Soft China data a special risk for the NZD, recovery in US economy sees interest rates moving higher, vote volatility risks

By Ian Dobbs*:

The US economy continues to recover at a decent rate and this has finally seen long term interest rates start to move higher.

The US dollar remains broadly supported with expectations that the Fed are slowly inching toward interest rate hikes sometime around the middle of next year.

In the Europe the focus remains on the potential for Scotland to break away from the UK and the resulting volatility that would cause.

Of more concern for the Australasian duo has been recent soft data from China. ‘Official’ Chinese data has always been taken with a grain of salt, but one release that can’t be manipulated is electricity demand.

The latest electricity production data saw a year on year decline for the first time since 2009.

It seems likely Chinese growth will fall somewhat short of the 7.5% target and this has implications for commodity prices and the Australasian currencies.

Major Announcements last week:

• RBNZ leaves rate unchanged

• Australian Employment change 121k vs 15k expected.

• Chinese Inflation 2.0% vs 2.2% expected

• US Retail Sales 0.6% vs 0.3% expected

• US Consumer Sentiment 84.6 vs 83.2 expected

• Chinese Industrial Production 6.9% vs 8.8%

• Chinese Electricity Production -2.2% year on year.

NZD/USD

The New Zealand dollar has seen relentless depreciation against the USD over the past few weeks. An improving US economy has seen the big dollar make broad based gains and this coupled with some strong language from the RBNZ last Thursday helped to drive the pair down to 0.8125. In the past 24 hours we have seen a recovery from those lows, but this move can be viewed as a corrective bounce within the broader down trend. The pair could easily recover back toward 0.8280 before running into significant resistance. Selling into that potential strength is recommended for those looking to purchase USD’s. The immediate focus now turns to tonight’s dairy auction, then later in the week we current account and GDP data to digest. From the US this week we have the key releases of producer prices, inflation, building permits and the Philly Fed manufacturing index, along with the FOMC statement.

NZD/AUD (AUD/NZD)

Weakness in the Australian dollar has been the main driver of this pair over the past week. Record Australian employment data only provided temporary relief for the AUD as it ended last week as one of the worst performing currencies. Over the weekend the release of soft Chinese data also weight on the AUD and this has help the pair trade up to resistance around 0.9050 (support 1.1050). We have now seen a significant bounce from the 0.8853 low (1.1296 high) that traded 11 days ago. I expect either 0.9050 (1.1050), or perhaps the next level of resistance around 0.9150 (1.0930), to cap this period of NZD strength in the pair. Those looking to purchase AUD’s with NZD’s should consider doing some at the current level, and work an order ahead of 0.9150 for the rest. After today’s limited impact from the RBA monetary policy meeting minutes’, in NZ we have another dairy auction tonight, followed  by current account and GDP data later in the week.

NZD/GBP (GBP/NZD)

The past week has seen a sharp pullback in this pair from the 0.5160 resistance area (1.9380 support area) that was tested early last week as the GBP came under heavy selling pressure. That selling pressure was on the back of a poll suggesting a slight majority of Scottish were in favour of independence. Since then however, the majority of polls have suggested the opposite with a 2-3% margin in favour of staying as part of the UK. The referendum on Thursday is still a major risk event with the margin of error on all these polls bigger than the gap between the two camps. In terms of the NZD side of the equation, we have another dairy auction to digest tonight, which will be followed by current account and GDP data over the coming days. For the time being support around 0.5000 (resistance around 2.0000) looks set to contain the downside in the pair, but that could come under pressure if the UK makes it through the referendum unscathed. However, a vote for independence will likely see levels over 0.5200 (under 1.9231) trading in a very short time span.

