NZDUSD helped by weaker than expected US CPI data but remains susceptible to any further uptick in risk-aversion; NZDAUD continues to range trade; US-Korea tensions ease; Chinese data disappoints

By Howard Wilcox*:

Military tensions around the geopolitical situation on the Korean peninsula have not escalated over the weekend, as cooler heads call for the rhetoric to be dialled down. Market response continues to be rather low key as it becomes more apparent that the overwhelming belief is that the risk of a military face-off is highly unlikely and the week has opened with a more positive tone that has buoyed U.S. equities and diverted flows away from haven assets such as gold and the Japanese yen. However expect the market to remain on edge and risk-aversion to continue to have market moving potential, as North Korea will hold its annual Liberation Day celebrations in Pyongyang on Tuesday (a great excuse to launch a missile) then on 21st August the joint annual military exercises between South Korea and the US are scheduled to begin (always a contentious point with North Korea).

The main news was the very tepid US CPI data released on Friday night which saw core inflation for July of only 0.1% against an expected 0.2%, which left the annual rate at 1.7% (v’s 1.8% expected). This saw speculation increase that the September rate hike maybe now off the table and there is now only a 40% chance of Fed rate hike in December. The USD softened on the release.

Chinese data released yesterday was a little disappointing, showing July industrial production expanded at slower than forecasted pace and retail sales growth for the month was slower than expected. This may reflect that the recent government restrictions on property, excess borrowing and industrial overcapacity have begun to take effect. The softer data, while although not a major miss, do suggest that Chinese economic growth over the second half of 2017 may not be as robust as forecasted.

The New Zealand dollar, after getting boxed around the ears by the RBNZ last week opens the week marginally higher but given the unsettling talk around intervention last week, upside may be limited especially as we head into the last 4 week countdown to the general election on the 23 September, now a much closer race is expected.

Major Announcements last week:

  • RBNZ leaves the cash rate unchanged
  • UK Manufacturing Production 0.0% as expected
  • US PPI -0.1% vs 0.1% expected
  • US CPI 0.1% vs 0.2% expected
  • NZ Retail sales 2.0%
  • Chinese Industrial Production 6.4% vs 7.1% expected

NZD/USD

The New Zealand dollar has been helped by the weaker US CPI but remains susceptible to any further uptick in risk-aversion. It’s now up slightly at 0.7300 USD with support 0.7250 that should hold in the near term. However, any United States dollar strength will test this level and tonight’s US retail sales data may be key in this respect.

DIRECT FX Current level Support Resistance Last wk range
NZD/USD 0.7306 0.7250 0.7400 0.7252 - 0.7370

NZD/AUD (AUD/NZD)

The New Zealand dollar is higher at 0.9270 and continues to range trade. If AU commodities extend gains this will see the Australian dollar outperform and place pressure back on the NZD. A break of 0.9250 would target 0.9175. We still view any dips toward or below 0.9200 as a good opportunity for those looking to transfer AUD to NZD.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9279 0.9200 0.9350 0.9206 - 0.9337
AUD / NZD 1.0777 1.0695 1.0870 1.0711 - 1.0863

NZD/GBP (GBP/NZD)

The New Zealand dollar has posted some gains against the UK Pound. It is now at 0.5630 with weaker UK data providing NZD support. This week’s UK data dump has potential to set direction. NZD upside is favoured however and we look for 0.5650/70 later this week.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5632 0.5600 0.5755 0.5587 - 0.5663
GBP / NZD 1.7757 1.7377 1.7857 1.7658 - 1.7900

 NZD/CAD

The New Zealand dollar bounce back has pressured the Canadian dollar on this cross. It is now trading at 0.9290 should test 0.9300, which if broken would see 0.9350 targeted.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9298 0.9220 0.9350 0.9225 - 0.9354

NZD/EURO (EURO/NZD)

The New Zealand dollar opens the week marginally firmer on the Euro as risk-off sentiment increases. Now at 0.6194 with immediate resistance at 0.6205 it is EU data dependent currently and could see a move back to the 0.6160/70 level over the next few days.

DIRECT FX Current level Support Resistance Last wk range
NZD/EUR 0.6200 0.6160 0.6210 0.6163 - 0.6263
EUR/NZD 1.6128 1.6103 1.6233 1.5966 - 1.6227

NZD/YEN

The New Zealand dollar has moved back to 80.40 level vs the Japanese Yen on the risk-off tone, this reprieve looks temporary and with better JPY data look for a move back to the 79.50 level initially.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 80.51 78.95 83.00 79.09 - 81.43

AUD/USD

The New Zealand dollar bounce back has pressured the Canadian dollar on this cross. It is now trading at 0.9290 should test 0.9300, which if broken would see 0.9350 targeted.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7871 0.7850 0.7950 0.7839 - 0.7942

AUD/GBP (GBP/AUD) 

The AUD remains in a flat trading range on this cross. Now at 0.6071 moves on this cross have been balanced by the risk aversion of the AUD with weaker UK data for the GBP. It should hold current level but this week's UK data could see move up moves for the AUD. We look for 0.6100 to be tested.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6070 0.6060 0.6150 0.6036 - 0.6099
GBP / AUD 1.6474 1.6611 1.6502 1.6396 - 1.6567

AUD/EURO (EURO/AUD)

The Australian dollar is back at similar levels to last weeks close ...now at 0.6680 but good EUR data could push the AUD back on this cross to 0.6650/56.

