Eyes on FOMC and BoJ announcements; Australian inflation data could have policy implications for RBA

Eyes on FOMC and BoJ announcements; Australian inflation data could have policy implications for RBA

By Sam Coxhead*:

Trade this week looks set to get interesting from tomorrow as the market gears up for key central bank meetings from the US Fed and BOJ.

Wednesday’s second quarter Australian inflation data also has policy implications for the RBA ahead of their meeting next Tuesday. This as the market looks to the prospect of a further cut to the cash rate as inflation languishes well below the 2-3% RBA policy target band.

Wednesday’s US FOMC meeting will also be interesting. Look mainly for the tone of the statement as the Fed looks most likely to exercise caution against ramping up rate hike expectations later in the year.

The week rounds out with the BOJ central bank meeting on Friday which looks likely to be the most interesting event this week. They are set to reveal the form and extent of the extra stimulus, expectations of which have gained traction since Japanese PM Abe’s win in the upper house of parliament earlier in the month.

Major Announcements last week:

  • NZ Q2 Inflation, 0.4% y/y [vs. 0.5% exp.]
  • UK Inflation, 0.5% y/y vs. 0.4% exp. (Jun.)
  • German ZEW Current Conditions, 49.8 vs. 51.8 exp. (Jul.)
  • US Building Permits, 1.5% m/m vs. 0.6% exp. (Jun.)
  • NZ GDT Dairy Prices, 0% vs. -0.4% prior.
  • UK Unemployment Rate, 4.9% vs. 5.0% exp. (May)
  • Australia NAB Quarterly Business Confidence, 2 vs. 4 prior.
  • UK Retail Sales, -0.9% m/m vs. -0.6% (Jun.)
  • US Philly Fed Manufacturing, -2.9 vs. 5.0 exp. (Jul.)
  • EU Manufacturing PMI, 51.9 vs. 52.0 exp. (Jul.)
  • Canadian Inflation, 1.5% y/y vs. 1.4% exp. (Jun.)
  • US Manufacturing PMI, 52.9 vs. 51.6 exp. (Jul.)

NZD/USD 

The New Zealand dollar has consolidated against the USD in opening trade so far this week. The lateral movement comes after a big week last week which saw the NZD fall by 1.6% against its US counterpart. This was on the back of a weak local inflation print and moves by the RBNZ to tackle an overvalued exchange rate and heated property market. Expect a quiet week this week at least until Thursday mornings (NZ time) FOMC meeting and Friday’s BOJ meeting (watched for NZD/JPY flow). We favour selling towards .7070 for another look at .6950 in time.

  Current level Support Resistance Last wk range
NZD / USD 0.6999 0.6950 0.7070 0.6959 - 0.7608

NZD/AUD (AUD/NZD)

The New Zealand dollar has drifted higher against the Australian dollar in trade since Friday. There has been little to go on for the cross since our report, although the upwards adjustment looks to be in response to the general weakness in commodity prices overnight (AUD-). Wednesday will be the key day for the cross this week as the market waits to see whether the Australian inflation data satisfies the criteria for a RBA rate cut next week. We favour selling rallies in the .9415/40 (buying dips 1.0621/1.0593) zone for the time being, although Wednesday’s data has the ability to change our sentiment. Look for second NZD resistance to be pegged around .9470 (1.0560 AUD support) in the event of a poor number.

  Current level Support Resistance Last wk range
NZD / AUD 0.9350 0.9280 0.9420 0.9299 - 0.9424
AUD / NZD 1.0695 1.0616 1.0776 1.0611 - 1.0753

NZD/GBP (GBP/NZD)

The New Zealand dollar has rallied against the UK pound since our last commentary. PMI data from the UK on Friday was marked by weakness from the month prior, although the prints were mixed when measured against expectations. The move higher comes on the back of a 7% NZ dollar decline over the last two weeks from the highs to the lows and has us favouring more mixed trading (rather than directional) in the weeks ahead. Key support is noted at .5250 (resistance 1.9048). UK Q2 GDP data tomorrow is the key release to watch this week, although given it is made up largely prior to the Brexit vote we would be surprised to see it move the cross materially.

