US will remain in focus as the market reassess the time horizon for tapering and the budget ceiling debate starts to take centre stage

By Ian Dobbs*:

Developments from the United States have dominated price action over the past week.

The big surprise was the decision from the Federal Reserve not to start tapering quantitative easing purchases this month, as was widely expected. That sent shock waves through all markets and the resulting moves have been substantial.

The US will remain in focus over the coming weeks as the market reassess the time horizon for tapering and the budget ceiling debate starts to take centre stage.

There is the very real possibility of a US government shutdown and this would have negative implications for the USD.

In the wider market the economic calendar is very light and this week and this will put even more focus on events in the United States.

Major Announcements last week:

·  UK CPI 2.7% vs 2.7% expected

·  German ZEW 49.6 vs 45.3 expected

·  Canadian manufacturing sales 1.7% vs 0.6% expected

·  US CPI 0.1% vs 0.1% expected

·  FOMC no September tapering

·  NZ GDP 0.2% vs 0.2% expected

·  GBP retail sales -0.9% vs 0.4% expected

·  Canadian Core CPI 0.2% vs 0.1% expected

NZD/USD

The New Zealand dollar has managed to consolidate gains made last week in the wake of the Fed announcement and better NZ GDP. Since that sharp move higher the currency has mostly traded sideways in the tight range between 0.8350 and 0.8400. Although the currency is maintaining these elevated levels, further gains from here will prove tough going with plenty of resistance between 0.8400 and 0.8500. In the last couple of hours the currency has seen some selling pressure that has pushed it down to 0.8320. With only trade balance and business confidence data from NZ this week the focus will be on US numbers and any indication of the timing for a potential tapering by the Fed.

NZD/AUD (AUD/NZD)

The New Zealand dollar materially outperformed the Australian dollar last week helped by some decent current account and GDP data. This helped the NZD sustain most of its post Fed announcement gains, while the AUD drifted lower and gave back much of the ground it had made. That saw the NZDAUD cross continue to grind higher into the weekend and it traded up to 0.8916 (down to 1.1216) , which is just below the previous high of 0.8922 (low of 1.1208). The failure to break through that 31 July high has seen the pair pull back and it currently trades around 0.8850 (1.1274). We could easily see some further weakness down to initial support now coming in at 0.8820 (resistance at 1.1338). But as long at the pair holds above there the risk is it will build a base for another attempt at recent highs. There is very little out of either country this week. From NZ we have trade balance and business confidence data while from Australia there is only the RBA financial stability report.

NZD/GBP (GBP/NZD)

Last week in the wake of the Fed announcement the New Zealand dollar outperformed the UK Pound Sterling and this saw the cross trade up to a 0.5248 high (1.9055 low). The move was aided by decent GDP data from NZ and some disappointing UK retail sales figures. Since then however the pair has consolidated in sideways trade between 0.5200 and 0.5240 (1.9084 and 1.9194). There is strong resistance above 0.5250 (1.9048) and I would be surprised to see a sustained move up through there. The most likely scenario is that the pair will eventually drift lower back towards 0.5100 (1.9608) over the coming week or two. That prediction could prove incorrect if UK data takes a turn for the worse and we see the GBP come under some pressure. But at this point last weeks soft retail sales numbers look more like an aberration than the start of a trend. Close attention will be paid to a number of BOE speakers this week, along with house price data, current account and the final reading of GDP. From NZ there is only trade balance and business confidence to digest.

 NZD/CAD

Like a number of New Zealand dollar crosses the NZDCAD has been in a solid uptrend since the beginning of September. The latest gains came last week in the wake of the Fed ‘no-taper’ announcement and after solid NZ GDP. Gains however stalled around the 0.8635 level and we are currently seeing the start of what could turn out to be a decent correction. The pair looks on target to test what is now key support at 0.8550. If it can hold above there the focus will remain on the top side. But a move below 0.8550 will certainly change that outlook. There are most likely plenty of stop-loss orders building below that level as well, and that will attract the market. From NZ this week we only have trade balance data and business confidence to focus on and from Canada there is only retail sales set for release tomorrow.

