Europe and Japan in the economic quagmire while UK & US show signs of improvement; China remains vulnerable with significant risk in property and credit markets

By Ian Dobbs*:

The economic data releases from the last week have revealed a continuation of the theme of a slow economic recovery in the global sense.

With Europe and Japan in economic respective quagmire’s, eyes are closely on the news from the UK and the US for inspiration. Both economies continue to improve, albeit not plain sailing for either economy.

Wage growth remains the sticky indicator across the board and until wages start to climb, the full benefits of lower levels of unemployment will not be seen.

The Chinese economy continues to represent a significant risk with the property and credit markets remaining vulnerable. The economic resilience in China is of primary importance to both the Australian and New Zealand economies.

2015 looks to be a crucial year for China as it looks to continue to develop its economy, in the face of the pressures created by the extraordinary global monetary conditions of the last six or so years.

Major Announcements last week:

• Chinese HSBC Manufacturing 50.4 as expected

• UK Manufacturing 53.2 vs 51.5 expected

• US ISM Manufacturing 59.0 vs 56.5 expected

• Australian Retail Sales 1.2% vs +.3% expected

• RBA leaves monetary policy unchanged

• NZ Fonterra GDT Price Index -.3% vs +1.4% previous

• NZ Unemployment rate 5.4% vs 5.5% expected

• Australian Unemployment rate 6.2% as expected

• BOE leave monetary policy unchanged

• ECB leave monetary policy unchanged

• Canadian Unemployment rate 6.5% vs 6.8% expected

• US Unemployment rate 5.8% vs 5.9% expected

NZD/USD

NZD/AUD (AUD/NZD)

Some relative underperformance from the Australian dollar in the first half of last week saw this pair trade up toward 0.9015 (down toward 1.1093). Since then the market has largely traded sideways between that level and 0.8950 on the downside (1.1173 on the topside). We could see some further NZ dollar gains toward 0.9050 (1.1050), but I suspect that level will cap the NZD topside for now. A further period of ranging between 0.9050 and 0.8850 (1.1050 and 1.1300) seems likely over the coming week. The RBNZ’s Financial Stability Report will draw focus tomorrow as will comments from Governor Wheeler when he testifies in front of a parliamentary committee. While from Australia we have business confidence, consumer sentiment, the wage price index and inflation expectations set for release.

NZD/GBP (GBP/NZD)

Although the New Zealand dollar saw some periods of increased demand last week, the overriding trend was one of depreciation against the UK Pound. The pair traded down toward 0.4800 (up toward 2.0833) in the later stages of the week before staging a significant recovery. The NZD then managed to outperform the GBP in the wake of Friday night’s US employment data and this helped the pair trade up over minor resistance around 0.4900 (support around 2.0408). This leaves the near term outlook a little confused and further NZ dollar gains cannot be ruled out. Selling NZ dollars into any periods of strength toward the key 0.5000 (2.0000) level is recommended as the NZD should eventually turn back down. The RBNZ’s Financial Stability Report will draw focus tomorrow, as will comments from Governor Wheeler when he testifies in front of a parliamentary committee. While from the UK this week we have claimant count change (unemployment claims) and average cash earnings data to digest ahead of the BOE’s inflation report on Wednesday.

 NZD/CAD

The New Zealand dollar rallied up toward 0.8940 mid last week against the CAD, helped by stronger than expected NZ employment data. Since then however, a raft of better than forecast Canadian releases have seen the CAD regain much of the lost ground. Friday’s much better than expected Canadian employment data was the latest release to support the CAD and this saw the pair briefly trade down to 0.8740, before bouncing a touch. With no overall direction for the time being, we are likely to see a further period of ranging between the parameters 0.8740 and 0.8940. The RBNZ’s Financial Stability Report will draw focus tomorrow as will comments from Governor Wheeler when he testifies in front of a parliamentary committee. While from Canada we only have the new house price index and manufacturing sales to draw attention.

NZD/EURO (EURO/NZD)

This pair has been trading sideways within a well-defined range since the beginning of October. The bottom of that range comes in around 0.6150 ( top 1.6260) and buying NZ dollars on dips is the recommended trading approach. In the later stages of last week the New Zealand dollar largely outperformed the Euro, particularly in the wake of Friday night’s US employment data, and as such the pair tested the top of its recent range at 0.6260 (lows at 1.5974). So far that has capped NZD gains and we could easily see pullback toward the middle of the range over the coming days. Longer term however, I believe the risks are skewed toward Euro underperformance and as such a break above 0.6260 (below 1.5974) is likely at some stage over the coming weeks / months. Hence the recommendation to buy dips toward 0.6160 (selling rallies toward 1.6234). The RBNZ’s Financial Stability Report will draw focus tomorrow as will comments from Governor Wheeler when he testifies in front of a parliamentary committee. While from Europe we have Eurozone industrial production, GDP and the final reading of inflation to draw focus.

