By Ian Dobbs*:
Central bank expectations are playing a key role in driving currencies at the moment, with a number of key meetings set for this week and next.
First up we have the US Federal Reserve’s FOMC statement early on Thursday morning and after the recent run of soft US economic data the market is expecting the Fed to signal the lift off in rates is likely to be pushed out until later this year.
This expectation has weighed on the USD recently and confirmation from the Fed could well spark further selling.
The Reserve Bank of New Zealand (RBNZ) will release their rate statement a few hours later and here too the market is looking for a slightly more dovish stance than previously.
This will be followed by the Bank of Japan’s BOJ) monetary policy statement, which shouldn’t contain any surprises or change in overall tone.
Next week we have what may be the toughest central bank decision yet when the Reserve Bank of Australia (RBA) meet on Tuesday. The chance of an interest rate cut from the RBA has declined recently, but is still a very close call.
Major Announcements last week:
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Australian Inflation +.2% as expected
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BOE leave monetary policy unchanged as expected
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Chinese HSBC Manufacturing 49.2 vs 49.6 expected
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European Manufacturing PMI 51.9 vs 52.6 expected
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US manufacturing PMI 54.2 vs 55.5 expected
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US Durable Goods Sales +.2% vs +.3% expected
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Japanese Retail Sales (YoY) -9.7% vs -7.3% expected
NZD/USD
The New Zealand dollar lost substantial ground to the USD last week in the wake of comments from RBNZ deputy Governor McDermott. The pair traded down to a low of 0.7544 on Friday, before staging something of a recovery. That recovery was boosted by further soft US data in the form of core durable goods orders on Friday evening. We have both the Fed and RBNZ rate meetings to digest this week and both central banks are expected to soften their stance a touch. The RBNZ are still very much neutral, but the risks have recently shifted slightly in favor of the next move being an interest rate cut, not a hike. The Fed on the other hand have signalled interest rate hikes are coming, but recent weak data may see them signal they will hold off until later in the year. As a result of these expectations both currencies could see periods of pressure and we can expect increased volatility on Thursday morning with the announcements only three hours apart. With the New Zealand dollar having recently broken above minor resistance around 0.7620 there is potential for a move up toward 0.7700. I suspect pair will struggle to sustain gains over that level a head of the central bank announcements on Thursday morning.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7625 | 0.7500 | 0.7700 | 0.7544 - 0.7736 |
NZD/AUD (AUD/NZD)
The New Zealand dollar has lost significant ground to the Australian dollar over the past week. Softer than expected NZ inflation contrasted with a stronger than forecast Australian inflation result and this started the correction lower in the pair. Since then we have seen expectations increase for a somewhat ‘dovish’ RBNZ rate statement on Thursday, thanks largely to a speech from Deputy Governor McDermott last Thursday. The pullback has now taken this pair all the way back to support around 0.9700 (resistance 1.0310). For the time being that level has contained the down side and we now await the RBNZ statement due out at 9am Thursday. Ahead of that release we have the trade balance and business confidence data set to hit the wires tomorrow. Topside NZ dollar resistance is now seen around 0.9800 (support 1.0205) and I expect that level to cap any potential NZD resurgence ahead of the RBNZ statement.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9690 | 0.9600 | 0.9800 | 0.9695 - 0.9960 |
| AUD / NZD | 1.0302 | 1.0204 | 1.0417 | 1.0040 - 1.0314 |
NZD/GBP (GBP/NZD)
The past week has seen a sharp NZ dollar pullback in this pair from levels above 0.5160 (below 1.9380) all the way to support around 0.5000 (resistance 2.0000). A combination of New Zealand dollar weakness and UK Pound strength has driven the move and we may well now tread water for a couple of days as we await the RBNZ rate statement on Thursday morning. We do have UK GDP data tonight to add some volatility, although the outcome will likely be very close to expectation which is for +0.5%. While support around 0.5000 (resistance 2.0000) remains intact, the NZD could easily drift higher, but be wary of any sustained move below 0.5000 (above 2.0000) as this would open the way for NZD losses to 0.4900 (2.0400) and potentially even 0.4800 (2.0830).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.5010 | 0.4900 | 0.5100 | 0.4993 - 0.5179 |
