By Ian Dobbs*:
Both the GBP and EUR have suffered in trade this week after the conclusion of last week’s UK/EU summit on the subject of a British exit from the European Union.
Prime Minister Cameron called for a U.K. referendum on the 23rd of June this year at the weekend. He did so having negotiated reforms that he believed should sway British voters to vote to remain within the EU.
The risk of Britain leaving the EU has seen the GBP fall to its lowest levels since March 2009 in trade overnight.
The fears of such a move rose sharply yesterday after Cameron party member and London Mayor Boris Johnson said that he would campaign for the UK to leave the European Union. Voters remain evenly split on the issue and fears of an exit look set to weigh on the GBP over coming months.
Major Announcements last week:
- NZ Retail sales, 1.2% q/q vs. 1.4% exp.
- NZ RBNZ Inflation expectations 1.6%
- UK Core inflation, 1.2% y/y vs. 1.3% exp. (Jan.)
- German ZEW, 52.3 vs. 55.5 exp.
- EU ZEW, 13.6 vs. 10.3 exp.
- NZ GDT dairy index -2.8%.
- UK ILO Unemployment rate, 5.1% vs. 5.0% exp.
- US Industrial Production, 0.9% vs. 0.4% exp. (Jan.)
- Australian employment, -40.6k (Jan.)
- Australian unemployment rate, 6.0% vs. 5.8% exp. (Jan.)
- UK Retail sales, 2.3% m/m vs. 0.8% exp. (Jan.)
- US Core Inflation, 2.2% y/y vs. 2.1% exp. (Jan.)
- Canadian Core inflation, 2.0% y/y vs. 1.9% exp. (Jan.)
NZD/USD
The New Zealand dollar has put in a strong showing against its US counterpart in trade overnight. Resistance at .6680 broke after heavy buying of the key commodity currencies was seen, buying which gained additional momentum after the solid gains in oil, industrial metal and iron ore pricing (and NZX dairy pricing for the NZD). Early week rallies in global equity indices have also helped increase the demand for the more risk sensitive currencies like the NZD. The largely empty local data calendar means these forces will again hold sway this week. Resistance is eyed from the overnight highs (~.6725) to .6750. Very minor support should be seen in the .6675/85 area although .6550 is key support lower.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6700 | 0.6550 | 0.6750 | 0.6548 - 0.6726 |
NZD/AUD (AUD/NZD)
The New Zealand dollar is drifting in trade so far against the Australian dollar this week. Weaker than expected Australian employment data on Thursday helped the local unit lift from its lows (~.9200, 1.0870) last week. A relatively empty data schedule this week has us favouring mainly lateral trading with a marginal NZD downside bias this week as resistance in the .9310/30 (1.0742/1.0718 support) area caps. Strong gains in key commodities like oil and iron ore would likely place NZ dollar under pressure, testing buyers around the .9200 (1.0870) level.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9267 | 0.9200 | 0.9330 | 0.9199 - 0.9325 |
| AUD / NZD | 1.0791 | 1.0718 | 1.0870 | 1.0724 - 1.0871 |
NZD/GBP (GBP/NZD)
The New Zealand dollar has rallied strongly against the U.K. pound in trade so far this week. This comes after the resistance around .4650/60 (2.1505/2.1459 support) broke during trade yesterday, mainly on the back of the very poor showing of the GBP/USD exchange rate. The GBP fell heavily in opening trade yesterday over continued concerns of a British exit from the EU which have heightened since last week’s UK/EU summit on the subject. Buying of commodity currencies overnight helped push the NZD to its highest levels since May 2015 against the GBP. We favour additional NZD gains in the near-term based on a continuation of this theme, although would prefer entries nearer prior resistance (.4660 support, 2.1459 resistance).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4736 | 0.4660 | 0.4775 | 0.4546 - 0.4768 |
| GBP / NZD | 2.1112 | 2.0942 | 2.1459 | 2.0971 - 2.1999 |
NZD/CAD
The New Zealand dollar has rallied well against the CAD in trade so far this week. This comes after the CAD received more moderate gains relative to the NZD overnight, this despite the solid showing in the oil price. Whilst both currencies benefit from increased commodity currency appeal the gains in this cross can be put down to the very strong showing in the AUD/USD (and by association the NZD) exchange rate over the last 24 hours. Resistance above the overnight highs is seen around .9240 and just above, first support should be seen around .9140/50. We favour selling near resistance at present.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9186 | 0.9140 | 0.9240 | 0.9046 - 0.9210 |
NZD/EURO (EURO/NZD)
