Australasian currencies initially reacted positively to Chinese stimulus; realisation hit market this was a sign of real problems facing China; PBoC move to ease financing difficulties for small companies

Australasian currencies initially reacted positively to Chinese stimulus; realisation hit market this was a sign of real problems facing China; PBoC move to ease financing difficulties for small companies

By Ian Dobbs*:

The People Bank of China surprised markets on Friday evening by announcing a cut in interest rates in an effort to support the world’s largest economy.

The initial reaction for the Australasian currencies was positive as anything that is supportive of Chinese demand will have flow on effects for New Zealand and Australia.

But the market quickly realised the move is actually a signal of the real problems facing China going forward and this negative sentiment eventually weighed on the local pair.

This was the first rate cut from the PBOC since 2012 and the question is will it be the start of a cycle of cuts.

The move was designed to ease difficulties in financing for companies, especially small companies, and there has long been question marks over the sustainability of debt creation seen in the Chinese economy in recent years.

Large company defaults and bankruptcies, once unheard of in China, are now occurring regularly, and house prices are declining in almost all major cities. The headwinds the Chinese economy is currently facing suggest we will see further interest rate cuts.

Major Announcements last week:

  • NZ Retail Sales 1.5% vs .8% expected
  • Japanese GDP -.4% vs +.5% expected
  • UK Inflation +1.3% vs +1.2% expected
  • EU German Economic Sentiment 11.0 vs 4.3 expected
  • NZ GDT Auction results -3.1%
  • BOJ leaves monetary policy unchanged
  • Chinese HSBC Manufacturing 50.0 vs 50.2 expected
  • UK Retail Sales +.8% vs +.4% expected
  • US Inflation 0.0 vs +.1% expected
  • US Philly FED Manufacturing Index 40.8 vs 18.9 expected
  • Canadian Inflation +.3% vs +.2% expected

NZD/USD

The New Zealand dollar has remained largely range bound against the USD over the past week with price action mostly contained below the 0.7900 level. We did see a short lived spike up to 0.7946 on Friday evening in the wake of the surprise rate cut from China, but the pair could not sustain the gains. In the past 24 hours the NZD has also been weighed on by a declining Australian dollar that saw pressure in the wake of the announcement from BHP Billiton that they are to cut investment and spending. US data remains supportive of the US economy going forward and this should also help to limit periods of relative NZD strength. Selling levels over 0.7900 remains the preferred option at this stage. Still to come this week from NZ we have the trade balance, building consents and business confidence numbers. While from the US we get consumer confidence, durable goods orders and new home sales data.
 
DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7845 0.7700 0.7900 0.7808 - 0.7974

NZD/AUD (AUD/NZD)

The past week has seen this pair trading in a relatively tight band between 0.9080 and 0.9140 (1.0941 and 1.1013). There is big resistance around 0.9150 (support at 1.0929) that has capped the pair since late July and the market has so far failed to have a serious attempted to overcome it. I suspect this level will continue to put a roof on the NZD appreciation and we should eventually see a pullback that will take us below 0.9000 (above 1.1111). Last night’s announcement from BHP Billiton that they plan to dramatically cut spending and investment has weighed on the AUD and the pair is now trading around 0.9130 (1.0953). Current levels therefore provide a good opportunity for those looking to purchase Australian dollars with New Zealand dollars. Still to come this week from NZ we have the trade balance, building consents and business confidence numbers. While from Australia we get data on construction work done data tomorrow and on Thursday we have private capital expenditure figures to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9130 0.8850 0.9150 0.9073 - 0.9144
AUD / NZD 1.0953 1.0929 1.1300 1.0936 - 1.1021

NZD/GBP (GBP/NZD)

The New Zealand dollar has lost ground to the UK Pound over the past week, although we are yet to see a decisive break back below initial support around 0.5000 (resistance at 2.0000). That level was tested late last week, but managed to contain the downside and a bounce to 0.5067 (1.9736) ensued. That bounced was helped by news of a rate cut in China which lent support to the NZD temporarily, and the UKIP by-election win which put pressure on the GBP. In the past 24 hours however, we have once again traded down to support at 0.5000 (resistance at 2.0000) and I expect this level to come under increasing pressure, with the risks skewed toward a break lower. Still to come this week from NZ we have the trade balance, building consents and business confidence numbers. While from the UK we have the BOE Inflation Report Hearings, the second estimate of GDP, CBI realized sales and the Nationwide House Price Index.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5005 0.4900 0.5100 0.4993 - 0.5096
GBP / NZD 1.9980 1.9608 2.0408 1.9625 - 2.0029