 NZD/YEN

The Japanese Yen has remained under pressure ever since the surprise easing by the Bank of Japan at the end of October. This has seen the cross to the New Zealand dollar climb to just over 89.00, although the pace of these gains has been more moderate in recent days. Any periods of weakness should find support around 88.00 with the target still firmly on a test of the 2014 high at 89.91. The RBNZ’s Financial Stability Report will draw focus tomorrow as will comments from Governor Wheeler when he testifies in front of a parliamentary committee. From Japan this week we have tertiary industry activity and core machinery orders data to digest.

AUD/USD

The Australian dollar struggled throughout much of last week losing significant ground to an appreciating USD. This came despite better than forecast results from retail sales and October employment data. The pair traded to a low of 0.8542 in the hours leading up to Friday night’s key US employment report. The failure of that data to live up to market expectations resulted in significant selling pressure on the USD. As such the pair subsequently made a strong run back up to 0.8680 before finally running out of momentum. With the immediate pressure now taken off the downside, we could see the AUD try to stage a more significant recovery. If the pair can overcome minor resistance around 0.8680, a move back up toward 0.8800 is not out of the question. Still to come this week from Australia we have business confidence, consumer sentiment, the wage price index and inflation expectations. While from the US later in the week we get retail sales and consumer sentiment data to digest.

AUD/GBP (GBP/AUD)                            

The Australian dollar was under pressure across the board for much of last week and as a result this pair traded down toward recent AUD cycle lows near 0.5350 (highs 1.8692). We have seen a significant recovery from those lows, helped by some relative AUD outperformance in the wake of the US employment numbers on Friday night. The pair is now back within the more familiar 0.5420 to 0.5520 (1.8115 - 1.8450) range and I expect this to dominate price action over the course of the coming week. Still to come this week from Australia we have business confidence, consumer sentiment, the wage price index and inflation expectations. While from the UK this week, we have claimant count change (unemployment claims) and average cash earnings data to digest ahead of the BOE’s inflation report on Wednesday.

AUD/EURO (EURO/AUD)

The Australian dollar was under pressure across the board for much of last week and this saw it dramatically underperform the Euro up until Thursday night. That is when ECB President Draghi quashed rumours of a potential leadership challenge after the central bank’s rate meeting. This caused the Euro itself to see some pressure and this allowed the cross to the AUD to stage something of a recovery. So far the recovery has taken the pair back to 0.6950 (down to 1.4388), but the AUD rally could easily continue higher over the coming days. Key AUD topside resistance is not seen until 0.7030 (downside support at 1.4225). Still to come this week from Australia we have business confidence, consumer sentiment, the wage price index and inflation expectations. While from Europe we have Eurozone industrial production, GDP and the final reading of inflation to draw focus.

AUD/YEN

The Japanese Yen has seen continued pressure ever since the Bank of Japan’s surprise easing at the end of October. This has driven the cross up to a high again the AUD to 99.71 so far. We did see a period of Australian dollar underperformance mid last week, but the weakness was limited to 98.00 and the cross has since recovered. Expect 98.00 to continue to contain the downside with a test toward the psychological level of 100.00 likely over the coming weeks. Still to come this week from Australia we have business confidence, consumer sentiment, the wage price index and inflation expectations. From Japan this week we have tertiary industry activity and core machinery orders data to digest.

AUD/CAD

After seeing some initial pressure from the Australian dollar in the early stages of last week, this pair quickly turned around with the Canadian dollar dramatically outperforming the AUD. The CAD was helped by a strong USD as well as a raft of better than expected data releases. The most recent of which was Friday’s strong employment result. This helped to drive the pair to the week’s low of 0.9755, although we have seen a small recovery off there so far. To be fair, we have seen very little overall direction for the past seven weeks with the pair largely contained between 0.9700 and 0.9950. Further choppy price action within that range is expected over the coming week. Still to come this week from Australia we have business confidence, consumer sentiment, the wage price index and inflation expectations. While from Canada we only have the new house price index and manufacturing sales to draw attention.

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