Sharp recovery in oil and gold boosts commodity bloc currencies; volatility likely to remain high; local data having little impact on NZD

By Ian Dobbs*:

The past week has been dominated by continued declines in commodity prices which have weighed on the commodity bloc currencies of Australia, New Zealand and Canada.

A sharp recovery in the price of oil and gold in the past 24 hours has given some hope that the recent weakness may have run its course, although it is still too early to make that call.

The only thing that is certain is the volatility is likely to remain high especially with a number of key releases scheduled this week.

We have central bank meetings from the RBA, ECB, BOE and BOC to digest this week along with the all-important US non-farm payrolls employment report.

Overall the recent theme of increasing volatility within a contained range should continue. It appears to be prudent not to expect much to happen in the way of paradigm shifts in market trends ahead of the second quarter of 2015, much to the exasperation of most committed market observers.

Major Announcements last week:

• German IFO Business Climate Index 104.7 vs 103.0 expected

• Canadian Retail Sales (core) 0.0 vs +.4% expected

• US prelim. GDP 3.9% vs 3.3% expected

• US core Durable Goods -.9% vs +.5% expected

• Australian Private Capex +.2% vs -1.7% expected

• European Inflation +.3% as expected

• Canadian GDP +.4% as expected

• UK Manufacturing 53.5 vs 53.1 expected

• US Manufacturing 58.7 vs 57.9

NZD/USD

NZD/AUD (AUD/NZD)

This pair broke above key resistance around 0.9150 (support at 1.0929) last week as the Australian dollar suffered at the hands of declining commodity prices. Once clear of that resistance gains have continued to just shy of 0.9300 (1.0753) last night. Although the near term trend has firmly been to the NZD topside the past week, there is potential that resistance around 0.9300 (support around 1.0753) could cap this move. A pull back toward 0.9200 (rally to 1.0870) and then possibly 0.9150 (1.0929) would then likely eventuate. Key to this potential price action however, will be the rash of key data out over the coming days. From Australia we have building approvals and the RBA rate statement this afternoon to digest. Then later in the week retail sales and GDP are set for release. From NZ we have tonight’s Fonterra dairy auction to draw focus.

NZD/GBP (GBP/NZD)

Price action in this pair over the past week has continued to gravitate to the 0.5000 level (2.0000). The pair bounced from 0.4960 (2.0161) early last week, but a couple of attempts since then to gain a foothold above 0.5020 (below 1.9929) have both failed. We saw better than expected manufacturing PMI from the UK last night and if the construction and service sector readings over the next couple of days also come in on the strong side the UK Pound should benefit from increased demand. This would push the cross back below 0.5000 (above 2.0000) and potential down towards 0.4900 (up towards 2.0408). On the New Zealand side of the equation we have tonight’s dairy auction from Fonterra to digest and any further weakness in prices could see a very significant downward revision to forecasted pay-out for 2014/15 which will weigh on the NZD.

 NZD/CAD

The past week saw gains in this pair up toward the 0.9000 level. These gains were driven by declining oil prices that weighed heavily on the Canadian dollar even though a number of other Canadian economic releases have come in on the strong side. In the past 24 hours however, we have seen something of a turnaround in oil and the CAD. The NZDCAD cross has now dropped sharply from its highs and the risks remain skewed to this pullback extending further to the downside. A test of 0.8800 could easily unfold over the coming days. Tonight we have the latest dairy auction from Fonterra to digest and then later in the week there is a rash of key Canadian releases scheduled. These include the Bank of Canada (BOC) rate statement, Ivey PMI, employment change and the trade balance.

NZD/EURO (EURO/NZD)

The past week has seen sideways price action in this pair between the somewhat tighter parameters of 0.6250 and 0.6330 (1.6000 and 1.5798). Although some data points out of Europe have shown a small improvement recently, and this has helped the EUR stabilize to a degree, the longer term outlook is for further Euro weakness. With that in mind buying dips in this pair toward 0.6250 (selling rallies toward 1.6000) remains the favoured play. We have Fonterra’s latest dairy auction tonight and this could certainly impact demand for New Zealand dollars in the near term. From Europe this week the focus will be on the ECB rate meeting and subsequent press conference on Thursday night.

