Strong US employment data caused a sharp appreciation in the USD; wild ride for bond markets with yields significantly higher; expect volatile price action around RBNZ announcement

By Ian Dobbs*:

Long term interest rate markets had a wild ride last week with yields moving significantly higher in many countries.

Germany led the way with 10 year yields approaching 1.0% after being as low as 0.05% in mid-April.

This move comes in the face of the ECB quantitative easing programme, which should put downward pressure on yields.

The implications of the bond market rout are open for debate. It’s not uncommon for the bond market to lead broader moves in the wider economy, and maybe the move higher in yield is signalling a pickup in inflation is just around the corner.

More likely however, is that what we have seen recently is exactly what a number of officials have warned about over recent months.

Liquidity in many key interest rate markets is not what it used to be with central banks owning huge amounts of the debt on issue.

In an environment where the US, and even the UK, are moving closer to the point where they try to ‘normalise’ monetary policy, the result will be increased volatility and markets may have to get used to moves of this magnitude.

Major Announcements last week:

• Global Dairy Trade Price Index -4.3%
• Australian GDP 0.9% vs 0.7% expected
• UK Services PMI 56.5 vs 59.2 expected
• ECB leaves interest rates unchanged at 0.05%.
• Canadian Trade Balance -3.0b vs -2.1 b expected
• US ISM Manufacturing PMI 55.7 vs 57.1 expected
• Australian Retail Sales 0.0% vs 0.7% expected
• Australian Trade Balance -3.89b vs -2.17b expected
• BOE leaves rate unchanged at 0.5%
• Canadian Ivey PMI 62.3 vs 55.1 expected
• Canadian Employment Chance +58.9k vs +10.2k expected
• US Non-farm Payrolls Change +280k vs +225k expected

NZD/USD

NZD/AUD (AUD/NZD)

The key NZD support level in this pairing of 0.9170 (1.0905) was tested again late last week and for the second time in as many months it contained the NZ dollar downside. Since then we have seen a gradual recovery, helped by disappointing retail sales and trade balance data out of Australia. We may well be in for an extended period of ranging as the pair seems comfortable bouncing between 0.9170 support (resistance 1.0905) and 0.9450 resistance (support 1.0582) on the NZD upside. This week could well prove to be very volatile however with the RBNZ monetary policy statement and a number Australian data points set for release. Whether or not the RBNZ cut interest rates is a close call and as such the NZD will react either way. From Australia we get business confidence data today, followed by consumer sentiment and employment change figures later in the week. RBA Governor Stevens is also set to speak tomorrow afternoon. If we were to see a sustained break below 0.9170 (above 1.0905) it will quickly shift the focus to much broader NZD decline targeting 0.8850 (1.1300).

NZD/GBP (GBP/NZD)

The New Zealand dollar underperformed the UK Pound on Friday night during the volatile price action seen in the wake of US employment data. This caused the pair to trade to a fresh cycle low of 0.4606 (high 2.1711). There are indications however, the downside momentum is waning and as such those NZD lows didn’t last long. So far this week we have seen a correction back above 0.4650 (below 2.1500) and I expect this move to test initial resistance around 0.4685 (support 2.1350). If that level is overcome then a much broader correction toward 0.4750 (2.1050) or potentially even 0.4800 (2.0835) could unfold. The biggest risk event on the week will be the release of the RBNZ’s interest rate decision and monetary policy statement on Thursday morning. The market is split right down the middle in terms of rate cut expectations and as such the NZD should prove volatile in the wake of the announcement. From the UK this week we have manufacturing and industrial production data, the NIESR’s estimate of GDP, and a speech from Governor Carney to digest.

 NZD/CAD

Up until Friday evening this pair was trading in a very tight range around 0.8900. The release of very strong employment data from both the US and Canada on Friday caused a sharp appreciation of the Canadian dollar which drove this pair to fresh cycle lows at 0.8745. Somewhat interestingly though, in the past 24 hours a sharp reversal has developed with the pair a good 100 points off its lows. There has been no fundamental data to drive this reversal, and as such the cross probably remains vulnerable to renewed weakness. We do however, have the Reserve Bank of New Zealand’s interest rate announcement and monetary policy statement on Thursday morning and this event will dictate near term direction. Expect plenty of volatility around the announcement with the market evenly split into ‘cut’ and ‘no cut’ camps. Still to come this week from Canada we have the new house price index and a speech from Governor Poloz to digest.

