RBA cash rate cut of 25 bps to 2.75% is further acknowledgement of global economic under-performance

By Sam Coxhead*:

The theme of central bank stimulus providing the lead for the wider markets continued last week.

The equity markets saw continued demand boost them to fresh record highs. Joining the apparent bonza, are well supported debt markets across the globe.

Notably in Europe the peripheral members states are issuing debt with increasing ease.

Global economic data remains patchy, with ongoing softness becoming evident in China and the closely related Australian economy.

The pick up in UK economic activity has surprised many, and GBP has reacted accordingly.

The US employment numbers continue to improve, with the unemployment rate pushing lower to 7.5%.

Today’s RBA decision to take the opportunity to ease their cash rate 25pts to 2.75% is another acknowledgement of the global economies underperformance in the first quarter 2013.

Lower global inflation levels enabling the ongoing support a wide range of central banks.

Major Announcements last week:

·  US Personal Consumption 1.1% v 1.2% expected

·  Euro-Zone CPI 1.2% v 1.6% expected

·  Euro-Zone Unemployment 12.1% as expected

·  CAD GDP 1.7% v 1.3 expected

·  US Consumer Confidence 68.1 v 61.0 expected

·  US ISM Manufacturing 50.7 v 50.5 expected

·  US Fed leaves rates unchanged as expected

·  ECB cuts rates by 0.25%

·  US Non-farm Payrolls 165k v 140k expected

NZD/USD 

The NZD is treading water within the broad 0.8465 - 0.8575 range of the last two weeks. Offshore factors have been driving it back and forth within that range, and this theme will continue this week ahead of NZ employment data on Thursday. The employment number offers the biggest risk for the NZD this week. A very soft number could easily catch the investor market holding too many NZ dollars , and see a quick move down to 0.8400 initially. Below 0.8400 and the way opens up for a much bigger correction towards 0.8200. Expect plenty of buyers looking to pick the bottom of any pullback though, as the medium term outlook for the Kiwi remains firm relative to most other currencies.

NZD/AUD (AUD/NZD)

The AUD has been under continued pressure lately, and that has seen the NZDAUD continue its slow march higher. It is currently cementing a move above 0.8300. Although these levels represent good selling relative to the last few years, I would be very hesitant to call any sort of top. There is no major technical resistance in the upside until 0.8570. The downside is protected by 0.8250 support ahead of 0.8200. There is potential for plenty of movement this week following the RBA rate announcement today, and looking forward to the NZ unemployment data on Thursday. Today’s RBA cut to the cash rate has further undermined the AUD. It will be interesting to see if this trend continues ahead of the both the NZ and Australian employment numbers on Thursday.

NZD/GBP (GBP/NZD)

The broad corrective pullback in this cross is still in play with tests of the downside the current focus. Somewhat stronger than expected data out of the UK recently is driving this move and this week sees more economic releases to keep and eye on. After bouncing off lows around 0.5440 (1.8380), the currency pair has so far failed to sustain any moves above 0.5480 (1.8250) and that keeps the downside in favour. With plenty of data out in both NZ and the UK this week, it could be a defining few days for this pair. If continued better than expected UK data is backed up by poor NZ unemployment figures, the downside could really open up. In that scenario at test of 0.5250(1.9050) could be on the cards. However, if UK data starts to disappoint again and NZ unemployment is around expectation, we can look forward to a move back to 0.5550(1.8020). The BOE rate decision on Thursday should have little impact as it’s almost certainly going to be no change, with no accompanying statement. We have to wait two weeks for the minutes to be published to get any insight into their thinking.

 NZD/CAD

The NZDCAD finished last week on a firm note thanks to a bout of CAD weakness and NZD strength. The rate bounced from 0.8530 to briefly trade over 0.8625. This move feels corrective though, within the broader theme of a turn down from recent highs. The pair is now giving back these recent gains and is currently trading around 0.8575. Another test of support is likely this week with the downside still the focus. However, with key employment numbers out of both NZ and Canada, the pair will likely see further volatility within its recent range.

NZD/EURO (EURO/NZD)

Weakness in this pair after the ECB’s rate cut and negative interest rate talk, saw it trade down to 0.6440 (1.5528). It has since recovered back to a more comfortable level of just above 0.6500(below 1.5385), sitting right in the middle of the broad 0.6400 - 0.6600 range of the last few weeks. More of the same is expected over the coming days, with NZ unemployment data Thursday likely to add some volatility. A shock number there will the lower end of the range tested. Aside from that, sideways action within the range is likely.