 NZD/CAD

The Canadian dollar continues to stage something of a recovery against the New Zealand dollar after briefly trading up over 0.9000 this time last week. Better than forecast data out of Canada has driven the move, along with a slightly weaker NZD thanks in part to a further fall in dairy prices. The risks remain skewed to the downside and a test of the 0.8800 level is expected over the coming week. Still to come this week from NZ we have the trade balance, building consents and business confidence numbers. While from Canada get data this week in the form of retail sales and GDP, along with the current account and raw materials price index.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8860 0.8800 0.9000 0.8838 - 0.9011

NZD/EURO (EURO/NZD)

It has been a choppy past week for this pair with significant swings in price action. Some improving data released from the Eurozone has resulted in periods of reduced pressure on the Euro and this combined with movements in the NZD has seen the cross fall from 0.6380 to 0.6240 (rally from 1.5674 to 1.6026) and then recover back up again. In the past 24 hours we have seen some relative NZD weakness which probably provides a buying opportunity in the pair. Currently trading around 0.6325 (1.5810), there is minor support at 0.6290 (resistance at 1.5898) which may well now contain the NZD downside. The longer term trend in the cross is up with the Euro expected to remain under pressure against the NZD heading into year end. Still to come this week from NZ we have the trade balance, building consents and business confidence numbers. While from Europe we have German retail sales, French consumer spending, inflation and unemployment data.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6315 0.6200 0.6400 0.6234 - 0.6389
EUR / NZD 1.5835 1.5625 1.6129 1.5653 - 1.6040

 NZD/YEN

This pair remains elevated in line with the recent strong uptrend, but somewhat tellingly the cross has failed to kick on with further gains this week. We did see a sharp spike higher on Friday night in the wake of the surprise Chinese rate announcement, but it was quickly reversed. Although the broader trend is firmly to the topside, we are seeing some indicators that suggest momentum is waning and this raises the prospect of a corrective pullback. There has been no significant pull back since the pair started rallying from around 85.00 at the end of October and the market looks overdue just such a move. A good shake out of weak long (brought) positions could easily see the pair trade down toward 89.80 and this would provide a good NZD buying opportunity. Those looking to purchase Yen in the next couple of weeks should think about using the current strength to lock a rate in before such a correction develops.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 92.62 91.50 93.50 92.12 - 93.65

AUD/USD

The Australian dollar has lost ground to the USD over the past week thanks to strong US data and an announcement from BHP Billiton that they are to significantly cut spending and investment. That BHP Billiton news was out overnight and it has caused the AUD to give back much of the gains made in the wake of the Chinese rate cut announcement on Friday evening. The pair now trades just above 0.8600 and a move toward the recent cycle lows of 0.8538 remains a distinct possibility. Tomorrow from Australia we get data on construction work done data and on Thursday we have private capital expenditure figures to digest. From the US this week we get consumer confidence, durable goods orders and new home sales data.  Selling into any strength toward 0.8700 is the favoured strategy at the moment with a slight downside bias in play.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.8595 0.8540 0.8750 0.8567 - 0.8745

AUD/GBP (GBP/AUD)                            

It has been a choppy past week for this pair with some significant swings in price action. The cross bounced from 0.5480 (1.8248) late last week, helped by news out of China of a surprise rate cut. This boosted the Australian dollar somewhat and helped the cross trade all the way back up to 0.5561 (down to 1.7982). In the UK the week’s by-election that was won by the UKIP caused some ripples and kept the GBP under pressure in the early stages of this week. We have however, seen a pullback in the pair in the past 12 hours driven by Australian dollar weakness in the wake of news that BHP Billiton will dramatically cut back on spending and investment. The cross is now back to 0.5480 (1.8248) and the risks are skewed to further AUD weakness. A sustained break below 0.5480 (above 1.8248) will open the way for a much broader pull back to 0.5430 (1.8416), ahead of 0.5350 (1.8692). Tomorrow from Australia we get data on construction work done data and on Thursday we have private capital expenditure figures to digest. While from the UK we have the BOE Inflation Report Hearings, the second estimate of GDP, CBI realized sales and the Nationwide House Price Index.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5480 0.5420 0.5600 0.5473 - 0.5593
GBP / AUD 1.8248 1.7857 1.8450 1.7879 - 1.8270

AUD/EURO (EURO/AUD)