 NZD/YEN

After trading down to 91.85 around this time last Tuesday, the NZDJPY cross has gradually recovered back toward recent highs. Whether the pair can push on through the cycle highs of 93.68 remains to be seen however, as momentum has waned significantly from the gains seen in the first half of November. Last night’s downgrade of Japan’s sovereign rating from Moody’s created some volatility, but had little impact overall on the pair. Tonight dairy auction from Fonterra will draw attention and further declines will pressure the New Zealand dollar. From Japan we have average cash earnings data this afternoon to digest and then leading indicators on Friday. The key level on the downside to watch is now 92.60 with a break below there suggesting near term risks for the pair have swung back to the downside.

AUD/USD

The Australian dollar made fresh cycle lows to the USD on Monday, weighed on by further declines in commodity prices. The pair traded to a low of 0.8418 before staging a bounce back above 0.8500 overnight. We have building approvals out early this afternoon, but the main focus will be on the Reserve Bank of Australia (RBA) rate statement due out later today. No change is expected from the central bank but their view on the current level of the AUD will draw attention. Later in the week from Australia we also get retail sales and GDP data. From the US this week there is also plenty for the market to digest. We have a number of Fed speakers scheduled and the market will be keen to get a sense of their current thinking with regard to the timing of rate hikes. We also have key data in the form of non-manufacturing ISM and the non-farm payroll employment report. Although the current risks to the AUD remain to the downside, there are so many key releases from both countries over the coming days that price action going forward will be determined by these outcomes.

AUD/GBP (GBP/AUD)                            

The past week has seen this pair testing the downside driven in large part by weakness in the Australian dollar. The AUD has been weighed on by declining commodity prices and this has seen the pair trade down toward 0.5390 (up toward 1.8553) on a number of occasions. The pair has failed however, to test the more significant 0.5350 (1.8692) level, although that could still come as the risks remain skewed toward further weakness. Today’s release of Australian building consents data will be followed by the RBA rate statement and then later in the week we have GDP and retail sales numbers to digest. These releases, in conjunction with UK construction and service sector PMI’s, will likely determine the near term direction for the pair.

AUD/EURO (EURO/AUD)

Continued declines in commodity prices have seen the Australian dollar come under a lot of pressure this past week and this has driven the pairing down to the lowest level since June at 0.6767 (highs 1.4778). Although the longer term forecast is for the Euro to see increased pressure over the coming months, some very recent Eurozone data has shown small improvements and this has seem immediate pressure on the Euro ease. Price action over the coming days will be driven by a number of key releases. From Australia today we have building approvals and the RBA rate statement to digest. Then later in the week we get GDP and retail sales data. From Europe the focus will on Thursday night’s ECB rate meeting and subsequent press conference. If we see further weakness in the pair it could fall all the way to support around 0.6650 (resistance around 1.5038). If the Australian dollar manages to find some support from this week’s economic releases then a move back toward 0.6900 (1.4493) should eventuate.

AUD/YEN

The past week has seen mostly sideways price action in this pair between the parameters of 100.00 and 101.00. Early last week prices pulled back from the recent cycle highs of 102.84, and since then trading has been relatively quiet. Direction from here is a tough call. The strong gains seen in the first half of November have stalled, and if the pair breaks below 100.00 a deeper pullback to 98.00 will likely unfold. While the pair holds above 100.00 however, another attempt toward 102.84 could slowly develop. From Australia today we have building approvals and the RBA rate statement to digest. Then later in the week we get GDP and retail sales data. While from Japan we have average cash earnings data this afternoon to digest and then leading indicators on Friday.

AUD/CAD

The Australian dollar and the Canadian dollar have both struggled over the past week on the back of declining commodity prices. Both currencies have seen periods of pressure, but it is the AUD that has underperformed and this caused the cross to trade to fresh cycle lows at 0.9568. The risks are skewed to the downside as the Canadian dollar has seen increased demand in the last 24 hours on the back of a bounce in the price of oil. Recent data from Canada has also been stronger than expected and if this continues with the key releases out later in the week the CAD could see some real appreciation. From Australia today we have building approvals and the RBA rate statement to digest, then later in the week we get GDP and retail sales data.

-------------------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

--------------------------------------------------------------------------------------------------------------------------

Market commentary: