UK PM nails down time frame for Brexit; bearish sentiment toward GBP; NZD trapped in tight range

UK PM nails down time frame for Brexit; bearish sentiment toward GBP; NZD trapped in tight range

By Sam Coxhead*:

Headlines out of the UK at the weekend have sent the GBP to within a whisker of its Brexit vote lows against the greenback in trade this week.

The move comes as UK PM Theresa May indicated that the British government will look to invoke Article 50 of the Lisbon Treaty by March next year, and spoke of a strong stance on immigration in the coming EU talks.

Tightened immigration control looks likely to invoke a strong counter response from the EU in regards to UK access to the single market, and hence it appears that the UK is on course for a ‘hard’ Brexit.

In the US focus will be on Friday’s September Nonfarm payrolls release where economists expect 178k jobs to be created.

Unemployment looks set to remain at 4.9%, although look to the wage reading for important information on inflation and interest rates.

Major Announcements last week:

  • NZ Trade Balance, $-1.265B m/m vs. $-0.766B exp. (Aug.)
  • German  IFO-Business Climate, 109.5 vs. 106.4 exp. (Sep.)
  • US New Home Sales Change, -7.6% m/m vs. -8.6% exp. (Aug.)
  • US Consumer Confidence, 104.1 vs. 99.0 exp. (Sep.)
  • US Durable Goods Orders, 0.0% vs. -1.4% exp. (Aug.)
  • Japanese National Inflation, -0.5% y/y vs. -0.4% prior (Aug.)
  • Japanese Industrial Production, 1.5% m/m. vs. 0.5% exp. (Aug.)
  • NZ ANZ Business Confidence, 27.9 vs. 15.5 prior. (Aug.)
  • Australian Private Sector Credit, 0.4% m/m vs. 0.4% prior (Jul.)
  • UK Q2 GDP, 0.7% q/q vs. 0.6% prior.
  • Canadian GDP, 0.5% m/m vs. 0.3% exp. (Jul.)
  • EU Core Inflation, 0.8% y/y vs. 0.9% exp. (Sep.)

NZD/USD 

The New Zealand dollar continues to remain entrapped in a tight range against the greenback in recent trade. Buyers continue to be seen on dips towards .7220 presently although selling above .7300 has kept rallies in check during recent trade. Focus this week locally is on the next 24 hours with RBNZ Governor Wheel speaking this afternoon and the GDT dairy auction series overnight. We favour buying USD above .7300 at present and expect recent resistance to cap until Friday’s key US employment data.

  Current level Support Resistance Last wk range
NZD / USD 0.7290 0.7200 0.7330 0.7229 - 0.7329

NZD/AUD (AUD/NZD)

The New Zealand dollar is trading largely unchanged in trade against the Australian dollar since our report on Friday. The next 24 hours will be the most important for the next move in the cross this week as get the RBA interest rate statement, a speech from the RBNZ’s Wheeler and the GDT dairy auction. We favour buying AUD on rallies towards the top of the .9450/.9550 (1.0582/1.0471) range based on the recent momentum and respective outlooks for monetary policy, although the coming hours will be interesting. Look for a sustained break of .9450 (1.0582) to open key support in the .9280/.9300 (1.0776/1.0753 resistance) area over time.

  Current level Support Resistance Last wk range
NZD / AUD 0.9491 0.9450 0.9550 0.9449 - 0.9547
AUD / NZD 1.0536 1.0471 1.0582 1.0474 - 1.0584

NZD/GBP (GBP/NZD)

Bearish sentiment towards the GBP (Brexit headline related) has pushed the UK pound to the top of its post UK EU exit vote range against the New Zealand dollar again in recent trade. Momentum remains dictated by events/headlines in the UK presently and ushers in the prospect of additional gains from the NZD should the GBP remain under pressure. UK PMI indicators along with a speech from the RBNZ’s Wheeler (and the latest GDT dairy auction) are the events to watch this week. We are unsure of the next move given the considerable uncertainty around the timing/nature of headlines coming out on the UK EU exit issue.