The range of 0.6830 to 0.7030 (1.4225 to 1.4641) has largely contained this pair since mid-September and the past week has seen both those levels tested at times. The pair has failed to break out however, and it currently trades bang in the middle of that range at 0.6930 (1.4430). Some improvements in data out of Europe has caused periods of EUR out performance, while the news of a surprise rate cut in China helped the Australian dollar outperform at the end of last week. Overall however there is little to suggest a broad trend is developing in either direction and so playing the now well defined range remains the favoured strategy. Tomorrow from Australia we get data on construction work done data and on Thursday we have private capital expenditure figures to digest. While from Europe we have German retail sales, French consumer spending, inflation and unemployment data.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6916 0.6830 0.7030 0.6835 - 0.7024
EUR / AUD 1.4460 1.4225 1.4641 1.4237 - 1.4630

AUD/YEN

The past week has seen the recent strong uptrend in this pair stall somewhat, in line with weakening momentum indicators. We did briefly trade to fresh highs in the wake of the surprise Chinese rate cut announcement on Friday, but these were short lived. There is now potential for a significant pullback, perhaps toward 98.50, before the rally resumes. Tomorrow from Australia we get data on construction work done data and on Thursday we have private capital expenditure figures to digest. While from Japan, BOJ Governor Kuroda is due to speak this afternoon and later in the week we get data on household spending, inflation, unemployment and retail sales.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 101.50 100.00 103.00 101.35 - 102.85

AUD/CAD

The Canadian dollar continues to stage something of a recovery against the Australian dollar after peaking above 0.9900 just over a week ago. Better than forecast data out of Canada has driven the move, along with a decline in the AUD thanks in part to news of BHP Billiton’s plan to slash spending. The risks remain skewed to the downside with the pair currently trading just above recent cycle lows of 0.9679. A break below that level would open the way from a move to 0.9600 and possibly even 0.9400. Tomorrow from Australia we get data on construction work done data and on Thursday we have private capital expenditure figures to digest. While from Canada get data this week in the form of retail sales and GDP, along with the current account and raw materials price index.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9710 0.9680 0.9900 0.9695 - 0.9880

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Market commentary:

The People Bank of China surprised markets on Friday evening by announcing a cut in interest rates in an effort to support the world’s largest economy. The initial reaction for the Australasian currencies was positive as anything that is supportive of Chinese demand will have flow on effects for New Zealand and Australia. But the market quickly realised the move is actually a signal of the real problems facing China going forward and this negative sentiment eventually weighed on the local pair. This was the first rate cut from the PBOC since 2012 and the question is will it be the start of a cycle of cuts. The move was designed to ease difficulties in financing for companies, especially small companies, and there has long been question marks over the sustainability of debt creation seen in the Chinese economy in recent years. Large company defaults and bankruptcies, once unheard of in China, are now occurring regularly, and house prices are declining in almost all major cities. The headwinds the Chinese economy is currently facing suggest we will see further interest rate cuts.

Australia

There has been no data of significance released from Australia over the past week. The Australian dollar did however get a boost, albeit temporarily, from news that China had cut interest rates, but a recent announcement from BHP Billiton that they are going to dramatically cut spending by up to $US4b per year has weighed on the AUD. Tomorrow we get data on construction work done and on Thursday we have private capital expenditure figures to digest.

New Zealand

Producer prices data from New Zealand last week came in much weaker than forecast suggesting there is little in the way of pipeline inflation pressure in the economy. The index was dragged down by lower farm-gate milk prices that reduced input costs for dairy manufacturers and this trend could have further to run. Fonterra’s latest dairy auction, also out last week, saw another decline this time by 3%. On a more positive note, yesterday’s migration data saw a record all time high of people coming to the country on a permanent or long-term basis. The number of net migrants jumped to 5,200 in October from 4,800 in August. It is exactly this sort of data that the Reserve Bank of New Zealand pointed to when deciding not to ease the LVR lending restrictions recently. Still to come this week we have the trade balance, building consents and business confidence numbers.

United States

The US economy continues to perform well and the Fed remains on course to hike interest rates sometime around the middle of next year. Although inflation data last week came in stronger than forecast at 1.7% year on year, long term inflation expectations are actually declining and these are unlikely to force the Feds hand on tightening. The Fed will hike because they know as well as anyone that zero rates, over the long run, probably create as many problems as they solve. Over the next couple of months we should get more clarity from the Fed on their approach to, and potential timing of, future rate hikes and this was alluded to in the minutes released last week. There are plenty of risks however, particularly to the outlook for global growth with some real question marks hanging over the prospects of China, Europe and Japan. But barring a full on crisis in one of those countries the Fed should push on with interest rate ‘normalization’. Tonight we get the second reading of GDP and the market is expecting a slight revision downward to 3.3% from 3.5% previously. This is still a very healthy result and would support the current outlook for the Fed. Other data to watch out for this week includes consumer confidence, durable goods orders and new home sales.

