By Ian Dobbs*:
The United States dollar made solid gains across the board in the wake of better than forecast employment data on Friday, reinforcing the broader trend toward a stronger dollar.
The improving economic situation in the US helped boost Chinese exports to the country which jumped 48.3 percent from a year earlier. This was a key factor in China’s trade balance for February improving significantly to +$60.62 billion.
Although the data was affected by timing of the Chinese New Year holiday some valid concerns remain. While exports surged, Chinese imports declined year on year by 20.5%, which may well be a telling signal of weakness in the domestic economy.
The Chinese central bank has cut interest rates twice since November and further steps to stabilize economic growth may well be forthcoming. The health of the Chinese economy is hugely important to both New Zealand and Australia.
Major Announcements last week:
- Australian GDP 0.5% vs 0.7% expected
- UK services PMI 56.7 vs 57.6 expected
- Bank of Canada leaves rates unchanged at 0.75%
- US ISM Non-Manufacturing PMI 56.9 vs 56.5 expected
- Australian Retail Sales 0.4% as expected
- Bank of England leaves rates unchanged at 0.5%
- European Central Bank leaves rates unchanged at 0.05%
- Canadian Ivey PMI 49.7 vs 49.4 expected
- Canadian Building Permits -12.9% vs -4.2% expected
- US Non-Farm Payrolls 295k vs 240k expected
- US Unemployment Rate 5.5% vs 5.6% expected
- Chinese Trade Balance $60.62bn vs $7.8bn expected.
NZD/USD
The New Zealand dollar suffered last week on the back of two key releases. The first was from the RBNZ when they announced they are looking to create a new asset class for property investors, and the second was a strong US employment result. It was the latter release out on Friday evening that pushed the NZD down through support around 0.7450 all the way to a low so far of 0.7324. The focus is now firmly on a test back below 0.7200 over the coming week or two. The key event this week will be the RBNZ monetary policy statement on Thursday morning. There is some real uncertainty around what the central bank will say, although they are likely to maintain their current neutral stance. We should get a further insight into what sort of macro-prudential tools could potentially be implemented for property investors, and the bank will also not miss the opportunity to try and talk the currency down. These factors only reinforce the near term negative outlook for the NZD and the potential for a retest of cycle lows below 0.7200.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7334 | 0.7200 | 0.7450 | 0.7324 - 0.7609 |
NZD/AUD (AUD/NZD)
The New Zealand dollar dramatically underperformed its Australian cousin last week, thanks in large part to the Reserve Bank of New Zealand. Their announcement that they are looking to create a new asset class for property investors undermined support for the NZD, which was trading at the time near post flight highs to the AUD. The downside pressure paused around 0.9600 (1.0417) for a time, but eventually re-emerged and late on Friday evening the pair traded as low as 0.9522 (high as 1.0502). Although support around 0.9500 (resistance around 1.0526) has so far contained the NZD downside, we have a major hurdle to overcome on Thursday morning in the form of the RBNZ monetary policy statement. It seems unlikely they will miss the opportunity to try and talk the currency down, and further details on potential macro-prudential tools to limit property investing could also weigh. The risks for the NZS are therefore skewed to the downside, and a serious test of support around 0.9500 (resistance around 1.0526). Thursday could also prove important for the Australian dollar side of the equation with their employment change data set for release. Ahead of that we have Australian consumer sentiment and inflation expectation numbers to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9555 | 0.9500 | 0.9700 | 0.9522 - 0.9724 |
| AUD / NZD | 1.0466 | 1.0309 | 1.0526 | 1.0284 - 1.0501 |
NZD/GBP (GBP/NZD)
The New Zealand dollar has been under consistent pressure from the UK Pound since the RBNZ announced plans last week to create a new asset class for property investing. The pair paused around the 0.4900 (2.0408) level, and actually managed a bounce to 0.4942 (2.0235) ahead of US employment data on Friday evening. In the wake of that release however, the NZD again underperformed and the cross quickly traded down through minor support at 0.4900 (resistance at 2.0408). This is very negative price action and it keeps the focus firmly on the NZD downside. At test toward key support around 0.4750 (resistance around 2.1053) may well unfold over the coming week or two. The major event this week will be the RBNZ’s monetary policy statement on Thursday morning. Expect the NZD to remain heavy in the lead up to that release. From the UK this week we have a speech from Governor Carney to digest, data on manufacturing and industrial production, the NIESR’s GDP estimate and the trade balance.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4855 | 0.4750 | 0.4900 | 0.4851 - 0.4985 |
| GBP / NZD | 2.0597 | 2.0408 | 2.1053 | 2.0060 - 2.0613 |
NZD/CAD
