Improving global economic data is being offset by the threat of the US Fed tapering back monetary stimulus

By Ian Dobbs*:

It was a busy week for economic news last week, and this saw further bouts of volatility contained by the broader ranges in most markets. Better than expected economic news in the UK, and to a lesser extent from Europe, kept the pressure on the US dollar for the most part.

This pressure opposes the improving outlook in the US, and the potential lowering of monetary stimulation from the Fed in the coming months.

Expect the rangy nature of the price action to continue in the near term at least, as these kinds of opposing forces battle for ascendency.

Australian sentiment remains under pressure for the most part, helped by the political posturing as the September 7th election approaches.

Today’s announcement from the RBNZ of the October 1st implementation of restrictions of high “loan to value ratios” (LVRs) has dented confidence in the NZ dollar. The move impacts expectations of cash rate increases, albeit to a limited extent.

This week is relatively light on major global economic news, although the annual central bankers symposium in Jackson Hole offers heightened focus.

Major Announcements last week:

·  Japanese prelim. GDP +.6% vs +.9% expected

·  UK Inflation 2.8% as expected

·  German Investor Sentiment 42.0 vs 40.3%

·  US Retail Sales +.5% vs +.4% expected

·  NZ Retail Sales +1.7% vs +1.4% expected

·  UK Unemployment claimant change -29.2k vs -14.3k expected

·  European GDP +.3% vs +.2% expected

·  UK Retail Sales +1.1% vs +.7% expected

·  US Inflation +.2% as expected

·  CAD Manufacturing Sales +.5% vs +.5% expected

·  US Consumer Sentiment 80.0 vs 85.6 expected

NZD/USD 

The New Zealand dollar finished last week on a firm footing near 0.8100. There was small bout of weakness when the earthquake hit Wellington on Friday, however this was short lived and the currency quickly recovered. The 0.8100 level should have provided good resistance but in the end it was overcome, and the NZD traded up to the next resistance at 0.8160 during yesterday’s trading session. That however was a step too far and the currency quickly reversed from there. The reversal from 0.8160 left the currency looking a little vulnerable and this afternoon an announcement from the RBNZ on loan-to-value ratios (LVRs) has seen it lose a lot more ground. The move down through 0.8050 has confirmed the risks have all swung back to the downside and further losses seem likely, albeit the pair still well within its broader recent range.

NZD/AUD (AUD/NZD)

There has been over the last week little to change the current outlook for the pair. The recent range of 0.8700 - 0.8900 (1.1236 - 1.1494) looks set to continue for the time being as the New Zealand dollar consolidates recent gains against the Australian dollar. With the broader trend in favour of further NZD appreciation we can expect a break above 0.8900 at some stage. However it seems the NZD will need to do some more work below 0.8900 before it can attempt a break higher. The pair has traded up to 0.8876 in the last 24 hours, only to quickly be reversed and trade down below .8800 following the RBNZ LVR’s announcement today. There is little in the way of market moving data set for release from either country for the rest of the week.

NZD/GBP (GBP/NZD)

Some relative strength in the New Zealand dollar over the past few days saw this pair trade up over 0.5200 (under 2.0000). This occurred even as the UK Pound Sterling had been well supported on a number of other crosses. But those levels didn’t last long and last night as the NZD, AUD, and CAD, all seemed to underperform against other currencies, and this pair turned around sharply. It now trades just above 0.5100 (1.9608) thanks to the announcement from the RBNZ on new loan-to-value ratios for the banking sector. This combined with the recent run of firm UK data should see a move to the lower part of the current 0.5000 - 0.5250 (1.9048 - 2.0000) range. The focus will now turn to the second reading of UK GDP out on Friday. Ahead of that we also get UK data on public sector borrowing and industrial order expectations which should have limited impact.

NZD/CAD

For much of last week the New Zealand dollar appreciated against the CAD as solid NZ data kept the local currency well supported. Friday’s release of Canadian manufacturing sales came in below expectation and didn’t helped the CAD. This saw this pair trade to the highest level since late May at 0.8427. There has however been a quick turnaround from that peak in the last 24 hours, and it now trades near 0.8290. The move lower was aided by today’s RBNZ announcement on loan-to-value ratios for the banking sector. This has turned the picture somewhat negative for the pair. The target is now a test towards 0.8200. We will be further insight into the Canadian economy later this week with retail sales and inflation data set for release.