Europe

Data from Europe last week was a mixed bag, although there was a hint of improvement in a couple of readings that could be considered encouraging. The trade balance improved by more than forecast and this was followed by the German ZEW Economic Sentiment Index which saw the first improved reading in 2014. Reinforcing this was last night’s German IFO Business Climate Index which improved to 104.7 from 103.2, after the previous six readings which all declined. One month’s improvement does certainly not make a trend, but is it however an optimistic signal. Countering this were last week’s PMI readings for the manufacturing and service sectors that both declined and we have also seen a number of comments from ECB officials that suggest they won’t hesitate to undertake outright sovereign QE should the inflation picture deteriorate. We are not there yet and the ECB certainly has a number of hurdles to overcome before they could start buying government bonds, but the threat of this should keep the Euro under pressure heading into next year. Still to come this week we have German retail sales, French consumer spending, inflation and unemployment data.

United Kingdom

The Bank of England (BOE) minutes released last week suggested that they believe the recent downward pressure on inflation will ease as spare capacity in the economy is absorbed. This will push inflation back toward their target over the next 2-3 years. Although the UK economy has seen a slowdown from growth seen earlier in the year, a good portion of this attributable to the tough export environment with their biggest trading partner, Europe, floundering economically. Domestically the UK economy continues to perform well and this point is not lost on the BOE. Employment remains strong, with encouraging signs of wage gains, and last week’s retail sales numbers were much better than forecast. There are however some real risks coming from within the UK and this point was highlighted over the weekend after a by-election was won by the anti-EU UK Independence Party (UKIP). The UKIP has been gaining traction lately and now present a very real risk to the current two-party system in Britain. Should they end up holding the balance of power after next year’s election there could be some real turbulence. One recent report suggested an EU exit by the UK would result in a 10% decline of the Pound. The political situation could have a big impact on the value of the GBP over the coming months. Still to come this week we have the BOE Inflation Report Hearings, the second estimate of GDP, CBI realized sales and the Nationwide House Price Index.

Japan

The big news from Japan last week were the duel announcements from PM Abe that he will delay the next planned sales tax hike, and dissolve the lower house of parliament and call fresh elections. The move came after the latest data from the July-September period showed the Japanese economy actually contracted. This surprised most economists who were expecting modest growth to save the economy from recession. The economy has taken a massive knock, and largely failed to recover, from April’s sales tax hike and PM Abe has decided he needs to seek a fresh mandate from the population to continue his economic policies, dubbed “Abenomics”. PM Abe is walking a tightrope, trying to stimulate the economy out of two decades of low growth and deflation on the one hand, while on the other trying to shore up the country's fiscal position that sees total debt at more than twice the size of the economy. It is almost an impossible task, but he is getting plenty of help from the Bank of Japan who are easing policy on a scale never seen before. These easing’s have resulted in a dramatic weakening of the Yen and it continues to remain under pressure trading at multi year lows across the board. BOJ Governor Kuroda is due to speak this afternoon and later in the week we get data on household spending, inflation, unemployment and retail sales.

Canada

The Canadian dollar saw plenty of pressure in the early part of November as falling oil prices weighed on the currency. However, recent data has been supportive of the Canadian economy and this has resulted in something of a turnaround for the currency. The positive economic numbers continued last week with wholesale sales coming in much stronger than forecast up 1.8%, and inflation also printing stronger than expected at 2.4% year on year. The forecasts were for around 2.1% y/y and it seems the recent uptick in inflation may not be as “temporary” as the Bank of Canada (BOC) expects. We get further key data this week in the form of retail sales and GDP, along with the current account and raw materials price index.

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

 

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    9 Comments

    Comment Filter

    Highlight new comments in the last hr(s).

    Lots of right wing opinion on how bad it is and its others fault. Rinse and repeat similar articles in similar publications Ad nauseam. It is interesting however that in desperation we seem to be heading towards a "begger thy neighbour strategy"  The Q is can a 2nd Great Depression be avoided, and that is a no for me. 
    regards

    The idea that the RBNZ is going to hike interest rates up to 5% sometime in the next 18 months is just so ridiculous (after reading Grant Shirley's link).   At best it's wishful pre GFC thinking by bank economists, at worst its deliberate misleading.  
     

