Plenty of risk around central bank announcements with markets keen for insight into Fed's QE tapering timeline

By Ian Dobbs*:

This week is a big one for markets with a number of key events scheduled. Central bank policy meetings will dominate the middle of the week.

The US FED’s decision on Thursday morning is followed by announcements from the Bank of England (BOE), and the European Central Bank (ECB) on Thursday evening. There is plenty of risk around these meetings with markets keen to get further insight from the FED on the timing of quantitative easing tapering.

We are also looking for more details around the forward guidance the BOE signalled at their last meeting.

In the last hour we have seen comments from the Reserve Bank of Australia (RBA) governor which have caused Australian dollar losses across the board. On top of all this, we have key US employment numbers at the end of the week. So we can expect lots more action and some decent ranges over the coming days.

Major Announcements last week:

·  LDP win Japanese upper house elections

·  Japanese Inflation +.4% on yearly basis

·  Canadian Retail Sales +1.2% vs +.1% expected

·  NZ Trade Balance +414m vs +5m expected

·  Australian Inflation .4% vs .5% expected

·  Chinese HSBC Manufacturing 47.7 vs 48.6 expected

·  European Manufacturing 50.1 vs 49.1 expected

·  RBNZ leave cash rate unchanged at 2.50%

·  UK prelim. GDP +.6% as expected.

NZD/USD 

The New Zealand dollar has maintained and reasonably firm footing since last week’s RBNZ statement. The currency closed the week near 0.8100 and spent much of yesterday testing that level as well. It’s failure to break through has seen a pullback overnight, and some weak building consent numbers this morning add to the softness in demand. The first line of support now comes in around 0.7990, and as long the currency holds above there the focus remains on the topside. However the picture quickly changes on a sustained move below that level. Such a move would warn the broader downtrend of the past three months is trying to reassert itself. The only other NZ data out this week is business confidence released tomorrow. After that, the focus turns to offshore events and in particular the FED policy meeting on Thursday morning, and US employment report on Friday night. Both these events could cause a large move in the value of the USD.

NZD/AUD (AUD/NZD)

After strong gains in the second half of last week, this pair had taken a breather and spent the last couple of days consolidating above 0.8700 (1.1494). That all changed in the wake of RBA Governor Stevens speech this afternoon. His comments that the recent inflation data has left from for further rate cuts sent the AUD lower and the NZD took off again. It has now traded over 0.8800 ( below 1.1363) and all the risks are still skewed to the topside for the NZD. There is now good support at 0.8700 (resistance 1.1500) should we get any sort of pullback. The long term trend is up and a target of 0.9000 (1.1111) is still well on the cards by the end of the year, if not earlier.

NZD/GBP (GBP/NZD)

After rallying up to 0.5260 (1.9011) last week in the wake of the RBNZ monetary policy statement, the NZD has so far failed to kick on. This has seen the pair drift a touch lower as the market awaits the key BOE monetary policy decision on Thursday evening. That BOE announcement could set the tone for near term direction. The market is expecting the BOE to give some firmer forward guidance and this will limit any strength in the GBP ahead of the actual release. There is plenty of resistance between 0.5250 and 0.5300 (1.9048 and 1.8868). While this caps the topside NZD the risk remains for the pair to drift back down toward the bottom of its recent range at 0.5000 (2.0000).

 NZD/CAD

Last week saw muddled price action ahead of the RBNZ monetary policy announcement last Thursday. The CAD saw increased demand following the positive retail sales numbers, but the small gains were reversed following the strange pick up in NZD demand following the RBNZ meeting. The pair has stalled at the initial resistance at .8320 and since then the NZD has seen some pressure as the equity markets have struggled. This week sees the ANZ business confidence survey on Wednesday provide the focus in NZ. Also on Wednesday, in Canada, are the monthly GDP numbers which will be closely watched. The market’s reaction to the FED monetary policy announcement will probably provide the primary lead overall. To that end, it is hard to see them disappoint a market expected guidance towards September tapering, and this should temper any material NZD gains from the current levels.

NZD/EURO (EURO/NZD)

The NZD rallied up to 0.6100 (1.6393) last week in the wake of the RBNZ monetary policy statement. It closed the week just below that level and spent much of yesterday testing 0.6100 (1.6393) again. Its failure to break through has seen it pull back a touch to currently trade around 0.6050 (1.6529). The market is now in a holding pattern awaiting some key releases later this week. We have the FED policy meeting on Thursday morning, and then the European Central Bank meeting on Thursday night. Key support for the pair comes in around 0.6010 (resistance 1.6639). A move below there would be a weak signal and open the way for a test of recent lows around 0.5850 (highs 1.7094). The topside will prove tougher going with initial resistance at 0.6100 (support1.6393) likely to continue to cap any NZD strength for now.