| GBP / NZD | 1.9960 | 1.9608 | 2.0408 | 1.9310 - 2.0028 |
NZD/CAD
The past month has seen this pair gradually pullback from the highs of around 0.9600 that were trading at the end of March. That pullback accelerated last week driven in large part by weakness in the New Zealand dollar. Softer than forecast NZ inflation data and a somewhat ‘dovish’ speech from the RBNZ deputy governor pressured the local currency. The Canadian dollar has also benefited from a much more upbeat tone from Bank of Canada Governor Poloz recently and this helped the pair trade down to support around 0.9160 on Friday. So far that level has contained the downside and we may well be in for a period of ranging ahead of Thursday’s RBNZ statement. From Canada this week we get the raw materials price index and GDP data to digest along with a couple of speeches from Governor Poloz.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9230 | 0.9100 | 0.9300 | 0.9164 - 0.9457 |
NZD/EURO (EURO/NZD)
Like many New Zealand dollar crosses, this pair saw a sharp pullback from the elevated levels seen at the beginning of last week. Broad NZD weakness was largely to blame as the local currency came under pressure thanks to softer than forecast inflation and a dovish speech by the RBNZ deputy Governor. There is now the expectation that the RBNZ will soften its stance slightly when it delivers its rate statement on Thursday morning. This should keep the local currency on the back foot over the next couple of days. We do have NZ trade balance and business confidence data to digest tomorrow while from Europe this week we get inflation, unemployment, German retail sales, French consumer spending, and Spanish GDP data.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.7010 | 0.7000 | 0.7200 | 0.6948 - 0.7203 |
| EUR / NZD | 1.4265 | 1.3889 | 1.4286 | 1.3884 - 1.4393 |
NZD/YEN
Broad based weakness in the New Zealand dollar last week saw this pair correct lower after a brief test over 92.00. The local currency came under pressure thanks to softer than forecast inflation and a dovish speech by the RBNZ deputy Governor. There is now the expectation that the RBNZ will soften its stance slightly when it delivers its interest rate statement on Thursday morning and this should limit any potential NZD strength ahead of that release. We also have the Bank of Japan monetary policy statement out on Thursday along with a rash of other data on Friday. Selling into strength ahead of 92.00 is recommended as this pair looks likely to remain within the increasingly familiar 88.00 to 92.00 range over the coming weeks.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 90.82 | 88.00 | 92.00 | 90.24 - 92.39 |
AUD/USD
The Australian dollar has made solid gains against the USD over the past week. Gains have come on the back of both Australian dollar strength and weakness in the USD. The USD pressure has been due to further soft data, the latest result being core Durable Goods orders data on Friday. While the AUD has found support from stronger than forecast inflation, and the subsequent decrease in the odds of an interest rate cut in May. The pair has managed in the past 24 hours to trade up through resistance around 0.7850 and this opens the way for a test of 0.7930, and potentially 0.8050. There are a number of key releases from the US this week to digest. Consumer confidence and GDP hit the wires ahead of the key FOMC statement on Thursday morning Australian time. The week is rounded out with ISM Manufacturing PMI on Friday. From Australia we have import prices, private sector credit, and producer prices to draw focus.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7875 | 0.7850 | 0.8050 | 0.7683 - 0.7875 |
AUD/GBP (GBP/AUD)
The Australian dollar lost a little ground to the UK Pound in the first half of last week, trading down to support around 0.5140 (resistance 1.9455). Since then however, a tight range has developed between that level and 0.5180 on the topside (1.9300 downside). The UK Pound gained support after the release of upbeat minutes from the Bank of England, but it’s hard to see the GBP gaining much more ground ahead of the May 7th general election. That is still shaping up to be a very tight race and uncertainty over just who will be able to form a government should help to cap near term GBP gains. From Australia this week we only have import prices, private sector credit, and producer prices data to digest. While from the UK we get GDP data tonight and manufacturing PMI data on Friday. Expect more sideways action for the pair ahead of next week’s RBA meeting and UK election.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5170 | 0.5100 | 0.5300 | 0.5140 - 0.5208 |
| GBP / AUD | 1.9342 | 1.8868 | 1.9608 | 1.9202 - 1.9455 |
AUD/EURO (EURO/AUD)
