Increase in demand of US$ driven by better-than-expected US data and economic outlook

By Sam Coxhead*:

The overriding theme that is driving the FX markets at the moment is one of broad based US dollar resurgence.

The big trigger that ignited the recent moves was the USDJPY breaking above 100.00 late last week. But the pressure had been slowly building, with a run of better than expected US data over the last few weeks.

Increasing focus has been on how the FED will exit its QE stimulus program, and just when this exit may commence.

As a result, longer end US interest rates have moved higher, in line with the more optimistic outlook. This has underpinned the increased demand for US dollars.

While commodities are somewhat heavy, and stock markets continue to find positives in any news and are currently trading near all time highs on many indexes.

The G7 meeting over the weekend failed to deliver any ground breaking headlines. They are happy with Japan’s efforts to stimulate growth (read weaken demand for YEN), and there was general agreement on an ‘improved outlook’ for the global economy.

Major Announcements last week:

·  Australian Retail Sales -.4% vs +.2% expected

·  Canadian Manufacturing Index 52.2 vs 58.3

·  RBA eases cash rate to 2.75%

·  NZ Unemployment rate 6.2% vs 6.8% expected

·  AU Unemployment rate 5.5% vs 5.6% expected

·  UK Manufacturing +1.1% vs .4% expected

·  BOE leaves monetary policy unchanged

·  Canadian Unemployment rate 7.2% as expected

NZD/USD 

The NZD has seen a decent range against the USD the past week, falling from 0.8520 all the way to a recent low of 0.8230. The move has been driven by broad US dollar demand, and comes in the face of the strong NZ employment numbers. Softer than expected retail sales this morning has kept the pressure on the currency. Initial downside support comes in around 0.8160, and could well be tested this week if the USD strength across the board continues. The topside is protected by resistance around 0.8360. Domestic data out over the coming days will probably have limited impact as offshore forces drive this pair in the near term.

NZD/AUD (AUD/NZD)

This pair is currently trading sideways around 0.8300 (1.2050). Dips toward 0.8250 (rallies 1.2120) are finding buyers of NZ dollars, while tests toward 0.8350 (1.1980) can’t be sustained at the moment. So [the] NZ dollar is consolidating at these recent higher levels (AUD lower levels), and as long as the pair holds above 0.8225 (below 1.2160), the bias remains for a strong NZD. The stronger NZ economy relative to the softening outlook for Australia, should keep this bias over the medium term. There is little in the way of major data out in either economy for the remainder of the week. Therefore expect more sideways price action over the coming days.

NZD/GBP (GBP/NZD)

The broad correction lower for the NZD against the GBP is continuing, although with slowing momentum. The recently improved UK data has helped the GBP outperform the NZD during this bout of USD strength. This has seen the pair move to trade around 0.5400 (1.8520). While the pair consolidates below 0.5480 (above 1.8250), the focus remains on the downside for the NZ dollar. A sustained move through the .5400 (1.8520) level would leave the NZD looking vulnerable. The target in that case would be 0.5250 (1.9050). UK employment data and the Bank of England inflation report should provide the lead for the pair this week.

 NZD/CAD

The CAD has continually outperformed the NZD over recent weeks. That has seen the cross march lower from the highs of 0.8780 seen one month ago. There is some support around 0.8300, and indeed the pair is currently bouncing off the recent low made yesterday of 0.8320. With such a dominant near term trend in play, picking a bottom of the move is a high risk strategy. Only move back up through 0.8420 could change the short term outlook. That would be the first sign that a broader corrective rally might be underway, at which point the upside target would move to 0.8500. Until then the downside is still in focus.

NZD/EURO (EURO/NZD)

New Zealand has little local economic data for the remainder of this week provide a lead for this pair. However, in Europe the latest inflation and GDP numbers for both Germany and the Euro-zone will be closely watched. Currently trading with the NZ dollar near one month lows, the risk is still the downside for the NZD. This will be the case as long as the pair is holds below 0.6450 (above 1.5500). The target of any further downside action will be support around 0.6200 (resistance 1.6130). A recovery back above 0.6450 (below 1.5500) opens the way for a test of 0.6600 (1.5150).

 NZD/YEN

The last month has seen this cross consolidating at relatively high levels. Sideways action between 82.50 and 84.80 has dominated recent price action. The longer term trend is higher, and that keeps the risk on a break of the top of that range. This would likely see a test of recent highs at 86.40. A sustained move back below 82.50 could signal a deeper correction towards key support at 79.80. But as long as the market is above this level, the focus is on the topside and further gains.

AUD/USD

The recent bout of USD strength that has come on top of the rate cut by the RBA last week, and has left the AUD looking very vulnerable. It has now pushed below the important psychological level 1.0000 with the USD. The downside remains the focus, and any rallies should be capped around resistance at 1.0150. Apart from the Federal budget tonight that should reinforce the view of a struggling economy, there is little in the way of data to drive the market. The focus will then be on offshore events, and just how far the resurgent USD has to run.