NZD/EURO (EURO/NZD)

The last couple of weeks have seen a good recovery by the NZD against the EUR from recent lows near 0.5830 (highs 1.7153). This recovery looks however to have peaked in the last 24 hours at 0.6124 (lows 1.6329). There was no explicit trigger for the turnaround and it comes as the NZD, AUD and CAD all seemed to underperform against most currencies to start the week. The pair has now traded down below 0.6000 (above 1.6666) on the back of the announcement from the RBNZ on new loan-to-value ratios for the banking sector. Although this was widely expected, it has seen the NZD come under renewed selling pressure. This will keep the focus for the NZD against EUR firmly on the downside. There is little in the way of market moving data out of NZ for the rest of the week. From Europe we have to wait until Thursday to get readings on the manufacturing and service sectors, and then Friday for consumer confidence.

NZD/YEN

The past couple of weeks have seen this pair grinding higher as the New Zealand dollar appreciated against the JPY. This move started from 76.40 on the 7th August and looks to have peaked in the last 24 hours at 79.89. The reversal from the peak last night has been reasonably sharp and seen the pair trade down to 78.00 so far. The latest leg lower came on the back of the RBNZ’s announcement of new loan-to-value ratios for the banking sector. The rest of the week sees a very light economic calendar for NZ. The same can be said for Japan with most of the focus being on the continued debate around the planned sales tax increases.

AUD/USD

Recent strength in the Australian dollar has had more to do with broad USD weakness than any positive local fundamentals. Data out of Australia has failed to excite and it was left up to the RBA minutes today to try and impact. Those minutes added little in the way of further insight with the RBA seeing another rate cut as possible, but not imminent. The AUD has tried twice in the last ten days to hold onto gains above 0.9200, but failed on both attempts. Last night as it was rejected from there again the fall was somewhat sharper and the currency traded down to 0.9104. This leaves the AUD looking vulnerable and any move back down through 0.9080 would confirm the negative near term outlook. The focus will then quickly turn to recent lows at 0.8849. There are no major releases from Australia for the rest of the week. The market will take its lead from offshore factors and in particular the Fed minutes out on Thursday morning, manufacturing data on Friday morning, and the Jackson Hole symposium this weekend.

AUD/GBP (GBP/AUD)

The Australian dollar has been losing ground against the GBP for much of the past week. This has been due to the consistently stronger data coming out of the UK and the very uninspiring economic numbers coming out of Australia. Over the last 24 hours the AUD, NZD, and CAD all seemed to come under some pressure relative to other currencies. This saw the AUDGBP pairing fall from 0.5900 (rally from 1.6949) to 0.5817 (1.7191). We may get a small bounce from here, but the focus is firmly on a test of recent lows at 0.5768 (1.7337). The GBP should remain supported heading into Friday’s second estimate of GDP that many are predicted to be revised higher.

AUD/EURO (EURO/AUD)

The AUD against the EUR spent much of the past week trading sideways between 0.6840 and 0.6920 (1.4450-1.4620). The top of that AUD range has capped the pair on three separate occasions over that time, and the failure to break above there has now taken its toll. The AUD fell sharply from there last night and has now broken the lower end of its range. This keeps the downside firmly in focus and we can look for a move toward 0.6870(1.4560) ahead of cycle lows at 0.6669 (highs 1.5000). With little out of Australia for the rest of the week the focus will turn to readings on the Euro-zone manufacturing and service sectors.

AUD/YEN

The Australian dollar has tried twice in the last few days to break above 90.00 against the Yen. Both attempts have failed with sharp rejection’s to the down side. This now leaves the pair looking vulnerable and a break below 88.60 would confirm the short term negative outlook. The focus will then move to 87.50 ahead of recent cycle lows at 86.41. There is little fundamental data out of either Japan or Australia for the rest of the week so the pair will take its lead from the wider market.

AUD/CAD

Although the AUDCAD has seen a decent range over the past week there has been little in the way for real direction. The pair is currently trading at a similar level to where it was this time last week. Some relative outperformance by the Australian dollar late last week saw the cross to the Canadian dollar trade up to resistance around 0.9530 on Friday. It opened this week at the same level, but quickly fell away to currently trade near 0.9440. Expect more directionless trade in the near term with the risk being a test lower toward 0.9330. Towards the end of the week we get Canadian retail trade and inflation data, both of which will be closely watched.

