NZD could experience volatility with RBA announcement; US data supporting economic outlook & USD remains well supported; NZD/EUR trades near historical highs

By Ian Dobbs*:

We have seen a very mixed bag of data from the United States recently. Better than expected results from core inflation, durable goods order, and GDP late last week helped to support the economic outlook going forward. But countering these were softer than forecast readings from pending home sales and Chicago PMI, which fell below the 50 level for the first time in two years.

So far this week the data has mostly undershot expectations as well. Personal spending, personal income, ISM Manufacturing PMI, and construction spending all came in a touch below forecast.

The overall impact of this data has been limited with the USD largely remaining well supported.

We still have the key release of non-farm payrolls to come on Friday night with the market expecting another healthy reading around +240k. Ahead of that data we have ISM non-manufacturing PMI and the trade balance to digest.

Major Announcements last week:

• US New Home Sales 481k vs 471k expected

• NZ Trade Balance 56m vs -162m expected

• Australian Private Capital Expenditure -2.2% vs -1.7% expected

• UK GDP 0.5% as expected

• US Core Inflation 0.2% vs 0.1% expected

• NZ ANZ Business Confidence 34.4 up from 30.4 prior

• US GDP 2.2% vs 2.1% expected

• UK Manufacturing PMI 54.1 vs 53.5 expected

• Euro Inflation -0.3% vs -0.5% expected

• US ISM Manufacturing PMI 52.9 vs 53.4 expected

NZD/USD

NZD/AUD (AUD/NZD)

The New Zealand dollar has recovered sharply from its dip to 0.9544 (1.0478) Australian dollars mid last week. That move was driven by declining NZ inflation expectations, but since then we have seen better trade balance figures and another record high for NZ migration. The Australian dollar has also been weighed on by soft private capital expenditure data and the prospect of a potential rate cut from the Reserve Bank this afternoon. The market is split right down the middle in terms of cut or no cut expectations and as such there is likely to be significant volatility around the announcement. If the RBA do cut interest rates again the NZDAUD will trade to post float highs and potentially test levels over 0.9750 (under 1.0256). On the NZD downside there is support around 0.9530 (resistance around 1.0493) and this would be a target for the pair in the event of a ‘no change’ decision from the RBA.

NZD/GBP (GBP/NZD)

It has been a very quiet week for this pair with tight trading range just below 0.4900 (above 2.0408) containing price action for much of the past five days. We have seen some supportive economic releases from both countries recently and this has reinforced the lack of overall direction. Taking a look at the broader picture, while resistance around 0.4900 (support around 2.0408) contains any periods of NZD strength, the risks remains skewed to the downside and a move back toward 0.4800 (up to 2.0833). Volatility in the wake of this afternoons RBA rate decision could easily spill over into this pair and provide some much needed direction. Still to come this week from the UK we have the construction and service sector PMI’s to digest. Governor Carney is also due to speak tonight and then on Thursday we have the BOE rate decision. In NZ the focus turn to tonight’s dairy auction from Fonterra.

 NZD/CAD

The New Zealand dollar has remained well supported against the Canadian dollar this week, although it has been unable to make further gains. A broad trading range of 0.9300 to 0.9500 has developed and this could well contain price action over the coming week. The main event of the week is the Bank of Canada rate decision set for release early Thursday morning. The market has scaled back expectations for another cut, although it’s certainly not out of the question. Other data from Canada this week includes GDP, Ivey PMI, building permits, and the trade balance. From NZ tonight we have another Fonterra dairy auction to digest.

NZD/EURO (EURO/NZD)

The Euro has remained under pressure from the New Zealand dollar for much of the past week. The pair traded just shy of January's 0.6769 high (1.4773 low) before running out of steam. The Eurozone is seeing a slight improvement in a number of economic data releases and this should help to limit further gains for the pair in the near term. While 0.6770 (1.4771) caps the NZD topside, the risks are skewed to a pullback toward initial support around 0.6640 (resistance around 1.5060). From New Zealand tonight we have another Fonterra Dairy auction to digest, while from Europe this week we have retail sales, German factory orders, and the ECB rate meeting to draw focus.

