ECB QE announcement significant in its size and should see Euro under pressure; No surprise from Greek election; NZD & AUD trade lower on softer iron ore and a more neutral RBNZ view

By Ian Dobbs*:

Events in Europe over the past week have been a major focus for the markets. The ECB’s QE announcement was significant in its size and should see the Euro remain under pressure over the coming months.

Greece’s election on Sunday provided the result the polls were suggesting and some interesting negotiations between the new PM and Troika (ECB, IMF and the European Commission) are set for the coming weeks.

The Australasian duo have remained under pressure this past week with soft iron ore prices weighing on the AUD and expectations of a more ‘neutral’ RBNZ weighing on the NZD. Both currencies traded to fresh cycle lows against the USD.

The tone of Thursday’s upcoming Fed statement will play a major part in determining if there is further downside in the near term.

Volatility in the wider markets is significantly higher than last year and this is providing good opportunity, as well as risk, for those with exposure.

Major Announcements last week:

• Chinese GDP 7.3% vs 7.2% expected

• NZ Fonterra GDT 1.0% vs 3.6% previous

• NZ Inflation -.2% vs 0.0% expected

• BOJ leave monetary policy unchanged

• BOE leave monetary policy unchanged

• BOC cuts cash rate to .75% , unchanged was expected

• ECB initiate QE to total 60bio per month

• Canadian Inflation -.3% as expected

• Canadian Retail Sales +.7% vs +.5% expected

NZD/USD

NZD/AUD (AUD/NZD)

We have seen some good volatility in this pair with prices ranging between the broad parameters of 0.9300 and 0.9500 (1.0753 and 1.0526) over the past week. Both currencies have seen periods of pressure at times with the New Zealand dollar continuing to suffer from last week’s soft inflation data, and the Australian dollar weighed on by further weakness in iron ore prices. There is a slight downside bias to the pair as it continues to correct from the 0.9600 (1.0417) levels seen earlier in the year and potential still exists for a move toward 0.9200 (1.0870). Key to near term direction will be the RBNZ rate statement on Thursday morning. If the RBNZ back away from the hawkish tone of December’s statement and suggest a much more neutral bias, then further NZD pressure is likely. That is far from a certain outcome however, and central banks in general have surprised markets a number of times so far this year. If the RBNZ choose to focus on renewed house price pressure and maintain their ‘hawkish’ stance, the NZD could react very positively. Ahead of the RBNZ statement we have Australian inflation data set for release tomorrow.

NZD/GBP (GBP/NZD)

This pair has continued to decline driven by weakness in the New Zealand dollar and some gains in the UK Pound. Last week’s soft NZ inflation data continues to weigh on the local currency as does the growing expectation that the RBNZ will be on hold, in terms of interest rates, well into mid-2016. We will hear from the RBNZ themselves on Thursday morning when they release their official cash rate review and this event holds the biggest risk on the week. Data from the UK last week in the form of employment and retails sales were both supportive and this has underpinned the GBP’s recent gains. Tonight we get UK GDP and this is expected at a comfortable 0.6%. Topside resistance comes in around 0.5000 (support around 2.0000) while on the downside there is minor support around 0.4900 (resistance 2.0408) then major support at 0.4750 (resistance 2.1053).

 NZD/CAD

Both the New Zealand dollar and the Canadian dollar have been under pressure recently resulting in some choppy price action. The surprise rate cut from the BOC last Thursday saw the pair spike higher, but since then the NZD has underperformed and the cross has ground its way back to where it was before the cut. Looking at the bigger picture the broad range of 0.9200 to 0.9400 that has contained price action since the beginning of the year still remains in play. However, we do have the RBNZ rate statement on Thursday morning and this event will likely determine the near term direction. The only data from Canada this week is GDP on Friday, but as it’s a monthly number its impact will be muted.

NZD/EURO (EURO/NZD)

This pair remains well supported in the wake of last Thursday’s QE announcement from the European Central Bank (ECB). Although we are still some way from the highs of 0.6760 (low of 1.4793) seen only a couple of weeks ago, that fact that the pair remains well supported in the face of an otherwise very soft New Zealand dollar, says a lot about how much pressure the Euro is currently seeing. The political situation in Greece isn’t helping and this will be an ongoing focus for the coming month or so. I expect to see the EUR continue to struggle and we could easily see the pair back up to recent highs over the coming weeks. Key to the near term direction will be Thursday mornings RBNZ rate statement. This is the biggest risk factor on the week. Friday sees the release of inflation data from Europe which is expected to show further declines. Buying into weakness toward the 0.6500 (selling strength toward 1.5385) level is the favoured strategy for an eventual test backup over 0.6700 (under 1.4925).