AUD/GBP (GBP/AUD)                            

The AUD has been materially outperformed by the GBP the last few weeks. The pair has recently traded below 0.6500 (above 1.5385) for the first time since early January. If the UK’s recent run of stronger data is continued this week with the release of employment figures and the BOE inflation report, then further downside could be on the cards. The next big support level is around 0.6400  (resistance 1.5625) and that marks the current target. Resistance at 0.6580 (support 1.5200) would have to be overcome to change the outlook, and put the focus on a broader corrective bounce.

AUD/EURO (EURO/AUD)

This pair has continued its recent trend with the AUD under pressure, and is currently trading on its recent lows around 0.7665 (highs 1.3046). The focus now is on a test of the yearly lows at 0.7620 (highs 1.3123). Expect reasonable AUD buyers to emerge at that level, and there is certainly scope for a corrective bounce within the broader downtrend of the last month. It would take a move above 0.7780(1.2855) to signal that is underway. European data out this week will likely drive the pair, with inflation and GDP numbers scheduled for release for both Germany and the Euro-zone.

AUD/YEN

The last month has seen little overall direction for this pair, and recently both currencies have suffered at the hands of a stronger USD. The resulting swings back and forth within the broad range of 99.50 - 102.50 look set to continue in the near term. Working limit orders at the desired level is a good option for those looking to cover exposure in a choppy directionless market such as this. The longer term trend has been up as the pair has ground it’s way higher from around 80.00 in October last year. That keeps the focus on the top of the recent range, but it will take a sustained break above 102.50 to signal further gains.

AUD/CAD

The relentless march lower in AUDCAD continues with the pair making recent lows around 1.0050 yesterday. This is only just above the major support band of 0.9950 - 1.0030 where buyers should emerge and at least put some two way action back into the market. The pair will have to do a lot of work if it want’s to get through that band of support. I suspect after the move we have seen, it will lack the required momentum in the near term. Those looking to buy AUD and sell CAD should work limit orders below 1.0030 to take advantage of any spikes into that support zone.

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Market commentary:

The overriding theme that is driving the FX markets at the moment is one of broad based US dollar resurgence. The big trigger that ignited the recent moves was the USDJPY breaking above 100.00 late last week. But the pressure had been slowly building, with a run of better than expected US data over the last few weeks. Increasing focus has been on how the FED will exit its QE stimulus program, and just when this exit may commence. As a result, longer end US interest rates have moved higher, in line with the more optimistic outlook. This has underpinned the increased demand for US dollars. While commodities are somewhat heavy, and stock markets continue to find positives in any news and are currently trading near all time highs on many indexes. The G7 meeting over the weekend failed to deliver any ground breaking headlines. They are happy with Japan’s efforts to stimulate growth (read weaken demand for YEN), and there was general agreement on an ‘improved outlook’ for the global economy.

Australia

Home loans data released yesterday in Australia came in quite strong at +5.2% vs an expectation of +4.0. It was countered somewhat by slightly weaker Chinese data, and has had little effect on the generally weaker Australian dollar demand. The AUD remains under pressure against the USD holding below parity for the first time since July last year . The rest of the week sees a very light economic calendar with little to challenge the current view that the economy is under pressure, as support from Chinese demand is slowly diminishing. The federal budget tonight may be of some interest, although forecasts of a $20 billion shortfall in finances will only serve to reinforce the above view.

New Zealand

This week should be somewhat more subdued than the week previous. There is little in the way of domestic news that will be of material impact on demand for the NZD. Retail sales data released this morning was a little disappointing coming in at 0.5%,  against an expectation of 0.8%. This has kept the NZD on the back foot, particularly against the stronger USD of late. Producer prices and manufacturing data are the only other releases of passing interest this week. The market will continue to be focused on the resurgent USD. This adds volatility to all the NZ dollar pairings, as it becomes a game of relative performance.

United States

The big story of the last week has been the recent bout of USD strength. This pressure had been building for a while, with slightly better data pointing to a more optimistic outlook for the US economy. Key to this has been their employment figures. With unemployment at 7.5% it is still well above the target the Fed has set at 6.5%, however it is heading in the right direction. If this trend continues we will start to see talk of the Fed scaling back their quantitative easing programme. Whilst we’re not there yet, but the market looks to be positioning itself in that direction. Last night saw the release of retail sales data that has helped to reinforce this view, coming in better than forecast. The US stock market seems to find positives in everything. Over the last couple of years equities would rally on bad economic data as it meant more QE was likely. Now they are benefiting on an improved economic outlook. You have to wonder how long these elevated levels can last, or how much higher they can go?

Europe

With a full European economic calendar this week, there will be plenty for the market to digest. Last night saw the Euro-zone finance ministers meeting where they agreed to release the next tranche of aid to both Cyprus and Greece. The rest of the week sees GDP and inflation data for both Germany and the Euro-zone, along with the closely watched German economic sentiment survey. We currently going through a period of relative calm in this Euro crisis, but if we have learnt anything from the last few years, it must surely be that we can expect more shocks ahead. The Euro-zone has a long way to go to overcome the structural issues they face and hopefully start to see an improvement in the southern economies.

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 »