The New Zealand dollar has been under consistent pressure from the Canadian dollar since the RBNZ announced plans last week to create a new asset class for property investing. This drove the pair down toward minor support around 0.9300 ahead of Friday’s US employment data. That better than forecast result once again saw the NZD underperform and the pair traded below support to a low so far of 0.9242. This has now significantly increased the chance of a much broader correction toward 0.9100 or lower. Key to direction this week will be the RBNZ’s monetary policy statement on Thursday, and at this stage it seems the risks for the NZD from this event are also skewed to the downside. The week is rounded out on Friday night with Canadian employment data set for release. The market is expecting a gain in employment of 21.3k with the unemployment rate dropping to 6.5%.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9262 | 0.9100 | 0.9300 | 0.9242 - 0.9520 |
NZD/EURO (EURO/NZD)
Despite some improving economic data, the Euro has been under a lot of pressure recently. Concerns around Greece and the advent with the ECB’s EUR 1.1 trn quantitative easing programme have both weighed on the Euro, which traded to multi year lows across the board in the middle of last week. Against the New Zealand dollar this saw a high of 0.6869(low of 1.4558) trade before the RBNZ triggered a pullback. Their announcement that they are looking to create a new asset class for property investors undermined support for the NZD and caused this pair to pull back toward 0.6750 (1.4815). We have seen largely sideways price action since then and I expect this to continue ahead of the RBNZ’s monetary policy statement on Thursday morning. This event provides the major focus for the week and the risks around it are skewed toward further NZD downside. Any break below 0.6750 (above1.4815) should result in a test of support around 0.6700 (resistance around 1.4925).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6770 | 0.6700 | 0.6900 | 0.6709 - 0.6869 |
| EUR / NZD | 1.4771 | 1.4493 | 1.4925 | 1.4559 - 1.4905 |
NZD/YEN
The Reserve Bank of New Zealand’s announcement last week that they are looking at creating a new asset class for property investing caused a sharp turnaround for this pair. Until then the NZD was gaining ground against the Japanese Yen having just traded up over 91.00. But that announcement undermined support for the NZD and a sharp correction lower has ensued. The pair has traded to a low of 88.64 so far and the risks remain skewed to the downside. The key event this week will be the RBNZ monetary policy statement on Thursday morning. The central bank could well heap further pressure on the currency by trying to talk it down, or by releasing further details of potential macro-prudential tools to be used on property investors. This could easily see the pair trade back toward 88.00. From Japan this week we have core machinery orders, tertiary industry activity, and consumer confidence data to digest.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 89.10 | 88.00 | 90.00 | 88.64 - 91.09 |
AUD/USD
The Australian dollar tested resistance around 0.7850 repeatedly last week, but failed to overcome it. With the topside firmly capped, sellers wasted no time jumping in after the US released a strong non-farm payrolls report on Friday evening. The gain of 295k jobs was much better than forecast and this boosted the USD across the board. The AUD fell to below 0.7700, before a small bounce ensued. The risks are now firmly on a test of recent cycle lows at 0.7623 over the coming week or two. To draw focus from Australia this week we have data on consumer sentiment, inflation expectations, and employment change. While from the US we get retail sales, producer prices, and consumer sentiment numbers.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7671 | 0.7630 | 0.7850 | 0.7686 - 0.7856 |
AUD/GBP (GBP/AUD)
The Australian dollar made gains against the UK Pound last week helped by the RBA’s decision not to cut rates. The pair traded as high as 0.5178 (low as 1.9312) on Friday evening ahead of the key US employment release. Since that release however, the AUD has dramatically underperformed and this has created a sharp pullback toward minor support around 0.5085 (resistance around 1.9666). While the market holds above this level there is potential for a recovery, but the nature of the pullback suggests to me that we could see some further downside. A sustained break below 0.5085 (above 1.9666) should result in a much broader pullback toward 0.5000 (2.0000). From Australia this week we have consumer sentiment, inflation expectations, and employment change data to digest. While from the UK this week we have a speech from Governor Carney, data on manufacturing and industrial production, the NIESR’s GDP estimate and the trade balance.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5080 | 0.5000 | 0.5200 | 0.5048 - 0.5178 |
| GBP / AUD | 1.9685 | 1.9231 | 2.0000 | 1.9312 - 1.9810 |
AUD/EURO (EURO/AUD)