DIRECT FX Current level Support Resistance Last wk range
AUD/EUR 0.6679 0.6615 0.6840 0.6658 - 0.6744
EUR/AUD 1.4971 1.4620 1.5117 1.4829 - 1.5021

AUD/YEN

The AUD is back up on this cross at 86.70 as the risk tone reduces, also helping is better Japanese economic data ...should hold at current levels over the next few days support is down at 85.40..

DIRECT FX Current level Support Resistance Last wk range
AUD/YEN 86.72 85.00 86.80 85.46 - 87.77

AUD/CAD

The AUD continues to range trade in a narrower 1.0041-0.9970 range , now at 1.0010 stronger CAD fundamentals are supportive, look for test of 0.9950 later this week.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 1.0016 0.9950 1.0085 0.9975 - 1.0068

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Market commentary:

Military tensions around the geopolitical situation on the Korean peninsula have not escalated over the weekend, as cooler heads call for the rhetoric to be dialled down. Market response continues to be rather low key as it becomes more apparent that the overwhelming belief is that the risk of a military face-off is highly unlikely and the week has opened with a more positive tone that has buoyed U.S. equities and diverted flows away from haven assets such as gold and the Japanese yen. However expect the market to remain on edge and risk-aversion to continue to have market moving potential, as North Korea will hold its annual Liberation Day celebrations in Pyongyang on Tuesday (a great excuse to launch a missile) then on 21st August the joint annual military exercises between South Korea and the US are scheduled to begin (always a contentious point with North Korea).

The main news was the very tepid US CPI data released on Friday night which saw core inflation for July of only 0.1% against an expected 0.2%, which left the annual rate at 1.7% (v’s 1.8% expected). This saw speculation increase that the September rate hike maybe now off the table and there is now only a 40% chance of Fed rate hike in December. The USD softened on the release.

Chinese data released yesterday was a little disappointing, showing July industrial production expanded at slower than forecasted pace and retail sales growth for the month was slower than expected. This may reflect that the recent government restrictions on property, excess borrowing and industrial overcapacity have begun to take effect. The softer data, while although not a major miss, do suggest that Chinese economic growth over the second half of 2017 may not be as robust as forecasted.

The New Zealand dollar, after getting boxed around the ears by the RBNZ last week opens the week marginally higher but given the unsettling talk around intervention last week, upside may be limited especially as we head into the last 4 week countdown to the general election on the 23 September, now a much closer race is expected.

Australia

The Australian dollar, unlike some other risk currencies, has resisted a sharp downward move, only to quietly drift lower this past week on the view that the threat of war is positive for gold and commodity prices which helps AUD. U.S. Treasury yields also fell more aggressively than Australian bond rates and this change in the yield spread helped to limit the slide in AUD/USD.  However, with that in mind, the Australian dollar is still seen as a high beta currency and for that reason it will not be able to escape the pressure of risk aversion. The reduced risk-averse tone as Korean tensions ease over the last few days has seen the AUD hold around the 0.7850/60 mark however upside looks limited, with the main hope Thursday’s Australian employment report, as according to the latest PMI numbers, solid job growth was seen in the manufacturing and service sectors. But prior to that, the RBA minutes will be released later this afternoon and given the central bank's downgrades, the tone isn't expected to be Australian dollar supportive.  With last night’s China data for July industrial production and retail sales growing below expectations the AUD/USD remains around the 0.7850 level at this morning's open, with a rebound to the 0.7900 level looking distant even on the slightly more risk-on market tone. A break of 0.7840 would expose 0.7810 then 0.7785.

New Zealand

The risk aversion created by U.S./North Korea tensions put significant pressure on commodity currencies. The New Zealand dollar has been the worst performer and more losses are likely in the coming week. Last week the RBNZ opened a can of worms over their intervention talk, but we believe that this is extremely unlikely and more reflection of RBNZ frustration at the continuing high NZD level. Immigration remains strong and yesterday’s retail sales data was solid, showing an increase for the June quarter of 2% in sales volumes across a wide sector range. Year to date , to June, spending volumes are up a solid 5.4% but there are doubts whether these will prove sustainable over the rest of the year, as the gains have been driven by low interest rates and the related rise in house prices. However in recent months we have seen a gradual rise in interest rates and house prices have pulled back. There is another Global Dairy auction tonight and prices are expect to show a 3-4% rise , this should be positive for the NZD. Downside pressure remains on the NZD/USD, but 0.7250 should hold over the next few days unless risk-aversion increases on a blowout of Korea tensions.