  Current level Support Resistance Last wk range
NZD / GBP 0.5670 0.5560 0.5700 0.5562 - 0.5674
GBP / NZD 1.7637 1.7545 1.7985 1.7652 - 1.7980

 NZD/CAD

The New Zealand dollar has moved marginally higher in trade against the Canadian dollar since Friday. There has been little to go on for this cross in recent hours and the small rally appears to represent a stabilization after last week’s strong oil inspired CAD gains. Events to watch this week start in NZ with a speech from RBNZ Governor Wheeler this afternoon and GDT dairy auction tonight. Other focus will be on any further oil headlines and Canadian employment numbers on Friday.

  Current level Support Resistance Last wk range
NZD / CAD 0.9563 0.9450 0.9690 0.9492 - 0.9684

NZD/EURO (EURO/NZD)

The New Zealand dollar has moved higher in recent trade against the Euro, although the moves have been muted since our report on Friday. In focus over coming hours will be RBNZ Governor Wheeler’s speech this afternoon and the next in the GDT dairy auction series overnight. European PMI’s will also feature this week although for now we favour mixed trading this week within recent ranges, although the current momentum may see the cross move through first resistance with .6550 (1.5267) and .6595 (1.5163) being the targets above.

  Current level Support Resistance Last wk range
NZD / EUR 0.6505 0.6425 0.6520 0.6449 - 0.6519
EUR / NZD 1.5374 1.5337 1.5564 1.5340 - 1.5507

 NZD/YEN

The New Zealand dollar has lifted in trade against the Japanese Yen since our report on Friday. There has been little to go on in recent trade for either the NZD or JPY so the recent gains reflect the relative support for the commodity currencies and easing in Yen against the greenback. In focus this week for the cross will be RBNZ Governor Wheeler’s speech this afternoon and the GDT dairy auction overnight. Whilst favouring the JPY overall this move looks likely to extend towards 75.00 given the recent momentum.

  Current level Support Resistance Last wk range
NZD / YEN 74.32 72.20 75.00 72.73 - 74.14

AUD/USD

The Australian dollar has rallied against the greenback in trade since Friday. There have been few drivers since that commentary and the move reflects the decent support that has been seen for the commodity currencies so far this week. This afternoon has the potential to be a busy one for this pair with last week highs (.7710) through to .7735 looking to offer decent resistance. Look to the RBA statement for critical direction whilst later in the week it will be the turn of US economic indicators to drive the next move.

  Current level Support Resistance Last wk range
AUD / USD 0.7681 0.7590 0.7710 0.7591 - 0.7710

AUD/GBP (GBP/AUD)                            

The Australian dollar has again shifted higher in recent trade against the UK pound. The move reflects the poor performance of the GBP in the wake of headlines from the UK PM at the weekend which indicated a strong stance on immigration and a March 2017 timetable for the formal notification of the UK EU exit. Immediate focus for the cross is today’s RBA cash rate statement, whilst later in the week features further UK PMI indicators. The messy nature of Brexit headlines makes calling the next move very difficult, although for now the momentum is clearly once again for the AUD higher.

  Current level Support Resistance Last wk range
AUD / GBP 0.5974 0.5850 0.6010 0.5859 - 0.5984
GBP / AUD 1.6740 1.6640 1.7095 1.6712 - 1.7068

 AUD/EURO (EURO/AUD)

The Australian dollar has lifted in trade against the Euro since Friday’s commentary. The move reflects the outperformance of the AUD which has rallied to near last week’s highs against the greenback in recent trade. The move reflects the sentiment shown towards the EUR (Brexit, banking headline weakened) versus that shown towards the commodity currencies. Look to the RBA statement this afternoon for immediate direction with particular focus on the inflation forecast based ‘implicit’ easing bias. For now the momentum points towards further AUD gains.