The New Zealand dollar has rallied strongly against the Euro in trade so far this week. This comes on the back of the solid gains seen by the NZD/USD overnight as commodity currencies benefitted from increased risk appetite and a rally in key commodity pricing. The EUR/USD in contrast has felt the weight of poor sentiment that is pervading the market over the likelihood of a British exit from the EU at the 23rd June UK referendum. Key support is now noted at .5980 (1.6722 resistance), although some minor support should be seen ahead around .6050 (1.6529 resistance). Minor resistance above the overnight NZ dollar highs should be seen around .6180 (1.6181).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6074 | 0.5980 | 0.6180 | 0.5871 - 0.6105 |
| EUR / NZD | 1.6463 | 1.6181 | 1.6722 | 1.6381 - 1.7033 |
NZD/YEN
The New Zealand dollar has rallied against the Japanese Yen this week, although sits off its highs in present trade. This cross appears to be in a consolidating phase presently which comes on the back of the previous significant declines seen at the start of 2016 which occurred on the back of the risk off NZD flow and JPY safe haven demand. Empty data calendars and reduced market volatility have us favouring more of the same this week as our bullish JPY view (against the USD) is offset by improving demand for the NZD in the more stable risk environment.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 75.51 | 74.10 | 76.50 | 74.20 - 76.53 |
AUD/USD
The Australian dollar has advanced strongly against the USD in trade so far this week. Much of the move occurred during overnight trade and comes on the back of the solid gains seen in key commodity pricing which pushed the CRB index up ~2%. Strong rallies in both oil and iron ore were noted. Rallies in international equities have also helped shore up wider market risk sentiment (AUD+). Resistance ahead of .7250 has capped the rally so far, minor support is seen around .7180 and then .7130. Resistance beyond .7250 is noted in the .7325/.7340 zone. U.S. data and commodity/risk considerations will hold the key to whether the AUD/USD can build on its gains or revert well back into its range.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7227 | 0.7130 | 0.7250 | 0.7070 - 0.7246 |
AUD/GBP (GBP/AUD)
The Australian dollar has surged in trade against the U.K. pound so far this week. This comes after the GBP has suffered on the back of elevated concerns over a Brexit, which have increased after the UK-EU summit on the subject which concluded last week. A strong showing by the AUD/USD on the back of surging key commodity prices and improved risk sentiment has compounded the move. First resistance lies just above the overnight highs around the .5140 (1.9455 support) level. Momentum is higher for the AUD, although the strong move of recent days may mean levels to buy closer to .5050 (1.9802) are on offer in the event of a pullback.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5109 | 0.5035 | 0.5140 | 0.4932 - 0.5127 |
| GBP / AUD | 1.9573 | 1.9455 | 1.9861 | 1.9506 - 2.0276 |
AUD/EURO (EURO/AUD)
The Australian dollar has rallied strongly in trade against the EUR this week. This comes on the back of the weak showing by the EUR as it suffers from the fall-out over a potential British exit from the EU at the 23rd June UK referendum. Weak euro-zone PMI data overnight added to the pressure on the EUR. The AUD in contrast has rallied strongly on the back of firmer key commodity pricing and improved risk sentiment. Data considerations are light for the cross this week, this should allow the AUD to build on its gains should the risk and commodity price environment stay supportive.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6553 | 0.6450 | 0.6585 | 0.6341 - 0.6577 |
| EUR / AUD | 1.5260 | 1.5186 | 1.5504 | 1.5205 - 1.5771 |
AUD/YEN
The Australian dollar has advanced against the Japanese Yen in trade so far this week. This comes on the back of the strong rally in the AUD exchange rate seen since the market opened. The gains have been helped by firming commodity prices and the general improvement in risk sentiment which has improved on the back of the strong gains seen so far this week in international equity markets. These considerations look set to dictate moves in this cross for the remainder of the week given the largely empty data calendar. A break of 82.50 should open higher levels although for now further consolidation appears most likely.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 81.33 | 79.80 | 82.00 | 79.85 - 82.42 |
AUD/CAD