 NZD/YEN

Friday’s release of better and expected US employment data saw the JPY come under renewed selling pressure as a risk on appetite entered the market. It’s been all upside action for the NZDJPY rate since bouncing off support around 82.50 late last week, and it’s currently holding firm above 84.50. There is little in way of data out of Japan this week to change the current soft outlook for the Yen. NZ employment data is the only risk to what is otherwise a firm outlook for the cross. The pair is currently sitting just below resistance at 84.80, above which the way opens up for a test of recent highs around 0.8600. The downside is still supported around 82.50.

AUD/USD

The AUD has been under pressure recently with a spike higher on Friday to 1.0320 proving short lived, and key support at 1.0225 back under pressure. Recent data from both Australia and China has mostly been soft, maintaining the downside in focus. The RBA easing of the cash rate today should provide further pressure to AUD in the coming sessions. Certainly the Australian employment numbers on Thursday now become the focus. Any positive US numbers should provide further tests lower for this pair.

AUD/GBP (GBP/AUD)                            

With the AUD having come under pressure lately and the GBP finding some renewed strength, this pair has made a corrective move back towards more comfortable and sustainable levels. With the Australian dollar’s current air of vulnerability, further underperformance can not be ruled out. There are plenty of economic releases this week, and these will help offer the lead for direction in the short term. The RBA decision to cut the cash rate places further pressure on the AUD with initial support at .6550 (1.5270 resistance) already under some intense pressure. Expect further support at .6525 (resistance 1.5325) in the event of further AUD weakness.

AUD/EURO (EURO/AUD)

Not a lot of real direction eventuated for the this pair over the course of the last week. After EURO seeing pressure following the ECB announcement on Thursday, it has recovered somewhat and the pairing has traded mostly sideways since. The AUD looks to remain vulnerable in the coming sessions, and following today’s RBA monetary policy meeting the risk remains for further losses. The pair should find some support around 0.7760 (1.2890 resistance) ,and that may contain the downside for now. The RBA rate decision has provided the key for near term direction. In the event of increased pressure on the EURO, the pair sees resistance at 0.7925 (1.2620 support), ahead of 0.7985 above (1.2520 support below), albeit that be the unlikely direction in the coming sessions.

AUD/YEN

After bouncing off lows around 99.50 late last week, the AUDJPY got a shot in the arm from US payrolls data. The better than expected result saw YEN weakness across the board, and nowhere more so than against the AUD. The cross moved sharply from 100.50 to highs of 102.25. However, the start of this week has seen the AUD come under some more pressure, after poor retail sales figures combined with further weakening in the Chinese services sector. This saw the AUDJPY retreat back below 101.50 ahead of the RBA policy decision. That announcement of a 0.25 point cut by the RBA has seen a spike lower in the cross as the AUD gets sold. Expect it to continue to trade heavily as the market digests the news. Support is around 100.50 ahead of last week’s lows at 99.50.

AUD/CAD

The dramatic reversal in AUDCAD from highs near 1.0700 earlier in the month has kept all eyes firmly on the downside. After trading 1.0320 late last week there was some small respite for the pair as it bounced to the 1.0400 level. But sellers were never far away and it has now turned back down to test the lows. There is a key support level at 1.0275 that is coming under heavy pressure as I write this. A sustained move below here will open the way for further losses with 1.0200 the initial target.

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Market commentary:

The theme of central bank stimulus providing the lead for the wider markets continued last week. The equity markets saw continued demand boost them to fresh record highs. Joining the apparent bonza, are well supported debt markets across the globe. Notably in Europe the peripheral members states are issuing debt with increasing ease. Global economic data remains patchy, with ongoing softness becoming evident in China and the closely related Australian economy. The pick up in UK economic activity has surprised many, and GBP has reacted accordingly. The US employment numbers continue to improve, with the unemployment rate pushing lower to 7.5%.Today’s RBA decision to take the opportunity to ease their cash rate 25pts to 2.75% is another acknowledgement of the global economies underperformance in the first quarter 2013. Lower global inflation levels enabling the ongoing support a wide range of central banks.