This pair remains trapped in a sideways range just below recent highs. 0.7130 to 0.7260 (1.3775 - 1.4025) has contained trading for the past week. There doesn’t look to be much on the economic calendar to cause a break out over the coming days. We do have import prices, private sector credit, and producer prices data from Australia to digest this week, but the market is already focused on next week RBA meeting as being a key potential driver. From Europe this week we have inflation, unemployment, German retail sales, French consumer spending, and Spanish GDP, but the market remains focused on the never-ending Greeks saga as a potential default draws ever closer.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.7235 | 0.7130 | 0.7330 | 0.7155 - 0.7256 |
| EUR / AUD | 1.3822 | 1.3643 | 1.4025 | 1.3781 - 1.3977 |
AUD/YEN
This pair is looking to move higher after breaking above the 93.20 level that had capped trading from all of April. There is resistance around 94.00 ahead of the March high at 94.72. The Australian dollar is benefiting from growing uncertainty around the expectation for a cut from the Reserve Bank of Australia when they meet next week. That rate meeting is the main focus for the market at the moment, although we do have data this week to digest in the form of import prices, private sector credit, and producer prices. From Japan this week we have the BOJ monetary policy statement on Thursday along with a rash of other data on Friday. I would expect 94.72 to cap gains in the near term and selling ahead of there is recommended for an eventual pullback toward 92.00.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 93.71 | 90.00 | 94.00 | 91.75 - 93.77 |
AUD/CAD
This pairing has traded a relatively tight and unsurprising trading range over the last week. The support at .9400 contained any periods of AUD vulnerability and the initial resistance at .9550 has curbed the two periods of strength over the past week. The Australian inflation numbers did provide some AUD appreciation, and the pairing has meandered with sideways price action since. Overall we can expect the wider range of .9400 - .9600 to likely contain the price action this week, barring any surprises from the BOC speeches and Canadian GDP numbers.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9520 | 0.9400 | 0.9600 | 0.9422 - 0.9543 |
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Market commentary:
Central bank expectations are playing a key role in driving currencies at the moment, with a number of key meetings set for this week and next. First up we have the US Federal Reserve’s FOMC statement early on Thursday morning and after the recent run of soft US economic data the market is expecting the Fed to signal the lift off in rates is likely to be pushed out until later this year. This expectation has weighed on the USD recently and confirmation from the Fed could well spark further selling. The Reserve Bank of New Zealand (RBNZ) will release their rate statement a few hours later and here too the market is looking for a slightly more dovish stance than previously. This will be followed by the Bank of Japan’s BOJ) monetary policy statement, which shouldn’t contain any surprises or change in overall tone. Next week we have what may be the toughest central bank decision yet when the Reserve Bank of Australia (RBA) meet on Tuesday. The chance of an interest rate cut from the RBA has declined recently, but is still a very close call.
Australia
The Australian dollar has found some support over the past week helped by stronger than expected inflation data and increasing doubt about a interest rate cut from the central bank in May. Minutes from the Reserve Bank of Australia’s (RBA) last meeting show that the decision not to cut in April was to allow officials more time to assess how the economy was tracking and responding to the cut in February. Over recent weeks we have seen some key data come in better than forecast, notably employment and inflation. These results have really muddied the waters in terms of expectations for another cut when the RBA meet on May 5th. Many forecasters are still calling for another 0.25% interest rate reduction, but the reality is it’s now a very close call. Governor Stevens delivered a speech this morning and although he declined to comment on monetary policy he did say that unemployment rates look quite healthy now. Still to come this week we have import prices, private sector credit, and producer prices data.
New Zealand
The focus this week in NZ is squarely on the Reserve Bank of New Zealand's (RBNZ) rate statement set for release on Thursday morning. No change in interest rates is forecast although the market is now expecting the central bank to strike a somewhat ‘dovish’ tone. Expectations for this softer stance have really come about after deputy Governor McDermott delivered a speech last week in which he spent a significant amount of time outlining the conditions under which the bank would cut rates. He also said specifically that the bank was not considering any rate increases. His comments completely undermined support for the New Zealand dollar which lost ground across the board in the second half of last week. Ahead of the RBNZ statement, which is out on Thursday morning, we have trade balance and business confidence data to digest.