NZD/EURO (EURO/NZD)

The New Zealand dollar put in a good week against the Euro last week breaking above resistance at 0.6160 (1.6234) and trading up to a 0.6220 (support at 1.6077) high. Solid GDP data from NZ helped support the move and since then we have had some patchy numbers from Europe. This has seen the pair consolidate the move higher with trade ranging around the 0.6190 (1.6155) level. So far dips towards 0.6160 ,now support, (1.6234, no resistance) have contained the downside, but as I write this the NZD is coming under some pressure and we could see another test of that level. A break back below 0.6160 (1.6234) would put all the focus back on the downside. From NZ this week there is only trade balance data and business confidence to digest. While from Europe we get German business and consumer climate, German inflation, and French consumer spending.

 NZD/YEN

The New Zealand dollar made good gains against the Japanese Yen last week after the Fed announcement and some solid NZ GDP data. That move seems to have run out of steam just above 83.50 and the pair is now coming under a little pressure. It currently trades around 82.20 and we could easily see a deeper correction to support at 81.50. The pair has made decent gains since the beginning of September when it was around 76.00 and to date there has been little in way of a meaningful pullback. This would suggest the cross is due for a correction lower and 81.50 is the initial target. There is little in the way of data this week to dive the pair with only NZ trade balance and Japanese inflation drawing any real focus.

AUD/USD

After last week’s snap higher to 0.9528 on the back of no action by the Fed, the Australian dollar slowly but surely gave back all of those gains. It traded down to around 0.9350 yesterday morning which is where it originally took off from. The break below trend support at 0.9400 was a negative signal and even though the currency has since bounce back up to 0.9450, helped by better Chinese manufacturing numbers yesterday, the downside still looks vulnerable. There is very little set for release from Australia this week so the focus will turn to US numbers and any indication of the timing for a potential tapering by the Fed.

AUD/GBP (GBP/AUD)                            

It would be fair to say there has been little overall direction for this pair in the past two weeks. Trading has been characterised by choppy price action between 0.5820 and 0.5920 (1.6893 and 1.7182) and this looks set to continue in the near term. With the AUD coming under a little pressure today we could see a move to the lower end of that range over the coming 24 hours. There is little in the way for domestic data from Australia this week with on the RBA financial stability review out tomorrow, while from the UK we have a number of BOE speakers, along with house price data, current account and the final reading of GDP.

AUD/EURO (EURO/AUD)

This pair has continued to trade sideways within the broad 0.6940 - 0.7040 (1.4205 - 1.4409) range that has contained it for much of the past two weeks. We did get a brief dip through the bottom of that range to a low of 0.6915 (high of 1.4461) in thin early Monday morning trade, but it was short lived and the pair recovered all the way back up to 0.7000 (down to 1.4286). That recovery was helped by some better Chinese manufacturing numbers out yesterday. In the last few hours we have seen some Australian dollar weakness and the pair could now test back to support around 0.6920 (resistance 1.4451). There is little in the way of domestic data from Australia this week with only the RBA financial stability review out tomorrow. From Europe this week we get German business and consumer climate, German inflation, and French consumer spending.

AUD/YEN

93.50 has proven to be an interesting level for this pairing. That level had capped the topside until last week’s Fed announcement gave the Australian dollar a good boost and once it gave way the cross quickly traded up to 94.48. The pair then drifted lower and traded back down through 93.50 to a low of 92.63 early on Monday morning. We have seen a bounce from that low but again 93.50 has capped the strength on a couple of occasions. This has left the pairing looking a little vulnerable and we could be in for a broader pullback to support around 91.60. The last few hours have seen some weakness in the AUD and this cross is now back below 93.00. While 93.50 keeps a lid on any strength the risk is for further downside action.

AUD/CAD

The Australian dollar snapped higher against the Canadian dollar in the wake of the Fed’s ‘no-taper’ announcement last week. Since then we have seen the pairing give back most of its gains as the AUD has come under some pressure and the Canadian dollar has been support by some better than expected data. The cross looks like it might test back down to supported around 0.9650. Reaction at that level will be key for near term direction. Any sustained move below there would leave the pair vulnerable to further losses initially targeting 0.9550. But if support at 0.9650 can hold then the cross could mount another attempt back up to the highs over 0.9700. With only retail sales set for release from Canada this week and the RBA financial stability report from Australia, direction may well come from the wider market.

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Market commentary:

Developments from the United States have dominated price action over the past week. The big surprise was the decision from the Federal Reserve not to start tapering quantitative easing purchases this month, as was widely expected. That send shock waves through all markets and the resulting moves have been substantial. The US will remain in focus over the coming weeks as the market reassess the time horizon for tapering and the budget ceiling debate starts to take centre stage. There is the very real possibility of a US government shutdown and this would have negative implications for the USD. In the wider market the economic calendar is very light and this week and this will put even more focus on events in the United States.