The Australian dollar is drifting in current trade against the Canadian dollar. This comes after both currencies have enjoyed decent gains against the USD since our last report, the CAD on the back of improving oil pricing, and the AUD mainly on improving risk sentiment. These themes look set to dominate again this week, although Australian employment (Thursday) and Canadian inflation/retail sales (Sat. morning) should be noted. We favour selling rallies noting recent lower tops on up-swings, and also fearing the potential for a more concrete development from the OPEC producers to curtail production.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9880 | 0.9700 | 0.9930 | 0.9715 - 0.9925 |
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Market commentary:
Both the GBP and EUR have suffered in trade this week after the conclusion of last week’s UK/EU summit on the subject of a British exit from the European Union. Prime Minister Cameron called for a U.K. referendum on the 23rd of June this year at the weekend. He did so having negotiated reforms that he believed should sway British voters to vote to remain within the EU. The risk of Britain leaving the EU has seen the GBP fall to its lowest levels since March 2009 in trade overnight. The fears of such a move rose sharply yesterday after Cameron party member and London Mayor Boris Johnson said that he would campaign for the UK to leave the European Union. Voters remain evenly split on the issue and fears of an exit look set to weigh on the GBP over coming months.
Australia
It has been a relatively quiet start to the week for the Australian dollar with the U.S. out overnight for Presidents’ Day holiday. Trade in the AUD last week was dictated by the sentiment which emulated from the performance of the offshore financial markets, which for most of the week was negative. The markets finished the week on a positive note however, this saw both the Dow and S&P 500 finish the week up around 2% in trade on Friday. Better than expected U.S. data (retail sales, consumer sentiment) helped calm the mood of the markets, especially after the recent run of weaker numbers which has played a part in undermining the global growth outlook. In Australia a speech by the RBA Governor added little on Friday after he noted that the RBA was unlikely to be raising rates any time soon and that they retained the flexibility to ease further, both were points which are already well known by the market. The Governor will be speaking again this afternoon over the release of the monetary policy meeting minutes. The only other data of note this week is the January employment data release on Thursday. Yesterday’s better than expected Chinese trade data and Australian new motor vehicle sales elicited little market response.
New Zealand
The NZD has sprung higher in early trade this week. The move comes on the back of a surge in key commodity prices (which has bolstered the commodity currencies) and the strong offshore equity markets which have again helped to lift the tone in sentiment towards riskier currencies. This week is a particularly quiet one for local events so again it will be down to international events to set direction. The resilience of the NZ and Australian economy to the downturn in China has bolstered demand for the antipodean currencies over recent weeks, especially in light of the market’s growing awareness of the high threshold for further RBA/RBNZ rate cuts. Last week’s RBNZ inflation expectations survey which fell to 22 year lows may cause the Governor some concern however, especially since reduced inflation expectations were noted as a point of potential concern in a recent speech.
United States
The USD has lifted in trade so far this week. This has come mainly on the back of declines in the EUR and GBP which have fallen on the back of raised fears of a British exit from the EU at the coming UK referendum on the issue. The USD was mixed in trade on Friday (having earlier lifted during the week) after the release of the latest US inflation numbers. The data pointed to inflation returning to the 2% Fed target over the medium term as the price of oil stabilizes. The m/m and y/y numbers beat the market’s expectation by 1/10th of a percent (core and headline). The FOMC minutes released last week were mixed and included a split amongst many members based on the uncertain inflation outlook and increased financial market uncertainty. Markit PMI manufacturing data released overnight disappointed after the new orders, employment and output subseries data all fell. The data calendar is a busy one this week which culminates with Q4 GDP data on Friday night.
