IMF says "bold action" needed to bolster global growth; Chinese economy holding up; Japanese and eurozone economies continue to struggle

By Ian Dobbs*:

The outlook for global growth has been in the spotlight recently with concerns centred around the prospects of China, Japan and the Eurozone.

The IMF said on Saturday that “bold action” is needed to bolster the global economic recovery and they urged governments not to constrain growth by tightening budgets too drastically. China’s real estate market is certainly slowing down and there are real concerns that an outright collapse could eventuate, but for the time being it seems controlled.

Other parts of the Chinese economy seem to be faring better as evidenced by yesterday’s release of better than expected trade data. There was a big increase in imports which is a positive signal for Chinese domestic demand.

Economic growth in Japan however, continues to struggle to recover from April's sales tax increase, while the Eurozone remains in deep trouble, flirting with outright recession and deflation.

The combination of these concerns along with the end of QE in the US is seeing the US stock market come under pressure with the S&P now down 6.4% from September’s peak.

We have also seen long term interest rates decline significantly with US 10 year bonds trading to fresh cycle lows of 2.28%.

Recent gains in the USD have also taken a pause and the only thing that is certain is that the increased volatility we are seeing in all markets is here to stay for the foreseeable future.

Major Announcements last week:

• Canadian Building Permits -27.3% vs -6.0% expected

• FOMC minutes viewed as somewhat “dovish”

• Australian Employment Change -29.7k vs 17.6k expected

• Australian Unemployment Rate 6.1% as expected

• Bank of England leaves rates unchanged at 0.5%

• Canadian Employment Change 74.1K vs 18.7k expected

• Canadian Unemployment rate 6.8% vs 7.0% expected

• Chinese Trade Balance 31.0b vs 41.2b expected.

NZD/USD

NZD/AUD (AUD/NZD)

The past week has seen the New Zealand dollar largely outperform the Australian dollar. In thin market conditions early yesterday the AUD came under selling pressure and this helped to drive the pair up to 0.9034 (down to 1.1069). However, there is resistance around 0.9050 (support around 1.1050) that I expect to provide a tough barrier to further NZD gains, and the pair retreated from its highs without a solid test of that level. Data over the past week has only had a minimal impact on the pair, although that could change with Australian business confidence numbers due out this afternoon. These will be followed by consumer sentiment data tomorrow with inflation expectation and a speech by the RBA assistant governor later in the week. In New Zealand the focus now turns to Wednesday nights dairy action from Fonterra. For the time being a continuation of the broad 0.8850 - 0.9050 (1.1300 - 1.1050) range looks likely to dominate.

NZD/GBP (GBP/NZD)

The New Zealand dollar is once again testing levels just over 0.4900 (under 2.0408) to the UK Pound after being rejected from there here last week. There is plenty of resistance just above 0.4900 (support under 2.0408) and this should prove tough to overcome. If we do get a NZ dollar break higher, a test to the psychological 0.5000 (2.0000) level could eventuate, but I would expect that to contain any potential strength. The pair has been driven up here by some relative weakness in the UK pound thanks to some slightly softer data releases recently and comments from Governor Carney that don’t suggest he’s in a hurry to raise rates. This week sees the release of some key data for the UK. Tonight we get the latest reading of inflation, and tomorrow we have employment numbers to digest. These two releases combined with the latest dairy auction from Fonterra on Wednesday night are likely to dictate near term direction for the pair.

 NZD/CAD

The Canadian economy has seen some very supportive data recently, but somewhat surprisingly it has failed to help the Canadian dollar. Employment numbers released on Friday night we’re much better than forecast yet the resulting gains in the CAD were very short lived. Price action like this is a warning sign and we could well see the New Zealand dollar make further gains against the CAD over the coming week. The initial target would be a test of 0.8900. The key release from NZ this week comes in the form of Fonterra’s latest dairy auction on Wednesday night. While from Canada we have manufacturing sales and inflation data to digest toward the end of the week.

NZD/EURO (EURO/NZD)

This pair continues to trade in a choppy range between the broad parameters of 0.6150 and 0.6250 (1.6260 and 1.6000). Increasing concerns about the outlook for European growth and inflation have yet to feed through into further Euro weakness, but that’s no reason to think it won’t eventually come. Data from New Zealand has had little impact over the past week although that could change with the release of tomorrow night’s dairy auction results from Fonterra. From Europe this week we have German economic sentiment, Eurozone industrial production, and the final reading of inflation to digest. I expect dips toward 0.6150 (rallies to 1.6260) to continue to provide good value buying of NZ dollars, with the risks skewed to a break higher for the pair over the coming weeks.

