The continued shutdown of the US government has seen the US dollar remain under pressure; NZD continues to hold above 0.7300 and is now building a more solid base; NZD opens the week higher against the AUD

The continued shutdown of the US government has seen the US dollar remain under pressure; NZD continues to hold above 0.7300 and is now building a more solid base; NZD opens the week higher against the AUD

By Howard Wilcox*:

The main news of the week is the continued shutdown of the US government which has seen the US dollar remain under pressure. Funding for the federal agencies ran out on Saturday with Trump and Republican lawmakers locked in a standoff with Democrats. As the shutdown entered its second day, there appeared to be no clear path for a quick end to the crisis, however at the last minute a stop-gap deal was cobbled together that would fund the government through Feb. 8. Advancing the spending bill clears the way to reopen the government after a three-day shutdown, although that could merely delay the fight over immigration, which has been the major point of contention, for several weeks. In an update to its forecasts presented to the World Economic Forum at Davos in Switzerland, the International Monetary Fund (IMF) has raised global economic growth to 3.9% in 2018 and 2019, up from the 3.7% per year it forecast last October. It lifted its forecasts for US growth from 2.3 % to 2.7% in 2018 and from 1.9 to 2.5 per cent in 2019. It commented that the short-term growth boost brought about by the US tax cuts will have a positive, albeit short-lived, output spill over for US trading partners. However, it also pointed out that it was likely to widen the US current account deficit, strengthen the US dollar, and affect international investment flows. Later this week there will be an ECB policy meeting and accompanying press statements(Thurs) and of Bank of Japan policy meeting and interest rate decision later today. These are expected to reaffirm the course of winding back monetary stimulus.

Major Announcements last week:

  • Bank of Canada hikes interest rates 0.25% as expected
  • Australian Employment Change 34.7k vs 13.2k expected
  • Australian Unemployment Rate 5.5% vs 5.4% expected
  • Chinese GDP 6.8% vs 6.7% expected
  • US Building Permits 1.30m vs 1.29m expected
  • UK Retail Sales -1.5% vs -0.8% expected

NZD/USD

The New Zealand dollar (NZD) continues to hold above 0.7300 and is now building a more solid base with the weaker US tone on the US government shutdown helping. We remain sceptical that fundamentals will remain supportive, but at the moment the trend for the NZD/USD is up. A break over 0.7340 would target 0.7355 but any snap-back in the USD as next month's Fed rate decision approaches will knock the NZD. Current levels look attractive for sellers of NZD.

DIRECT FX Current level Support Resistance Last wk range
NZD/USD 0.7317 0.7150 0.7340 0.7236 - 0.7331

NZD/AUD (AUD/NZD)

The NZD opens the week higher against the Australian dollar (AUD), after closing on Friday down at 0.9083, it is now up at 0.9135 but still well below the months high at 0.9215. Immediate resistance is at 0.9147 but this may not be tested until the NZ CPI data is released tomorrow. Given the continued commodity strength, the AUD is favoured on this cross.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9132 0.9090 0.9230 0.9089 - 0.9172
AUD / NZD 1.0950 1.0834 1.1001 1.0903 - 1.1002

NZD/GBP (GBP/NZD)

The New Zealand dollar (NZD) has slipped a little on this cross, currently around 0.5240 as more positive news for the UK pound emerges on potential for a “soft” Brexit and the chance of a favourable trade agreement between the UK and EU. With the UK Pound (GBP) approaching the 1.40 level on the USD this had continued pressure on this cross as NZD/USD gains have been slower. Next support level is 0.5230 then 0.5205 but unlikely this last level will be seen ahead of NZ CPI tomorrow.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5231 0.5240 0.5440 0.5229 - 0.5293
GBP / NZD 1.9117 1.8382 1.9084 1.8891 1.9123

 NZD/CAD

The New Zealand dollar (NZD) opens the week against the CAD higher than the 0.9090 close last Friday at 0.9112, as the CAD is hit by rumours around the NAFTA negotiations. Solid commodity prices and supportive economic data have driven the CAD over the last few weeks but as the NAFTA deadline approaches, markets are getting twitchy thus eroding CAD value.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9111 0.8950 0.9150 0.9009 - 0.9123

NZD/EURO (EURO/NZD)

The New Zealand dollar (NZD) has weakened against the Euro (EUR), now down at 0.5977 as expectations increase for more hawkish tone from the ECB on Thursday, immediate support is at 0.5950 a break of which would target 0.5930. Any finite outcome for the German government would further strengthen the EUR but this is unlikely over the next few days. Thursdays ECB meeting will be the key, expect current ranges to hold ahead of this event.