  Current level Support Resistance Last wk range
AUD / EUR 0.6853 0.6765 0.6880 0.6771 - 0.6868
EUR / AUD 1.4592 1.4535 1.4782 1.4560 - 1.4769

 AUD/YEN

The Australian dollar has moved higher against the Japanese Yen since our commentary on Friday. The move comes in the void of any fresh critical data and reflects the relative support for the commodity currencies and softer Yen versus the greenback. In focus this week is this afternoon’s RBA statement which should govern over any Australian data. Further focus will be on any global equity market volatility and key US data at the end of the week. Momentum for now points to further AUD gains for the time being, although the big picture trend still favours the JPY overall.

  Current level Support Resistance Last wk range
AUD / YEN 78.31 76.00 79.20 76.22 - 78.17
 
AUD/CAD

The Australian dollar has risen moderately against the Canadian dollar in recent trade. The retracement higher comes on the back of the strong bounce seen in the AUD/USD exchange rate out of the .7590/.7600 area during last week’s correction. Today’s RBA cash rate statement has the potential to be important for the cross, whilst in Canada it will be Friday’s employment data that looks most important on the scheduled data front. We favour buying CAD towards last week’s high in the short term, although the tone from today’s RBA statement will be interesting.

  Current level Support Resistance Last wk range
AUD / CAD 1.0075 1.0000 1.0170 1.0005 - 1.0157

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Market Commentary:

Headlines out of the UK at the weekend have sent the GBP to within a whisker of its Brexit vote lows against the greenback in trade this week. The move comes as UK PM Theresa May indicated that the British government will look to invoke Article 50 of the Lisbon Treaty by March next year, and spoke of a strong stance on immigration in the coming EU talks. Tightened immigration control looks likely to invoke a strong counter response from the EU in regards to UK access to the single market, and hence it appears that the UK is on course for a ‘hard’ Brexit. In the US focus will be on Friday’s September Nonfarm payrolls release where economists expect 178k jobs to be created. Unemployment looks set to remain at 4.9%, although look to the wage reading for important information on inflation and interest rates.

Australia

Last week was a particularly quiet week for domestic events and this saw the AUD drift for much of the week. Some gains against the USD were seen after the OPEC oil production agreement, although they proved fleeting. Data releases of note came on Friday with HIA New Homes Sales for September and private sector credit data for July. New Home Sales rebounded strongly from the previous month’s falls largely thanks to the strong sales of ‘multi-unit’ housing. The credit data showed a further deceleration in part thanks to a continued slowdown in credit lent to property investors. Job vacancies which rose solidly in the three months to August are consistent with the recent message of solid jobs growth. In focus this week is today’s building approvals numbers and RBA interest rate statement (expect no change). Data from the retail sector comes tomorrow prior to trade data for August on Thursday.

New Zealand

The New Zealand dollar has continued to remain range-bound in recent trade against the greenback ahead of what looks to be a more interesting week this week, with key employment data due in the US on Friday. Last week locally saw the release of August trade numbers which fell short of expectations ($500M worse than expected) and new dwelling building consents which fell 1% m/m, although home permits were more reflective of the current housing shortage, rising by 4.4%. ANZ business confidence numbers rose strongly in the latest month to 27.9, the jump was more than expected and was led by confidence in the service sector. NZIER business confidence data this morning showed a net 26% of businesses expecting conditions to improve, the strongest reading in over three years. In focus locally for the remainder of this week will be a speech by current RBNZ Governor Wheeler this afternoon and the overnight GDT dairy auction, where current futures pricing points to a flat/small drop.