Australia

It has been a very quiet week for Australia with little in the way of key data since last Tuesday’s RBA minutes. We did get good Chinese manufacturing numbers yesterday which helped to support the Australian dollar a touch. The reading of 51.2 was the highest in six months and continues the improving trend of late in Chinese data. The economic calendar for the rest of this week is very light as well with only the RBA financial stability review set for release tomorrow.

New Zealand

Last week was a positive one for New Zealand with descent data on consumer sentiment, current account and GDP all helping to support the currency. These combined with the boost from the Fed’s lack of tapering to see the New Zealand dollar make big gains across the board. Since then we have seen some consolidation with the currency holding onto most of those gains. The only data out domestically this week is the trade balance tomorrow and business confidence on Friday, so focus will continue to be on offshore events.

United States

The big event of the past week was the Fed’s decision to not adjust down the level of monthly quantitative easing purchases, currently at $85bln. That caused big moves in markets around the globe and has left many forecasters scratching their heads. Since then we have seen comments from a number of Fed officials and they have all said it was a very close call whether to taper or not. So where does that leave us? Is the data between now and the October meeting likely to improve enough to see them taper then? It seems unlikely we will get any dramatic change in economic numbers between now and then, but only time will tell. Last night we got a reading from the manufacturing sector that came in below expectation and a touch below the previous number, so that isn’t going to help. The focus is now shifting to the debt ceiling debate and the very real chance of a government shutdown. US Senate majority leader Harry Reid said last night the Republican-controlled House will have the choice of either passing a funding bill with no add-ons or shutting down the government. This may well be the real reason the Fed held off tapering last week. Key data to watch over the rest of this week will be consumer confidence, new home sales, durable goods, and pending home sales.

Europe

Last week we saw good readings on economic sentiment from Germany and Europe as a whole, and that positive mood has been reflected in the German elections over the weekend. Angela Merkel's party have increased their share of the vote by 8% to 42%. It is the best showing by the conservatives since 1990. The downside is Merkel’s coalition partner is out of parliament altogether and she now faces some difficult negotiations to form a new coalition. Last night we got a reading on the manufacturing sector for September and while the result was a touch under expectation, it was still in expansionary territory. The pullback in manufacturing activity was however offset by better numbers for the service sector which showed good gains. ECB president Draghi was also on the wires saying he expects a continued slow recovery, and that interest rates are to remain at record low levels for an extended period. He also said the ECB was ready to deploy another long term refinancing operation (LTRO) to the banking sector if required. Still to come this week are readings on the German business and consumer climate, German inflation, and French consumer spending.

United Kingdom

Last week’s poor retail sales number was the first piece of soft data the UK has seen in quite a while. The market seems to be taking it with a grain of salt and the impact has been limited so far. Should we get more average data over the coming week then the GBP could head for a decent correction. On Friday night we got figures on public sector net borrowing and they were a pleasant surprise. Although the overall level of borrowing is still high, it is coming down and quicker than expected. These figures suggest that public finances are benefiting from the stronger economic activity. We had comments from the Bank of England’s Broadbent last night. He said the third quarter was looking strong so far although he can’t be sure it will continue at this rate. He also said a faster drop in jobless would support a rethink on stimulus. Later this week we get the Nationwide house price index, current account, and the final reading of GDP.

Japan

There has been no data released in the past week that has had a material impact on the economic outlook for Japan. Recent comments for BOJ Governor Kuroda have been supportive of the outlook for Japanese growth and global growth. He says that overseas economies will gradually pick up as the US and European economies improve. He expects that to support increases in exports and output, as well as a pickup in capital expenditure in Japan. This week is another light one on the calendar with only inflation data scheduled for release.

Canada

Data out of Canada last week was overall supportive with good readings on manufacturing sales, wholesale sales, and core inflation. We also got an upbeat speech from the Bank of Canada’s Poloz who seems confident the economy is building momentum. It seems the biggest risk facing the economy is from the potential housing market bubble. But getting a reading on that is not as easy as it sounds. Recent figures suggest August real estate activity was up 11.1%, but we have also heard from Toronto’s land development association who say high rise sales were at a 10 year low in August. The only data this week is retail sales set for release tomorrow.

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