  Current level Support Resistance Last wk range
NZD / GBP 0.5340 0.5250 0.5400 0.5250 - 0.5395
GBP / NZD 1.8725 1.8519 1.9050 1.8536 - 1.9049

 NZD/CAD

The New Zealand dollar has continued to rally against the Canadian dollar since our report on Friday. Recent strength has come on the back of a weaker CAD which has eased on the back of falling oil prices in overnight trade. Oil looks set to be a key driver over the course of the week given the lack of incoming data until Friday. With oil looking heavy for the time being we favour additional moderate upside towards .9300, although we are looking for some support in the price of oil around $41.90/42.00 WTI) to help arrest the CAD’s recent decline.

  Current level Support Resistance Last wk range
NZD / CAD 0.9248 0.9090 0.9300 0.9086 - 0.9260

NZD/EURO (EURO/NZD)

The New Zealand dollar has drifted up marginally against the Euro since our commentary on Friday. The move comes as the Euro closed on its lows last week as the USD gained against most of its key peers. Data this week looks unlikely to signal a marked change in the direction for this cross, although the EU inflation and GDP prints on Friday have the greatest chance of upsetting. We continue to favour more rangy conditions and see trade remaining within .6300/.6420 (1.5873/1.5576) as being highly likely.

  Current level Support Resistance Last wk range
NZD / EUR 0.6370 0.6300 0.6420 0.6314 - 0.6419
EUR / NZD 1.5700 1.5575 1.5875 1.5578 - 1.5837

 NZD/YEN

The New Zealand dollar is drifting in trade against the Japanese Yen this week. The cross continues to trade with a heavy tone overall after last week’s dovish RBNZ comments on the value of the NZD and recent uptick in the Yen. Focus for this week will be on Japan on Friday as the BOJ issues its monetary policy statement. Expect significant volatility during the day with the outcome of the degree of extra stimulus (or lack of) and its impact on the Yen driving this cross. We favour selling rallies although first solid resistance lies nearer 77.00.

  Current level Support Resistance Last wk range
NZD / YEN 73.50 71.00 76.85 73.24 - 75.24

AUD/USD

The Australian dollar has drifted lower against the USD since our report on Friday. The move comes as the USD finished on its highs on Friday in a move that saw the AUD/USD fall to just under .7450. Focus for this week is on Wednesday’s inflation print which the market is viewing as critical for next week’s RBA policy response. Look for direction to be dictated by this data, although interest will also be on the following US FOMC statement. For now we moderately favour the AUD downside. Second support and resistance is pegged at .7400 and .7550 respectively.

  Current level Support Resistance Last wk range
AUD / USD 0.7485 0.7440 0.7520 0.7443 - 0.7557

AUD/GBP (GBP/AUD)                            

The Australian dollar has firmed against the UK pound since our report on Friday. The move comes on the back of the GBP weakness which underperformed relative to the AUD in the face of the overall stronger greenback on Friday. Data out of the UK on Friday was weak, although was more positive when viewed against the pessimistic expectations. Wednesday is the critical day for the cross this week as we get indicators on Australian inflation and UK GDP come to market. We lack any bias on the week and see the data as likely dictating the next move.

  Current level Support Resistance Last wk range
AUD / GBP 0.5712 0.5625 0.5775 0.5625 - 0.5741
GBP / AUD 1.7508 1.7320 1.7780 1.7418 - 1.7779

 AUD/EURO (EURO/AUD)

The Australian dollar has drifted in trade against the Euro since our report on Friday. The lateral trading experienced was to be expected given the lack of key data coming from both regions in the interim. Look for direction this week to come from Wednesday’s Australian inflation numbers which will have a key bearing on whether the RBA chooses to cut rates when they meet next week. We have little bias ahead of this data and see more range trading until the release as being most likely.

