By Ian Dobbs*:
All the team at Direct FX would like to thank you for your continued support throughout 2014. We wish you all a safe and cheerful holiday period and a prosperous 2015.
Our Weekly commentary will be taking a break now until the week of 19 January, but we are operational for dealing throughout the holiday period with the exception of the statutory holidays in Australia and New Zealand.
As the markets wind down for 2014, expect the general levels of liquidity to lower in the coming week. These lower levels of liquidity leave the price action vulnerable to sharper than usual moves at times.
From an Australasian perspective, following today’s uneventful release of the minutes from the RBA’s previous meeting, the final pieces of NZ data become the focus.
Tomorrow’s Fonterra Global Dairy Trade (GDT) auction results will be closely followed. Any further pressure on prices would like see the NZ come under renewed pressure, albeit RBNZ seem calm about the impacts on the wider economy.
After the GDT results the attention transfers to the release of the third quarter NZ growth numbers that will be on office on Thursday morning.
Major Announcements last week:
- Chinese Trade Balance 54.5 B USD vs 44.3B USD expected
- NAB Australian Business Confidence Index 1 vs 5 previous
- UK Manufacturing Production -.7% vs +.2% expected
- Chinese Inflation 1.4% vs 1.6% expected
- RBNZ leave monetary policy unchanged
- Australian Unemployment rate 6.3% as expected
- US Retail Sales +.5% vs +.1% expected
- Chinese Industrial production 7.2% vs 7.6% expected
- US UoM Consumer Sentiment 93.8 vs 89.6 expected
NZD/USD
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7744 | 0.7700 | 0.7900 | 0.7609 - 0.7865 |
NZD/AUD (AUD/NZD)
The past week’s price action has been dominated by the sharp appreciation in the New Zealand dollar in the wake of the RBNZ monetary policy statement. This drove the cross to the Australian dollar up over 0.9450 (below 1.0580) and although we have seen some moderation in the pair since then, it still remains above 0.9400 (below 1.0640). On a purely historical basis these are good levels to sell the pair, but further investigations higher can’t be ruled out with a hawkish RBNZ and growing expectation for rate cuts from the RBA. There is now little in the way of economic data set for release from Australia until next year. From NZ however, we still have another dairy auction tomorrow and then the 3rd quarter GDP number due for release on Thursday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9415 | 0.9300 | 0.9500 | 0.9220 - 0.9472 |
| AUD / NZD | 1.0621 | 1.0526 | 1.0753 | 1.0557 - 1.0846 |
NZD/GBP (GBP/NZD)
Last Thursday’s surprisingly hawkish RBNZ monetary policy statement saw this pair spike up once again toward the 0.5000 (2.0000) level. Since then we have seen a gradual pull back with the pair currently trading around 0.4950 (2.0202). There is a rash of key data set for release from both countries over the coming days which will no doubt set the tone for the pair heading into the holiday period. From NZ we have another dairy auction and GDP data to digest. While from the UK we get the results of bank stress tests tonight along with inflation data. On Wednesday we have employment numbers and on Thursday we get retail sales. Resistance around 0.5000 (support around 2.0000) should continue to provide a relatively tough NZD topside barrier, while there is downside support toward 0.4800 (resistance toward 2.0833).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4950 | 0.4800 | 0.5000 | 0.4868 - 0.4995 |
| GBP / NZD | 2.0202 | 2.0000 | 2.0833 | 2.0019 - 2.0544 |
NZD/CAD
This pair remains elevated after jumping higher in the wake of last Thursday’s hawkish RBNZ monetary policy statement. The Canadian dollar has continued to suffer on the back of declining oil prices and this is the reason the cross remains high, while most other NZD pairs have seen a pullback of sorts. There is talk however, of some possible M&A activity which could support the CAD over the coming days. Resistance comes in around 0.9050 and while below there the risks are skewed to a pullback toward 0.8900. Over the coming days from NZ we have another dairy auction to digest along with GDP data. While from Canada we still have a number of key releases to come with manufacturing sales, wholesale sales, inflation and retails sales all set to hit the wires ahead of the weekend.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9020 | 0.8750 | 0.9050 | 0.8749 - 0.9047 |
NZD/EURO (EURO/NZD)
The New Zealand dollar spiked up over 0.6300 (down under 1.5875) to the Euro in the wake of last week’s hawkish RBNZ statement. Since then we have seen a pullback that has largely undone most of those gains with the pair currently sitting just above 0.6200 (below 1.6130). There is good NZ dollar support for the pair down toward 0.6150 (up to 1.6260) and I expect this to contain any near term weakness. It’s looking increasingly like the ECB will have to undertake outright QE next year and this should dramatically weaken the Euro. A lot can happen between now and then however, and with the thin liquidity of the holiday season added into the mix, there is potential for plenty of volatility. Over the coming days from NZ we have another dairy auction to digest along with GDP data. From Europe we get manufacturing and service sector PMI data, along with the German ZEW economic sentiment and IFO business climate surveys.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6220 | 0.6150 | 0.6350 | 0.6180 - 0.6311 |
| EUR / NZD | 1.6077 | 1.5748 | 1.6260 | 1.5845 - 1.6182 |
NZD/YEN
Although this pair spiked higher after last Thursday’s hawkish RBNZ monetary policy statement, we have since seen a sharp turnaround with all those gains undone. Weakness in global stock markets has caused some risk aversion and this has helped the Yen appreciation against the NZD. Year-end position squaring could also have played a part and we are also now entering the holiday period which is marked by thin market liquidity. This can mean market moves are exaggerated and with plenty going on in world economies at the moment a volatile Christmas period can’t be ruled out. We could easily see further declines in the near term in this pair with support not coming in until just below 90.00. Over the coming days from NZ we have another dairy auction to digest along with GDP data. While from Japan the focus now turns to Friday’s BOJ monetary policy statement.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 91.15 | 90.00 | 93.00 | 90.76 - 93.31 |
