Officials from many countries want to keep interest rates low; Fed's QE tapering announcement has had the opposite effect and sent rates higher

By Ian Dobbs*:

This week is a big one for markets, with a number of central bank monetary policy decisions followed by the key US employment numbers on Friday. 

Today we have the Reserve Bank of Australia rate decision, then on Thursday we have both the Bank of England and the ECB policy meetings.

In the wake of the Fed’s announcement on tapering quantitative easing, interest rates have moved higher around the world.

This is not a welcome response for many central banks who are still trying hard to stimulate economies into consistent growth. Officials from many countries have been on the wires recently stating rates are to stay low for the foreseeable future. They could use these meetings as a chance to be much more specific, and give definite time frames on how long rates will remain low.

This forward guidance would at the least see short term interest rates regain some of the lost ground.

The end of the week will hold plenty of opportunity for action with US employment numbers set for release. The US dollar has remained strong in the wake of the Fed’s announcement, and the risks must lie with a low employment growth number causing a decent correction.

Major Announcements last week:

·  US Durable Goods Orders 0.7% vs 0.0% expected

·  US Consumer Confidence 81.4 vs 75.2 expected

·  NZ Trade Balance 71m vs 412m expected

·  UK Current Account -14.5B vs -11.9B expected

·  US Pending Home Sales 6.7% vs 1.1% expected

·  Canadian GDP 0.1% as expected

NZD/USD 

The recent volatility continued for this pair throughout the last week of trade. However, whilst the pressure on the NZ dollar remains, the pair looks to have established a base for the time being. The support around the .7700 level held through several tests last week. This week sees little in the way of NZ economic news due for release. The focus will come entirely from the US lead, with the focus on Friday’s employment report. A weaker employment component of the overnight US manufacturing numbers highlights the importance of this number. Expect further consolidation within the recent range ahead of this important report.

NZD/AUD (AUD/NZD)

This pair has continued to trade in its recently established range, consolidating the recent NZ dollar strength. This week’s focus comes entirely from Australian input in the absence of any top tier NZ economic news. The RBA monetary policy announcement due later on today should not offer any surprises, with the cash rate unchanged at 2.75%. The latest retail sales, trade balance and building approval numbers round out the Australian data for the week. Expect the pair to continue to consolidate within its recent range this week.

NZD/GBP (GBP/NZD)

This pairing has consolidated its recent move over the last week. The NZ dollar remains vulnerable to bouts of pressure, but seems to have established a base for the time being at .5000 (2.0000). This .5000/.5200 (1.9230/2.000) range is where the pair comfortably spend the second half of 2012. This week’s focus comes from the UK, in the absence of any material NZ economic news due for release. Overnight the latest manufacturing numbers surprised to the upside, and these come ahead of the latest construction and services numbers due midweek. The Bank of England’s monetary policy announcement on Thursday should off little surprise. But with new Governor Carney at the helm, it will be closely watched. Expect further range trading from this pair in the absence of any surprises. The grinding appreciation from the NZD can be expected ahead of the US employment numbers on Friday, with the USD demand currently being a primary driver in the wider markets.

 NZD/CAD

Movements in the NZD seem to have been the driving force of this pair over the last few days. As the New Zealand dollar sank on Friday evening so did this cross, and the resulting recovery in the NZD has seen the pair back up close to the week’s highs. There is good resistance between 0.8230-0.8250, and this should prove difficult to overcome in the near term. With little in the way of economic data out of New Zealand this week, the focus will be on Canadian data. To that end we get trade balance on Thursday followed by employment data on Friday. With the US being Canada’s biggest trading partner, US employment figures also out on Friday can have a big impact on the pair.