 NZD/CAD

Weakness in the New Zealand dollar over the past seven days has been the main driver for this pair. The cross traded down to a low of 0.8958 in the aftermath of last Thursday’s RBNZ monetary policy statement thanks to some strong language from the central bank re the value of the NZD. Since then we have seen a bounce in the pair helped by softer than expected readings from Canadian housing starts and the house price index. Key to near term direction will be tonight’s dairy auction and then later in the week from NZ we get current account and GDP data. Canada also has plenty of data out this week, starting with manufacturing sales tonight. Governor Poloz is also set to speak and then toward the end of the week inflation data and wholesale sales figures are set for release. Expect a range over the coming week of between 0.8950 and 0.9150 with those two levels providing key support and resistance.

NZD/EURO (EURO/NZD)

For much of the past week the New Zealand dollar lost ground against the Euro and this drove the pair to a low of 0.6268 (high of 1.5954) during trading yesterday. Weakness in the NZD was the main driver after the RBNZ did its best to talk the currency down at last week’s monetary policy statement. In the last 24 hours we have seen a decent bounce from the NZD and this has helped the pair recover back above 0.6300 (below 1.5873). Near term direction will likely be dictated by results from the dairy auction tonight, then current account and GDP data over the coming days. From Europe the focus now turns to the upcoming TLTRO (Targeted Long-Term Refinancing Operation) and the implications the level of take-up has on the state of the European economy.

 NZD/YEN

We have seen largely directionless trading for this pair over the past week. Periods of relative weakness in both the New Zealand dollar and Japanese Yen have seen the cross drift between 87.20 and 88.00 with it currently trading toward the centre of that range. The BOJ’s Kuroda is set to deliver a couple of speeches this week and if there is any indication of further easing measures in the pipeline the Yen will see pressure. The risk of further action from the BOJ is increasing as the economy fails to recover from April’s sales tax increase. Locally the immediate focus turns to tonight’s dairy auction, the result of which could easily drive near term price action in the NZD. Further ranging for the pair, with a very slight upside bias, looks likely over the coming week.

AUD/USD

The Australian dollar has been under pressure for much of the past week. Even record high employment data failed to turn the tide as the USD completely outperformed the local currency. Yesterday the pair traded below 0.9000 for the first time since March, after being weighed on by poor Chinese data released over the weekend. We have seen a small bounce from those lows, and taking into account the size of recent losses, a period of consolidation seems likely. Key resistance on the topside comes in around 0.9200 and selling into any potential strength toward that area is recommended as the USD should continue to appreciate over the coming months. From the US this week we have the key releases of producer prices, inflation, building permits, the Philly Fed manufacturing index and the FOMC statement.

AUD/GBP (GBP/AUD)                            

The past two weeks this pair has seen a vicious spike higher in the AUD, followed by a sharp pullback. The cross is now back within the broad 0.5450 to 0.5650 range (1.8350 to 1.7700) that has dominated trading since March after touching a high of 0.5808 (low of 1.7218) just over a week ago. The sharp pull back comes on the back of weakness in the Australian dollar and a significant recovery in the UK Pound, thanks to some polls suggesting a slight majority of Scottish in favour of staying within the UK. That Scottish referendum on September 18th is still a major risk event with a very tight vote forecast. A ‘no’ vote for independence should see the GBP appreciate a touch, where as a ‘yes’ vote will see a big fall in the value of the GBP. There is plenty other UK data out this week, however it will all take a backseat to the referendum.

AUD/EURO (EURO/AUD)

The past week has seen largely one way traffic for this pairing with Australian dollar weakness driving the cross to a low of 0.6937 (high of 1.4415) so far. Even the strongest employment number on record couldn’t turn the tide for the AUD and it’s only in the past 24 hours that we have seen a small bounce and some stabilisation. Key support comes in just above 0.6900 (resistance just below 1.4493) and I would expect that to contain any further downside in the near term. Tonight from Europe we get German economic sentiment data and on Thursday we have the first Targeted LTRO. The market will be keen to see what sort of take-up there is for those funds and what that implies for the state of the European economy.