United States
For the most part US data has continued to disappoint over the past week and this has kept the USD under some pressure ahead of this week’s Fed meeting. Friday’s key durable goods orders data suggested that manufacturers are struggling to deal with the broad appreciation of the USD over the past year. Although the headline number was stronger than expected, this was dramatically affected by aircraft and defence orders. A better gauge of overall factory conditions is the core reading and this declined by 0.5% versus expectations of a 0.3% gain. The prior reading was also revised significantly lower. This core number has been negative for a number of months now and it adds credibility to the argument that March’s soft jobs report had as much to do with deteriorating economic conditions as it did to the impact of poor weather. The Fed has said that any potential rate increase will be data dependant and the reality is current data does not support the case for a rate hike in June. We get the FOMC (Federal Open Market Committee) statement on Thursday morning and the market is expecting the Fed to be somewhat dovish, signalling a later lift off in rates. Ahead of the Fed statement we have consumer confidence and GDP data to digest. Then toward the end of the week ISM manufacturing PMI data will draw focus.
Europe
Although last week’s PMI readings from both the manufacturing and service sectors in Europe were disappointing, other confidence indicators are more encouraging. Both the ZEW economic sentiment and German IFO business climate readings have shown solid improvement over recent months. The IFO business climate index is now at its best level in 10 months and is consistent with improving economic activity in Germany. The IFO say prospects for the German economy remain very good and that the low Euro exchange rate is compensating for sluggish growth in other parts of the world. We are yet to see any agreement between Greece and its creditors, although prospects of a deal look to have increased in the wake of a reshuffle of the negotiation team. Greek PM Tsipras has side-lined controversial Finance Minister Varoufakis who it’s fair to say didn’t have much of a working relationship with European officials who described him as an amateurish time-wasting, gambler. This week to draw focus we have data in the form of inflation, unemployment, German retail sales, French consumer spending, and Spanish GDP.
United Kingdom
Although the UK Pounds is still suffering from uncertainty around the upcoming general election, it did manage to make significant gains last week. These gains were driven by the release of the Bank of England (BOE) minutes which were more upbeat on the economic outlook than expected. The minutes also suggested we could well see a couple of the MPC (monetary policy committee) members once again start to vote for interest rate increases over the coming months. In terms of the election, it has been reported over the weekend that Labour leader Ed Miliband has said he is not interested in any coalitions deals with the Scottish National Party (SNP). A potential Labour/SNP coalition was viewed as the most market unfriendly outcome of the election. Although we all know to talk a politician's pre-election statements with a large grain of salt, it will certainly help sentiment toward the GBP to a degree. The latest poll results are still showing a very close race with the most likely outcome at this stage a hung parliament. Political uncertainty is also very ‘market unfriendly’ and therefore the chance of a hung parliament will limit potential near term gains for the GBP. Tonight we get preliminary GDP data for the first quarter with the market expecting a result of 0.5%. Later in the week we have manufacturing PMI data to digest.
Japan
The past week has seen a mixed bag of data from Japan with positive readings from industry activity indicators and the trade balance, countered by a fall in manufacturing PMI data to 49.7, below the key 50 level which denotes contraction in the sector. In the past couple of hours we have also seen the latest retail sales figures and these too were disappointing. Retail sales for March fell by 1.9% against expectations of a 0.6% rise. There has been little market impact from the result as it seems base effects in the data are largely to blame. Still to come this week we have the industrial production, the BOJ monetary policy statement, household spending, inflation and employment data.
Canada
The only piece of economic data released from Canada in the past week was wholesale sales for February which printed on the soft side at -0.4%. There is no doubting that growth in the first quarter in Canada was extremely poor and dramatically impacted by the sharp decline in oil prices. In response to this the Bank of Canada (BOC) cut interest rates at their January meeting in what Governor Poloz described as ‘taking out insurance’. Since then however, and in particularly recently, Governor Poloz has been surprisingly upbeat about the economic outlook going forward. On Friday he delivered another speech in which he said that the oil price declines were a “front-loaded, one time shock” and that starting in the second quarter positives should start to outweigh negatives. He also believes by the second half of the year the oil shock should be fully behind them. This positive outlook is helping the Canadian dollar regain some ground although the market will want to eventually see hard data back Poloz’s optimism. The Governor is set to deliver two more speeches this week and we also have the raw materials price index and GDP data to digest.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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