  Current level Support Resistance Last wk range
AUD / EUR 0.6812 0.6750 0.6825 0.6762 - 0.6829
EUR / AUD 1.4680 1.4650 1.4820 1.4643 - 1.4789

 AUD/YEN

The Australian dollar has eased against the Japanese Yen in trade since Friday in a move that has accelerated on the back of a strengthening Yen in recent hours. This week looks set to be a busy one as we receive data from Australia on inflation on Wednesday and the results of the BOJ meeting on Friday. These events look set to dictate the fortunes for the cross on the week and the uncertainty around them has us preferring to stay on the sidelines this week, although we note that for now the momentum is to the AUD downside.

  Current level Support Resistance Last wk range
AUD / YEN 78.60 77.40 81.50 78.25 - 80.42
 
AUD/CAD

The Australian dollar has continued to rally against the Canadian dollar since our report on Friday. The move comes on the back of the CAD weakness which has accelerated in overnight trade on the back of further falls in the price of oil. The oil move comes in response to a stronger USD and as concerns continue to remain over the extent of the oil inventory overhang. Look for oil and the Australian inflation data on Wednesday as being the key elements of concern for the cross prior to our report on Friday. For now momentum is to the upside, although a weak Australian inflation release is likely to see this quickly reverse as the market moves to fully price in a RBA rate cut next week.

  Current level Support Resistance Last wk range
AUD / CAD 0.9892 0.9730 0.9970 0.9738 - 0.9888

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Market Commentary:

Trade this week looks set to get interesting from tomorrow as the market gears up for key central bank meetings from the US Fed and BOJ. Wednesday’s second quarter Australian inflation data also has policy implications for the RBA ahead of their meeting next Tuesday. This as the market looks to the prospect of a further cut to the cash rate as inflation languishes well below the 2-3% RBA policy target band. Wednesday’s US FOMC meeting will also be interesting. Look mainly for the tone of the statement as the Fed looks most likely to exercise caution against ramping up rate hike expectations later in the year. The week rounds out with the BOJ central bank meeting on Friday which looks likely to be the most interesting event this week. They are set to reveal the form and extent of the extra stimulus, expectations of which have gained traction since Japanese PM Abe’s win in the upper house of parliament earlier in the month.

Australia

Minutes from the last RBA board meeting dominated focus in Australia last week. The minutes confirmed that the door is wide open for a cut at the August 2nd meeting, although the central bank indicated that it was waiting on further information on inflation, labour and housing. A recent assessment from the RBA described the labour and housing market as “mixed” and the current data suggests that the updated RBA economic forecasts which come ahead of the August policy meeting will do little to change the high likelihood that a 25bps (to 1.5%) rate reduction will be delivered. The minutes bring this Wednesday’s June quarter inflation numbers into close attention with an on consensus expectation of 0.4% q/q likely being enough to see the RBA cut. Other focus for the week will be the US FOMC meeting on Thursday (Australian time) and local producer price and private sector credit numbers due on Friday.

New Zealand

It has been a quiet open for the kiwi in trade this week after last week’s hard correction which saw the local unit fall significantly against most of its peers after the Reserve Bank (RBNZ) took steps to stem its recent strength. The week started with the RBNZ tabling a discussion paper which would introduce further macro-prudential measures aimed at restricted lending to the residential property market and tackling the sharp price rises currently being experienced in the sector. The move’s by-product is a greater central bank ability to cut interest rates. The market was left in little doubt over the RBNZ’s intention when later in the week it directly pointed at the need to reduce rates in order to tackle the over-valued NZD and low tradable inflation. Look for a cut at the policy meeting on August 11th as the bank attempts to move inflation closer to its 1-3% policy target. Data released on Monday last week showed inflation running well adrift of the mid-point of this bank target at just 0.4% y/y currently. This week has started with trade numbers this morning which printed near expectations for June. Expect a much quieter week this week which is dominated by offshore events which include the US FOMC meeting. Building consents and the ANZ business confidence survey on Friday are the only local points of interest.

