Russia pulls back troops reducing geopolitical risks; Australasian currency risks are still tilted toward further losses

By Ian Dobbs*:

The past week has seen volatility diminish across most currency pairs in the FX market.

Geopolitical tensions around Russia and the Ukraine seem to have reduced with Russia pulling back troops that were amassing near the border.

But just as those concerns ease the US again looks to be getting heavily involved in Iraq.

The Australasian currencies remain range bound not far off recent lows and the risks are still tilted toward further losses at this stage.

Growth prospects in Europe show little sign of life while the outlook for both the US and UK economies remain very positive. That being said, neither the Fed nor the Bank of England have given any indication that rate hike expectations could be brought forward.

Generally subdued inflation is providing the central banks the opportunity to keep rates lower for longer, but they do both risk falling ‘behind the curve’ at some stage.

Major Announcements last week:

·  Australian Retail Sales +.6% vs +.3% expected

·  UK Construction PMI 62.4 vs 62.1 expected

·  RBA leaves monetary policy unchanged

·  UK Services PMI 59.1 vs 58.1 expected

·  European Retail Sales +.4% as expected

·  US Non-manufacturing PMI 58.7 vs 56.6 expected

·  NZ Unemployment rate 5.6% vs 5.8% expected

·  UK Manufacturing PMI .3% vs .7% expected

·  Australian Unemployment rate 6.4% vs 6.0% expected

·  BOE leave monetary policy unchanged

·  BOJ leave monetary policy unchanged

·  ECB leave monetary policy unchanged

·  Canadian Unemployment rate 7.0% as expected

NZD/USD

The past week has seen the New Zealand dollar trade in an ever decreasing range around the 0.8460 level. The broader trend is still very much down as soft commodity prices continue to weigh on the pair, although we are yet to see a decent test of support around 0.8400. On the topside the key resistance level comes in around 0.8520 and I would expect that to contain strength in the near term. Later this week from New Zealand we get the Business NZ manufacturing index along with retail sales. While from the US the focus turns to retail sales, producer prices and consumer sentiment.

NZD/AUD (AUD/NZD)

The past month has seen a dramatic fall from the NZ dollar in this pair from 0.9400 (1.0638) to a low so far of 0.9051 (high of 1.1049). It now looks like that NZ dollar downside momentum has waned and for the time being we are stuck between support around 0.9060 (resistance 1.1038) and resistance around 0.9160 (support around 1.0917). Those two levels have contained the pair for just over two weeks now and there seems little impetus to break out of that range in the near term. Data this week from Australia that could influence includes consumer sentiment, the wage price index, and inflation expectations. While from New Zealand we get the Business NZ manufacturing index along with retail sales data.

NZD/GBP (GBP/NZD)

Declines in the New Zealand dollar early last week finally saw this pair trade back below the 0.5000 level (above 2.0000), albeit briefly. Further falls in dairy prices did the damage to the NZD, however the UK Pound has also been under pressure recently as data in the UK has come off the boil to a degree. This has no doubt frustrated many who have been waiting to sell GBP’s and buy NZD’s, as dips in the NZ dollar have been short lived and continued downside momentum has been lacking. I expect this environment to continue in the near term and as such buying dips toward 0.5000 (selling up to 2.0000) is still recommended. Looking further out, say couple of months, a move toward 0.4900 (2.0408) is a possibility but I wouldn't get excited about NZD losses beyond there at this stage. Later this week from New Zealand we get the Business NZ manufacturing index along with retail sales. While from the UK we have the BOE inflation report and the second estimate of GDP.

 NZD/CAD

Trading in this pair has remained volatile with 100 point range over the past week. Both the New Zealand dollar and the Canadian dollar have seen periods of weakness. Friday evening’s Canadian employment data was the trigger for one such period of CAD weakness. The much worse than expected result caused the cross to leap up to 0.9310 as the CAD saw heavy selling pressure, but that move has largely been reversed over the past 24 hours. We are now trading back down near support around 0.9230. A break below there would open the way for a test of 0.9190. Data from NZ this week that could influence includes the Business NZ manufacturing index and retail sales. While from Canada we have the house price index and manufacturing sales data to digest.

