price data and trade balance to focus on.

Japan

The Japanese Yen has continued to weaken in the wake of the US employment report. There has been little else in the way of market moving news relevant to Japan out in the last few days. Current account data came in bang on expectation, and bank lending figures have confirmed the improving outlook showing a strong year on year improvement. With economic forecasts improving for Japan, it seems the biggest risk to their recovery could come from China. There have been numerous articles published recently (like this one) regarding the credit boom/bubble in China, and the risk of a banking crisis. There is little Japan could do to insulate itself from a sharp economic slowdown in its biggest neighbour. On Thursday we have the Bank of Japan policy meeting and press conference which will be the big focus for the week. Ahead of that we get the minutes from the previous meeting and consumer confidence, both out on Wednesday.

Canada

Along with the closely watched US employment report released Friday, Canada also published its monthly employment data. Although it came in at almost flat (actual was - 400 jobs) it was a very surprising number. That’s because it comes on the back of last month’s stellar figures that showed a 95,000 gain, the biggest in a decade. Most economists had expected a bit of payback this month, with the average forecast for loss of 7,500. So the near flat outcome was actually a very good result. But forecasters are still very sceptical of the data, pointing out it flies in the face of a number of less optimistic releases such as the record string of 17 monthly trade deficits. As a result of the data the Canadian dollar outperformed many other currencies, aided by the US dollar that rallied in the wake of their employment report. The housing market is big risk for the Canadian economy going forward, and this week we get building permits and housing starts data that will be closely watched. The business outlook survey released tonight will also get attention.

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

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