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Market commentary:

It was a busy week for economic news last week, and this saw further bouts of volatility contained by the broader ranges in most markets. Better than expected economic news in the UK, and to a lesser extent from Europe, kept the pressure on the US dollar for the most part. This pressure opposes the improving outlook in the US, and the potential lowering of monetary stimulation from the Fed in the coming months. Expect the rangy nature of the price action to continue in the near term at least, as these kinds of opposing forces battle for ascendency. Australian sentiment remains under pressure for the most part, helped by the political posturing as the September 7th election approaches. Today’s announcement from the RBNZ of the October 1st implementation of restrictions of high “loan to value ratios” (LVRs) has dented confidence in the NZ dollar. The move impacts expectations of cash rate increases, albeit to a limited extent. This week is relatively light on major global economic news, although the annual central bankers symposium in Jackson Hole offers heightened focus.

Australia

Recent data from Australia has been subdued at best, although it’s had little impact on the currency. The key event for this week was the release of the Reserve Bank of Australia (RBA) monetary policy meeting minutes. These revealed nothing new with the RBA maintaining and easing bias, albeit to a lesser extent than before. They say a further rate cut is possible, but not imminent. These remarks should have little lasting impact on the currency. There is little out for the rest of the week that could materially impact the current outlook for a softening economy.

New Zealand

Sentiment within the NZ economy has remained positive throughout the last week. The second quarter retail sales materially exceeded the markets expectations, coupling with strong manufacturing numbers to underpin NZ dollar demand. The possibility of economic drag from Australia remains real, but for the time being has been of limited impact. This week’s economic calendar is light with the RBNZ inflation expectations survey offering some domestic focus. The interest rate market continues to grind higher as the chances of a cash rate hike from the current emergency lows at 2.50% becomes more likely at some stage early in 2014. The prospect of a higher cash rate will continue to be NZD supportive for the most part. However today the RBNZ have announced that from Oct 1st banks will be subject to restrictions on high loan-to-value lending. Although this had been widely signalled it has had a big impact on the currency sending the NZD lower by around 80 points against the USD so far.

United States

The US had consumer confidence numbers out on Friday night that came in below expectations and below last month's reading. The fall was unexpected, although the previous reading was a six year high, and has been blamed on rising interest rates. Long term interest rates have moved one full percentage point higher over the last three months. Although the result was a surprise, the market impact has been limited as most commentators view it as a bump in the road on an otherwise improving economic outlook. The United States dollar has generally remained on the back foot since late last week in what has been quiet trading. Later this week we get housing data, the Fed monetary policy meeting minutes, and weekly unemployment claims to focus on.

Europe

At the very end of last week we saw the release of inflation data for the Euro-zone. It came in bang on expectation at 1.6% and therefore had little impact on the currency. Around the same time we got slightly disappointing data on the Euro-zone trade balance and current account. Both pieces of data come in a touch under market expectations, but no so far as to cause any real concern. The next few days will provide a better opportunity to gain an insight into Euro-area performance with readings on both the service and manufacturing sectors due for release. Then at the end of the week we also get consumer confidence data. The market will be looking for this data to confirm its view that there is a very gradual recovery taking place in the Euro-zone at the moment.

United Kingdom

This coming Friday, the Office for National Statistics (ONS) publishes its second reading of quarter two GDP. The first estimate published a few weeks ago came in at a healthy 0.6%. But after the recent run of much better than expected data there is talk the (ONS) will revise up the data to reflect a better performance in the June quarter. This is helping keep the GBP well supported and long term UK rates being pushed higher. In fact UK 10 year government bond yields have climbed to the highest level in two years over the last few days. On Monday we got a report that showed UK house prices actually dropped in August. This was the first dip in seven months while year on year prices are still up over 5%. We have also seen the Confederation of British Industry (CBI) release their forecast for UK growth which they say will print at 1.2% for 2013 and a healthy 2.3% for 2014. So it seems everyone is getting behind the recovery story in the UK at the moment. There is other second tier data out this week but nothing that should materially change the current outlook.

Japan

The Japanese economy has a disappointing start to last week as the preliminary second quarter GDP number came in at +.6% vs the expectation of a +.9% result. Yesterday saw a weaker than expected trade balance, with the deficit the 3rd largest on record, and a consequence of the recently weak YEN. A large portion of the rising import demand was thanks to increased energy demand as reliance on nuclear energy falls following the earthquakes of 2011. The economic calendar remains quiet for the remainder of the week, as focus moves to offshore influences.

Canada

Friday evening saw the release of Canadian manufacturing sales for June. The market was expecting a small increase but instead the result was a small decrease of 0.5%. This marks the fourth decrease in six months and won’t help the outlook for second quarter GDP that has already been lowered thanks to the floods in Alberta. Later this week we will be further insight into the Canadian economy with wholesale sales, retail sales, and inflation data all set for release.

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