By Ian Dobbs*:
For much of the past week the USD has been under pressure as disappointing data failed to inspire buyers.
The one exception was Friday evening when the all-important non-farm payrolls data hit the wires. That better than expected result saw the big dollar gain sharply across the board, but somewhat tellingly, it has failed to hold on to those gains at the start of this week.
We may well now see further weakness in the USD as more long (brought) positions get squeezed out.
Central banks take centre stage this week with a general lack of other key data to focus on. The Bank of Japan (BOJ) and Reserve Bank of Australia (RBA) meetings conclude today, while Thursday sees the Fed minutes released ahead of the Bank of England’s rate meeting.
A notable pick up in foreign exchange market volatility is providing opportunity for those who have left limit orders, or those who are quick enough, to take advantage of. These sort of trading conditions are likely to prevail through to the years end.
Major Announcements last week:
• NZ ANZ Business Confidence 13.4 vs 24.4 previous
• Chinese HSBC Manufacturing PMI 50.2 vs 50.5 expected
• UK Final GDP .9% vs .8% expected
• European Inflation estimate +.3% vs +.3% expected
• NZ GDT Auction Price Index -7.3%
• Canadian GDP +.9% vs +.8%v expected
• Australian Retail Sales +.1% vs +.4% expected
• US Manufacturing PMI 56.6 vs 58.6 expected
• ECB leave monetary policy unchanged
• US Unemployment rate 5.9% vs 6.1% expected
• Canadian Manufacturing 58.6 vs 53.4 expected
• NZ NZIER Business Opinion 19 vs 32 previously
NZD/USD
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7822 | 0.7700 | 0.7900 | 0.7715 - 0.7924 |
NZD/AUD (AUD/NZD)
The past week has seen choppy sideways trade for this pair between the parameters of 0.8880 and 0.8990 (1.1261 and 1.1123). Both currencies have seen periods of pressure and increased demand as volatility in the wider markets spills over into this pair. Key support around 0.8850 (resistance around 1.1300) has not been tested and this would suggest a further period of consolidation is likely. A move as high as 0.9050 (low as 1.1050) cannot be ruled out, although selling into that potential NZD strength is recommended for those looking to purchase AUD with New Zealand dollars. With little out from NZ over the rest of the week the focus turns to Australian releases. We have the RBA rate statement this afternoon to digest, then on Thursday Australian monthly employment data hits the wires.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.8925 | 0.8850 | 0.9050 | 0.8881 - 0.8990 |
| AUD / NZD | 1.1204 | 1.1050 | 1.1299 | 1.1124 - 1.1260 |
NZD/GBP (GBP/NZD)
After trading to the medium term target of 0.4750 (2.1053) in the early stages of last week, this pair has seen something of a recovery helped by a short squeeze in the New Zealand dollar last Thursday. For the time being resistance around 0.4900 (support around 2.0408) has capped the NZD topside and I expect this to continue to provide a tough barrier for further gains. If we do get a break above 0.4900 (below 2.0408) then a move up to key resistance at 0.5000 (2.000) is possible. However, that is not the favoured scenario. More likely is a further period of consolidation over the coming weeks between 0.4750 and 0.4900 (2.1053 and 2.0408). There is little out from New Zealand this week to drive prices so attention will turn to the UK where we get manufacturing production data and the BOE credit conditions survey tonight, along with the BOE rate meeting on Thursday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4870 | 0.4750 | 0.4900 | 0.4773 - 0.4901 |
| GBP / NZD | 2.0534 | 2.0408 | 2.1053 | 2.0404 - 2.0951 |
NZD/CAD
After trading to a fresh cycle low against the Canadian dollar early last week, the New Zealand dollar has seen something of a recovery over the past seven days. The bounce was helped by a sharp short squeeze in the NZD on Thursday which briefly saw levels over 0.8820 trade. Friday’s strong US employment data helped the CAD however, and the cross has moderated back to the 0.8730 level. Although the longer term trend is still to the downside, a bounce as high as 0.8950 can’t be ruled out and selling into that potential strength is recommended for those looking to buy Canadian dollars. There is little in the way of economic data this week from NZ, so the focus will turn to Canadian data in the form of building permits, housing starts, and employment change.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8722 | 0.8650 | 0.8850 | 0.8646 - 0.8829 |
NZD/EURO (EURO/NZD)
The past week has seen the New Zealand dollar recover all the ground lost sharply last Monday in the wake of the revelation of RBNZ intervention. The pair traded up to a high of 0.6252 (low of 1.5995) on Thursday, as a short squeeze in the NZD saw a sharp appreciation of the local currency. Since then trading has been somewhat subdued with the pair currently ranging around 0.6200 (1.6129). Direction from here is a tough call. Most likely a period of consolidation between 0.6100 and 0.6300 (1.6393 and 1.5873) will ensue and that range could easily contain the pair for the coming weeks. With little in the way of key data from NZ or Europe this week we are left with a speech by ECB President on Thursday to draw focus.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6190 | 0.6100 | 0.6300 | 0.6107 - 0.6252 |
| EUR / NZD | 1.6155 | 1.5873 | 1.6393 | 1.5994 - 1.6374 |
NZD/YEN
The past week has seen choppy price action in this pair with no overall direction. After breaking down below 86.00 at the beginning of last week after the revelation of RBNZ intervention in August, trading has been confined to a range of 84.70 to 86.00. I expect 86.00 to continue to provide a tough barrier on the topside and selling into that level is recommended for those looking to purchase Yen with New Zealand dollars. There is little from NZ this week to drive prices, so attention will turn to Japan where we have the BOJ meeting today, followed by current account, core machinery orders and the BOJ monetary meeting minutes later in the week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 85.13 | 84.00 | 86.00 | 84.71 - 86.02 |
