Confusion was the main theme last week with both the FED and ECB causing market consternation with mixed rhetoric on policy

By Ian Dobbs*:

Conditions in the financial market over the last week have not been pretty.

Mixed up confusion was the clearest theme. Lower levels of liquidity saw increased ranges following the mixed messages from central banks, and mostly disappointing economic news.

Both the FED and ECB caused market consternation with mixed rhetoric on policy.

Worsening conditions in Portugal and Italy highlighted on-going risks in Europe.

Chinese news has been mixed at best, and intense focus on the health of its banking sector continues to cause unease. Expect these themes to remain at the forefront in the coming weeks and months.

Levels of volatility are likely to remain elevated in most markets. The recent USD strength looks less convincing in recent sessions, and this will provide a point interest in the coming weeks.

Major Announcements last week:

·  NZIER Business Confidence 32 vs 33 (remains high)

·  Canadian Building Permits 4.5% vs 2.6% expected

·  Chinese Inflation 2.7% vs 2.5% expected

·  UK Manufacturing -.8% vs +.3% expected

·  AU Unemployment rate 5.7% vs 5.6% expected

·  BOJ leave Monetary policy unchanged as expected

·  US Consumer Sentiment 83.9 vs 85.3

NZD/USD 

The last week has seen the New Zealand dollar test higher and test lower but end up around where it stated. Mid last week after the Fed minutes the currency spiked up through resistance at 0.7880, reaching as high as 0.7968, but the move was short lived. The currency quickly traded back down to 0.7800 where is seemed comfortable. In the early part of last night we saw a bout of USD strength with the NZD getting pushed down to 0.7732. However the losses were quickly reversed in the wake of much softer than expected US retail sales data and the NZD quickly headed back up to 0.7800. The currency has now spent the last three weeks trading sideways in the broad 0.7700 - 0.7900 range. It is noticeable that it has failed to make fresh lows on a number of occasions, when the AUD has been doing just that. This does warn of the potential for a bigger corrective rally, but it will take a sustained move above resistance at 0.7880 to really bring that into focus. In the meantime we can expect more sideways action. Any move below 0.7700 would be a very weak signal and warn that the medium term downtrend is still in play with further losses to follow.

NZD/AUD (AUD/NZD)

The NZDAUD continues to grind out gains and now seem very comfortable above 0.8500 (1.1765). The recent highs of 0.8631 (1.1586) were made on Friday evening after comments from the Chinese finance minister hit the wires that seemed to suggest growth going forward could be below 7%. Both the NZD and AUD got sold, but the AUD saw the worst of it making fresh cycle lows and this caused the cross rate to spike above 0.8600 (1.1628). However, like many moves of the past week, a good chunk of it was unwound pretty quickly. This afternoon’s release of the RBA minutes has lent support to the Australian dollar and as a result the NZDAUD cross is testing down towards 0.8530 (1.1723). This correction could easily head a fair bit  further lower, however on a longer term time horizon it’s not hard to imagine levels of 0.8800 (1.1364) or even 0.9000 (1.1111)by the end of the year.

NZD/GBP (GBP/NZD)

There has been little action in this pair over the last few days as it consolidates around the 0.5150 (1.9417) level. Last week’s attempt over 0.5250 (1.9048) was very short lived and the subsequent pull back into the now well defined range of 0.5000 - 0.5250 (1.9048 - 2.0000) confirms we can expect more sideways action ahead. The big risk on the week is centred around the Bank of England minutes and what information the market can gather from those in relation to new governor Mark Carney's influence. We know he’s got the bank looking at forward guidance, but what the market really wants to know is the impact he will have on voting with regard to more quantitative easing. Is he voting for more QE like his predecessor Mervyn King? This is what the market is expecting so the risk is if he didn’t vote for more QE, the Pound Sterling could find some strength. If this is the case then cross to the NZD could again be testing 0.5000 (2.0000). Before that we get readings on inflation tonight and then on Thursday there is retail sales data.