NZD/EURO (EURO/NZD)

With both the New Zealand dollar and the Euro coming under pressure over the past few weeks the cross rate between the two currencies has been chopping around in a tight range, with a very slight bias toward NZ dollar underperformance. For the time being the NZD topside looks to be limited to resistance around 0.6370 (support around 1.5700) and further tests of 0.6300 on the  NZ dollar downside (1.5873 on the topside) are expected. A sustained break below 0.6300 (above 1.5873) will open the way for a move toward 0.6200 (1.6129). Data from NZ this week that could influence includes the Business NZ manufacturing index and retail sales. While from Europe we get German economic sentiment data, GDP, the ECB monthly bulletin and the final reading of inflation.

 NZD/YEN

After falling dramatically in the early stages of last week, on the back of a declining NZD, this pair settled around the 86.50 level. Trading around that level was interrupted on Friday afternoon by the Bank of Japan (BOJ) monetary policy statement. The Yen saw a surge in demand after the central bank left their overall economic assessment unchanged, which disappointed some in the market who thought it might be downgraded due to recent poor data. The pair dipped down to 85.76 but managed to recover the majority of those losses over the next 12 hours and now trades back toward 86.50 where is seems comfortable. Key resistance come in around 86.80 and while below there the risks are skewed to further weakness. Any move above 86.80 however, would be the first sign that a broader correction higher is developing and the initial target would be 87.50. Data from NZ this week that could influence includes the Business NZ manufacturing index and retail sales. While from Japan we have GDP, the BOJ minutes and core machinery orders.

AUD/USD

The Australian dollar took a hit last week on the back of soft employment change data and a big jump in the unemployment rate. The pair traded to a low of 0.9241 and we have yet to see much in the way of a recovery. This comes despite the RBA suggesting they suspect the employment result was largely due to sample changes. While the AUD holds below minor resistance around 0.9280 the risks are still skewed to the downside. A break above 0.9280 would likely see the AUD test the next level of resistance at 0.9330. I would expect that level to cap any near term strength. On the downside the target is a test of support around 0.9210. Data from Australia this week that could influence includes consumer sentiment, the wage price index, and inflation expectations. While from the US the focus turns to retail sales, producer prices and consumer sentiment.

AUD/GBP (GBP/AUD)                            

The last few months have seen this pair carve out a now well defined trading range between the broad parameters of 0.5450 and 0.5600 (1.8349 and 1.7857). That range has narrowed even further over the past couple of weeks to between 0.5500 and 0.5560 (1.8182 and 1.7986). Last Thursday’s poor reading of Australian employment saw both extremes of that tighter range trade within a few hours of each other, but support at 0.5500 (resistance at 1.8182) held firm and the cross has now moderated back to the middle of the band. It is now up to data releases over the course of the week to see if the pair can find any real direction. To that extent from Australia this week we get consumer sentiment, the wage price index, and inflation expectations. While from the UK we have the BOE inflation report and the second estimate of GDP.

AUD/EURO (EURO/AUD)

Last week’s poor Australian employment data was the key driver for this pair. The Australian dollar dramatically underperformed the Euro in the wake of that release and this saw the pair reverse prior gains eventually trading to a low of 0.6909 (1.4475 high). We have only seen a very limited bounce since then and this keeps the focus on the AUD downside. The target is a move down to support around 0.6860 (up to resistance at 1.4578). So far this week trading has been very quiet as we await some data that could spark a move. To that extent from Australia this week we get consumer sentiment, the wage price index, and inflation expectations. While from Europe we get German economic sentiment data, GDP, the ECB monthly bulletin and the final reading of inflation.

