By Ian Dobbs*:
Trade in the USD last week was dominated by the US FOMC meeting aftermath on Thursday.
This saw the Fed bow to the markets assessment of a more clouded outlook for the global economy by reducing their estimate for interest rate hikes in 2016 to two from four.
Fed Chair Yellen signalled a greater willingness to tolerate an upside inflation surprise as opposed to see it continue to run under 2%.
June now looks the most likely time for the next Fed move. In doing so the Fed have shown a willingness to yield to threats which as yet haven’t manifested in key US employment and inflation indicators. This illustrates that global economic concerns and financial market volatility will continue to bear significantly on the outlook for US monetary policy in 2016.
Major Announcements last week:
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EU Industrial Production s.a. 2.1% m/m vs 1.5% exp. (Jan.)
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BoJ Cash Rate, -0.1% as exp.
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US Retail Sales, -0.1% m/m vs. -0.2% exp. (Feb.)
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NZ GDT Dairy price index, -2.9%
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UK ILO Unemployment rate, 5.1% as exp.
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US Inflation ex. Food+Energy, 0.3% m/m vs. 0.2% exp. (Feb.)
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US FOMC interest rate, 0.5% as exp.
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NZ Q4 GDP, 0.9% vs. 0.6% exp.
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Australian Employment, 0.3k vs. 10.0k exp. (Feb.)
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UK BoE Cash Rate, 0.5% as exp.
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US Philly Fed Manufacturing Index, 12.4 vs. -1.7 exp. (Mar.)
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Canadian Core Inflation, 0.2% m/m vs. 0.4% exp. (Feb.)
NZD/USD
The New Zealand dollar has eased from its highs after rallying to around .6870 since our report on Friday. The move up was sharp and came after a more dovish than expected US interest rate meeting on Thursday. Continued positive sentiment towards commodities and commodity based currencies also helped the gains. The .6890/.6905 zone has capped this rally so far. This is the third time since October last year that rallies above .6850 have failed. We expect this area to again cap this week given the light local data calendar.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.6763 | 0.6575 | 0.6905 | 0.6577 - 0.6874 |
NZD/AUD (AUD/NZD)
The New Zealand dollar is drifting in current trade against the Australian dollar. Liquidity inspired NZD gains in the cross last week failed at the highs seen a week earlier (around .8970, lows 1.1148). Lows traded last week (.8830, highs 1.1325) managed to only briefly pierce the RBNZ rate cut NZD low points. It is a very quiet week for both countries this week on the economic front. This has us favouring more consolidation with recent ranges. Any outperformance from the NZD over the AUD should be limited to the resistance at .8970 (1.1148 support).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.8927 | 0.8830 | 0.8970 | 0.8835 - 0.8968 |
| AUD / NZD | 1.1202 | 1.1148 | 1.1325 | 1.1151 - 1.1369 |
NZD/GBP (GBP/NZD)
The New Zealand dollar has largely drifted against the UK pound since our report on Friday. Notable gains were seen after the US Fed meeting last week however. These came mainly on the back of reduced liquidity in the NZD, although the weakening USD helped the commodities space generally. The softer tone since the BoE meeting ceased overnight as the GBP weakened on the back of rising political uncertainty fears. Look for UK events to dictate this week starting with inflation numbers tonight. We favour support at .4650 (2.1505 resistance) to hold any NZD declines on the week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.4707 | 0.4650 | 0.4780 | 0.4654 - 0.4781 |
| GBP / NZD | 2.1245 | 2.0921 | 2.1505 | 2.0914 - 2.1487 |
NZD/CAD
The New Zealand dollar continues to drift in trade against the Canadian dollar this week. Both the CAD and the NZD have performed well against the USD since the more dovish than expected US Fed meeting last week. The CAD has eased from its highs against the USD in recent trade and comes despite an oil price which has reached fresh 2016 highs overnight. Falls in the cross from the highs set in December to the lows have totalled over 8%, the inability of the CAD to kick on despite further gains in the oil price have us favouring a moderate bounce in the cross in the short term.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.8852 | 0.8775 | 0.8940 | 0.8791 - 0.8917 |
NZD/EURO (EURO/NZD)
The New Zealand dollar is edging higher in current trade against the Euro. Gains at the end of last week managed to marginally breach the resistance levels set a few days earlier. Reduced liquidity in the NZD post the FOMC meeting (and subsequent USD selling) was a key reason behind the surge, although the weaker USD is typically supportive of US$ priced commodities (commodity currency +ve). It should be a quieter week this week. We see the European data which is scheduled for release this week as being relatively unlikely of leading to moves outside of last week’s range.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6022 | 0.5925 | 0.6065 | 0.5927 - 0.6068 |
| EUR / NZD | 1.6607 | 1.6488 | 1.6868 | 1.6480 - 1.6871 |
NZD/YEN
