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Markets are very jittery at present as investors wait for the Fed to announce when they plan on reducing their stimulus program

Currencies
Markets are very jittery at present as investors wait for the Fed to announce when they plan on reducing their stimulus program
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By Ian Dobbs*:

All eyes this week will be on the US Federal Reserve policy meeting.

Financial markets in general have been dominated lately by talk, and expectation around, just when the Fed will start to taper its quantitative easing programme.

Although no one expects a move at this meeting, the entire market will be looking for a signal that it is likely to come sometime between September and December. That is the expectation currently priced into markets.

There are all sorts of risks around this and the markets are very jittery. Last night for example, the US dollar made sharp gains across the board as a newspaper article hit the wires saying the Fed will signal the start of tapering is just around the corner.

It caused such a stir in currencies, equities and bonds, that the reporter had to take to twitter to state he has no inside knowledge of what the Fed might do and that everyone should calm down.

That promptly saw the dollar give back some of the gains.

Major Announcements last week:

·  RBNZ rate decision unchanged

·  US Retail Sales  0.3% vs 0.3% expected

·  US Consumer Sentiment 82.7 vs 84.9 expected

·  Australian Employment change 1.1k vs -9.8k expected

NZD/USD 

The recovery in the New Zealand dollar over the past week has hit a ceiling around the 0.8100 level. Three times in as many days the currency has been rejected from there. Last night the NZD fell over 100 points as the USD made gains across the board on the back of newspaper article suggesting the Fed will signal a start to tapering assets purchases at this week’s meeting. This shows how nervous the markets are at the moment and unfortunately the rest of the week could see more of the same. Key domestic releases this week that could impact the currency are the current account and GDP figures.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7990 0.7920 0.8120 0.7761 - 0.8110

NZD/AUD (AUD/NZD)

The NZDAUD cross started the week back up trading near its recent highs of 0.8431 (AUDNZD lows of 1.1861). But again it failed to hold onto gains and fell back below 0.8400 (above 1.1905) last night. This came as both the New Zealand dollar and the Australian dollar got sold against a surging USD. The pair feels like it wants to break into a new range above 0.8400 (below 1.1905) but for the time being it’s confined to trading just below that level. Any dip toward 0.8300 (1.2048) should continue to find good support, with further tests above 0.8400 (1.1905) expected over the coming week. Trading will no doubt remain choppy over the coming days and working limit orders to take advantage of these conditions is recommended for those looking to cover exposure.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8390 0.8250 0.8450 0.8311 - 0.8431
AUD / NZD 1.1919 1.2121 1.1834 1.1861 - 1.2032

NZD/GBP (GBP/NZD)

The Pound Sterling has remained reasonably well supported recently and movements in this pair have been driven by direction in the New Zealand dollar. As the NZD recovered from recent lows early last week, so did this pair, eventually trading back up over 0.5150 (under GBPNZD 1.9417) for a time. Weakness in the NZD overnight however has seen the cross back below 0.5100 (above 1.9608) where is currently trades. There has been nothing to suggest a change in the view that this pair will look to spend some time consolidating recent losses, while range trading between 0.5000 (2.0000) and 0.5250 (1.9048). Risks to that scenario would come from weaker data out of the UK this week in the form of inflation and retail sales. However the recent trend has been for firm data and that is expected to continue.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5085 0.5000 0.5250 0.4993 - 0.5187
GBP / NZD 1.9666 2.0000 1.9231 1.9280 - 2.0028

 NZD/CAD

There has been little out of Canada recently to alter the current solid outlook for their economy. This has kept the Canadian dollar well supported and recent moves in this pair have been driven by the New Zealand dollar. As the NZD recovered from its lows early last week, so did the NZDCAD. The recovery took it from 0.7950 all the way up to 0.8250, where it finally ran out of legs. Some weakens in the NZD last night has seen the pair trade back to 0.8150. Topside resistance between 0.8250 and 0.8300 will prove tough to overcome and should cap any strength in the near term. We can expect plenty of volatility over the coming days with NZ data in the form of current account and GDP, and well as the US Fed meeting.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8135 0.8100 0.8300 0.7946 - 0.8256

NZD/EURO (EURO/NZD)

Movements in the New Zealand dollar have been the driving force of this pair recently, with the Euro remaining well supported and somewhat more stable than the NZD. As the NZD staged a recovery from recent weakness last week, so did this pair trading all the way up to 0.6100 (down to 1.6393). The cross has given back some of its gains overnight as the NZD lost ground and it now trades just below 0.6000 (above 1.6667). A period of sideways trading is now expected between 0.5900 (1.6949) and 0.6100 (1.6393) as the pair consolidates the recent down trend. There is plenty of data out this week for both currencies to give further insight and add to volatility.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.5980 0.5900 0.6100 0.5844 - 0.6101
EUR / NZD 1.6722 1.6949 1.6393 1.6391 - 1.7110