AUD/USD
The Australian dollar has remained under pressure this past week, thanks in part to continued declines in commodity prices, trading to four year lows just above 0.8200. Encouraging US data in the form of retail sales, consumer sentiment and capacity utilization has helped support the USD as we head into what should be an important FOMC rate statement on Thursday morning. The market is keen to get a hint of the timing for the first rate hike and this will be key in determining near term direction for the USD. There is now no data of significance released in Australia until next year. From the US however, along with the FOMC statement we also have inflation data to digest. By all accounts liquidity in the market is already drying up and the holiday period will only be thinner. This can mean quite trading with little action, or exaggerated moves due to the lack of liquidity. With everything going on in the world at the moment, I suspect the latter is more likely.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.8225 | 0.8100 | 0.8300 | 0.8202 - 0.8372 |
AUD/GBP (GBP/AUD)
The Australian dollar has remained under pressure against the UK Pound this past week and the pair has traded at low at 0.5218 (high 1.9164). It is possible that the market could put in a significant AUD bounce from here, as there is decent support ahead of 0.5200 (resistance 1.9230). In January of this year the pair made a low of 0.5209 (high1.9198), before staging a strong recovery and that level has been a target for this recent bout of weakness. It may well be with that target effectively achieved the market now see a correction back up to key resistance now around 0.5350 (support 1.8692). There is now no data of significance due for release in Australia until next year. From the UK however, there is still plenty to digest this week. Tonight we get the bank stress test results along with inflation data. The on Wednesday we have employment numbers and on Thursday we get retail sales.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5255 | 0.5200 | 0.5350 | 0.5218 - 0.5329 |
| GBP / AUD | 1.9029 | 1.8692 | 1.9198 | 1.8764 - 1.9163 |
AUD/EURO (EURO/AUD)
The Australian dollar has continued to lose ground to the Euro this past week and currently trades not far from the cycle low of 0.6587 (highs 1.5181). Further falls in commodity prices have weighed on the AUD and this has kept the pair under pressure. Key resistance now comes in around 0.6650 (support 1.5040) and it will take a move above there to signal the AUD downside pressure is abating. Until then, further investigations below 0.6600 (above 1.5150) are likely. There is now no data of significance due for release in Australia until next year. While from Europe this week we get manufacturing and service sector PMI data, along with the German ZEW economic sentiment and IFO business climate surveys.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6605 | 0.6500 | 0.6700 | 0.6587 - 0.6740 |
| EUR / AUD | 1.5140 | 1.4925 | 1.5385 | 1.4837 - 1.5181 |
AUD/YEN
The Japanese Yen has outperformed the Australian dollar this week, continuing the pair’s correction lower. The AUD has struggled as commodities have continued to decline while the Yen benefited from some risk aversion on the back of weak global stock markets. There is support toward 96.50 and perhaps with the current low of 96.63, that corrective target has effectively been achieved. If that proves to be the case the pair could stage a significant bounce from current levels. A break above 97.60 would likely confirm a low has been put in place and signal further gains are likely. There is now no data of significance released in Australia until next year. While from Japan the focus now turns to Friday’s BOJ monetary policy statement.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 96.80 | 96.50 | 99.50 | 96.63 - 100.20 |
AUD/CAD
Both the Australian dollar and the Canadian dollar have been under pressure this past week and as such the cross rate has remained largely range bound. Declining oil prices have weighed on the CAD while the AUD too has suffered at the hands of falling commodities. The pair has struggled to maintain levels toward 0.9600 and while below there the risks are skewed to a pullback toward the 0.9500 level. There is talk of some possible M&A activity which could support the CAD over the coming days and this would certainly fit within that broader range trading picture. There is now no data of significance released in Australia until next year. While from Canada we still have a number of key releases to come with manufacturing sales, wholesale sales, inflation and retails sales all set to hit the wires ahead of the weekend.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9580 | 0.9400 | 0.9600 | 0.9456 - 0.9594 |
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Market commentary:
Australia
The Australian dollar has continued to struggle this past week despite what looked like some good employment data last Thursday. Employment change came in at +42.7k against expectations of just +15.2k. However, most of that gain was in part-time work and the unemployment rate actually edged up to 6.3% from 6.2%. The RBA’s Edwards said employment won’t grow strongly in 2015 and interest rates will remain low. The Australian Treasury released their Mid-Year Economic and Fiscal Outlook yesterday and they see unemployment now rising to 6.5% by the second quarter which is up from May’s estimate of 6.25%. They have left their GDP forecasts largely unchanged, but have significantly increased their budget deficit expectations for the next few years. The RBA released their minutes earlier this afternoon and as there was little new, the impact was non-existent. The rest of the week looks pretty quiet with only leading indicators tomorrow and the RBA’s quarterly bulletin on Thursday.
