Geo-political intrigue adds to dynamic market sentiment; rising oil prices and negative economic growth impacting the United States

By Sam Coxhead*:

The general themes of 2014 have continued throughout the course of the last week, albeit with a new dynamic coming to the mix.

Yield chasing investors have ensured the Australasian currencies remain in demand, and this should continue throughout the year.

Adding credence to this view is the fact the Chinese government has pledged to provide policy accommodation to ensure their 7.5% growth targets are met. With a Chinese slowdown representing the primary risk to the Australian and New Zealand economies, this kind of pledge will be of comfort, given the autonomy of China’s economy.

Adding to the mix are the increasing tensions in the Middle East. The fantastical prospect of some kind of Iranian/US allegiance against the ISIS uprising certainly adds an element of intrigue. Of more direct consequence are rising oil prices and the negative impacts on economic growth, especially in the United States.

Major Announcements last week:

·  Japanese final Q1 GDP 1.6% vs1.4% expected

·  Chinese Inflation 2.5% vs 2.4% expected

·  UK Unemployment rate 6.6% vs 6.7% expected

·  RBNZ hikes cash rate to 3.25% as expected

·  Australian Unemployment rate 5.8% vs 5.9% expected

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

·  BOJ leaves monetary policy unchanged as expected

·  BOE’s Carney paves the way for earlier cash rate hikes

NZD/USD

There was one material move for this pair last week. Following the RBNZ MPS the NZD saw increased demand as the market discounted the chances of a pause in the hiking cycle. Since the subsequent couple of sessions the pair has consolidated at levels just below the major resistance at .8700 cents. Whilst in the vicinity it seems likely that there will be a further test of this level at some point. However, there will likely be further sideways trading ahead of the FED’s monetary policy meeting and NZ Q1 GDP release, both due on Thursday morning NZT. The outcome of these releases will provide the near term direction for this pair. Certainly the .8700 level has proved difficult to consolidate through before, and the easy ground has already been taken by the NZD.

NZD/AUD (AUD/NZD)

This pair remains very well contained by its wider recent range. The only material move of the last week came after the RBNZ’s monetary policy announcement and the demand for NZ dollars materially increased for around 24 hours. Since then the pair has consolidated the move towards the higher NZD end of the range. This afternoons RBA meeting minutes were of limited impact and now the focus moves to Thursdays NZ GDP number. Certainly the current levels provide an opportunity for those looking to buy Australian dollars with NZD at more economic levels than at a week or so ago. Discounting a materially strong GDP number than forecast, look for the pair to continue to trade in the increasing familiar wider range for the time being.

NZD/GBP (GBP/NZD)

It has been a very interesting last week for this pair, with both currencies seeing periods of materially increased demand. Even with the periods of volatility, the pair continues to trade within a very familiar range. The NZD saw grinding appreciation into the RBNZ rate announcement, the subsequent NZD rally saw the extreme for the week set at .5164 (1.9363), before the comments from Carney and Osborne boosted the GBP back by more than a percent. Since then the pair has traded a tiny range. The UK inflation numbers later on today offer some focus ahead of tomorrow’s BOE policy announcement. With no change expected eyes will then turn to the NZ GDP number Thursday morning, ahead of the UK retail sales number later in the day. Expect the wider trading band to contain the price action.

 NZD/CAD

After seeing grinding appreciation in to last week’s RBNZ announcement, the NZ dollar jumped higher against the CAD in the subsequent trading sessions. Interesting, the .9450 initial resistance has contained the NZD demand since then, and this levels remains the primary target in the short term. Ahead of the latest Canadian inflation and retails sales data on Friday, expect all eyes on the Q1 NZ GDP numbers on Thursday morning. No matter what eventuates in the coming months, the current levels will likely prove to have offered reasonably good value buying of CAD with NZ dollars.

NZD/EURO (EURO/NZD)

Following the ECB’s move to negative deposit rates the NZ dollar has seen grinding appreciation over the EUR. Last week’s hike to the NZ cash rate from the RBNZ further boosted demand for the NZD. The pair tested the resistance at .6420 (support 1.5575) within a couple of sessions of the RBNZ hike, and has had another go at the level without success at this point. With little chance of further action from the ECB for a few months at least, we may see this pair look to establish a new range around the current levels. This week’s primary focus will be the NZ Q1 GDP numbers on Thursday. A better than expected number could see a further test of the recent NZD highs.

 NZD/YEN

Last week the NZD was in demand ahead of the RBNZ rate announcement, and was already testing the 87.50 resistance level. In the sessions following the announcement, the pair rallied over 1.5% and has consolidated for the time being at least, at these levels. The increased tensions in the Middle East (risk aversion) has not pressured the NZ dollar to much at this stage, but that remains an issue to keep an eye on. This week’s data is fairly light with the primary focus coming from Thursday Q1 NZD GDP number. It looks like the pair is likely to consolidate and establish a new range at the high NZ dollar levels, again offering an opportunity for great value buying of YEN with NZ dollars.