United States

This week has started positively for the dollar after the release of a better than expected ISM manufacturing report overnight. Particular strength was noted in new orders, and to a lesser extent production. Key data last week included a smaller than expected fall in new home sales and consumer confidence that reached nine year highs. Jobless claims were seen remaining low and durable goods orders were stronger than expected. Home prices continued to experience modest price growth and the latest good trade deficit was smaller than expected. The University of Michigan consumer confidence read come in above expectations whilst 79% of respondents to the Chicago PMI noted a negligible impact on business from the presidential election so far. Various Fed speakers were on the Fed circuit although theirs and Fed Chair Yellen’s comments offered little new, namely a majority that calls for a gradual increase in rates given the current environment. This week will be busy for data, particularly so towards the end of the week with key Non-farm payrolls employment due on Friday.

Europe

It was a quiet week for the Euro last week which saw volatility suffer due to a lack of critical incoming economic data. Data started with the German IFO which saw business conditions rise to its highest level since May 2014. Overall economic confidence across the euro area rose to an eight month high, whilst German inflation at 0.5% y/y was at 16-month highs. Unemployment was seen edging higher across the euro-zone (10.1%) and core inflation remained flat at 0.8% y/y, well below the near 2% ECB target. Indicators this week have started with the German and euro area manufacturing PMI reads which both remained unchanged in expansion territory. Key regional prints were seen outperforming their consensus target although remain at lower levels overall. Focus for later in the week will be on the composite and services PMI reads, regional industrial production numbers and German factory order data.

United Kingdom

The Sterling was in focus in trade overnight on the back headlines from PM Theresa May (out over the weekend) that the government would look to trigger Article 50 by the end of March next year. May’s call for preparatory talks on the Brexit before the formal resignation date was rejected by the European Commission. May suggested that there would be no deal on immigration to keep the UK in the European single market. Data released last week was second tier and included BBA mortgage approvals which printed near the consensus and further mortgage approvals data which showed lender approvals near two-year lows. Growth for the second quarter was revised up slightly from its previous estimate and marked the 14th consecutive quarter of expansion. This week has started with the September Manufacturing PMI which came in well above expectations (the highest since mid-2014).  This ranks higher than its corresponding European or US reads, although the data was overlooked in favour of the prevailing bearish Brexit sentiment. Focus for the remainder of the week will be on the remaining PMI reads and industrial/manufacturing production numbers on Friday.

Japan

Key data out of Japan last week included a raft of numbers that were released on Friday. The data was led by the latest inflation numbers which saw the key national ex-food & energy release print in line with its weak estimate at +0.2% y/y, well below the 2% BoJ target. The preliminary reading of industrial production for August came in higher than expectations at 4.6%, above that seen in the same month last year. Other releases included household spending and numbers from the retail sector which disappointed, whilst the unemployment rate which edged higher to 3.1% was also worse than expected (exp. flat at 3.0%). Yesterday’s Tankan Manufacturing index indicated that large manufacturers were more downbeat than expected about their business conditions over the last quarter. Confidence amongst these manufacturers was flat in Q3 whilst sentiment amongst the service sector respondents was seen falling to its lowest level in nearly two years. Look for a quiet week this week that will be dominated by US data and risk/safety flow in the Yen (should global equities decline sharply).

Canada

Trade last week was defined by positive developments in the energy markets which saw the CAD gain after the OPEC producers surprisingly agreed to limit production at their meeting in Algeria. Forecasts of another year of depressed prices in 2017 and excess supply is said to have swayed Saudi Arabia towards reaching for a deal in light of its huge budget deficits currently being experienced. Canadian data releases came on Friday and included a better than expected rise in GDP for July. The 0.5% gain came on the back of last month’s similar sized increase and marked the best two months of growth since mid 2011, although much of the jump is likely related to the resumption of oil production after the Alberta wildfires. Industrial product prices fell in August in a result that was worse than expectations due to declines in pricing for meat, dairy and fish. Data this week included the overnight RBC Manufacturing PMI indicator which came in under expectations and trade data on Wednesday. Building permits feature on Thursday although the main release of the week will be Friday’s employment numbers (and Ivey PMI).

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

 

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