 NZD/YEN

The New Zealand dollar has maintained a firm footing against the Japanese Yen this week. Prices have ground their way above resistance around 90.00 trading to a high of 90.60 so far. It has however, been slow going even in the face of supportive economic data from New Zealand and largely disappointing releases from Japan. While this keeps the focus on the topside, caution is warranted as momentum indicators are waning and we could easily see a corrective pullback toward 89.00, or potentially even 88.00. Later this afternoon from Japan we get average cash earnings data, then tonight from NZ we have another Fonterra dairy auction to digest.

AUD/USD

The Australian dollar staged a short lived flurry above 0.7850 resistance last week, but the move couldn’t be sustained. Since then the USD has seen gradual appreciation and the AUD has been weighed on by soft private capital expenditure data and the prospect of a potential rate cut from the RBA this afternoon. The market is split right down the middle in terms of cut or no cut expectations and as such there is likely to be significant volatility around the announcement. Initial support comes in around 0.7740, although this is unlikely to provide much assistance in the event of a cut. A move toward 0.7650 would likely unfold should the RBA adjust interest rates again. If the central bank holds off cutting this afternoon the pair should get back up to test 0.7850 or even 0.7900 again. Gains past there are unlikely unless the bank signals a very neutral policy stance. Later in the week from Australia we get GDP data, retails sales, and the trade balance. While from the US we have ISM non-manufacturing PMI, the trade balance, along with the all-important monthly employment report.

AUD/GBP (GBP/AUD)                            

The Australian dollar has seen further sideways trading against the UK Pound this week. The broad parameters of 0.5000 to 0.5100 (5.0000 to 1.9608) have contained price action with the cross currently bank in the middle of that range. The key event that is likely to dictate near term direction is this afternoons RBA rate statement. The market is split right down the middle in terms of cut or no cut expectations and as such there is likely to be significant volatility around the announcement. A cut from the RBA should see support around 0.5000 (resistance around 2.0000) tested, while a no change decision will see resistance around 0.5100 (support around 1.9608) come under pressure. Later in the week from Australia we get GDP data, retails sales, and the trade balance. While in the UK Governor Carney is also due to speak tonight and then on Thursday we have the Bank of England rate decision. We also have the UK construction and service sector PMI’s to digest over the coming days.

AUD/EURO (EURO/AUD)

The past few weeks have seen grinding AUD appreciation for this pair, although we may have seen a short term top put in place at 0.6986 (low in place at 1.4314). That level has capped the pair on two occasions over the past week. If the RBA cut interest rates this afternoon we should see a significant move to the AUD downside. That RBA decision will be the key event that drives prices over the coming days. It is a very close call whether they cut or not and as such there should be some significant volatility around the announcement. Later in the week from Australia we get GDP data, retail sales, and the trade balance. While from Europe this week we have retail sales, German factory orders, and the ECB rate meeting to draw focus.

AUD/YEN

After peaking just shy of 94.00 late last week this pair has traded sideways treading water around the 93.30 level. Some softer than forecast data from both countries late last week has reinforced the sideways trade with the market now keenly focused on the RBA rate decision this afternoon. That RBA decision will be the key event that drives prices over the coming days. It is a very close call whether they cut or not and as such there should be some significant volatility around the announcement. Later in the week from Australia we get GDP data, retails sales, and the trade balance. From Japan this week the only data of note is average cash earnings also set for release this afternoon.

AUD/CAD

We have interest rate decisions from both the Reserve Bank of Australia and the Bank of Canada this week and as such, there is potential for some wild moves in this pairing. Although both decisions are a close call, there has been a subtle shift toward a slightly greater chance of an cut from the RBA, and a less chance of one from the BOC. As such the AUDCAD cross has lost a little ground over the past few days after peaking at 0.9858 this time last week. Key support on the down side comes in around 0.9600 and this will be the target should the RBA cut interest rates this afternoon. Gains on any topside move will run into resistance toward 0.9950 and selling ahead of that level is recommended should the market attempt such a rally.

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