    Agree, inflation has been <2% and is now 1%, so we have dis-inflation.  Spending up to xmas might boost the quarter, but 1st 1/4 2015?  Sales on now, just what will the first 3 months be like I wonder.
    So continuing to raise the OCR would be a WTF moment for me, but then when egos get in the way damage is done.
    regards

    The other Stephen pointed out that the GDP deflator is 3.5 %.
    Nominal GDP growth , this yr is running at almost 8%..
    The GDP deflator is  another way to measure the effects of monetary inflation...  ( the inflation/deflation that comes from credit growth or collapse)
    Credit growth has been strong first half of yr....     BUt dairy price collapse has been a bit of a shock.....  which , I'm guessing, is the reason why any OCR increases are  on hold for a while. ( global commodity price downturn).....   
    I'm guessing ...2015 Auckland House prices will go up another 6%+...
    I'm guessing OCR on hold for most of 2015...???

    I dont like mixing methods of measuring inflation and cherry picking which one suits you the best (not that I am saying you are), so I prefer to stick to Core inflation or at worst CPI so my anchor is constant.   Oh and that 8% is for China or us btw?   If its NZ, frankly someone telling me our GDP is going up an effective 8% with no pay rises for many and un-employment being too high and not falling is hard to believe as real.
    So for me the CPI dropping to 1%  from 1.5%~1.6% is a hell of a kicker.  In engineering terms if the control band is 1 to 3% then at 1% and that drop rate there should be a control action taking place, in this case the OCR should be dropping.  Now there are all sorts of problems with controling  too fast as its inherently destabilizing so I'll live with the OCR not moving until we see if that 1% is real or if there is noise. if it jumps back up to 1.6%, Ok holding was the right call but if its 0.8%~1.2% next time still holding the OCR up will be un-justified in my eyes expect as an ego thing at the RB, unless they can show a really good reason why and of course they never do.
    I dont know what the dairy price dropping this much is going to really do but it strikes me that a tidy % of high debt dairy farms need a high payout to be viable and I cant see that as realistic in the future.   I assume then that with grapes down and now dairy rural NZ is going to take a big hit, but tahst OK Auckalnd's housing will go up 6% (maybe even more) so all will be well.
    hrmmm
    regards
     
     
     
     

    Ok...   but CPI   is no constant or anchor...     tradables cpi is -ve....  nontradables is 2.5 to 3%
    http://www.rbnz.govt.nz/statistics/tables/m1/
       Nominal GDP has been as high as 9% 
    http://www.rbnz.govt.nz/statistics/tables/m5/
    Its not about cherry picking.... Its about understanding 1st principles......
    I think you might be too 'mechanical" in your views.....    
    For me... coming to my own understanding of first principles...in regards to how Monetary systems work and how increasing money supply ( credit growth)... impacts and how its effects manifest in an economy....  gives me a more evolving and fluid view on things... ( for me )
    I highly recommend Ray Dalios "economic model"...    Its cool...  
    http://www.economicprinciples.org/
    Sometimes nominal figures are more important to see a picture .....    especially when the "deflators" are all arbitary constructs...     Dont u think..??
    Longer term i do agree with you Steven...   We will see a big crash in Auckland house prices... .. I'm thinking in about 10 yrs...     BUT prices could well double from current levels before that happens...
    Why are u so fixated on the CPI...???

    Hence I like core inflation and not CPI, but also I go for trends first off.
    I am not fixated on CPI as its seasonal and to adjusted amongst other things so Im really not keen on it.  Like I said I want to wait and see how the trend does. 
    "Ray Dalios" is not someone I'd generally pay attention to myself, especially if someone like "Institutional Investor’s Alpha" likes him. Kind of like avoiding the "right" wingers whose thoughts bear little resemblence to reality.  But I'll go listen, hrrmm, well he fails as he doesnt see energy as one of the main drivers....
    I dont like or think much of GDP to many lies hidden in it let alone use it for a basis of calculation.
     
    regards
     
     

    PS. Steven...
    If its NZ, frankly someone telling me our GDP is going up an effective 8% with no pay rises for many and un-employment being too high and not falling is hard to believe as real.
    Yes....   in my view.... this is the main reason for the growing wealth inequality...and the struggles of the middle and working class....    and why beneficiares cant  make ends meet...
     

    Im struggling to see inequality is significantly up in NZ, I see no solid data/proof.  Food banks however seem low or empty, so something is indeed not healthy.
    regards