NZD/EURO (EURO/NZD)

The recovery off the recent cycle lows for the NZD against the EURO ran out of steam at 0.6030 (1.6584), in the middle of last week. Since then we have seen sideways consolidation between that peak, and 0.5900 (1.6950). Improved readings on Euro-zone manufacturing have helped to support the Euro, as the market awaits the ECB rate decision on Thursday. Prior to the ECB announcement, the latest data on retail sales and readings on the service sector will be released to offer a lead. It’s hard to know just what ECB president Draghi will say at his press conference on Thursday, however recent comments from him and other officials give us a clue. They are not at all happy with the move higher in interest rates since the announcement on tapering by the US Fed. It’s not unreasonable to expect them to try to talk down longer term interest rates, or perhaps even take bolder action. Any such event should undermine support for the EUR, at least initially. Until then expect the pair to be contained in the 0.5900-0.6050 (1.6530-1.6950) range.

 NZD/YEN

After a long period of sideways trading, the NZDJPY pair started to slowly march higher around the middle of last week. That move has continued into the early part of this week, and the pair now trades just below 78.00. A good survey on business optimism out of Japan yesterday has done little to influence the price action, and a break above resistance at 78.00 would open the way for gains toward 80.00. There is little in the way of data out of New Zealand this week and Japan only has some second tier numbers scheduled for Friday. Before that we get a speech from BOJ governor Kuroda on Thursday, and Friday’s US employment numbers certainly have the ability to move the pair.

AUD/USD

The Australian dollar spent much of last week ever so slowly grinding its way off its lows at 0.9148 that were set last Monday. However, there was very little in the way of momentum in the move and on Friday evening, another bout of US dollar strength saw the AUD quickly retreat. There was no real trigger for the move, aside from month end flows, and the AUD didn’t put up much of a fight. It quickly traded down through 0.9148 to set a new cycle low at 0.9114. The early part of this week has seen a small recovery back up over 0.9200, but again there is little real momentum in the move. The market is waiting to see what the Reserve Bank of Australia (RBA) have to say today after their monetary policy meeting and that will help decide AUD direction in the near term. Later in the week we get key US employment numbers that will also have a big impact. So far the US dollar has ignored all the FED officials who have been saying the markets overreacted to the tapering announcement. If we happen to get a soft US employment report there is potential for a sharp reaction. Other Australian data to watch for includes retail sales and trade balance on Wednesday, and building approvals on Thursday.

AUD/GBP (GBP/AUD)                            

The downtrend of the past two months from the AUD against the GBP seems to have taken a pause, at least for now. With a brightening outlook in the UK and a softer one for Australia, it’s hard to see a turnaround in the overall trend of this pair. However, the market may have gotten a little ahead of itself, and this leaves room for more sideways consolidation, or perhaps even a small corrective bounce from the AUD. The trigger for any such move could come from the RBA today or the Bank of England on Thursday. These are the two key events for the pair this week. Ahead of these events there is minor support around 0.6000 (resistance 1.6666)protecting the recent cycle lows of 0.5926 (highs 1.6875). Any increase in AUD demand will run into resistance around 0.6150 (support 1.6260). A move through that level could signal the start of a much broader corrective rally for the AUD. Other data to watch for includes Australian retail sales and trade balance on Wednesday, and building approvals on Thursday. Out of the UK there are readings on the construction sector tonight, and the service sector tomorrow night.

AUD/EURO (EURO/AUD)

Last week was a tail of two halves for the AUD against the EUR. The first half of the week saw the AUD recovering well off its recent lows, but it ran out of steam in the middle of the week with the pair peaking around 0.7170 (slump 1.3947). From there it slid south into the weekend as the Australian dollar continued to come under pressure. The early part of this week has seen a very small recovery from the AUD as the market awaits both the RBA and ECB rate decisions. These two events will dictate near term direction. Looking at the broader picture, it seems momentum is starting to wane on the downtrend of the past two months for the Australian dollar. This would suggest a period of consolidation is likely with the chance of a small corrective increase in demand. For the time being, 0.7000 -0.7200 (1.4285 - 1.3889) looks likely to contain the pair. A move below 0.7000 (above 1.4285) would be a weak signal and warn of further AUD losses to come. If the pair can trade up through 0.7200 (1.3889), this would dramatically increase the chance of a broader corrective increase in AUD demand that would then target 0.7600 (1.3158). Other data to watch for this week includes Australian retail sales and trade balance on Wednesday, and building approvals on Thursday. Europe has service sector readings and retail sales on Wednesday night.

