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The NZ$ had rough start to the week thanks to Fonterra's announcement at weekend; A$ impacted by expectations of RBA rate cut

Currencies
The NZ$ had rough start to the week thanks to Fonterra's announcement at weekend; A$ impacted by expectations of RBA rate cut
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By Sam Coxhead*:

In the later part of last week the focus was all on the US employment report. That came in somewhat softer than the market was expecting and saw the USD lose ground against most other currencies. Those losses however were very limited against the commodity currencies such as the NZD, AUD and CAD.

The early part of this week was dominated by a weak NZD after news from NZ’s biggest exporter Fonterra, that it had shipped some contaminated products to customers.

Today’s rate decision from the Reserve Bank of Australia could spark some action, however the market has almost fully priced in a 25 point cut, so the biggest reaction would come from a surprise no change result.

The Bank of Japan rate announcement later in the week should hold few surprises, so the focus will turn to employment data out of New Zealand, Australia, and Canada.

Major Announcements last week:

·  US Pending Home Sales +.4% vs -1.1% expected

·  Australian Building Approvals -6.9% vs +2.2% expected

·  NZ ANZ Business Confidence 52.8 vs 50.1 previous

·  Canadian GDP +.2% as expected

·  US Advanced GDP +1.7% vs +1.1% expected (new calc.)

·  FED leave monetary policy unchanged

·  Chinese Manufacturing (Govt produced) 50.3 vs 49.8 expected

·  Chinese Manufacturing HSBC 47.7 as expected

·  UK Manufacturing 54.6 vs 52.8 expected

·  BOE leave monetary policy unchanged

·  ECB leave monetary policy unchanged

·  US Manufacturing 55.4 vs 52.1 expected

·  US Unemployment rate 7.4% vs 7.5% expected

NZD/USD 

The start of this week has been dominated by news that Fonterra had shipped some contaminated produce and China, amongst other countries, had halted imports. There was a dramatic fall in the value of the NZD at the market open on Monday morning. Having closed the previous week around 0.7835 the currency quickly traded down to 0.7700. Those lows were made in the first few minutes of trading and from then on there was a gradual, albeit choppy, recovery. The NZD climbed back above 0.7800 and overnight made further gains to 0.7850 in the face of strong US data. So at this point is looks as if the impact of the Fonterra news was very short term and provided a great buying opportunity for those who have been waiting for a dip on a number of NZD crosses. Any further strength in the currency should run into good resistance around 0.7900 ahead of tomorrow's employment data.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7839 0.7700 0.7900 0.7699 - 0.8037

NZD/AUD (AUD/NZD)

After spiking up over 0.8900 (under 1.1239) last week the NZDAUD cross drifted lower to close the week around 0.8800 (AUDNZD higher to 1.1364). The Fonterra news over the weekend saw the New Zealand dollar open down substantially on Monday morning with the rate against the Australian dollar briefly dipping below 0.8700. It seems weakness on a number of NZD crosses bought buyers out of the woodwork who had been waiting for an opportunity. Accordingly the currency spent much of the day gradually recovering. Now back to 0.8800 (below 1.1365), the focus for this pair turns to the Reserve Bank of Australia’s rate announcement this afternoon. The market has almost fully priced in the expectation of a 25 point rate cut. This should keep the NZD well supported ahead of tomorrow NZ employment data, as the pressure remains on the AUD.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8790 0.8700 0.8900 0.8690 - 0.8926
AUD / NZD 1.1377 1.1236 1.1494 1.1203 - 1.1507

NZD/GBP (GBP/NZD)

