Australasian central banks likely to cut interest rates eventually; improving US data increasing chances of rate hike

By Ian Dobbs*:

The Australasian duo have seen their fair share of pressure over the past week with disappointing data from both countries weighing on their respective currencies.

Interest rate cuts are very likely to come from both central banks eventually, however the timing of which are open for debate.

The Reserve Bank of Australia may well provide some guidance to that end when they deliver their rate statement later this afternoon, while in NZ we have to wait until Thursday next week to get a feel for what the RBNZ are thinking.

Improving data from the United States has increased the chance of an interest rate hike by the Federal Reserve in September and this is helping to keep the trend toward a stronger USD well intact.

We are seeing officials from all over the world warn that the move toward a more ‘normal’ interest rate setting in the US will not be a smooth one, and markets should be braced for some volatile price action over the coming year.

The European Central Bank and the Bank of England also hold interest rate meetings this week, although they shouldn’t contain any real surprises.

Major Announcements last week:

• US Core Durable Goods Orders 0.5% as expected
• US CB Consumer sentiment 95.4 vs 95.2 expected
• The Bank of Canada leave interest rates unchanged at 0.75%
• Fonterra cuts 2014/15 payout by 10 cents. Estimates 2015/16 at $5.25/kg
• Australian Private Capital Expenditure -4.4% vs -2.2% expected
• UK Second Estimate of GDP unchanged at 0.3% vs 0.4% expected
• NZ ANZ Business Confidence 15.7 vs 30.2 last
• Canadian GDP -0.2% vs +0.2% expected
• US Preliminary GDP -0.7% vs -0.8% expected
• UK Manufacturing PMI 52.0 vs 52.7 expected
• US Manufacturing PMI 52.8 vs 51.9 expected

NZD/USD

NZD/AUD (AUD/NZD)

The New Zealand dollar’s corrective bounce against the Australian dollar ran out of steam at 0.9452 (1.0580) on Thursday last week. That NZD high was very short lived and since then we have seen the pair trade all the way back down to 0.9265 (up to 1.0793). This was helped along by Friday’s release of declining NZ business confidence data. We have the Reserve Bank of Australia interest rate meeting to digest this afternoon and that may well add some volatility. The broader trend is towards NZD underperformance and this would suggest the risks are skewed toward another test below 0.9200 (above 1.0870) at some stage. But we can’t rule out another test toward 0.9400 (1.0638) if the RBA surprise with a very ‘dovish’ statement. This would, I believe provide a NZD selling opportunity. Later in the week from Australia we get GDP, retail sales, and trade balance data to digest. While from NZ the economic calendar is a little light with only another dairy auction from Fonterra to draw focus.

NZD/GBP (GBP/NZD)

Weakness in the New Zealand dollar has been a key factor in this pairing testing levels below 0.4700 (above 2.1277). Until late last week those declines proved temporary with the cross quickly recovering back above 0.4700 (below 2.12770) on each occasion But the release of declining NZ business confidence data on Friday proved too much for the local currency and the pair ended the week have trading down to a low of 0.4626 (high of 2.1617). Although we have seen a recovery from there in the past 36 hours, it has so far failed to come close to 0.4700 (2.1277) and this keeps the risks skewed to the NZD downside. Still to come this week from the UK we have PMI readings from the construction and service sectors to digest, along with the Bank of England rate meeting. While from NZ the economic calendar is a little light with only another dairy auction from Fonterra to draw focus.

 NZD/CAD

The New Zealand dollar lost significant ground to the Canadian dollar last week driven by Fonterra’s announcement and a decline in NZ business confidence data. The pair traded down toward 0.8800 in the closing stages of last week, but was saved further misery by a weaker than expected Canadian GDP result. A range of 0.8800 to 0.9000 may well contain trade over the coming week and selling into the upper reaches of that range is preferred. Longer term the risks remain skewed to further declines and a test of the 2014 low at 0.8611. This week from Canada we have the trade balance, Ivey PMI and employment change numbers to digest. While from NZ the economic calendar is a little light with only another dairy auction from Fonterra to draw focus.

NZD/EURO (EURO/NZD)

The New Zealand dollar lost significant ground to the Euro last week, weighed on by Fonterra’s announcement and the release of declining NZ business confidence. Improving data out of Europe has also helped with the Euro’s outperformance of the NZD and the pair made fresh cycle lows at 0.6444 (highs at 1.5518) early yesterday. The recent trend would suggest the risks remain skewed to further weakness, however there is a lot of uncertainty around the outcome of Greek negotiations and these could cause a very sharp move in either direction. Time is rapidly running out for solution and there is every chance the coming week may well provide an outcome one way or another. Also from Europe this week we have service sector PMI’s, Eurozone inflation and retail sales data to digest, along with the ECB interest rate meeting. While from NZ the economic calendar is a little light with only another dairy auction from Fonterra to draw focus.