 NZD/YEN

The last couple of days has seen the Japanese Yen take a bit of a breather from recent wild moves. This has translated to a NZDJPY cross that has tended to trade sideways between 75.50 and 77.50. This period of calm could well be shattered on Wednesday night, if the US Fed meeting sparks a big move in the US dollar. For the time being the NZDJPY is in the throes of a downtrend and another test of 74.50 can’t be ruled out. The first sign that a bottom may be in place and broader corrective rally could be under way, is if resistance at 77.50 is overcome. Until then the downside is the main focus.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 75.70 75.00 78.00 74.48 - 77.65

AUD/USD

The Australian dollar has put in a decent recovery over the past week and shown that it is no longer a one-way bet. It has bounced a good 300 points from its lows of 0.9326 seen early last week. That recovery has however seemed to run into resistance around 0.9650, which has capped it on three occasions in as many days. Last night’s surge in the USD saw the AUD head back just below 0.9550, where it currently trades. It looks like offshore factors will be the driving force for the AUD this week, with the Fed meeting being key. It looks like resistance between 0.9650 and 0.9700 will cap the topside heading into Wednesday nights Fed meeting.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9515 0.9500 0.9700 0.9326 - 0.9664

AUD/GBP (GBP/AUD)                            

After the recent strong down trend this pair seemed to put a bottom in place, at least temporarily, around 0.6000 (1.6667) in the early part of last week. The recovery off that low has been less than convincing though with the AUDGBP only reaching 0.6159 (1.6236), before turning back down. It currently trades below 0.6100 and there is a real risk of further losses. Release of the RBA minutes today saw a small amount of AUD selling keeping this cross under pressure. With little else out on the domestic front this week it will be offshore events that drive the pair over the coming days. UK inflation tonight will be followed by the US Fed meeting tomorrow and the Bank of England minutes, with retail sales data on Thursday. Until resistance at 0.6170 (1.6207) is overcome, the downside remains the risk.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6060 0.6000 0.6200 0.5999 - 0.6159
GBP / AUD 1.6502 1.6667 1.6129 1.6236 - 1.6670

AUD/EURO (EURO/AUD)

With the Euro remaining well supported recently this pair has been driven by moves in the Australian dollar. Last week’s recovery in the AUD saw this pair regain some lost ground as it traded up to 0.7239 (EURAUD 1.3714). It had a number of attempts at that level over the last few days and failed to overcome it. Weakness in the AUD last night saw the pair turn back down and some more selling after the release of the RBA minutes has kept the pressure on. The near term risk is still the downside and another test of recent lows could well be on the cards. It will take a sustained move above resistance around 0.7230 (1.3831) to change the outlook. Driving forces over the rest of the week will come from Euro-zone data in the form of economic sentiment, consumer confidence and manufacturing surveys, as well as the US Fed meeting tomorrow night.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7125 0.7030 0.7230 0.7027 - 0.7239
EUR / AUD 1.4035 1.4225 1.3831 1.3815 - 1.4231

AUD/YEN

Considering the recent moves seen in the AUDJPY, and the Japanese Yen in general, the last few days have represented some relative calm. The pair has traded sideways broadly contained between 90.00 and 91.50. It’s hard to imagine it will stay this way for long however with any talk of tapering by the US Fed on Thursday morning potentially having a big impact on both these currencies. The AUDJPY currently trades just about 90.00 and while it holds below resistance at 92.50, the risk is for further losses. The next downside target is 87.80.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 90.15 89.00 92.50 88.95 - 93.70

AUD/CAD

The recovery in the Australian dollar last week helped the cross rate with the Canadian dollar regain some of its recent losses. After making a low of 0.9549 early last week, the pair managed to trade up to 0.9800 before running out of steam. Since then it’s been a slow drift lower in what could be described as directionless trading. Some selling after the RBA minutes were released this afternoon has seen the pair trade below 0.9700, but there doesn’t seem to be much momentum in the move. Although we can expect plenty more volatility over the coming days, I still feel we may have seen a low put in place at 0.9549, at least for the time being, and would like to see a test up to resistance at 0.9950. A move back below 0.9650 would change the picture and warn of a retest of those lows with the chance of further losses.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9690 0.9650 0.9850 0.9549 - 0.9818

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Market commentary:

All eyes this week will be on the US Federal Reserve policy meeting. Financial markets in general have been dominated lately by talk, and expectation around, just when the Fed will start to taper its quantitative easing programme. Although no one expects a move at this meeting, the entire market will be looking for a signal that it is likely to come sometime between September and December. That is the expectation currently priced into markets. There are all sorts of risks around this and the markets are very jittery. Last night for example, the US dollar made sharp gains across the board as a newspaper article hit the wires saying the Fed will signal the start of tapering is just around the corner. It caused such a stir in currencies, equities and bonds, that the reporter had to take to twitter to state he has no inside knowledge of what the Fed might do and that everyone should calm down. That promptly saw the dollar give back some of the gains.