 NZD/CAD

In the second half of last week the NZD succumbed to pressure from the CAD. For the most part this pressure was a product of increasing fear about the state of the Chinese economy and banking sector. More positive Canadian news also contributed. The pair finally found support at .8050 after easily pushing through the .8150 level. The start of the week has seen the Chinese GDP numbers hit expectation and this has alleviated pressure on the NZD to a certain extent. Today’s benign NZ inflation number was of limited impact. The focus is on Canada for the remainder of the week. Manufacturing numbers come later on today, ahead of the BOC monetary policy announcement on Wednesday, and inflation data Friday. Expect the pair to continue to trade with this more comfortable .8050/.8250 range in the coming week.

NZD/EURO (EURO/NZD)

There has been little in the way of positive news flow out of Europe in the last week, however the Euro seems to be comfortable holding on to much of the gains it made after the Fed minutes last week. As the NZD gave back most of its same gains the cross has drifted back below 0.6000 (1.6667). With little positive news to trade off I still expect dips toward 0.5900 (1.6949) to find support in the near term. We do get German economic sentiment data tonight that has the potential to impact along with Euro inflation and trade figures.

 NZD/YEN

Last week was an interesting one for this pair. The on-going concerns about the Chinese economic situation and banking sector negativity impacted on demand for the NZD. After initial appreciation the NZDJPY came under pressure. We have send a grinding recovery of sorts since yesterday’s Chinese GDP number came in on expectation. Current levels still look to be towards the lower end of the recent rate. This week sees today’s NZ inflation number provide the NZ focus. Its benign composition highlights the RBNZ predicament and the .7% annual number was of limited impact.  In Japan the BOJ monetary policy meeting minutes on Wednesday will be watched, but should similarly be of limited impact.

AUD/USD

The last week has seen a decent range for the Australian dollar of around 300 points against the USD. The highs were made in the wake of the Fed minutes that saw broad based USD selling. That move was short lived however and the AUD quickly headed back to where it was before the announcement. Since then the currency has suffered on the back of soft Chinese data and comments from Chinese officials. This saw the currency make fresh cycle lows near 0.9000 on Friday but there was little in the way of follow through selling and the AUD recovered a little. That recovery was helped yesterday when Chinese GDP came in close to expectation. There had been plenty of rumours that it would be much weaker, so the AUD benefited from a small relief rally. Today’s RBA minutes have also lent support to the currency as they seem to have reduced the expectation of a near term rate cut. Overall the currency still look vulnerable as it continues to make fresh lows on a regular basis. Only a sustained move up through 0.9250 will take the pressure off the downside.

AUD/GBP (GBP/AUD)                            

After touching highs of 0.6186 (1.6166) in the wake of poor manufacturing data last week the AUDGBP cross turned around headed south. This came on the back of weakness in the Australian dollar that was caused by soft Chinese data and comments from Chinese officials. The pair touched its lows on Friday afternoon and has since put in a small recovery. The RBA minutes released this afternoon have been supportive of the AUD as they seem to take a near term cut off the table. This has seen the cross trade up to around 0.6060 (1.6502) so far. The Bank of England minutes have the potential to shake things up as the market looks for clues as to how much influence new governor Mark Carney has had. We also get readings on inflation and retail sales from the UK this week. Support around 0.5950 (1.6807) should contain the downside for now.

AUD/EURO (EURO/AUD)

The EUR has remained surprisingly strong in the face of less than positive news. This combined with negative news and data out of China that weighed on the AUD and caused the cross make fresh lows late last week. There has been some respite for the AUD this week as Chinese GDP came in around expectation yesterday and today’s RBA minutes were a bit more supportive than expected. They certainly don’t sound like they are on the cusp of another cut next month as some had been predicting.  This has seen some AUD strength the cross to the EUR now trades back above 0.7000 (1.4286). I continue to expect any dips below 0.6950 (1.4388) to find buyers with potential for a move back up over 0.7100 (1.4085) if we get some EUR weakness. Data out tonight in the form of German economic sentiment, Euro-zone inflation, and trade data will be closely watched. Later in the week we also get Australian business confidence.