Despite some improving economic data, the Euro has been under a lot of pressure recently. Concerns around Greece and the advent with the ECB’s EUR 1.1 trn quantitative easing programme have both weighted on the Euro, which traded to multi year lows across the board last week. Against the AUD this saw a high of 0.7158 (low of 1.3970) trade before a corrective pullback ensued. The trend at this point is firmly to the AUD topside and we could see a pullback as far as 0.7000 (1.4286) without threatening the broader uptrend. Buying into weakness ahead of that level is therefore recommended. From Australia this week we have consumer sentiment, inflation expectations, and employment change data to digest. While from Europe there are a number of speakers scheduled for this week along with data on French and Italian industrial production.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.7083 | 0.7000 | 0.7200 | 0.6934 - 0.7158 |
| EUR / AUD | 1.4118 | 1.3889 | 1.4286 | 1.3971 - 1.4421 |
AUD/YEN
The Australian dollar has spent much of the past two week trading sideways against the Japanese Yen between the parameters of 93.00 and 94.00. The pair did manage a very brief flurry above 94.00 on Friday evening during volatile trading in the immediate aftermath of US employment data, but the quick reversal suggests it was more of an aberration, than a signal of further strength. With resistance around 94.00 therefore still effectively intact, the risks are growing for a pullback toward 92.00. From Australia this week we have consumer sentiment, inflation expectations, and employment change data to digest. While from Japan we get core machinery orders, tertiary industry activity, and consumer confidence data.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 93.20 | 92.00 | 94.00 | 92.94 - 94.15 |
AUD/CAD
The Australian dollar has maintained a very slight downside bias to the Canadian dollar over the past week. We have seen some choppy trading conditions with both central banks deciding not to cut rates again at this stage, and key US employment data adding to the volatility. The pair looks like a test toward support around 0.9650, and potentially even 0.9600, may be on the cards in the coming days. Topside resistance around 0.9850 is certainly not looking like it will be threatened in the near term. There will also be plenty of data to dive the pair later in the week, with employment data from both countries set for release on Thursday and Friday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9690 | 0.9650 | 0.9850 | 0.9684 - 0.9831 |
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Market commentary:
The United States dollar made solid gains across the board in the wake of better than forecast employment data on Friday, reinforcing the broader trend toward a stronger dollar. The improving economic situation in the US helped boost Chinese exports to the country which jumped 48.3 percent from a year earlier. This was a key factor in China’s trade balance for February improving significantly to +$60.62 billion. Although the data was affected by timing of the Chinese New Year holiday some valid concerns remain. While exports surged, Chinese imports declined year on year by 20.5%, which may well be a telling signal of weakness in the domestic economy. The Chinese central bank has cut interest rates twice since November and further steps to stabilize economic growth may well be forthcoming. The health of the Chinese economy is hugely important to both New Zealand and Australia.
Australia
Data from Australia late last week didn’t have a big impact in the market. While GDP came in a touch below expectation at 0.5%, both retail sales and the trade balance we broadly in line with forecasts. Although the Reserve Bank of Australia (RBA) didn’t cut interest rates again last week, they maintain a firm easing bias and this is keeping a lid on any periods of Australian dollar strength. Data released yesterday on job advertisements for February showed continued gains, albeit at a slightly reduced pace. This would be consistent with a very moderate gain in employment. We get the employment change data on Thursday and this will be the key focus for the week. The market is expecting a gain in employment of 15.3k with the unemployment rate to remain steady at 6.4%. Ahead of that release we get consumer sentiment and inflation expectations data.
New Zealand
There has been no economic data of significance released from New Zealand since last week’s dairy auction. The markets attention is focused squarely on the Reserve Bank of New Zealand (RBNZ) who release their Monetary Policy Statement (MPS) on Thursday morning. It should prove to be a very interesting meeting. There are certainly some growing expectations in the market that the central bank could cut rates later this year, although that seems long shot at this stage. The biggest hurdle for any potential rate cut is the red hot Auckland housing market. The RBNZ are unlikely to throw fuel on that fire anytime soon. It could be a different story however, if property price gains moderated, and this exactly what the central bank are trying to achieve with the recently announced consultation process to reclassify investor lending. The eventual goal would be the implementation of macro-prudential tools to increase the cost of investor lending. Although this would no doubt help cool demand, it seems unlikely to be enough in the face of record positive migration figures. A massive increase in supply is needed in Auckland and that’s not something that can happen overnight.