 NZD/YEN

This pair has continued to see periods of volatility over the last week. The YEN saw some pressure early last week. This pressure followed the news of the strong LDP party election win in the upper house. The risk aversion coming into the election had seen the YEN in demand, so it was only natural this would be unwound when it became clear that PM Abe has the mandate for the aggressive policies he’s implemented. Since then the equity markets have looked shaky, and this has undermined demand for the NZD accordingly. This week sees a lack of domestic focus in either economy, so expect the lead to come from noise created in the wider market. There is plenty of room for action with the various central bank announcements more than likely to add to the recent volatility.

AUD/USD

The Australian dollar finished last week on the front foot trading just below 0.9300. It started this week around similar levels, but overnight some USD strength combine with softer equity markets had seen the AUD drift lower. Trading was subdued until a speech from RBA governor Stevens this afternoon sent the AUD spiralling lower again. His comments that the recent inflation data leaves room for further rate cuts had an instant impact on the currency. The bank also expects the AUD to fall further in line with the deterioration in the terms of trade. This has left the AUD looking very vulnerable, and it will be surprising if the offshore markets tonight don’t look to sell it further. Aside from this the market is waiting for to key events in the form of the FED policy meeting and US employment report. This afternoon’s move in the AUD does warn that the broader downtrend of the past three months is trying to reassert itself. In this case a test toward recent lows around 0.9000 could well be on the cards.

AUD/GBP (GBP/AUD)                            

The failure of the AUD to push on up through 0.6020 resistance (below 1.6611) late last week has left the AUD looking vulnerable. It has now turned lower in the direction of the broader long term trend. Currently trading around 0.5936 (1.6846) the risks are all skewed to the downside and further AUD losses. The target at this point is the recent cycle lows of 0.5914 (1.6909). Comments from RBA governor Steven this afternoon have help the weakness. He has stated that the recent inflation data leaves room to cut interest rates further. He also still sees the AUD as overvalued, and expect further declines. A break below 0.5914 (above 1.6909) would be a very weak sign for the AUD, and the target would then move to 0.5780 (1.7301) ahead of the longer term goal of 0.5465 (1.8298). There will likely be plenty of further volatility this week with the Fed and BOE policy decisions still to come.

AUD/EURO (EURO/AUD)

For the most part this pair has spent the last week with grinding pressure on the AUD from the EURO. The better than expected manufacturing numbers in Europe has helped, but for the most part it has been a case of underperformance. Today’s comments from RBA Governor Stevens has pushed the pair through the AUD support at .6920 (1.4450). Given that the AUD is again at multi year lows to the EUR, the vulnerability remains firmly in place. From here the eyes will be firmly on the FED’s monetary policy announcement Wednesday, ahead of the ECB’s own announcement on Thursday. Expect further volatility for the remainder of the week, with a the bias remaining skewed towards AUD underperformance.

AUD/YEN

The AUD has seen constant pressure from the YEN throughout the last week. The low Australian inflation numbers has left the way open for further easing to the cash rate from the RBA. RBA Gov. Steven’s reiterated this sentiment today with his comments, which looked designed to further undermine demand for the AUD. Initial support looks to be in place at 89.00, and any recovery from the AUD seems unlikely unless the US FED surprise with they guidance later on this week. Any recovery from the AUD will find initial resistance at 91.50, and then 92.50 above, albeit those levels seem a long way away in the current environment.

AUD/CAD

The volatility continues for this pair. Last week saw the reasonable retail sales number in Canada provide support for the CAD. This CAD support placed initial pressure on the AUD, before the wider market sentiment saw the AUD recover into the end of the week. This week has been a different story. The AUD has seen periods of strangely intense pressure and this has been accentuated by comments from the RBA Gov, this afternoon. Comments such as the “recent fall in the AUD makes economic sense” are very much aimed at further undermining demand for the AUD. Expect the volatility to remain in place for the remainder of the week. Monthly Canadian GDP numbers will be closely watched, but the primary focus will be the news coming from the US FED’s monetary policy decision. Given the AUD sits at three year lows against the CAD, its air of vulnerability looks to remain in place for some time yet.

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Market commentary:

This week is a big one for markets with a number of key events scheduled. Central bank policy meetings will dominate the middle of the week. The US FED’s decision on Thursday morning is followed by announcements from the Bank of England (BOE), and the European Central Bank (ECB) on Thursday evening. There is plenty of risk around these meetings with markets keen to get further insight from the FED on the timing of quantitative easing tapering. We are also looking for more details around the forward guidance the BOE signalled at their last meeting. In the last hour we have seen comments from the Reserve Bank of Australia (RBA) governor which have caused Australian dollar losses across the board. On top of all this, we have key US employment numbers at the end of the week. So we can expect lots more action and some decent ranges over the coming days.