Australia

The only economic release of note this week in Australia was the RBA policy meeting minutes released today. There was little in them for the market to focus on. Consensus is for another rate cut by the RBA this year, but the timing of any cut is open for debate. There was however an interesting article published yesterday by ratings agency Fitch on China. They warn that the Chinese credit bubble is unprecedented in modern world history. And we all know how credit bubbles end don’t we! They also say when the Fed starts tapering asset purchases in the second half of this year it will cause a flood of capital to leave China. So the story of a soft Chinese outlook undermining support for Australia continues. There have also been a number of reports recently that have highlighted the increased risks of an upcoming recession in Australia. That’s still a pretty big call at this point, but the outlook is far from rosy and as a result the Australian dollar has remained subdued.

New Zealand

Offshore forces have been driving the New Zealand dollar recently and with all eyes on the US Fed meeting this week, we can expect more of the same. Domestically we have seen stronger readings for consumer confidence and a positive report from the NZ Institute for Economic Research. They have maintained their growth forecasts for 2013/14 at 2.7%, but increased their forecast for 2014/15 growth to 3.1%. Later on in the week we get current account data and more importantly, GDP figures for the first quarter.

United States

Friday in the US saw some slightly disappointing data released. Consumer confidence came in below expectation as did industrial production. Current account data was also out and that came in a little better than forecast. Overall the US dollar was a little softer after the releases. The big focus, not only for the US but for markets as a whole, this week is on the Federal Reserve policy meeting on Wednesday. Everyone will be analysing the release for clues as to the expected timing of any scaling back of quantitative easing. With the market having priced that in for somewhere between September and December, any signal that will change that expectation could have a decent reaction. Although the Fed meeting is likely to be the dominant force driving markets this week, we will also be on the lookout for any headlines from the G8 meeting currently underway.

Europe

The EUR has been well support recently thanks in no small part to trade balance data. Although last night's reading was a little below expectation, it still shows the Euro-zone has been running a healthy trade surplus. A trend that has been going on for some time now. What’s not so great is the employment picture. Friday saw figures released that show the number of employed in the Euro-zone is at it’s lowest level in more than seven years. The ECB has done a great job of pulling the region back from teetering over the edge of a cliff, but it’s up to governments now to try to get growth and employment heading in the right direction. The reforms needed are going to prove a lot harder to achieve now their collective backs aren't against a wall, and with elections on the horizon in key countries. This week’s upcoming data includes readings on the German and French manufacturing sectors, as well as Euro-zone economic sentiment and consumer confidence.

United Kingdom

The UK’s improving economic outlook was backed up by house price data out last night. It showed further gains in prices which is a trend that has been on-going for some time now. Like the Euro, the United Kingdom pound has found good demand lately and is holding on to recent gains. There could be all sorts of volatility this week with the US Fed meeting taking centre stage, however some key releases out of the UK will also warrant attention. Tonight sees inflation numbers released that could easily surprise, while on Wednesday we get the minutes from the last Bank of England meeting, and Thursday sees retails sales data.

Japan

The bank of Japan released the minutes from their last meeting on Friday. At that meeting no action was taken with relation to bond market volatility and this disappointed the market somewhat. The minutes show there was certainly a discussion about the issue with a number of views aired, and one member suggesting limiting quantitative easing to two years. Although they haven’t taken action on the issue yet, they may have to soon. The bond market volatility has spilled over in equities, and the currency, with big moves last week in all the Japanese markets. Aside from a speech from the Bank of Japan governor this coming Friday, there is little in the way of economic data out. All eyes will be on the Fed meeting and any potential headlines from the G8.

Canada

The bank of Japan released the minutes from their last meeting on Friday. At that meeting no action was taken with relation to bond market volatility and this disappointed the market somewhat. The minutes show there was certainly a discussion about the issue with a number of views aired, and one member suggesting limiting quantitative easing to two years. Although they haven’t taken action on the issue yet, they may have to soon. The bond market volatility has spilled over in equities, and the currency, with big moves last week in all the Japanese markets. Aside from a speech from the Bank of Japan governor this coming Friday, there is little in the way of economic data out. All eyes will be on the Fed meeting and any potential headlines from the G8.

No chart with that title exists.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »

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