After spending much of the previous two weeks testing the top of the recent range around 0.5260 (under 1.9011), this pair started to pull back in the second half of last week. This was largely in response to stronger data out of the UK. Then with weakness in the NZD at the market open yesterday morning on the back of the Fonterra news, the pair gapped lower to trade around 0.5070 (highs 1.9724). A gradual NZD recovery took place throughout the day, but more strong data overnight from the UK service sector saw the pair trade as low as 0.5055 (highs 1.9782). We have seen a decent recovery again off those levels, however any further upside action should be limited to resistance between 0.5120 (support 1.9531)  and 0.5140 (1.9455) in the near term. The focus for the pair now turns to NZ employment data tomorrow morning ahead of the key Bank of England (BOE) inflation report tomorrow night. The outcome of that report and the investigation into forward guidance by the BOE will be key in determining direction for the pair.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5102 0.5050 0.5250 0.5055 - 0.5261
GBP / NZD 1.9600 1.9050 1.9782 1.9007 - 1.9272

 NZD/CAD

Although the NZ dollar saw periods of pressure from the CAD last week, the real lunge lower from the pair came after the Fonterra whey issues arose during the weekend. The support at .8050 has held and represents the downside target should we see any further NZD weakness this week. As further information has come to light, the NZ demand has returned and the pair sits comfortably off its lows at this time. The Fonterra dairy trade auction results later on today offer the initial focus for this pair. The NZ second quarter employment numbers on Wednesday will offer the remainder of the NZ focus for the week. In Canada, building permit and manufacturing data are on Wednesday also, and then the important employment numbers are on Friday. Expect the pair to range trade around the new lower levels, especially if the AUD remains heavy, and weighs on NZD sentiment.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8112 0.8050 0.8250 0.8049 - 0.8207

NZD/EURO (EURO/NZD)

The EURO saw grinding appreciation over the NZ dollar that accelerated into the end of last week. The Fonterra whey scare than evolved over the weekend saw the NZD hit lows yesterday, before relief came overnight as further information came to hand. Helping demand for EURO’s has been a small improvement in the economic news of late. This week in New Zealand will see tonight’s Fonterra dairy auctions results closely monitored ahead of the NZ employment numbers tomorrow. In Europe the economic calendar is relatively light, but expect focus to come from the German industrial production numbers on Wednesday. The .5830 (1.7150) level represents the key target in the short term, if this pair is to continue its way towards more historically average levels.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.5908 0.5830 0.6030 0.5829 - 0.6023
EUR / NZD 1.6926 1.6580 1.7150 1.6603 - 1.7155

 NZD/YEN

Late last week the NZD came under some intense pressure from the JPY. The NZ dollar suffered as the RBA intimated further easing at today’s monetary policy announcement. Also pressuring the NZD were strong US manufacturing numbers, increasing the chances of early tapering of monetary stimulation from the FED that has benefited the NZD for so long. The Fonterra whey scare that came to light over the weekend added to the negative price action. But overnight as markets saw more positive economic news the pair has bounced off the support level at 76.50. This remains the key area in the short term. If the Fonterra issues pass, expect the NZD demand to remerge. Wednesday’s NZ employment numbers offer a focus ahead of the Japanese monetary policy announcement on Thursday. The Fonterra Global Dairy Trade auction overnight will also be close monitored.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 76.78 76.50 78.50 76.37 - 78.71

AUD/USD

The Australian dollar has struggled for much of the past week. It has been weighed on by expectations of a rate cut by the RBA at their meeting this afternoon, and by stronger data coming out of the United States. Fresh cycle lows were made yesterday morning at 0.8848. Since then we have seen a small recovery back over 0.8900, but the trend is still firmly down. The market is widely expecting a 25 point cut by the RBA today and that is well priced into the current AUD level. Later in the week we get data on Australian employment which can easily influence the currency. However barring any real surprises we can expect 0.9050 to cap any potential upside, and further tests of the recent lows.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.8914 0.8850 0.9050 0.8848 - 09203

AUD/GBP (GBP/AUD)                            

The Australian dollar has been materially outperformed by the Pound Sterling over the past week. The GBP has benefited from a string of better than expected results recently. Solid readings on the construction, manufacturing, and service sectors have helped the GBP. That said, gains for the UK currency have been limited somewhat in the lead up to tomorrow night’s Bank of England inflation report which will be key. On the other hand the AUD has suffered as expectations of a 25 point rate cut by the Reserve Bank of Australia at this afternoon's meeting have gained widespread support. These two central bank events are key for the pairs near term direction. Later in the week we also get data on Australian employment and the UK trade balance.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5805 0.5700 0.5900 0.5792 - 0.6003
GBP / AUD 1.7227 1.6949 1.7544 1.6658 - 1.7265