Australia

It had been a quiet start to the week for Australia and the Australian dollar, but it’s recently livened up and the next few days should hold plenty of potential for more action. RBA Governor Stevens has just released some comments in the last hour that have seen the AUD come to life. He has said the recent inflation data leaves room for further rate cuts. This caused an immediate drop in the AUD. This is in contrast to the last RBA minutes didn’t give the impression the bank had its finger on the trigger to cut again in August. However, the market now seems to have priced in a very good chance of just that. Later in the week we get private sector credit, home sales data, and producer prices. But the biggest impact for the currency could well come from the US. The FED monetary policy announcement on Thursday morning, and US employment numbers on Friday night will be closely watched.

New Zealand

The New Zealand dollar had remained reasonably firm since last week’s RBNZ monetary policy statement, but backed away from its recent highs last night. The only other data out since then has been building consents release this morning. They came in surprisingly weak and saw the NZD give up a little more ground. These are volatile numbers however and shouldn’t have a lasting impact. Aside from business confidence out tomorrow, there is little on the domestic front for the rest of the week. The focus will now turn to central bank policy meetings for the UK, Europe, and the US. Then at the very end of the week we get US employment numbers which are always closely watched.

United States

This week should be a big one for the US, with the Fed policy meeting early Thursday morning followed by the employment report on Friday night. Last week ended on a solid note with consumer confidence showing gains. The result was actually the best reading since July 2007 and shows consumers are feeling very positive about the economy. The question is can this flow through into higher spending and more jobs? The Fed policy meeting will be closely scrutinized for indications as to the timing of any tapering of the quantitative easing programme. At this point most in the market are expecting that to happen at the September meeting. Key to any reduction in stimulus is the employment market, and Friday’s numbers will therefore be very important. There is plenty of other data out this week as well, the highlights being GDP data and a reading on the manufacturing sector.

Europe

There has been little to materially change the outlook for the European economy over the last few days. This week should however be a very interesting one, with the ECB monetary policy decision on Thursday evening. With a recent run of better data the ECB shouldn’t feel the need to ease monetary policy any further at this stage. President Draghi will no doubt repeat his comments from the last meeting where he pledged to keep interest rates low for as long as needed. That ‘forward guidance’ was a big departure from the norm for the ECB, and there is talk more changes could be in the pipeline. A number of articles recently have suggested the ECB will start publishing the minutes from meetings in the same way many other central banks do. Ahead of the ECB meeting, we have Euro-zone unemployment and a raft of German data including retail sales, consumer climate, and inflation.

United Kingdom

It’s shaping up to be a big week for the UK and the Pound Sterling. Things have started out on the right foot for the economy with data released last night in the form of CBI Realized Sales. That index has lept up to its best levels since January, and came in well above expectation. This is a good indicator of strong consumer spending and reaffirms some of the better data the UK has seen in recent weeks. The GBP however struggled to gain much ground on the result as the market awaits the BOE monetary policy announcement on Thursday evening. New Governor Carney has already made an impact at the bank, changing tradition and releasing a statement with the decision. The market is keen to get further details on his forward guidance for rates. The expectation is that firmer guidance on rates at this meeting will be a negative for the GBP. That is keeping a lid on any potential strength the Pound might see in the lead up to the BOE meeting. This week we also get readings on the manufacturing and construction sectors, as well as consumer confidence.

Japan

It seems that the aggressive growth and inflation policies from the Japanese government and the Bank of Japan are starting to work their magic. On Friday we got the latest reading on inflation and it came in above expectation at a 0.4% yearly rate. That’s the highest level since 2008, and it helped the Yen make some solid gains across the board. Yesterday we got retail sales data and although it came in a touch below market expectations, the numbers were still a substantial improvement on the previous month and show consumer spending continues to grow. We have however, had some less than impressive data today in the form of household spending and industrial production. Both these figures came in well below expectation, which just serves to show that the current ultra-easy monetary policy from the BOJ will be here for a long time.

Canada

There has been little significant economic news out of Canada since last week’s retail sales numbers. They were very strong and have helped to keep the Canadian dollar well supported, as we head into what is likely to be an eventful week for FX markets in general. On Wednesday we get Canada’s raw material price index which is a lead indicator of inflation, then on Thursday we get readings on Canadian GDP. The big focus however will be on releases from Canada’s neighbour, and biggest trading partner, the USA. With a FED monetary policy meeting and employment numbers in the second half of the week, there is plenty of potential for action.

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