 NZD/YEN

Although still largely contained within the 88.00 to 90.00 range over the past week, this pair has seen some significant volatility. The cross plummeted from 89.97 on Thursday evening in the wake of Fonterra’s announcement, and then saw further pressure on Friday after NZ business confidence data declined substantially. There were a couple of brief tests below 88.00, but neither could be sustained and in the early stages of this week a small recovery has developed. Selling into strength remains the favoured play with further tests below 88.00 likely over the coming week. From Japan we have tomorrow’s release of average cash earnings data to draw focus, while from NZ attention will turn to Fonterra’s latest dairy auction.

AUD/USD

The Australian dollar has been under relentless pressure from the USD this past week, driven on two fronts. Broad based US dollar strength has played a part with data from the States largely supporting the case for an interest rate hike in September. But the local currency has also suffered after very disappoint private capital expenditure data which suggests the economy is having a tough time transitioning away from mining led growth. For the time being the cycle lows of 0.7530 set back on the 2nd of April have yet to be breached, but it may just be a matter of time. A break below there would open the way for 0.7280. A longer term target may well be a move toward 0.7000 by the end this year. We have the Reserve Bank of Australia rate meeting to digest this afternoon, then later in the week GDP, retails sales, and trade balance data will draw focus. From the States this week we have the key releases of non-manufacturing PMI and non-farm payrolls to digest.

AUD/GBP (GBP/AUD)                            

The Australian dollar remain in a downtrend against the UK Pound and in the wake of last week’s disappointing private capital expenditure data the cross traded as low as 0.4986 (high as 2.0056). My near term target for the pair is a test of 0.4925 (2.0305) and selling AUD into any periods of strength is recommended. Minor resistance around 0.5060 (support around 1.9763) may well cap the pair this week and that level therefore provides a viable target for those looking to sell Australian dollars. The immediate focus now turns to this afternoons RBA rate statement which could easily provide some volatility. Later in the week from Australia we have GDP, retails sales, and trade balance data to draw focus. While from the UK we have PMI readings from the construction and service sectors to digest, along with the Bank of England rate meeting.

AUD/EURO (EURO/AUD)

The Euro has significantly outperformed the Australian dollar over the past week. Improving data out of Europe has helped the Euro, although the market is fully aware of the potential risks around the ongoing Greek negotiations. The coming week could easily see an outcome one way or another from those protracted talks and this provides the biggest risk to any forecast. On the Australian dollar side of the equation, the currency has seen continued pressure in the wake of disappointing private capital expenditure data and this help drive the pair to its 0.6952 low (1.4384 high). Attention now turns to the outcome of the RBA meeting this afternoon. Although no rate cut is expected today, many forecasters now believe we will see another one before the end of the year. Later in the week from Australia we have GDP, retails sales, and trade balance data to draw focus. While from Europe this week we have service sector PMI’s, Eurozone inflation and retails sales data to digest, along with the ECB interest rate meeting.

AUD/YEN

There has been little overall direction in this pair over the past week, apart from a period of weakness in the immediate aftermath of Australia’s disappointing private capital expenditure data. That helped drive the pair to its 94.60 low heading into the weekend. We have seen recovery back above 95.00 in the early stages of this week, driven largely by declines in the Yen, although the pair is now approaching a resistance zone between 95.20 and 95.40 that I would expect to cap any further gains. The immediate focus now turns to this afternoons RBA rate statement which could easily provide some volatility. Later in the week from Australia we have GDP, retail sales, and trade balance data to draw focus. While from Japan this week we just have average cash earnings data out this afternoon to digest.

AUD/CAD

The Australian dollar lost ground to the Canadian dollar last week, driven in large part by disappointing private capital expenditure data. The pair traded just below 0.9500 heading into the weekend and was only saved further losses by a very soft Canadian GDP result. Resistance is now seen at 0.9600 and that level should contain any periods of strength seen over the coming week. Selling into strength is recommended with the target being a test of support around 0.9400. We have the Reserve Bank of Australia rate meeting to digest this afternoon, then later in the week GDP, retails sales, and trade balance data will draw focus. While from Canada this week we have the trade balance, Ivey PMI and employment change numbers to digest.

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