New Zealand
There has been very little in the way of significant data since Last Thursday’s surprisingly ‘hawkish’ RBNZ monetary policy statement (MPS). Governor Wheeler spoke to parliament's finance committee in the wake of the MPS and he said he was concerned about house price inflation in Auckland. He also said they have no plans for further macro prudential instruments. This is significant as it only reinforces the expectation that more rate hike are on the way at some point in the future. Wheeler did however, say that the RBNZ are on hold for a long time and the need for rate tightening has been pushed out. Still to come this week we have another dairy auction from Fonterra to digest and key GDP data is also set for release on Thursday.
United States
We have seen some mixed results from the US this past week, although taken as a whole, the results have been very supportive of the economy going forward. Producer prices and the Empire State Manufacturing Index were both weaker than expected but these have been outweighed by other more positive results. Retail sales were significantly stronger than forecast and the prior numbers were also revised up. The University of Michigan Consumer Confidence Index was very strong, printing at the highest level since 2007. Last night we saw industrial production and capacity utilization data and both these result also came in on the strong side. This week should prove to be very interesting with inflation data and the FOMC rate statement set for release. Will the Fed signal rate hikes are on the horizon, or will the low level of inflation see then sit on their hands for much of next year? Long-time bond investor Bill Gross believes the Fed will wait until inflation hits 2% before hiking, and that won’t happen until at least very late in 2015. The Fed need to start normalizing rates before then. The hunt for yield in this ‘zero rate’ environment has caused a massive mispricing of risk across various asset classes and the Fed could easily be sowing the seeds of the next crisis by maintaining this policy for too long. The shale oil industry in the US is just one example. Low interest rates allowed them to finance a massive amount of investments with estimates suggesting they have issued $550 bln in bonds. With oil now below $60 a barrel a huge portion of that industry is now uneconomical. Some producers may ride through this, but others, particularly those highly leveraged, won’t and large scale bond defaults are a very real possibility.Europe
Late last week the ECB held its Targeted LTRO (long-term refinancing operation) and the uptake from banks was at the lower end of expectation. The central bank lent EUR 129.84 bln worth of loans, which is far less than the EUR 270 bln of old loans due to be repaid. This has the effect of shrinking the ECB’s balance sheet which is the opposite of what the central bank wants. The ECB is trying to expand their balance sheet by EUR 1 tn to try and fight deflation but it seems the banking system doesn’t need any more ultra-cheap money. The only way forward for the ECB now is full-blown sovereign bond purchases known as ‘quantitative easing’ (QE). It seems increasingly likely a decision on this will be taken in the first quarter of next year. It really is just a matter of overcoming German opposition to launching a QE programme. But with growth forecasts for Germany getting revised down by most forecasters, and Euro wide deflation a very real threat it seems the Germans will have to relent. For the French it can’t come soon enough. Recent data showed that core inflation in France turned negative for the first time since modern data began. Adding insult to injury, ratings agency Fitch have just downgraded France AA from AA+ previously, sighting the weak economic outlook and high ratio of public debt. Attention this week now turns to manufacturing and service sector PMI data, along with German ZEW economic sentiment and IFO business climate surveys.
United Kingdom
Japan
Japan held elections over the weekend and it was a resounding win for PM Abe with his coalition gaining a near two thirds majority. Abe will now push ahead with his plan to fight deflation, while also trying to deal with the government's perilous fiscal position. Ratings agency Fitch said they will probably downgrade Japan if the 2015 budget doesn’t offset the recently delayed sales tax hike. Yesterday’s quarterly Tankan report was a very mixed bag. The manufacturing index declined while the non-manufacturing index increased. There was a notable split between large and small firms however, with the smaller firms much more pessimistic. The focus now turns to Friday’s BOJ monetary policy statement.
Canada
The Canadian new house price index came in right on expectation at +0.1% month on month. Governor Poloz last week suggested house prices are 10%-30% over valued, but this week the finance minister Joe Oliver says he doesn’t see a housing bubble in Canada and there is no need to take dramatic steps to cool it down. Capacity utilization data out on Friday came in at 83.4% versus 83.0% expected, suggesting there may not be as much slack in the economy as thought. There is also potential for some M&A activity to support the CAD in the near future with the Spanish company Repsol looking at a $8 billion takeover bid for Canada’s Talisman Energy. We still have a number of key releases to come this week with manufacturing sales, wholesale sales, inflation and retails sales all set for release.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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