The New Zealand dollar sits relatively mid-range in trade against the Japanese Yen currently. The significant volatility for the cross that was observed post the US Fed monetary policy meeting has eased somewhat in recent trade. Gains that capped ahead of 76.50 after the meeting were helped by the positive reaction in commodities post the Fed and the gains that were seen in the NZD/USD after the meeting. Quiet data schedules from both countries and a holiday week have us favouring reduced ranges this week. We continue to see more range trading as most likely for now.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 75.87 | 74.50 | 76.50 | 74.43 - 76.45 |
AUD/USD
The Australian dollar has drifted off its highs which were set near .7680 since our last report. The retracement should be seen as healthy for the current up-trend especially in light of the large gains that were seen after the US FOMC interest rate meeting. The positive sentiment shown towards commodities should continue to support the AUD in trade this week, although we are wary of the potential for comments regarding its recent strength from the RBA Governor in tonight’s speech. We favour buying the AUD (cautiously given the gains) and some support may emerge in the .7520/30 zone, although critical support is lower (~.7400).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7572 | 0.7400 | 0.7680 | 0.7415 - 0.7680 |
AUD/GBP (GBP/AUD)
The Australian dollar has lifted marginally from its lows against the UK pound which were seen after the BoE central bank meeting late last week. Commodity currencies and currencies with risk appeal were key beneficiaries after the US FOMC meeting earlier in the week which saw the AUD move to its highs. We favour further AUD appreciation over time although this week should be a quieter one for this cross. UK inflation and retail sales numbers are due for release and provide the UK focus. Last week’s highs above .5350 (lows 1.8690) are the target for a breach of very minor resistance around .5300 (1.8868 support).
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5269 | 0.5230 | 0.5300 | 0.5234 - 0.5359 |
| GBP / AUD | 1.8977 | 1.8868 | 1.9120 | 1.8658 - 1.9105 |
AUD/EURO (EURO/AUD)
The Australian dollar is drifting in current trade against the Euro. We favour this cross being well contained within last week’s ranges this week given the relatively low impact nature of the data due this week. Both the EUR and AUD have been well sought after post the US Fed meeting last week, although the commodity appeal of the AUD has seen it marginally outperform. Watch for any RBA Governor currency specific comments later today.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6741 | 0.6690 | 0.6800 | 0.6693 - 0.6795 |
| EUR / AUD | 1.4834 | 1.4706 | 1.4948 | 1.4717 - 1.4940 |
AUD/YEN
The Australian dollar is drifting higher in current trade this week against the Japanese Yen. The slide noted towards the end of the week found a base ahead of 84.20 yesterday. The inability of the AUD to outperform the JPY since the FOMC meeting is perhaps a little surprising to us. This has us slightly favouring higher levels moving forward towards key resistance based on the generally more supportive environment for commodities. A holiday week this week is likely to see the cross contained this week by last week’s extremities.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 84.94 | 84.00 | 86.40 | 83.95 - 85.83 |
AUD/CAD
Trade in the Australian dollar has been lacklustre so far against the Canadian dollar this week, although a drift higher has been observed over recent hours. This comes on the back of a CAD which has failed to rally (against the USD) despite oil prices rallying to fresh 2016 highs in trade overnight. We expect a very quiet week’s trade in this cross this week given the Easter holiday and quiet data calendars. We marginally favour selling rallies above .9950 at present.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9909 | 0.9860 | 0.9970 | 0.9866 - 1.0002 |
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Market commentary:
Trade in the USD last week was dominated by the US FOMC meeting aftermath on Thursday. This saw the Fed bow to the markets assessment of a more clouded outlook for the global economy by reducing their estimate for interest rate hikes in 2016 to two from four. Fed Chair Yellen signalled a greater willingness to tolerate an upside inflation surprise as opposed to see it continue to run under 2%. June now looks the most likely time for the next Fed move. In doing so the Fed have shown a willingness to yield to threats which as yet haven’t manifested in key US employment and inflation indicators. This illustrates that global economic concerns and financial market volatility will continue to bear significantly on the outlook for US monetary policy in 2016.
Australia
The AUD is continuing on a solid footing in trade this week after last week’s strong rally which saw it push to eight month highs against the USD. The latest surge came towards the end of the week after the US FOMC central bank meeting. This saw the Fed adopt a more dovish interest rate outlook which helped drive the USD lower and commodity prices higher to end the week. The ongoing global and financial market risks were seen as the key contributor for the Fed to remove two rate hikes this year from their suggested interest path. Key local data events were few last week which will again be the case this week in the run-up to Easter. The jobs report for February was the key event of note, this saw the unemployment rate fall to 5.8%, although reduced job participation drove the decline. Unemployment has now spent five months in the 5.8/6.0% range and conveys a message of a slowing in the strong pace of jobs growth seen last year. Of interest this week will be RBA Governor Stevens’ speech later today where market players will be watching closely for any comments on the recent AUD strength which has seen it rally 11% against the USD since January.