AUD/USD

This pair has seen very benign price action throughout the course of the last week. The most excitement came following the Australian employment numbers that saw a healthy shift from part to full time jobs. Overall the AUD remains elevated against the US dollar, but that does not look like changing in the near term. The resistance at .9425 has contained the appreciation for the time being, at similar levels to the highs seen in April. Expect more of the same this week, albeit increased uncertainty could stem from the Middle East. From a data perspective the US dominates with inflation numbers later on today, the FED’s policy meeting early Thursday Australian time and then the Philly Fed manufacturing survey on Thursday night. Current levels offer good value buying of US dollars, albeit this range could we persist for some time yet.

AUD/GBP (GBP/AUD)                            

The British Pound has seen increased demand over the Australian dollar since the notable comments from Messrs Carney and Osborne. The pair remains close to the wider .5450- .5650 (1.7700 - 1.8350) range that has been in place since mid-March. Direction from the current levels will come from the UK inflation number later today, the BOE policy announcement Wednesday, and the UK retail sales on Thursday. Expect the current range trading nature of this pair to continue in the short term at least. Increasing tensions in the Middle East could temper demand the AUD from a risk aversion perspective, albeit that correlation much weaker now than it once was.

AUD/EURO (EURO/AUD)

After seeing so much pressure over the last couple of the weeks, the EURO is finally managing to claw back some ground against the Australian dollar. The last few days has seen a fall from the peak around .6950 (low 1.04390) to the current levels just above the .6900 (1.4500) level. A realisation that further policy accommodation from the ECB is some months, off eased the way for a EURO bounce. Today’s RBA minutes offered little of further insight, and now focus turns to the latest German economic sentiment numbers due later on today. If tensions in the Middle East escalate, the AUD could see further pressure as global risk aversion increases.

AUD/YEN

This pair has continued to trade a very tight range of late, albeit with the AUD at elevated levels. Overtime it may well prove to have offered good value buying of JPY with AUD, especially if the issues in the Middle East continue to intensify. With the uneventful RBA meeting minutes out of the way this afternoon, the focus now moves onto BOJ minutes and Japanese trade balance tomorrow. Friday night sees BOJ Governor Kuroda make an on the record speech and this will be closely followed.

AUD/CAD

After trading a fairly contained range over the last week, the pressure has been increasing on the AUD in the last couple of sessions. It is probably in line with intensifying issues and risk aversions in the Middle East, but the support at 1.0150 looks very much like being tested in the coming hours. If the support at 1.0150 gives way, expect investigations lower to ensue, with an initial target of 1.0100. Following the mostly uneventful RBA meeting minutes this afternoon, the focus now shifts to the latest Canadian inflation and retail sales numbers on Friday.

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Market commentary:

The general themes of 2014 have continued throughout the course of the last week, albeit with a new dynamic coming to the mix. Yield chasing investors have ensured the Australasian currencies remain in demand, and this should continue throughout the year. Adding credence to this view is the fact the Chinese government has pledged to provide policy accommodation to ensure their 7.5% growth targets are met. With a Chinese slowdown representing the primary risk to the Australian and New Zealand economies, this kind of pledge will be of comfort, given the autonomy of China’s economy. Adding to the mix are the increasing tensions in the Middle East. The fantastical prospect of some kind of Iranian/US allegiance against the ISIS uprising certainly adds an element of intrigue. Of more direct consequence are rising oil prices and the negative impacts on economic growth, especially in the the United States.

Australia

Last week was a relatively interesting one for the Australian economy that saw employment numbers show a material shift in labour, from part-time to full time employment, and the unemployment rate remain unchanged at a healthy 5.8%. This week’s calendar is relatively quiet, with the RBA monetary policy meeting minutes released this afternoon the only release of note. Unsurprisingly, the minutes revealed little of new insight, with the final sentence of the minutes making a fine summary “the Board judged that the current accommodative stance of policy was likely to be appropriate for some time yet”. For the most part the Australian dollar has seen elevated demand, assisted at times by its smaller cousin from across the Tasman following the cash rate hike from the Reserve Bank of New Zealand. Amongst a global environment of very low (or zero) short end interest rates, expect the 2.50% cash rate in Australia to continue to draw demand. This will cushion any periods of softness in the near term at least, even in the face of materially lower commodity prices that the Australian dollar has traditionally been correlated to. Also of interest overnight were comments from Chinese Premier Li that the Chinese Government was prepared to use appropriate policies to ensure that its 7.5% annual growth target was met.