AUD/YEN

The Australian dollar lost significant ground to the Japanese Yen in the second half of last week. Poor Australian employment data triggered the move that was then extended on Friday after the Bank of Japan monetary policy statement. The Yen saw a surge in demand after the central bank left their overall economic assessment unchanged, which disappointed some in the market who thought it might be downgraded due to recent poor data. The pair traded to a low just under 94.00, but managed to recover some of that lost ground over the next 24 hours. The risks are still skewed to the downside for the time being and another test of 94.00 seems likely. From Australia this week we get consumer sentiment, the wage price index, and inflation expectations. While from Japan we have GDP, the BOJ minutes and core machinery orders.

AUD/CAD

The past week has seen some dramatic swings in this pair as both currencies have seen periods of intense pressure. Australian employment data on Thursday triggered a bout of AUD selling that drove the cross down from 1.0210 towards 1.0100. Then on Friday evening it was the turn of the Canadian dollar to underperform after Canadian employment also printed on the soft side. The pair initially spiked higher although those gains have largely been reversed in the past 24 hours, helped by better housing starts data out of Canada. Direction from here is a tough call. I tend to favour the downside at this stage however we need to see a break of minor support at 1.0100 to confirm it. Until that happens we could easily see the pair gain ground again, although I would be surprised to see it move as far back up at 1.0200. From Australia this week we get consumer sentiment, the wage price index, and inflation expectations. While from Canada we have the house price index and manufacturing sales data to digest.

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Market commentary:

The past week has seen volatility diminish across most currency pairs in the FX market. Geopolitical tensions around Russia and the Ukraine seem to have reduced with Russia pulling back troops that were amassing near the border. But just as those concerns ease the US again looks to be getting heavily involved in Iraq. The Australasian currencies remain range bound not far off recent lows and the risks are still tilted toward further losses at this stage. Growth prospects in Europe show little sign of life while the outlook for both the US and UK economies remain very positive. That being said, neither the Fed nor the Bank of England have given any indication that rate hike expectations could be brought forward. Generally subdued inflation is providing the central banks the opportunity to keep rates lower for longer, but they do both risk falling ‘behind the curve’ at some stage.

Australia

The big data from Australia last week was employment change that disappointed coming in at -0.3k. Not only was this well below the expectation of +13.5k, but the unemployment rate jumped to 6.4% from 6.0% previously. In Friday’s RBA monetary policy statement that is released quarterly the central bank suggested the jump in unemployment could be partly due to survey changes and sample rotation. Only time will tell if they are correct, however they added they expect unemployment to remain elevated for some time, not declining materially until 2016. They believe slack in the labour market and improved productivity are likely to keep domestic price pressures contained. As such they have trimmed their forecasts for underlying inflation by a quarter of a percent. They have also done the same thing to GDP forecasts for the end of 2014, which now stand at 2.5% from 2.75% previously. Later today we get business confidence data and the house price index. These will be followed over the coming day by consumer sentiment, the wage price index, and inflation expectations.

New Zealand

The negative impact of continued falls in dairy prices is starting to see economists revise their RBNZ cash rate expectations. One local bank now sees the RBNZ on hold through until March next year and I would not be surprised to see that expectation become more widespread. Last week’s somewhat disappointing employment data won’t have helped the situation. Neither will have yesterday’s total card spending data that came in at -0.1% for July, down from the prior result of +0.5%. House price appreciation looks to be moderating and this is likely the start of a broader trend that will take some of the urgency away from rushing into the next round of tightening’s. Later this week we get the Business NZ manufacturing index along with retail sales data.

United States

Data from the United States last week was largely positive with a number of releases coming in better than forecast. These included non-manufacturing PMI, the trade balance, unemployment claims, and factory orders. On Friday evening we also saw figures for non-farm productivity beat expectation, although the previous number was revised down which took some of the shine off the headline. Labour cost data was the opposite with a worse than expected headline reading being countered by a big upward revision to the prior result. So a mixed bag of results to end the week that haven’t had any material impact on the economic outlooks going forward. Last night we heard from the new Fed Vice Chairman Stanley Fisher and he certainly sounded as if he is on the ‘dovish’ side of the fence. He focused on the low participation rate in the labour market saying “many of those who dropped out of the labour force may be discouraged workers. Further strengthening of the economy will likely pull some of these workers back into the labour market.” This would help to constrain wages and inflation and be viewed as a reason to not hike rates early. Still to come this week are the key releases of retail sales, producer prices and consumer sentiment.