AUD/YEN

This pair continues to see relatively large inter week ranges. Last week saw the AUD under increasing pressure that drove the pair over 3.5% lower in the latter part of the week. In part the fears around the situation in China drove the move. These were alleviated somewhat on Monday as the Chinese 2nd QTR GDP hit expectation. This has driven a recovery for the AUD, and today’s RBA monetary policy meeting minutes have further eased the way higher for the pair. Tomorrow will see the release of the BOJ meeting minutes and these will also be closely watched. The remaining focus for the week will come from the Australian business confidence numbers on Thursday. The pair looks more comfortable back up above the 90.50 level, which should provide support this week. Resistance will likely been seen at 92.50, but there will have to be improved global sentiment to test that level this week.

AUD/CAD

The Australian dollar saw considerable pressure from the CAD in the latter half of last week.  The plunge in Friday was of particular significance as the support at .9500 was broken. However, yesterday’s on expectation Chinese GDP data has calmed nerves and consequently the AUD demand has improved. The just released RBA minutes were not as “dovish” as the market expected and this has seen the pair recover through that .9500 level. With a seemingly lower chance of further easing to the cash rate in the short term, there appears to be room for a little further AUD appreciation from current levels. Australian business confidence numbers on Thursday round out the Australian focus for the week. In Canada there are manufacturing numbers, the BOC monetary policy announcement, and retail sales up for release this week. Holding above .9500, should see the pair consolidate within the .9500-.9700 range in the short term.

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Market commentary:

Conditions in the financial market over the last week have not been pretty. Mixed up confusion was the clearest theme. Lower levels of liquidity saw increased ranges following the mixed messages from central banks, and mostly disappointing economic news. Both the FED and ECB caused market consternation with mixed rhetoric on policy. Worsening conditions in Portugal and Italy highlighted on-going risks in Europe. Chinese news has been mixed at best, and intense focus on the health of its banking sector continues to cause unease. Expect these themes to remain at the forefront in the coming weeks and months. Levels of volatility are likely to remain elevated in most markets. The recent USD strength looks less convincing in recent sessions, and this will provide a point interest in the coming weeks.

Australia

The Australian dollar has remained under pressure recently on the back of negative news flow out of China. The currency made fresh lows on Friday evening. This came after comments from the Chinese Finance Minister suggested that GDP growth as low as 7% could be on the cards. The comments were later clarified as been misreported, but the damage was already done. The actual GDP figures for the second quarter were released yesterday and came in around expectation at 7.5%. This saw a small recovery in the AUD, but it’s clear the direction the market wants to take the currency. Anything slightly negative and the AUD get sold hard. We have however just had the release of the RBA minutes and that has helped the currency. The minutes say the bank sees the current policy as appropriate, and seem to take the risk of a near term cut off the table. There were some who were predicting a cut at the next meeting and they will no doubt now reassess that. This should continue to support the currency in the short term. Later in the week we get readings on  business confidence that will also be closely watched.

New Zealand

We’ve had New Zealand inflation data out today and it has shown a distinct lack of pricing pressures in the economy. The result came in touch under expectation and saw the NZD come off a few points. The only other news out of NZ has been on the RBNZ’s plan to implement Loan-to-value ratios (LVR’s) for mortgage lending. There is a lot of debate around this, but the fact remains the housing market is a big risk for the economy and it’s the RBNZ’s job to do whatever it can to mitigate those risks. House prices, especially in Auckland, are well beyond overvalued. For this reason the RBNZ has been signalling for some time that they want to use other tools, as opposed to a cash rate hike, to try and cool the market. These LVR’s are quite possible just the first of many steps to rein in house prices, and rate hikes are certainly not ruled out altogether.  The only reason the RBNZ hasn’t wanted to use rate hikes at the moment is due to the strength in the currency. But if the weakness we have seen over the last couple of months continues, then rate hikes toward the end of this year are a very real possibility.