AUD/YEN

Weakness in the Australian dollar over the past seven days has seen this pair pull back significantly from recent highs set around 98.80. The AUD was under pressure all week and even record high employment change numbers couldn’t turn the tide. Support around 96.50 has contained the downside however, and this leaves the pair still in a strong position. After a period of consolidation we could easily see the cross start to climb again and this is the favoured scenario. Only a sustained move down through 96.50 would alter that outlook. The BOJ’s Kuroda is set to deliver a couple of speeches this week and if there is any indication of further easing measures in the pipeline the Yen will see pressure. The risk of further action from the BOJ is increasing as the economy fails to recover from April’s sales tax increase.

AUD/CAD

The Australian dollar was the one of the worst performing currencies last week and even a record gain in employment couldn’t halt its slide. Against the Canadian dollar the AUD fell back below parity, although downside momentum looks to have waned to a degree and we could easily get a recovery back toward 1.0100. Canada has plenty of data out this week that could influence starting with manufacturing sales tonight. Governor Poloz is also set to speak and then toward the end of the week inflation data and wholesale sales figures are set for release. I expect support around 0.9950 to contain the downside for now and the pair to try and stage a bounce. That bounce will run into resistance between 1.0100 and 1.0150 and selling into that potential strength is recommended.

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Market commentary:

The US economy continues to recover at a decent rate and this has finally seen long term interest rates start to move higher. The US dollar remains broadly supported with expectations that the Fed are slowly inching toward interest rate hikes sometime around the middle of next year. In the Europe the focus remains on the potential for Scotland to break away from the UK and the resulting volatility that would cause. Of more concern for the Australasian duo has been recent soft data from China. ‘Official’ Chinese data has always been taken with a grain of salt, but one release that can’t be manipulated is electricity demand. The latest electricity production data saw a year on year decline for the first time since 2009. It seems likely Chinese growth will fall somewhat short of the 7.5% target and this has implications for commodity prices and the Australasian currencies.

Australia

Last week proved to be an interesting one for Australia and the Australian dollar, which ended up being one of the worst performing currencies on the week. This poor performance came even as their key employment data printed at record levels. The problem with the employment change result of +121k is that it was just too strong to believe. The market has been left to assume that recent changes to the labour force survey methodology have dramatically impacted the result and a clearer picture of employment will only be seen once we can average results in another month or two. Other data over the past week has had little impact. Consumer sentiment declined by 4.6% while inflation expectations increased to 3.5%. Yesterday’s release of new motor vehicle sales figures also declined 1.8%. Recent soft Chinese data has also impacted sentiment with some worrying signs of a slowdown in Chinese growth and a further impact on the commodity exports. In the last hour the RBA have released the minutes from the previous monetary policy meeting which have contained no surprises. They themselves suggest labour market conditions remain subdued, which is much more in line with the markets belief and other indicators, excluding the recent employment change result. The RBA remains firmly on hold for the foreseeable future.

New Zealand

The Reserve Bank of New Zealand (RBNZ) released their monetary policy statement last Thursday and this was the key event of the past week for the local financial markets. Recent declines in commodity prices and a cooling of gains in the housing sector had seen the market push back expectations for the start of the next tightening cycle to around March next year. The expected peak of that tightening cycle had also been reduced and the market was keen to see if this was in line with the central banks outlook. In the end the RBNZ seem to condone much of the markets expectation with a feeling that further hikes are now a lot less urgent. A very gradual move from the current 3.5% cash rate to around 4.0% is likely to start sometime between March and June next year. Of more interest was the RBNZ’s strong language in regard to the value of the New Zealand dollar. “Unjustified” and “unsustainable” were two key words used to describe the current level of the NZD and the central bank said they expect further significant depreciation. This kept the pressure on the NZD which recently traded to a fresh cycle low against the USD of 0.8125. Tonight we have another Global Dairy Trade (GDT) auction to draw focus and this is followed by current account and GDP data on Wednesday and Thursday respectively. The upcoming election has yet to have any real impact on the financial markets. Only in the event of some unstable coalition been formed will we see any significant reaction to the outcome.