United States

The greenback has started this week in consolidation mode after finishing last week on its highs on Friday. Gains were noted over the course of the week as strong data came from the housing sector which saw the housing starts and forward looking building permits lift markedly from the month prior. Existing home sales are also in sound shape, a point enforced by sales which rose to their highest level since 2007. Jobless claims failed to deteriorate as expected in the latest weekly read. Data from the manufacturing sector included a disappointing read from the Philly Fed index, although we did see a positive upside surprise from the manufacturing PMI indicator. Focus for this week is on the FOMC on Wednesday. We are likely to see the Fed remain in a wait-and-see mode as it assesses the threats to the global outlook and local employment growth slowdown. Fed fund futures are currently pricing less than one 25 bps hike over the next 12 months and expect the inherently dovish Fed to refrain from any ramping of those expectations at the meeting this week.

Europe

The event calendar in Europe last week was dominated by Thursday’s ECB meeting which created minimal fuss after the ECB left policy unchanged. This result was expected given the minimal time period that has elapsed since the UK’s EU exit vote. The Euro ended the week on its lows on Friday despite the release of Eurozone PMI indicators which remained in expansion territory. All of the French and German regional reads provided positive upside surprises and only a marginal miss in the manufacturing series marred the Eurozone indicators. Other data released earlier in the week included a fall in Eurozone consumer confidence and data from the ECB that showed an easing in credit conditions. The ZEW indicators of economic sentiment disappointed both in Germany and across the Eurozone. This week has started with the German IFO business climate index which eased only slightly from the month prior and points to a relatively muted reaction to the Brexit vote so far. Other items of interest this week include business climate and consumer confidence indicators. Data on employment, inflation and GDP from across the Eurozone all also set to feature.

United Kingdom

The pound finished the week on a soft footing last week after the release of some of the first key indicators that captured the post-‘Brexit’ sentiment. These came in the form of the manufacturing and services PMI numbers which both registered sharp falls from the month prior and added to the case for a rate cut early next month. Key indicators for the week started with numbers on inflation which exceeded expectations and data from the labour market which showed unemployment falling to post GFC lows on the back of a large increase in self employment. Data issued from the retail sector was disappointing after it fell markedly at both the headline and core level. CBI industrial trends orders for July released overnight beat expectations, although registered a notable decline from the month prior whilst the optimism index plunged to -47. Focus will now turn to tomorrow’s first read on Q2 GDP and Thursday’s numbers on nationwide house prices. Expect a quieter week as the market gears up for next Thursday’s BoE monetary policy meeting.

Japan

There was little to report in Japan last week in what was a particularly quiet week for incoming economic data. The main indicator of note came from the manufacturing sector which saw the preliminary July PMI beat expectations. The data revealed international demand falling at the fastest rate in over 3 1/2 years, in part on the back of the recent appreciation of the Yen. Volatility was seen after historical comments from the BOJ’s Kuroda over the issue of helicopter money which is in focus ahead of this Friday’s BOJ monetary policy meeting. Expectations are that the BOJ will take easing action at the meeting which will come in conjunction with increased government spending. The Governor’s comments that ‘helicopter money’ is “forbidden in developed nations” means that helicopter money is off the agenda. Reports yesterday indicate that the stimulus budget may include a government overseas lending fund for projects involving Japanese companies and come as rumours circulate that the stimulus budget may be as large as 30 trillion Yen. Data releases this week include the trade numbers released yesterday which beat expectations as exports fell by less than expected. The data reel on Friday dominates the economic indicator calendar as numbers on inflation, retail sales, household spending and industrial production (amongst others) all come to market.

Canada

A firm greenback and lower overnight oil prices have seen the Canadian dollar trade under pressure this week. Supply concerns and a resurgent USD has helped the price of WTI crude oil fall to 3-month lows in trade overnight. The move comes as investors respond to further signs of a supply glut, especially among refined products which point to reduced demand for oil from refineries over coming weeks. Data released last week was concentrated on Friday. This saw inflation for June marginally exceed expectations (although the core monthly number matched expectations) and retail sales exceed analyst forecasts, although the data only provided temporary relief for the CAD. Wholesale sales released earlier in the week were seen expanding at its fastest rate in over a year on the back of rising demand for food and automobiles. Look for the greenback and oil to dictate local currency sentiment this week prior to Friday’s May GDP report.

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Sam Coxhead is a currency analyst with DirectFX You can contact him here >>

 

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