Europe

Data out of Europe last week was by and large a little disappointing. There was the odd bright spot such as French Industrial production and service sector PMI, but none of this could lend any support to the EUR which continues its slow grind lower against the USD. ECB President Draghi also took the opportunity to try and talk it down a touch after the central banks rate meeting on Thursday. He suggested the bank was pushing ahead with preparations to buy asset backed securities (ABS), although no final decision has been made yet. The OECD was on the wires last night suggesting that global growth is unlikely to pick up this year and that all indicators point to a slowdown in Germany. Germany has been at the core of growth in the Eurozone and a slowdown there would only heap further pressure on the ECB and the Euro. Tonight we get German economic sentiment data and later in the week we get GDP numbers, the ECB monthly bulletin and the final reading of inflation.

United Kingdom

After starting last week with good construction and service sector PMI numbers, UK data began undershooting expectations with disappointing results for manufacturing production, industrial production and the trade balance. This data weighed on the GBP which has seen a decent pullback from the highs it reached against the USD only five weeks ago. The Bank of England (BOE) monetary policy meeting went by with little impact and we now await the minutes on the 20th Aug to get further insight. One thing the bank seems to be struggling with is the contrast between wage and employment data. Wage growth is low, below inflation in fact, and has been that way for much of the past five years. This would suggest there is slack in the labour market and this excess capacity should keep inflation pressures in check. However, unemployment recently fell to 6.5% and the total number of people in employment is at a record high of 30.6 million. The employment figures suggests there isn’t that much spare capacity in the economy and delaying rate hikes could risk higher inflation down the road. Trying to measure ‘spare capacity’ in the economy is a very difficult task and it is this debate that will be key within the BOE and for the eventual timing of a rate hike. That makes this Wednesday’s employment data all the more interesting. The market is expecting unemployment claims to fall by -29.7k and the unemployment rate to drop again to 6.4%. Also on Wednesday have the BOE inflation report, then on Friday we get the second estimate of GDP.

Japan

The end of last week saw the Bank of Japan (BOJ) hold their latest rate meeting. There was some expectation that the recent run of poor data could see them downgrade the economic outlook and that this would be the first step toward potential further easing’s. In the end the BOJ kept its assessment unchanged and said the economy continues to recover moderately as a trend. The did downgrade their assessment on exports and industrial production, but not enough to affect the overall outlook. The bank believes household spending remains resilient and the negative impact of the sales tax hike will gradually begin to wane. The vote to keep policy steady was unanimous. Over the weekend Governor Kuroda has been on the wires saying there is no reason for Yen strength and the recent correction of excessive strength in the currency has been positive for the economy. He added price stability is still the main goal, although the BOJ doesn’t only look at CPI (consumer price index) for policy. Expectations for further easing’s this year from the BOJ have now been reduced, with little in the statement to suggest they have lost confidence in their ability to achieve the 2% price target. They, and the market in general, will want to see and improvement in data over the coming months. The most recent estimates of second quarter GDP suggest it could come in as low as -7.1%. It is due to hit the wires on Wednesday followed by core machinery orders on Thursday.

Canada

Canada released some very positive data last week with much better than expected results from the trade balance and building permits. Unfortunately the positive impact from those releases was countered by a very poor employment report on Friday evening. Employment change came in at just +0.2k against expectations for +25.4k. To make matters worse the swing from full time to part time work was massive with -59.7k full time jobs replaces with +60k part time ones. The unemployment rate did fall from 7.1% to 7.0% but this was only due to a fall in the participation rate and therefore not very positive at all. The Canadian dollar obviously came under some pressure in the wake of these numbers. Last night we did get a slightly better reading from housing starts that came in at +200k vs expectations of +194k and this helped to stabilize the CAD to a degree. The focus now turns to the house price index and manufacturing sales out at the end of the week.

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