AUD/USD
The past week has seen some sharp moves in this pair driven by market positioning and economic data. Long (brought) USD positions were squeezed out of the market on Thursday afternoon as the AUD jumped up over 0.8800, having traded down to 0.8664 less than 24 hours earlier. These gains were short lived however, as better than forecast US employment data caused renewed USD buying. The pair then traded down to a fresh cycle low of 0.8643. However, in an indication that the market may still be overly long (brought) USD’s, the pair has seen a sharp bounce from that low. Wild swings back and forth like this could well be signalling a medium term low is being put in place. If that is the case a much broader correction up towards 0.8900 or even 0.9000 could well develop over the coming weeks. The key focus domestically this week comes in the form of today’s RBA rate statement and Thursday’s employment data. From the US we have the Fed minutes also set for release on Thursday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.8760 | 0.8650 | 0.8850 | 0.8643 - 0.8826 |
AUD/GBP (GBP/AUD)
The past week has seen the Australian dollar stage something of a recovery against the UK Pound from the low of 0.5352 (high of 1.8685) set last Wednesday. Largely disappointing data from the UK has failed to support the GBP, while the Australian dollar saw good gains late last week, helped by better than forecast building consents data. There is potential for further gains toward the 0.5500 (1.8182) level, although the market is currently awaiting the release of this afternoons RBA rate statement before deciding on which direction to take the pair. This week from Australia we also have key employment data to digest, while from the UK the Bank of England also hold their monetary policy meeting on Thursday. Ahead of that release we get manufacturing production data and the BOE credit conditions survey to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5455 | 0.5350 | 0.5500 | 0.5352 - 0.5468 |
| GBP / AUD | 1.8332 | 1.8182 | 1.8692 | 1.8289 - 1.8684 |
AUD/EURO (EURO/AUD)
The Australian dollar has staged something of a recovery against the Euro after trading to a low of 0.6856 (high of 1.4586) this time last week. Good local building consents data has helped the move, as has continued uninspiring data from the Eurozone. Expect support around 0.6850 (resistance around 1.4600) to continue to contain near term NZD weakness, with potential for a move up toward 0.7000 (down to 1.4286). Key to near term direction will be the RBA rate statement out this afternoon, and then Australian employment data on Thursday. The only release of note from the Eurozone this week is a speech by ECB president Draghi on Thursday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6935 | 0.6850 | 0.7100 | 0.6856 - 0.6970 |
| EUR / AUD | 1.4420 | 1.4184 | 1.4599 | 1.4347 - 1.4587 |
AUD/YEN
The past week has seen choppy sideways price action for this pair with no overall direction. The downside has been limited to a number of tests around 95.00, but the market has quickly bounced on each occasion. Initial resistance around 96.00 has contained the topside and those two levels will likely dominate heading into today’s RBA and BOJ rate statements. Neither central bank is expected to adjust policy although there is still plenty of potential for a reaction to their respective economic assessments. Later in the week from Australia we have employment data to draw focus, while from Japan we have the current account, core machinery orders and the BOJ minutes to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 95.40 | 95.00 | 97.00 | 94.91 - 96.02 |
AUD/CAD
The Australian dollar traded to a low around 0.9700 against the CAD in the early stages of last week, but a lack of follow through selling has seen something of a recovery develop. It is starting to look like a medium term low may have developed around the 0.9700 level and a move up through 0.9840 would confirm it. In that case the market will target 0.9930 and possible even 1.0000. We do have the Reserve Bank of Australia monetary policy statement this afternoon and that could easily influence. Later in the week we also have Australian employment data to digest. From Canada this week we have building permits, housing starts, and employment change to draw focus.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9773 | 0.9700 | 0.9930 | 0.9708 - 0.9834 |
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Market commentary:
Australia
Data from Australia last week was somewhat mixed with a soft reading for retail sales countered by a healthy climb in building consents. The Australian dollar saw some volatility on the back of these results and that is likely to continue this week. This afternoon we have the RBA rate statement and then on Thursday employment data is set for release. No change is expected from the RBA and we will likely hear a repeat of the call for a period of stability in rates. However, the market is keen to see how the central bank views the recent weakness in the currency. In a little over month it has fallen from 0.9400 against the USD to a low so far of 0.8643. This could well prompt a change in language from the Reserve Bank. We are also likely to hear more warnings about the rise of investors in the housing market and the potential for implementation of macro-prudential tools. Thursday’s employment data will also be very interesting. Last month’s reading was a whopping 121k which raised all sorts of questions about the validity of the data, so some give back is expected this month.