AUD/EURO (EURO/AUD)

There has been very little respite for this pair since it broke down through 0.6900 (up through 1.4493) early last week in the wake of RBA Governor Stevens’ speech. That speech has cemented market views for a 25 point rate cut by the RBA at this afternoon's meeting. Weakness in the pair has been exasperated by a very resilient EUR which seems to have performed quite well across the board on the back of only mildly better data. We’ve seen a small bounce from the recent AUD lows but it’s nowhere near enough strength to threaten the broader downtrend which remains firmly in place. Over the rest of the week there is a raft of second tier Euro-zone data out and on Thursday we get Australian employment figures.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6723 0.6650 0.6850 0.6671 - 0.6942
EUR / AUD 1.4874 1.4599 1.5038 1.4405 - 1.4990

AUD/YEN

This pair is currently trading only a few points above its recent lows that were made on the 1st Aug at 87.25. Between then and now the AUDJPY has traded as high as 89.08, however the cross turned back down on Friday evening in the wake of the US employment report. The JPY materially outperformed the AUD after that data, and with the expectation of a 25 point rate cut by the RBA today the pair has traded heavily. Along with the RBA decision today we get the BOJ policy statement on Thursday to digest. Barring any real surprises it seems likely the broader downtrend will remain in play. Any potential strength will run into the first line of resistance at 89.00 which should cap in the near term.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 87.35 87.00 89.00 87.25 - 89.08

AUD/CAD

This pair lost a lot of ground in the early part of last week. This was in response to RBA Governor Stevens’ speech which help to cement expectations of a 25 point rate cut from the RBA at this afternoon's meeting. However, unlike most other AUD pairings, the AUDCAD has failed to kick on to the downside instead consolidating in sideways trade for much of the past four trading days. This is due to the fact that the Canadian dollar has kept pace with AUD weakness recently. The CAD traded very heavily after the softer than expected US employment report. This is because expected rate hikes in Canada next year are closely tied to the performance of their biggest neighbour, the US. There is plenty of data out of Canada this week to liven things up including trade balance, building permits and their own employment figures on Saturday morning. We also have Australian employment data on Thursday to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9230 0.9150 0.9350 0.9174 - 0.9442

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Market commentary:

In the later part of last week the focus was all on the US employment report. That came in somewhat softer than the market was expecting and saw the USD lose ground against most other currencies. Those losses however were very limited against the commodity currencies such as the NZD, AUD and CAD. The early part of this week was dominated by a weak NZD after news from NZ’s biggest exporter Fonterra, that it had shipped some contaminated products to customers. Today’s rate decision from the Reserve Bank of Australia could spark some action, however the market has almost fully priced in a 25 point cut, so the biggest reaction would come from a surprise no change result. The Bank of Japan rate announcement later in the week should hold few surprises, so the focus will turn to employment data out of New Zealand, Australia, and Canada.

Australia

There has been little in the way of positive news for the Australian economy lately. Negative sentiment toward the economy and the currency was reinforced yesterday after retail sales data came in well below expectation. This result will only serve to increase the pressure on the RBA to cut rates today, a move that is widely expected and priced into markets. It’s hard to see what will turn around the current trend in the AUD at the moment. We do get more key data on Friday with the employment data set for release. But unless that surprises with some very strong numbers, it seems the pressure will remain on the downside.

New Zealand

The New Zealand dollar has had a rough start to the week thanks to the announcement from Fonterra over the weekend that some of its exported whey products were contaminated. The NZD opened the week around 130 points lower against the USD and was down on all the crosses as well. Fonterra is New Zealand's biggest company and it exports 95% of its production. That makes up 25% of NZ’s total export earnings and equates to around $14 bln a year. So when it’s biggest customer, China, halts all imports the shock waves are felt quickly. The big question now is how much time it will take to fix the situation and put export clients back at ease. If the situation is quickly overcome the impact will be limited and the currency could quickly recover a lot of the lost ground. But if this drags on then the currency could come under further pressure. The latest Fonterra Global Dairy Trade (GDT) auction results are due later on today. On Wednesday we get NZ employment data to digest as well.