United States
The United States produced some mixed data last week, but the key release of non-farm payrolls on Friday was much more encouraging. The data showed the economy added 295k jobs, which was significantly higher than the 240k expected. These job gains helped drive the unemployment rate down from 5.7% to 5.5%. It wasn’t unequivocally strong however, with negative revisions to prior numbers and soft wage gain figures. Average hourly earnings increased just 0.1% on the month and are up 2.0% year on year. That’s down from prior gains and below expectation. Wage price pressures could be the key determinant in the Fed’s decision on whether to start hiking interest rates, or not, around the middle of this year. The 2% annual wage gains are exactly in line with the average of the past four years and may not be strong enough, in an environment of very low inflation, to tip the Fed’s hand. One thing's for certain, the Fed will signal later this month they are moving closer to rate hikes when they remove the word ‘patient’ from there rate statement. They will then decide on a meeting by meeting basis whether the time is right to actually hike. It may well be the case that the Fed holds off pulling the trigger until wage gains improve. Still to come this week we have retail sales, producer prices, and consumer sentiment data.
Europe
The past couple of weeks has seen a noticeable improvement in economic data from Europe. Better than expected readings from employment, retail sales, and German inflation have been the main highlights, although other indicators have also showed improvement. This somewhat brighter outlook was reflected by the European Central Bank’s upgraded growth outlook for 2015 released at last week’s rate meeting. In the past 24 hours the central bank has actively started purchasing bonds as part of their previously announced EUR 1.1 trillion quantitative easing programme. It is hoped this extra liquidity will further boost economic activity and help the Eurozone really turn the corner in terms of both growth and inflation. But there are still many hurdles to overcome, the least of which is not Greece. Never far from the headlines the Greek situation is again creating concern. This week’s Eurogroup meeting demonstrated the frustration the EU feels toward Greece with Eurozone finance ministers urging Greece to stop wasting time over reforms. The Dutch Finance Minister, who heads the group, went further saying proposed reforms were far from complete and little progress has been made. Greece is yet to receive the latest tranche of bailout funds and the country could well struggle to make payments on debt due over the coming weeks. With Greek concerns still at the forefront and the central bank now actively printing money, the Euro has remained under pressure largely ignoring the improvement in data. There are a number of speakers scheduled for this week along with data on French and Italian industrial production.
United Kingdom
It certainly seems the United Kingdom economy has started 2015 on a very solid footing. Activity across the construction, manufacturing, and service sectors is increasing at a healthy pace and the improving outlook for Europe can only help. The Bank of England (BOE) left interest rates unchanged at 0.5% after their meeting late last week, although it looks very likely a rate hike will come either late this year or early in 2016. This week to draw focus we have a speech from Governor Carney, data on manufacturing and industrial production, the NIESR’s GDP estimate and the trade balance.
Japan
A couple of releases from Japan over the past week have suggested the Government and Bank of Japan (BOJ) still have a lot of work to do in reflating the economy. Japan’s leading index, which measures future economic activity, dropped unexpectedly in January, after rising the previous month. The index fell to 105.1 from 105.6 prior. The market was expecting an improvement to 105.8. Japanese GDP released yesterday also disappointed. Year on year GDP for the fourth quarter came in at just 1.5% which is well below the expectations for a reading of 2.2%. It seems Japan’s rebound from recession was weaker than first estimated with an unexpected decline in business investment and soft private capital expenditure largely to blame. Data like this will only add to calls for further stimulus from the BOJ. Still to come this week we have core machinery orders, tertiary industry activity, and consumer confidence data.
Canada
Last week saw a mixed bag of data from Canada. There were improved readings for GDP and Ivey PMI, while building permits and the trade balance both disappointed. The main focus however was on the Bank of Canada and their rate meeting. Somewhat surprisingly the bank struck a very neutral tone and held rates steady. This comes after January’s surprise rate cut that really caught the market off guard. Last night we saw housing starts data come in below expectation and down on last month, but the key release will be employment change set for release on Friday. The market is looking for a gain in employment of 21.3k with the unemployment rate dropping to 6.5%.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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