United States

Largely positive data from the United States over the past week continues to support the optimistic outlook for the USD. Better than expected results from retail sales and consumer sentiment on Friday evening underscored that outlook. This has lessened the impact of a somewhat disappointing reading from industrial production last night. The focus this week now turns to Thursday morning’s Federal Reserve rate meeting and the potential for a subtle shift in the FOMC’s statement. There is some talk that the Fed will drop the reference to a “considerable time” between ending QE (quantitative easing) and hiking rates. This would be a signal that rate hikes are on the horizon for somewhere around early to mid-next year and it should help to further support the USD. If they don’t change that wording at this meeting they could well do it at the next meeting in October, which is when QE purchases will be completely wound up. Other key releases this week include producer prices, inflation, building permits and the Philly Fed manufacturing index.

Europe

Patchy data from Europe recently has done little to support the currency that has remained under pressure ever since the ECB undertook further easing’s at their last meeting. The best result of the past week came from industrial production that printed at +1.0% against expectations for +0.6%, but this has been countered by softer than forecast readings from the trade balance and investor confidence. This week should prove interesting with German economic sentiment, the final reading of inflation, and the first targeted LTRO (long-term refinancing operation) all set for release. Analysing the uptake of the targeted LTRO could provide valuable clues into the state of lending within the euro region. A low take up would indicate that companies are still unwilling to borrow and this would reinforce exactly what ECB President Draghi has been saying recently. That action is needed on both supply and demand side policies. Growth is desperately needed in the Eurozone at the moment and the biggest hindrance to that is restrictive government policies designed to rein in deficits.

United Kingdom

The only focus for the UK at the moment is on Thursday’s Scottish independence referendum. The implications are huge for both Scotland and the UK and as such the UK Pound has been fluctuating dramatically as various polls suggesting a very tight race have been released. A ‘yes’ vote for independence could easily see the GBP lose between 5% - 10% of its value. If we get a ‘no’ vote there will be a relief rally in the Pound, but more importantly it will see the market start to focus back on the prospect for rate hikes in the first half of next year. That expectation should see the GBP continue to gradually appreciate as a trend over the coming months. Although some economic data has moderated recently, overall the numbers are still very much encouraging and this should eventually see more members of the Bank of England’s (BOE) Monetary Policy Committee switch to the ‘hawkish’ camp and vote for a hike. Other releases to keep an eye on this week include inflation data tonight, employment numbers on Wednesday, and retail sales on Thursday. We also have the BOE rate meeting this week, although no change and no statement is expected from the central bank.

Japan

Data from Japan over the past week has failed to suggest the economy is recovering in any meaningful way from April’s sales tax hike. Disappointing readings from Tertiary Industry Activity, consumer confidence, and core machinery orders have all impacted on current sentiment. PM Abe is set to decide over the coming months on the next planned sales tax increase, but even his top adviser is now suggesting the economy must be stronger to withstand it. If data continues to disappoint, pressure will mount on Japanese officials to take action to stimulate growth again. BOJ Governor Kuroda and PM Abe met last week afterwards Kuroda told reporters that he won’t hesitate to adjust policy further should conditions emerge that warrant it. At the moment however, he sees no need to change monetary policy. We will hear from him again twice this week with speeches scheduled for this afternoon and Thursday. Thursday also sees the latest reading of the trade balance hit the wires.

Canada

Data from Canada over the past week has been largely focused on the housing market. Building permits were again strong coming in at +11.8%. The market was expecting a small decline of 4.2%. This strong reading was countered to a degree by softer than forecast readings from housing starts and the nationwide house price index. Overall it doesn’t seem there are any major cracks appearing in the Canadian housing market that remains one of the most overvalued in the world. This week we get data on manufacturing sales, inflation and wholesale sales, along with a speech from Bank of Canada (BOC) Governor Poloz.

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