 NZD/YEN

Weakness in the New Zealand dollar has been the key driver of this pair over the past two and a half weeks. We have seen sharp losses since last Wednesday’s softer than expected NZ inflation data and the focus now turns to how the RBNZ will deal with this. A move to a more neutral policy setting seems appropriate with most forecasts expecting the central bank to remain on hold until mid-2016. The RBNZ official cash rate review is out on Thursday morning and this is the main risk event on the week. Japanese retail sales and inflation data will also draw attention, but the impact from Japanese data can often be very muted. If we see further weakness in the pair there is decent support around 86.00, while on the topside key resistance comes in around 90.00.

AUD/USD

The Australian dollar lost ground for most of last week, but has managed to stabilize, and even recover from recent lows, in the early stages of this week. There is no denying the longer term trend which is firmly to the downside, and although we could easily see a corrective bounce back toward 0.8000, selling into periods of strength is the recommended strategy. Further weakness in commodity prices, particularly iron ore which recently hit a five year low, provides an overhang that will continue to weigh. There are some key releases this week which could easily dictate near term direction. Tomorrow we have Australian inflation data then on Thursday morning the FOMC statement hits the wires. Will a strong USD, low inflation and global growth concerns see the Fed waiver, or will they continue to indicate interest rate hikes in the second half of this year are coming? The week is rounded out with Friday’s release of US GDP data.

AUD/GBP (GBP/AUD)                            

The UK Pound has continued its recovery from the selling pressure seen in the first week of the year. Positive UK data last week in the form of employment and retail sales have supported the move and helped to dive the AUDGBP cross lower. Weakness in the Australian dollar has also played a part with iron ore prices recently trading to a five year low. These factors have helped to drive the pair toward 0.5250 (1.9048) where is currently trades. There are no major signs that the current weakness has run its course, and as such the risks remain skewed to further AUD downside. A period of weakness late last year saw the pair trade to the 0.5180 (1.9305) area and that looks like a good target for the current move. Australian inflation data tomorrow will be closely watched then on Friday we get producer prices. From the UK tonight we have GDP data to draw focus which will be followed by a number of second tier released later in the week.

AUD/EURO (EURO/AUD)

Both the Australian dollar and the Euro have seen periods of pressure recently and this has resulted in a volatile cross, but little overall direction. The ECB’s QE announcement last Thursday has weighed on the EUR while the AUD has struggled in the face of further declines in iron ore prices. The outlook for both currencies remains negative and we could therefore be in for a continuation of choppy sideways price action. Eventually however, I expect the pair to retest the recent highs around 0.7150 (lows around 1.3986) as QE and the Greek political situation see the Euro under perform. Australian inflation data tomorrow will be closely watched then on Friday we get producer prices. Friday also sees the release of inflation data from Europe which is expected to show further declines.

AUD/YEN

Weakness in the Australian dollar has been the key driver of this pair over the past two and a half weeks. The iron ore prices recently trading to five year lows and little in the way of a recovery expected this year, the AUD has suffered. The cross touched 92.20 in thin trade early on Monday morning, but we have seen a decent bounce from those lows. The prospect of further dips can’t be ruled out although support around 92.00 should prove to be a decent barrier. On the topside resistance comes in around 95.00 and those two levels may well contain trading over the coming week. Australian inflation data tomorrow will be closely watched, and then on Friday we get producer prices. While from Japan retail sales and inflation data will also draw attention, but the impact from Japanese data can often be very muted.

AUD/CAD

The past week has seen a very health range in this pair with the post Bank of Canada high of 1.0060 then giving way to a steady decline to a low of 0.9776. The size of the decline is somewhat surprising and the low was well below the level the pair was trading at just before the BOC announcement. Much of the decline was due to Australian dollar weakness that came on the back of a continued decline in iron ore prices. However, in the past 48 hours we have seen a substantial recovery back to the 0.9900 level where it currently trades. Direction from here is a touch call although I favour a move back up toward 1.0000 over another test below 0.9800. Australian inflation data tomorrow will be closely watched then on Friday we get producer prices. The only data from Canada this week is GDP on Friday, but as it’s a monthly number its impact will be muted.

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