United States

Friday evening saw the release of the key US employment report. All indications leading up to the event were that this could be a strong number, but as it turned out the result was less than solid. Expectations for a gain of 185k jobs were dashed as the actual result came in at only 162k. The unemployment rate did however fall a touch to 7.4%. The disappointing report caused the USD to lose a little ground against most other currencies. However, last night we got a reading on the service sector of the economy which was much better than forecast. The net result seems to be that expectations remain for the Fed to start tapering asset purchases in September. The rest of the week sees some second tier data set for release in the form of consumer credit and wholesale inventories, as well as a speech from Fed member Evans.

Europe

Recent data for the Euro-zone has shown a slight improvement and supported the outlook for very gradual recovery over the coming months. Last night’s reading on activity in the service sector come in a touch above expectation and has reinforced this view. Although the index is still below 50, which is the threshold for expansion or contraction, it still came in at the best level since January 2012. The Euro-zone still faces many headwinds and this was highlighted by a reading on investor sentiment, also released last night, which came in substantially weaker than forecast. We can expect further patchy data, albeit with a slightly improving trend, going forward. To that extent over the rest of this week we will get data on French and German industrial production, trade balance, and the ECB monthly report.

United Kingdom

The UK has had a string of sold data out over the last couple of weeks, and last night was the icing on cake. The index of activity in the service sector smashed expectations and printed at the highest level since 2006. That’s pre-crisis levels. The service sector is the biggest sector of the economy accounting for around three quarters of the overall economic activity. This comes on top of good readings last week for the manufacturing and construction sectors. This data suggest the second half of this year could well be a good one for the UK with growth outperforming expectations. While the GBP has gained some ground on the back of this and last week’s data, the gains are less than what could have been expected. This is largely because the market is waiting for tomorrow night’s Bank of England (BOE) inflation report. Along with that release, the BOE is going to give more details on the new forward guidance policy. The market expects these details to be a negative influence on the Pound. There are plenty of risks around this announcement, but the biggest move would surely come in the form of a rallying GBP if the BOE fail to deliver a strong guidance. The difficult thing for the UK in trying to tie forward guidance to something like the unemployment rate, as in the US, is that their inflation is near the top end of the targeted band. In fact inflation in the UK has remained stubbornly high over the past five years and with economic activity picking up the outlook must be for it to increase. This is not the case in the US or other countries. So tomorrow evening will be critical in dictating direction for the GBP.

Japan

There has been little to change the current outlook for the Japanese economy recently. Patchy data has only served to support the forecast of ultra-easy monetary policy for the foreseeable future. There is much debate within the government at the moment around the proposed sales tax increases planned for next year. Japan has a huge public debt and this has to be addressed at some stage. Many long term forecasters are already saying that changing population demographics make that debt unsustainable. So any delay in the tax increase would hit long term fiscal confidence. The key events for the rest of this week are the current account and the Bank of Japan monetary policy statement on Thursday, along with consumer confidence on Friday.

Canada

There has been no data of note for Canada since last week's GDP numbers. Friday nights US employment report hasn’t helped the Canadian dollar at all. It seems the weaker than expected US data has negatively impacted the CAD more than the USD. This is because expectations for a rate hike in Canada next year are closely tied to the US economy continuing to pick up. So while the USD lost ground against most other currencies after the data, it actually gained ground against the CAD. We have had a very quiet start to this week which has been compounded by a bank holiday in Canada today. So we have to wait for the second half of the week to get any fresh insight in the Canadian economy. That being said there is plenty to digest over the coming days including trade balance, building permits, and business optimism index. Then at the very end of the week we get housing starts and employment data.

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Sam Coxhead is a currency analyst with Direct FX You can contact him here »

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