Australia

Australia started the week on a disappointing note with more soft data having an impact on the currency. Retails sale came in well below expectation, job ads data was soft, and figures on the Chinese service sector showed the slowest growth in 20 months. Today the RBA has also decided to cut rates by 0.25% to 2.75% in what was a line ball call by most in the market. With inflation at or below trend, and most other indicators softening, the RBA had plenty room to move and they have done just that. Thursday sees the release of important employment data. Adding to the mix will be further data releases from China this week. Continued pressure on the Chinese economic data , will increase the vulnerability of the Australian dollar.

New Zealand

Last week offered little in the way of fresh insight into the NZ economy, with most of the focus was on offshore events. Better than expected US employment numbers did nothing to hurt demand for the NZD, which actually made ground against the US Dollar on Friday. This week’s economic calendar offers a bit more of interest than last week. The highlight will be the NZ unemployment rate on Thursday, which has the potential to put a spanner in the works for the currency. The NZD has been well supported lately and the outlook is for it to remain firm throughout this year. But disappointing unemployment figures could well catch the investor market with large holdings of NZ dollars. If this proves to be the case, expect a larger reaction than might otherwise be the case. This is certainly the biggest risk on the week. Until then, dips for the NZD will remain supported, and second tier data in the form of hourly earnings and retail card spending should have little impact.

United States

The US economy ended last week on a mildly firmer note with the release of all important employment data. It came in a little stronger than expected, but of more impact were the substantial upward revisions to both February and March’s figures. The unemployment rate also dropped to 7.5% which is the lowest level since December 2008. The impact was however tempered somewhat by weaker manufacturing data. None of this does anything to change the near term outlook for the Fed, who have publically stated they are targeting a 6.5% unemployment rate. US equity markets continue to make gains with fresh highs in the S&P 500 on Friday. This week see a relatively light calendar with only consumer credit, weekly jobless claims, and wholesale inventory data of any note. These come ahead of a speaking engagement by FED chairman Bernanke on Saturday.

Europe

A mixed bag of data out of Europe on Monday had little impact on the currency or the out look. Services sector data was slightly better than expected, while retail sales came in a touch worse.

After last week’s ECB rate cut the market was keenly focused on a speech by Draghi last night. He reiterated the point that the ECB council are studying closely what impact a move to negative deposit rates would have ,and that they stand ready to act if needed. Just like Thursday last week when he mentioned it, the currency has reacted to the downside. Talk of negative rates will always do that, but any move by the ECB in that direction would not happen soon. Draghi is most probably just “jawboning” the currency down.  This view is backed up by comments from another ECB governing council member, Ewald Nowotny, who said on Friday “negative rates are not something of relevance in the immediate future”.

United Kingdom

The recent run of stronger than expected economic releases out of the UK continued on Friday. Data on the services sector, the largest part of the economy, unexpectedly strengthened in April.This follows improved data on the manufacturing and construction sectors earlier in the week, and the better than expected GDP data the week before. This leaves little doubt in anyones mind that the BOE rate decision on Thursday will see no change in either the interest  rate or the total level of quantitative easing, currently set at 375 billion pounds. This meeting should have little impact on the currency. As pleasing as the recent data will be for both the BOE and the government, it is way too early to call the start of a sustained recovery. It may well be that what we are seeing is a bit of a bounce back from severe weather affected data earlier in the year. This week should shed a little more light on how the economy is performing with industrial and manufacturing production data set for release along with trade balance and construction output.

Japan

Japan has little in the way of domestic data out this week with trade numbers and JPY leading index the only releases of note. Offshore factors will therefore drive demand for the YEN, and that was certainly the case on Friday with the release of US employment data. Coming in better than expected and with a fall in the unemployment rate, there seemed to be a ‘risk on’ attitude enter back into the market. As a result the JPY weakened significantly, most noticeably on the crosses against the NZD, AUD and EUR. Against the USD, a test of the psychological 100.00 level could well be on the cards over the coming week. Over the weekend Japan has announced it’s intention to boost financial ties with Asean countries by increasing foreign bond holdings through investment in a Pan Asian Bond Fund. While no amounts were given, the flows required are all JPY negative and it will reinforce the heavy Yen sentiment.

Canada

Canada posted it’s first trade surplus in a year at the end of last week, helping to underpin the stable outlook. This will be good news for the Bank of Canada (BOC) that has stated the economy's need to move away from an over- reliance on domestic consumption. Exports to the US were responsible for a large part of the improvement in the trade figures. Friday’s positive US employment data will only help to underscore this. The CAD has remained on a firm footing at the start of this week in which the focus will be on Canadian employment numbers and housing data.

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