New Zealand
It has been a very quiet past week for data from New Zealand. Last Wednesday evening we got the result from the latest Fonterra dairy auction and they saw another big fall. The 7.3% decline means prices have fallen around 50% now from the peak set earlier in the year. The New Zealand dollar didn’t react as many would have thought to the news, and actually made good gains in the 24 hours after the release. This was simply due to market positioning and a broad weakening of the USD which triggered a short squeeze in the currency. In the past few hours we have seen the quarterly NZIER business confidence index. This has replicated other confidence indicators and declined further from the peak set earlier in the year. With little else of note on the calendar for this week the focus will turn to offshore events and releases.
United States
For much of last week data from the United States disappointed by undershooting expectations. Consumer confidence, manufacturing PMI, and construction spending in particular drew attention for their soft readings. This caused the USD to lose ground throughout the week with sharp losses across the board on Thursday. However, Friday proved to be a very different story. Key employment data in the form Non-Farm Payrolls came in significantly better than expectations at 248k. Adding to that solid result was the unemployment rate that dropped from 6.1% to 5.9%. This was very good data and looking into the detail made for even better reading. Along with adding more employees, companies were pushing their existing workforce to work longer hours to meet demand. Hours worked increased to 34.6 from 34.5 which is the most since May 2008. That might not seem like much, but in terms of economic output it is the same thing as if hiring increased by 600,000 last month. Data like this is going to make it increasingly difficult for the Fed to continue in their belief that there is “significant slack” in the labour market. Along with the payrolls data on Friday we had stronger readings from service sector and this helped the USD make solid gains heading into the weekend. This week see a somewhat lighter economic calendar with the main focus on Thursday mornings Fed monetary policy meeting minutes.
Europe
The focus last week in Europe was on inflation data and the ECB rate meeting. Inflation remains dangerously low at just 0.3% and ECB President Draghi sounded a little more concerned than previously about the downside risks when he spoke at the press conference after the central banks meeting. Draghi suggested structural problems such as high unemployment were part of the problem. Since that meeting we have seen a couple of conflicting data releases. Friday’s retail sales came in significantly better than forecast at +1.2%, but then last night German factory orders saw their biggest drop since August 2009 when they fell 5.7%. Weak Eurozone growth and geopolitical concerns have certainly played a part in this decline, but the figures could also have been distorted by late school holidays in Germany. This week the economic calendar is much lighter with largely second tier data set for release. We do however have a speech from Draghi on Thursday to draw focus.
United Kingdom
Japan
Last week’s Tankan survey showed there is a big divergence between business condition in the manufacturing and nonmanufacturing sectors. The large manufacturing index increased to its best level since March this year, while the large non-manufacturing index decline sharply for the second quarter in a row. A rapidly weakening Yen could be sighted as part of the reason for this and officials continue to suggest the pace of declines is a negative for the economy. The latest Bank of Japan (BOJ) meeting concludes today and it will be interesting to see their take on recent economic performance. Soft industrial production and stagnant inflation will certainly provide talking points for the central bank who are expected to leave current policy settings unchanged. Later in the week we get the current account, core machinery orders and the BOJ minutes to digest.
Canada
Last week saw a couple of disappointing releases from Canada that put the currency under some pressure. GDP for July came in flat against expectation for +0.2% The flat result was driven in part by a drop in oil and gas production. Friday saw the release of trade balance data that also missed forecasts by a significant margin, however last night Ivey PMI data provided a pleasant surprise. The index printed at 58.6 versus expectations of 53.4. That is a big jump from the prior reading of 50.9. It’s also the highest reading so far this year. Of particular interest was the prices component that jumped from 52.2 to 71.6. The Bank of Canada believes a recent jump in inflation is temporary, but data like this suggests we won’t be seeing a pullback any time soon. Still to come this week we have building permits, housing starts, and employment data.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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