Europe
The EUR has fallen in trade this week having been pulled lower by worse than expected overnight PMI data and heightened fears over the wider EU impact of a British exit from the EU. These fears include that an exit may signal the beginning of the end for the EU project. Brexit fears have increased overnight after many key British politicians have indicated they will campaign for an exit. Recent polls indicate a roughly 50/50 split in the British public opinion for such a move. The EUR was under pressure last week after the ECB minutes revealed discussion over additional easing at the last ECB meeting in January, an issue which also received additional press from Governor Draghi during the week. Preliminary PMI data released overnight showed an easing in the euro-zone composite number which was weighed on by declines in the manufacturing and services numbers. The weaker than expected data was joined by the German composite data which eased on the back of a miss in the manufacturing numbers. The French data also missed the market’s consensus, although it was the services numbers which provided the disappointment. Of immediate interest for the EUR will be tonight’s German IFO business confidence data before inflation and consumer confidence/inflation expectations data later in the week.
United Kingdom
The GBP has continued to fall sharply in trade this week. Market focus has centred on the fallout from last week’s EU/UK summit where PM Cameron secured reform that he believes form the basis to keep the UK as part of the wider EU. The referendum date was set for June 23rd. The GBP has already suffered further on the Brexit fears after senior members of the Cameron Conservative party (including London Mayor Boris Johnson) said they would campaign to leave the EU. Recent reports suggest up to 150 of the 330 Conservative MPs favour such an outcome. Fears over the consequences of a Brexit include the heightened uncertainty during the transition period and the ensuing damage to confidence, investment, and potential trade diversion as the trading relationships with EU countries weaken. Recent data out of the UK included a much better than expected retail sales release on Friday, mixed employment data last week and worse than expected inflation data for January. CBI industrial trend data released overnight fell again from the month prior and failed to meet the market’s expectations. Immediate focus for the GBP will be tonight’s inflation report hearings before they key Q4 GDP numbers on Thursday.
Japan
The JPY remains firm in current trade this week, this despite the firming global equity markets and improving risk sentiment which has greatly reduced the amount of safe haven flow into the Yen. Recent data out of Japan has been largely soft and included the manufacturing PMI numbers yesterday which underperformed the market’s consensus. Disappointing numbers last week included misses in the core machinery, industrial production and Q4 GDP numbers. Recent comments from the BOJ Governor Kuroda have been positive on Japan and have included ones on inflation which he views as improving steadily towards the BOJ’s target. He also thinks the positive impacts of the recently implemented BOJ negative rate policy are likely to gradually broaden across the Japanese economy. The negative rate policy has been in focus over recent days after former proponents of it have come out to speak against it. It is a quiet week on the data front in Japan this week, although national inflation numbers on Friday should interest some.
Canada
The CAD has clawed back losses experienced late last week in trade so far this week. The strong CAD link with oil has again been notable in recent trade. Oil prices have lifted ~2% in trade so far this week. This comes after being helped higher on the back of reports out of the IEA which said the oil market will gradually rebalance by 2017, a view predicated on the expectation of a 800k reduction in U.S. shale oil production in 2016/2017. Slashed exploration budgets are likely to have a major impact on the supply/demand balance in the years ahead as they impact on reserve replacement and the ability of many producers to bring in fresh supply. This issue was highlighted in ExxonMobil’s announcement overnight after they announced that new reserves had failed to replace 2015 production for the first time in 22 years. Key data out of Canada since our last report included inflation numbers which exceeded expectations and retail sales data which materially underperformed the market’s consensus. Look for pricing to again be heavily influenced by the developments in the energy market’s this week, especially given the largely empty local economic calendar.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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