 NZD/YEN

The New Zealand dollar has seen pressure from a somewhat resurgent Yen the past week and this caused the pair to trade to a fresh cycle low of 83.65 yesterday. Japanese data has been something of a mixed bag recently with the most encouraging result coming from core machinery orders that beat expectation by a long shot last week. There is little out of Japan this week so attention will turn to NZ data in the form of Fonterra’s latest dairy auction tomorrow night. Downside momentum in the pair does appear to be waning and there is potential for a correction back up toward 86.00. A move down through 83.50 would negate that view and open the way for further losses toward 82.00. A move such as this would be driven by further increase in wider market volatility.

AUD/USD

Swings in the value of the US dollar continue to be the driving force for this pair at the moment. A wave of USD selling in the wake of last Thursday’s Fed minutes saw the AUD trade up to 0.8898, before a sharp turnaround ensued. The USD recovery drove the pair back down to key support at 0.8650, but again this level contained the downside and another bounce higher is currently in progress. Better than expected Chinese trade data released yesterday have helped support the Australian dollar and a test back over 0.8800 seems likely. Demand for USD’s has also been undermined by weakness in US stock markets and declining US long term interest rates. This increased volatility is likely to remain for the foreseeable future and it does provide opportunity for those looking to transact. A recovery back above 0.8800 could easily extend up toward 0.8900 and those looking to purchase USD’s should take advantage of such a move. As long as key support around 0.8650 continues the downside the risk remains for investigations higher as the pair consolidates / corrects the sharp decline seen from 0.9400 only six weeks ago. Still to come this week from Australia we have business confidence, consumer sentiment, inflation expectations and a speech from RBA Assistant Governor Debelle. While data from the US this week to draw focus includes retail sales, the Philly Fed manufacturing index, building permits and consumer sentiment.

AUD/GBP (GBP/AUD)                            

The Australian dollar had a crack at the 0.5500 resistance level (1.8182 support) to the UK Pound late last week. It was however, firmly rejected from there and the pair quickly traded all the way back down to a low of 0.5379 (high of 1.8591). The UK Pound has struggled to get much support from data recently and comments from Governor Carney overnight have suggested he is in no hurry to raise rates. These ‘dovish’ comments combined with better than forecasted Chinese trade data yesterday to help the pair bounce from the lows and it now trades around 0.5450 (1.8349). Look for 0.5500 (1.8182) to continue to provide tough AUD resistance on the topside and selling ahead of that level is recommended. Still to come this week from Australia we have business confidence, consumer sentiment, inflation expectations and a speech from RBA Assistant Governor Debelle. While from the UK we have the latest reading of inflation and employment numbers to draw focus.

AUD/EURO (EURO/AUD)

The Australian dollar has seen some pressure from the Euro over the past week and this has driven the pair to test support around 0.6850 (1.4600 resistance). Increasing concerns about the outlook for European growth and inflation have yet to translate into further Euro weakness, but that’s no reason to think it won’t eventually come. As long as support around 0.6850 (resistance around 1.4600) contains the AUD downside, the risks are there for a recovery back up toward 0.7000 (down toward 1.4286). Key to near term direction will be data set for release this week. From Australia we have business confidence, consumer sentiment, inflation expectations and a speech from RBA Assistant Governor Debelle. While from Europe we have German economic sentiment, Eurozone industrial production, and the final reading of inflation to digest.

AUD/YEN

The Australian dollar has seen pressure from a somewhat resurgent Yen the past week and this caused the pair to test support around 93.00 in early trade yesterday. We have seen a bounce from that low, but the risks remain skewed to the downside for now. Japanese data has been something of a mixed bag recently, with the most encouraging result coming from core machinery orders that beat expectation by a long shot last week. There is little out of Japan this week so attention will now turn to Australian data. We have business confidence out this afternoon, then later in the week we have consumer sentiment, inflation expectations and a speech from RBA Assistant Governor Debelle will draw focus.

AUD/CAD

Canada released some very supportive data last week, the highlight of which was employment change on Friday evening. Unfortunately for the Canadian dollar the gains seen on the back of that release were very short lived. The AUDCAD pair traded down just below 0.9700, but we have seen a solid bounce from there. This is somewhat concerning and would suggest we could easily see further weakness in the CAD over the coming week. Resistance is seen around 0.9860 and a move above there open the way for correction toward 0.9950. We have business confidence data out this afternoon in Australia, then later in the week we have consumer sentiment, inflation expectations and a speech from RBA Assistant Governor Debelle will draw focus. From Canada we have manufacturing sales and inflation data to digest toward the end of the week.

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