AUD/YEN

After a long period of sideways trade the AUDJPY finally started to find some life in the second half of last week. Thanks in most part to weakness in the Yen, the pair started to push higher. Aside from a dip late on Friday as the AUD made fresh cycle lows, the gains have continued. These gains come in the face of better readings out of Japan on business optimism released yesterday. Yesterday also saw the release of a manufacturing index for Australia that has shown a solid improvement. The cross is currently trading just above 92.00 and there is easily potential for this move to extend to 93.00 or even 95.00. The RBA rate decision is an obvious risk today, and later in the week we get retail sales, trade balance and building approvals.

AUD/CAD

For most of last week the AUDCAD pair traded sideways between 0.9700 and 0.9750. But on Friday as another round of USD strength hit the market. Following this the CAD outperformed the AUD, and the cross sank to briefly trade just under 0.9600. In the early part of this week as the AUD has recovered, so has this pair, and it now trades back up over 0.9700. Some better manufacturing data out of Australia yesterday has helped and the market now awaits the RBA rate decision today. No change in interest rates is expected, however the accompanying statement will be closely scrutinized for clues as to the timing of the next potential rate cut. Later in the week there is data on Australian retail sales and trade balance as well as building approvals.

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Market commentary:

This week is a big one for markets, with a number of central bank monetary policy decisions followed by the key US employment numbers on Friday.  Today we have the Reserve Bank of Australia rate decision, then on Thursday we have both the Bank of England and the ECB policy meetings. In the wake of the Fed’s announcement on tapering quantitative easing, interest rates have moved higher around the world. This is not a welcome response for many central banks who are still trying hard to stimulate economies into consistent growth. Officials from many countries have been on the wires recently stating rates are to stay low for the foreseeable future. They could use these meetings as a chance to be much more specific, and give definite time frames on how long rates will remain low. This forward guidance would at the least see short term interest rates regain some of the lost ground. The end of the week will hold plenty of opportunity for action with US employment numbers set for release. The US dollar has remained strong in the wake of the Fed’s announcement, and the risks must lie with a low employment growth number causing a decent correction.

Australia

The Australian dollar ended last week on a soft note as broad based USD strength sent it to a fresh low for this cycle. There were no key drivers of the move and so far this week we have seen a recovery of some of the lost ground. There is going to be plenty of fundamental news out of Australia this week for the market to take a lead from. The most notable of which is the Reserve Bank of Australia interest rate decision out this afternoon. Yesterday saw data on the manufacturing sector released. This showed a big positive jump in the index. Although it still shows the industry is still contracting, it was the highest result for two years. The RBA will take heart from results like this as they are an early indication of a rebalancing in the economy. Also out yesterday was data on the Chinese manufacturing sector which showed the weakest reading for four months. This was expected though, as the credit squeeze has slowed the flow of cash to companies. Key data later in the week comes in the form of retail sales, trade balance and building approvals.

New Zealand

New Zealand has a very light economic calendar this week and as a result the market will be looking to offshore factors to take the lead. Central bank interest rate decisions from Australia, Europe and the UK will give plenty of chance for volatility. The broad theme of US dollar strength is still very much in play, even in the face of repeated calls from Fed officials last week that the market has overreacted to Bernanke’s announcement of the tapering of monetary stimulation. The NZD got pushed down to just above 0.7700 on Friday evening as flows continued to support the USD across the board.