NZD/EURO (EURO/NZD)

We have seen little in the way of continued direction in this pair after trading to fresh cycle low of 0.6284 (high 1.5913) on Thursday last week. Since that time the cross has largely consolidated recent NZD underperformance, trading sideways around 0.6340 (1.5775). The trend of the past six weeks is firmly to the NZ dollar downside and there is nothing to suggest it has run its course. This would suggest the risks remain skewed towards a further move in that direction. We do have the RBNZ interest rate announcement and monetary policy statement set for release on Thursday morning, which will likely be the main driver of the cross this week. It’s a close call whether the central bank cuts interest rate or not and as such the NZD could have a sharp reaction either way. Our opinion is the bank will choose to keep rates on hold for now which should see the NZD find support, at least initially. However, the central bank may signal that rate cuts are likely in the future this will limit the potential NZD upside. Key topside resistance come in around 0.6490 (support 1.5410) and those looking to purchase Euro’s should target that area, at the wholesale level, to transact. We also need to be mindful of the potential for an announcement on the outcome of Greek negotiations and the volatility this could provide. In all likelihood however, with Greece now stalling payments to the IMF until later this month, any finality may be a couple of weeks away.

 NZD/YEN

This pair remains happily contained with the broad parameters of 88.00 to 90.00 that have been in play since early May. Japan did release some much better than forecast GDP data yesterday, but it has had little influence on the value of the Yen. The key event this week will be the release of the Reserve Bank of New Zealand’s interest rate announcement and monetary policy statement on Thursday morning. We can expect some real volatility around the announcement as it’s a very close call whether they cut interest rates or not. Our opinion is the central bank will remain on hold for the time being, and this should cause some NZD appreciation. We may well see a test of 90.00 develop if indeed that does prove to be the case. From Japan this week we have the economy watchers sentiment, consumer confidence, core machinery orders and tertiary industry activity data.

AUD/USD

We have seen some volatile trading in this pair with a range of over 200 point in the past week. The AUD traded down toward 0.7600 on Friday night in the wake of strong US employment data, but we have seen a big bounce from that level in the past 24 hours. There was nothing fundamental to drive the recovery and as such the risks are skewed toward renewed Australian dollar weakness. We do have Australian data in the form of business confidence out this afternoon which could easily influence. Later in the week from Australia we get consumer sentiment and employment change data along with a speech from Governor Stevens. From the US this week we have retail sales, producer prices and consumer sentiment data to digest. The broader trend toward a stronger USD is certainly still in play, but for the time being the AUD seems to be finding support between 0.7550 and 0.7600. Until we get a sustained break below that band of support the risk of further sharp corrective bounces will remain. Selling into those bounces remains the favoured strategy.

AUD/GBP (GBP/AUD)                            

This pair made sharp losses in the second half of last week, weighed on by soft data from Australia. The cross again tested levels below 0.5000 (2.0000), however there was no follow through AUD selling and as such a small recovery ensued. Although the risks remain skewed to the downside, the repeated failures below 0.5000 (above 2.0000) raise some doubt about near term direction. For the time being the AUD topside is protected by resistance around 0.5100 (support 1.9610) and selling into any periods of strength is recommended. From Australia we have business confidence out this afternoon, then later in the week we get consumer sentiment and employment change data, along with a speech from Governor Stevens. While from the UK this week we have manufacturing and industrial production data, the NIESR’s estimate of GDP, and a speech from Governor Carney to digest.

AUD/EURO (EURO/AUD)

The Australian dollar has remained under pressure from the Euro this past week and currently trades close to cycle lows. Improving data out of Europe has contrasted with some disappointing Australian results to see the AUD underperform. Minor support around 0.6800 (resistance 1.4710) has so far contained the AUD downside, but it looks likely to come under increasing pressure. Through that level and the market will target 0.6720 then 0.6650 (1.4880 then 1.5040). From Australia we have business confidence out this afternoon, then later in the week we get consumer sentiment and employment change data along with a speech from Governor Stevens. With little in the way of key data from Europe this week, the Greek situation will continue to draw focus and we should be mindful of the potential for a sharp move in the Euro one way to the other when a deal is finally reached.

AUD/YEN

The Australian dollar traded as high at 96.99 Yen in the first half of last week, but since then the pair has moderated back below 96.00, driven mainly by some soft Australian data. 95.00 to 97.00 may well contain trade this week and selling into periods of strength is the recommended strategy. Australian business confidence data will draw focus this afternoon, then later in the week we get consumer sentiment and employment change data along with a speech from Governor Stevens. From Japan this week we have the economy watchers sentiment, consumer confidence, core machinery orders and tertiary industry activity data.

AUD/CAD

The Australian dollar has traded in a significant range against the Canadian dollar this week, falling nearly 250 points from the 0.9715 high set last Thursday. Disappointing Australian data has combined with a much better than forecast result from Canadian employment change to dive the move. Somewhat surprisingly in the past 24 hours we have seen a decent bounce from the lows, but this has failed at the 0.9560 resistance level and as such the focus remains on the downside. A test toward 0.9400 may well develop over the coming week. Australian business confidence data will draw focus this afternoon, then later in the week we get consumer sentiment and employment change data along with a speech from Governor Stevens. While from Canada we have the new house price index and a speech from Governor Poloz to digest.

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