New Zealand
Expect a quieter week this week heading into Easter after last week’s busy US FOMC dominated event calendar. The US Fed’s move on Thursday to lower their anticipated 2016 rate path provided a fillip for the NZD as the USD fell sharply on the news. Markets had already priced in a much less aggressive tightening path for the Fed this year, although the extent of the move was a surprise to most. The uncertain global economy was seen as a key contributing factor in the Fed’s thinking. Thursdays shift to suggesting only two hikes this year from the four indicated in December comes despite an improvement in the key US employment and inflation indicators since. Local events released last week included another soft GDT dairy auction and Q4 GDP upside surprise. ANZ Consumer confidence for March dipped slightly from February, although at 118.0 remained solid and in line with the historical average. Immigration data released yesterday showed a record 67,400 permanent and long-term migrants for the year to February. Expect US data flow and the commodities price environment to help set pricing this week, the only local data scheduled for release are trade numbers for February due on Thursday.
United States
The USD has received some reprieve so far this week after last week’s large FOMC inspired sell-off. The gains come after comments overnight from three non-voting Fed board members which spoke of a Fed that would meet their inflation objective thereby allowing them to resume rate hikes in the middle of the year. The FOMC interest rate meeting dominated the US news late week. This saw the Fed reduce the number of suggested hikes for 2016 from the four slated in December to two only. Data releases included a miss in the key retail sales control number and the latest industrial production figures. Michigan consumer sentiment also unexpectedly declined, although the long run inflation expectations survey recovered to the 2015 average. Better than expected releases included core producer price data and the latest annual core inflation print which rose to its highest level since May 2012. Existing homes sales numbers released overnight fell well short of consensus. Immediate events of interest this week start with further speeches from Fed members tonight, manufacturing PMI data and Richmond Fed manufacturing. Durable goods and GDP data are due later in the week.
Europe
The EUR has eased in recent trade this week, a move which comes after last week’s strong showing which was born about from the U.S Fed’s move to lower their anticipated interest rate path at the FOMC meeting on Thursday. Data out of Europe last week was lacking, but included a slight rise in euro-zone employment and euro-zone inflation which printed above expectations. Comments from Fed officials overnight have helped the USD rally after they signalled they were comfortable with the US inflation outlook. All three commenting members signalled the potential for imminent rate hikes. These comments contrast with those of the ECB Chief Economist Praet on Friday which countered the market’s view that the ECB was at the “physical lower bound” for interest rates, a view which had gained popularity after ECB president Draghi’s recent comments at the ECB monetary policy meeting press conference. Data to look forward to this week starts with the release of preliminary PMI’s and the German IFO survey tonight.
United Kingdom
The volatility that was notable in the GBP last week has continued again in trade so far this week. Central bank meetings drove the shifts in the GBP last week. Meetings by the US Fed and then UK BoE both contributed positively to the GBP move up towards the end of the week. The bigger kick came after the Fed’s more dovish than expected meeting which saw the Fed remove two of their anticipated hikes for 2016. Further buying was noted after the BoE meeting which spoke of the likelihood of higher rates in time. Employment data released during the week was mildly positive also. Sentiment towards the GBP has taken a dent over the weekend however, on the back of resignations from members of the ruling Tory coalition. Brexit fears also continue to weigh after the resignations and after a report from the Confederation of British industry which suggested that an exit from the EU would cost the UK 100bn GBP in lost economic output and 950k jobs by 2020. Data to feature this week starts with UK inflation and producer price numbers tonight, retail sales is set for release on Thursday.
Japan
The JPY is easing in trade so far this week against the USD, although still sits sharply higher than those levels observed at this time last week. The gains have come on the back of losses experienced by the USD post the US FOMC interest rate meeting which saw the Fed lower their anticipated path for interest rates in 2016. Events of interest in Japan last week included the BOJ monetary policy meeting on Tuesday, this passed without much fanfare however after the BOJ kept their policy unchanged as expected. The BOJ minutes for the January meeting were released on Friday. The minutes showed that four of the nine board members had dissented on the surprise decision to deploy a negative interest rate policy. This decision has drawn criticism from lawmakers for failing to bolster stock prices and arrest an unwelcome rise in the yen. Data releases during the week included better than expected core machinery and tertiary industry activity numbers and industrial production data which matched forecasts. Amongst the releases this week is the Reuters Tankan (tomorrow) and inflation data on Friday.
Canada
The CAD continues to benefit from buoyant oil market sentiment in trade this week. Recent CFTC data has shown an increased number of bets on a stronger price in the months ahead. This comes as net long (bought) positions moved to their highest levels since last June. The CAD received an additional boost last week from a USD which lurched lower after the more dovish than expected US FOMC interest rate meeting. The reduced 2016 suggested Fed rate path helped push commodities higher again on the prospect of continued weakness in the USD. Canadian data highlights last week included a softer than expected inflation print and much better than expected retail sales release. The inflation numbers included cheaper imports which have benefitted from the recent CAD strength. The Canadian data calendar is empty heading into Easter this week.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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