United States

The USD has continued to remain well supported across the board. This comes despite continued talk from FED officials who are all singing the same tune. The rhetoric is that the market has overreacted to the FED’s announcement on tapering quantitative easing. It seems the reaction after the announcement in the interest markets caught the FED by surprise. Subsequently, the FED, and most other central banks around the world, have been stressing that interest rates are not going up anytime soon. Markets love to get ahead of themselves, and maybe they have here. But the fact is that ultra easy monetary policy cannot last forever, and at least in the US, it’s close to being scaled back. Last night we got a reading on the US manufacturing sector that looked pretty good at first glance. The sector has shown an overall improvement from the previous month and the result was higher than expected. However, there is some concern about the employment aspect of the report which dropped to its lowest level in four years. With unemployment a key indicator for any FED tapering, this has raised eyebrows. At the end of this week we get the overall US employment growth data. If this happens to surprise with a low number, there is plenty of potential for the markets to unwind at least some of their recent moves. Before that, there is a report on the non-manufacturing sector due for release on Thursday, as well as a number of other FED officials due to speak.

Europe

Europe’s manufacturing sector for the most part, seems to be improving. We got readings from a number of countries last night, and these all came in stronger than expected. This will be welcome news for the ECB, who are predicting a return to growth in the Euro-zone in the second half of this year. However, there are many headwinds, the least of which is not Italy, which could derail those predictions. The ECB is likely to remain very cautious at this week’s monetary policy meeting, and will no doubt try to talk down interest rates that have moved higher in line with the US. Higher interest rates in Europe threaten to undo all the good work the ECB has done over the last year, and they will be keen not to let that happen. There is rumor they may give ‘forward guidance’ on interest rates. That is to state a definite time frame in which rates will not be moved. The Euro has remained well supported recently, in line with the slightly improved economic news. A very cautious tone from the ECB on Thursday, would reduce chance of a change in policy in the foreseeable future, and this could see the EURO put under a little pressure in the short term at least.

United Kingdom

Recent data from the UK has been supportive of the Pound Sterling and the overall economic outlook. At the end of last week we got consumer confidence numbers that beat expectation, with the best reading in two years. Last night a survey of the manufacturing sector was also stronger than expected and well into expansionary territory. This will put a smile on the face of the new Bank of England (BOE) governor, Mark Carney. He has just taken over the role and this week has his first monetary policy meeting. He may well have the best timing in the world, jumping into the job just as the outlook for the UK starts to brighten. That been said, many feel he will want to stamp his mark at the BOE, and what better way to do that than shake things up at his first policy meeting. Although no change in rates is almost a certainty, it’s hard to know what impact he will have on any vote for more quantitative easing. Most likely there will be no change in that as well, but there is talk he could make his mark by releasing a statement with the policy decision. The BOE are one of the few central banks not to do so. This statement could include forward guidance on the likely future path of interest rates. Whatever happens, this week’s rate decision by the BOE holds more risk than usual. Ahead of that decision we get readings on the construction and service sectors of the economy.

Japan

Yesterday saw the release of business survey results from Japan and they were very positive numbers. The mood among businesses has improved sharply, with manufacturing sentiment turning positive for the first time in nearly two years. This is great news for the government, and Bank of Japan (BOJ), as it confirms readings from a number of other indicators that show the economy is starting to pick up. Japan’s economy minister was on the wires shortly after the release saying he sees a ‘V’ shaped recovery for Japan. That may be a little optimistic and there is a long way to go, but these are nonetheless very positive results. What will also please BOJ Kuroda is the reduction in volatility seen over the last week in Japanese stocks and bonds. He is due to make a speech on Thursday which will no doubt be somewhat upbeat.

Canada

At the very end of last week we saw the release of Canadian GDP. It came in bang on expectation and didn’t have much impact as month end flows seemed to dominate the market. We saw another bout of broad based US dollar strength which saw the CAD back toward lows for this cycle, a move in line with the NZD and AUD. The economic calendar is light for the first half of this week, but the second half sees trade balance data followed by employment data and a survey of business optimism.

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