United States

Data out of the United States has been a little patchy the last few days. On Friday night we got strong readings on producer prices. These are likely to make the Federal Reserve (FED) more comfortable in tapering asset purchases over the coming months. However, we also got consumer sentiment readings that came in below expectation and are slightly down in last month. This shows consumers are a little bit wary of the outlook going forward. That was backed up last night by some surprisingly weak retail sales data. These figures caught the market by surprise, and this saw a quick turnaround in the fortunes of the USD. The dollar rapidly gave up any gains it had made on the day, and sentiment was weighed on even further as a number of forecasters are now revising down the GDP figures for the second quarter. Although this ‘soft patch’ of data doesn’t change the overall outlook for the US economy as most commentators expecting a robust third quarter, it does leave the USD vulnerable to a sizeable correction. There is plenty of data out over the rest of the week, as well as a testimony by Ben Bernanke on Wednesday night that will be closely watched. After the mixed signals given recently, the market will be keen to get a better handle on the Fed chairman's outlook.

Europe

The Euro currency has been reasonably steady the last few days, consolidating gains made in the middle of last week. There hasn’t been much in the way of support coming from the news flow, but the currency hasn’t been affected too much. Friday night saw some disappointing industrial production data and rumours of a French downgrade. The rumours turned out to be true with Fitch ratings agency cutting France one notch from AAA. Political uncertainty in Portugal remains high and it’s not looking much better in Spain. The Spanish prime minister is facing fresh calls for his resignation over a payments scandal. In the face of this the Euro has remained well supported over the last few days. We have had comments from an ECB official overnight saying forward guidance allows for lower rates. But it’s hard to see how how Draghi’s guidance that ‘rates will stay low for an extended period of time’ has changed the markets view at all. We can only assume that the ‘extended period of time’ means until data improves. How is that different from before? Unless this gets clarified somewhat, I can only believe that the interest rate market will slowly unwind much of the moves seen after the ECB meeting. Tonight  we get some key data in the form of German economic sentiment, Euro-zone inflation and trade balance.

United Kingdom

Although it has started off quietly for the United Kingdom this week holds plenty of potential for action. We get inflation data tonight, the Bank of England (BOE) minutes on Wednesday and retail sales on Thursday. The BOE minutes will be particularly interesting as the market is keen to see weather new governor Carney voted for more stimulus or not. If he did, then we will probably see the GBP come under some pressure. But as the market is expecting that the bigger reaction will likely be if turns out he didn’t vote for more QE. The GBP has been relatively quiet since it made some gains in the middle of last week, but data over the next few days could well dictate medium term direction.

Japan

There has been no news to impact the market or the outlook for the Japanese economy over the last few days. This is in large part due to the Japanese holiday yesterday. There is no data set for release today and to be fair the only data of note this week will be minutes from the Bank of Japan meeting out on Wednesday. They are unlikely to show anything dramatic and should just reaffirm that the BOJ will keep policy very stimulatory until inflation reaches 2%. The Yen itself continues to slowly weaken now trading back above 100.00 to the USD.

Canada

It could be a very interesting few days for the Canadian dollar and its economy. The government is announcing a cabinet reshuffle today, which shouldn’t have much impact if as expected the finance minister retains his portfolio. We did get home sales data out overnight and although it showed gains, they were less than the market was expecting and sales activity is down on the previous year. Prices are however up 4.8% on the previous year. But the highlight of the week will be the Bank of Canada rate decision out in the early hours of Thursday morning. No change is expected at this meeting however the market is expecting a rate hike before the end of the year. In the last few days there have been a couple of articles suggesting the bank will push out the timing of any potential rate hike. The basis for these calls is an economy whose outlook isn’t all that bright and this may be enough for the bank to alter its expected path of interest rates. Later in the week we also get readings on wholesale sales and inflation.

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