New Zealand

Last week in the New Zealand economy the focus came from the RBNZ’s bi-monthly monetary policy statement (MPS). The statement shows the inflation, GDP and 90 day interest rate forecasts all unchanged from the March statement. This caught the market by surprise to an extent, after analysts had cited a softening housing market and concerns over the Chinese economy as reasons for a potential pause to the cash rate hiking cycle in the coming months. Governor Wheeler has left himself a little room by stating the speed and extent of cash rate hikes remain subject to the economic and financial information as it comes to hand. The NZ dollar reacted strongly in the session following the MPS, albeit maintaining recent ranges within most pairings. This week has seen the Westpac consumer confidence survey remain at elevated levels. Interestingly for the RBNZ the latest housing numbers reveal a softening in the number of sales and pricing, further evidence that the LVR policy has had the desired effect. Tomorrow Fonterra dairy auction results offer some interest ahead of the first quarter GDP numbers on Thursday. The market expects a healthy 1.2% increase in activity, against a previous rise of .9%.

United States

The mixed nature of the US economy's recovery has been evident over the last last week. The retail sales numbers were uninspiring  and were coupled with lower than expected producer price and consumer sentiment data. On a more positive note, overnight the Empire State manufacturing, industrial production and NAHB housing data were better than expected. Interestingly, the manufacturing sector has finally eclipsed pre-recession levels of six and a half years ago. The US dollar remains largely out of favour and this is especially evident against the Australasian duo. Of increasing focus is the geo-political situation in the Middle East, and implications it may have on the wider financial markets, should it further escalate. In the meantime the main focus for the week is the Federal Reserve’s monetary policy statement early Thursday morning Australasian time.

Europe

Last week proved to be a relatively quiet one for economic news in Europe. The ECB and potential policy moves remains the main driver of sentiment. The move to negative deposit rates has undermined the EURO since the ECB policy announcement two weeks ago. From there the speculation has been on the potential drivers for a move towards full blown quantitative easing. Whilst this cannot be ruled out, logical thought points towards the impact of the current settings been able to run its course ahead of any further measures. Certainly when the relative longer term interest rates are taken into consideration, even after a slight move higher overnight for the European periphery, longer term interest rates must look very inviting for those looking to borrow. Last night the latest inflation numbers revealed an annual core rate of just .7%, stubbornly below the ECB target of close to 2% over the medium term. Later on today the latest German economic sentiment numbers are due for release and this is the primary data focus for the week.

United Kingdom

It has been a very interesting last week for the UK economy. Aside from continuing strength reported in the manufacturing and employment sectors (albeit average earnings behind expectations), potential new Bank of England (BOE) loan to value ratio powers for residential property lending hit the headlines. These kinds of policies seem to have had a desired effect in New Zealand, and potentially would work in the UK as they have similar property market pressures. Also of particular note were the deliberate comments from BOE Governor Carney. He hit the headlines with comments that interest rates in the UK could rise sooner that investors currently expect. The immediate effect was for GBP to strengthen and various economists to start talking about cash rate hikes potentially starting at the end of 2014. This week is another busy one for news in the UK. Inflation numbers come later on today and are followed by the BOE monetary policy meeting Wednesday and retail sales numbers Thursday. There are also numerous BOE officials due to make on the record speeches and these will be closely followed following the revelations from last week.

Japan

Last week saw the final Japanese Q1 GDP numbers revised up .2% to 1.6%. This positive result is tempered by the expectation of contraction in the 2nd quarter thanks to the sales tax increase implemented. The Bank of Japan monetary policy statement saw no change in the easy policy, with Governor Kuroda stating his intent to keep the easing policy firmly in place until the target of 2% inflation has been reached. The BOJ expect the economy to gradually recover from the impacts of the sales tax increase, but they see the impacts starting to recede from summer onwards. This week sees a fairly light calendar with the main focus coming from the BOJ meeting minutes released on Wednesday and further Kuroda musings scheduled for Friday evening.

Canada

Last week in Canada saw the mixed outlook continue. Housing starts were higher than expected, but the latest manufacturing numbers underperformed expectations. Friday saw Bank of Canada (BOC) Governor Poloz discuss the threat of a sharp correction in the elevated housing sector. It looms as the biggest risk to the economy, although the chances of a sharp correction remain low to his mind. External influences such as a sharp slowdown in the global recovery would increase the chances of the hard landing for housing and this would cause considerable stress. The BOC’s view remains that the housing sector will see natural soft landing, especially as the prospect of increasing interest rates approach at some stage in 2015. This week Friday’s inflation and retail sales data provide the data focus for the week, with increases expected of .2 and .4 percent respectively.

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