United States

Stocks gained and volatility receded as the prospect of war between the U.S. and North Korea cooled. Safe havens such as gold, Treasuries and the Japanese yen fell. Oil retreated while U.S. shares were broadly higher, with the S&P 500 Index gaining the most since April and the Dow Jones Industrial Average and Nasdaq Index rose. Fridays US CPI data was disappointing for dollar bulls as hopes for more Fed rate increases were scaled back and odds dropped to 40% that a December rate rise would be forthcoming. Politically there remains very little progress on tax reform or the infrastructure improvement plan advanced by the Trump administration and it is now difficult to see how these two keys policy items will be enacted by the end of the year by an increasingly embattled administration. July retail sales are out tonight and are expected to be much better than the June month. The EUR/USD rose to a high of 1.1850 on Friday after the US inflation number missed estimates, but improved risk sentiment at the beginning of this week sees it easing modestly to 1.1780., it would take at least a break below 1.1688, ( last week’s  low), to see the bearish pressure mounting. However, the pair remains near its recent highs and confined to a limited range, follow-through beyond the 1.1820 is required to confirm additional gains ahead, while on the other hand, dips towards 1.1735, will likely attract buying interest.

Europe

The Euro has been a solid performer over the last week, with no major news being good news for the euro. Of all the major currencies, the euro has been the most resilient. It outperformed the U.S. dollar, sterling and all the commodity currencies. With no major economic reports released, it was riding on the momentum of last month's stronger releases and the ECB's optimism but at times it also struggled under the pressure of risk aversion. Last night’s Eurozone industrial production was slightly below expectations at 2.6% (v’s 2.8%) and later in the week. GDP, trade and inflation numbers are due for release. German data has been relatively healthy but there's been weakness in France so the regional reports could be mixed. Aside from CPI, most of these reports are not expected to have a significant impact on the euro, however the release of the July ECB minutes on Thursday will be keenly watched; any comments on tighter euro area financial conditions - and what this means for the central bank's inflation and growth outlook - could implicitly be seen as a concern over recent market moves. Elsewhere, German 2Q GDP (Tue) should confirm the strong EZ economic recovery. Overall, we think solid US data - and what may be perceived as ECB "jawboning" - should hold EUR/USD gains over this week. As such we continue to look for the euro to outperform the USD, GBP and NZD but weaken against the JPY and possibly the CAD.

United Kingdom

Sterling also drifted lower this past week, but the losses have been limited with 1.2950 holding as support, which is surprising given the unambiguously dovish Bank of England monetary policy statement and Quarterly Inflation report. This week will be an important one for the British pound. Politics need to be considered this week, when the UK is expected to release its position papers on the future of the Irish border, the customs union, along with papers addressing the future relationship between the UK and the EU. We still believe the GBP is headed lower but the immediate direction of sterling now hinges on this week's slew of economic reports. Of all the G7 nations, the U.K. has the busiest data calendar.  Inflation, employment and retail sales numbers are due for release and while inflation and spending is likely to be weaker, labour market conditions appeared to have improved significantly according to the PMI reports. The levels to watch for GBP are 1.3060 (unlikely) on the upside and 1.2930 on the downside.

Japan

Japanese GDP data was positive, showing growth in the world’s third largest economy for Q2, was higher than expected, up 4% against an expected 2.5%. The result was mainly down to strong household spending driving the 6th straight quarter of growth under PM Abe. The good data offset a sell-off in Japanese equity markets that were down 1.1% as the market opened after a Japanese holiday on Friday, catching up to other global markets that had previously sold off on Korean geo-political tensions. The easing of Korean tensions has seen the USD/JPY retake the 110.00 level and is now around 110.15. Immediate resistance is at 110.45 to confirm additional gains into the 110.70 region. Support is at 109.25 then 108.80.

Canada

A solid week of recovery for USD/CAD, which experienced its first down day in 10 trading days on Friday. No major economic reports were released but for most of the week the pair was lifted by short covering, the sell-off in risk currencies and $50 resistance in oil. However fundamentals still support a stronger currency and we think there could be a recovery for the Canadian dollar and a sell-off in USD/CAD later this week. The only piece of Canadian data worth watching will be Canadian CPI on Thursday, with the data expected to be positive for the currency as the price component of latest IVEY PMI report increased sharply over the previous month. If inflation and employment conditions strengthen, Canadian dollar traders will start to argue for another Bank of Canada rate hike this year. Currently opens at 1.2728 after sliding as tensions eased over Korea, immediate resistance is at 1.2750 with support at 1.2700 (physiological)  then at the 12660/70  level.

Daily exchange rates

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