DIRECT FX Current level Support Resistance Last wk range
NZD/EUR 0.5967 0.5880 0.6080 0.5905 - 0.5981
EUR/NZD 1.6758 1.6447 1.7006 1.6720 - 1.6935

NZD/YEN

After trading down to 80.45 yesterday, the New Zealand dollar (NZD) is now up at 81.26 this morning, look for current levels to hold ahead of this afternoon's Bank of Japan’s (BoJ) statement, but given they are expected to remain unchanged more weight will be given to NZ CPI tomorrow. We expect the 81.00- 81.50 range to hold over the next day or so.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.18 79.20 81.50 80.16 - 81.29

AUD/USD

The Australian dollar (AUD) continues to hold above 0.8000, well supported by Australian economic data, particularly the jobs report that surpassed expectations. Also helping the Aussie are increased risk sentiment, higher commodity prices and the weaker USD tone. It is now building a solid base for a move on the 0.8045 level which if broken would target the September high of 0.8145.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.8008 0.7850 0.8070 0.7938 - 0.8039

AUD/GBP (GBP/AUD) 

The AUD has weakened on this cross as the UK Pound (GBP) has garnered strength from the more positive news around the “soft” Brexit potential along with the chance of a trade deal with the EU. However, this remains to be a “done deal” and there will be many twists in the tail before this is likely to occur. This cross is now around 0.5730 with immediate support at 0.5720 then 0.5700. A move by the GBP over 1.40 against the USD would pressure this cross.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5726 0.5700 0.5870 0.5725 - 0.5787
GBP / AUD 1.7463 1.7035 1.7543 1.7281 - 1.7468

AUD/EURO (EURO/AUD)

Although relatively flat on this cross the AUD is marginally stronger at 0.6538, Aussie data remains supportive, but news on this cross is all around the ECB meeting on Thursday. Look for current levels to hold ahead of Thursday. German politics may also be factor later in the week.

DIRECT FX Current level Support Resistance Last wk range
AUD/EUR 0.6531 0.6386 0.6600 0.6483 - 0.6550
EUR/AUD 1.5311 1.5151 1.5657 1.5268 - 1.5425

AUD/YEN

The AUD is now around 88.87 on this cross after a blip down to 88.36 yesterday, the AUD is well supported on this cross and with no upsets expected from the BoJ this afternoon, we still favour a push back over 89.00 over the next few days.

DIRECT FX Current level Support Resistance Last wk range
AUD/YEN 88.85 86.70 89.70 87.72 - 89.01

AUD/CAD

The CAD has slipped a little on this cross as NAFTA concerns have heightened, now at 0.9970 both currencies enjoy support from solid commodity prices...given the potential for a NAFTA surprise the AUD is favoured on this cross….look for a move back over 1.000 over the next few days.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9972 0.9730 0.9925 0.9859 - 1.0002

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Market commentary:

The main news of the week is the continued shutdown of the US government which has seen the US dollar remain under pressure. Funding for the federal agencies ran out on Saturday with Trump and Republican lawmakers locked in a standoff with Democrats. As the shutdown entered its second day, there appeared to be no clear path for a quick end to the crisis, however at the last minute a stop-gap deal was cobbled together that would fund the government through Feb. 8. Advancing the spending bill clears the way to reopen the government after a three-day shutdown, although that could merely delay the fight over immigration, which has been the major point of contention, for several weeks. In an update to its forecasts presented to the World Economic Forum at Davos in Switzerland, the International Monetary Fund (IMF) has raised global economic growth to 3.9% in 2018 and 2019, up from the 3.7% per year it forecast last October. It lifted its forecasts for US growth from 2.3 % to 2.7% in 2018 and from 1.9 to 2.5 per cent in 2019. It commented that the short-term growth boost brought about by the US tax cuts will have a positive, albeit short-lived, output spill over for US trading partners. However, it also pointed out that it was likely to widen the US current account deficit, strengthen the US dollar, and affect international investment flows. Later this week there will be an ECB policy meeting and accompanying press statements(Thurs) and of Bank of Japan policy meeting and interest rate decision later today. These are expected to reaffirm the course of winding back monetary stimulus.

Australia

The Australian dollar held onto solid gains as the week opened buoyed by last week’s good domestic data. Although Chinese figures were mixed, growth in the world's second-largest economy continues to show signs of steady growth which help underpin commodity prices and thus AUD strength. The Australian calendar has nothing to offer this week and is a short week as the Australian Day holiday falls on Friday. Australian commodities continue to power ahead including copper, which is the country’s 2nd biggest export and has now risen over 1 % in the last month. The Australian share market jumped more than 1% overnight which was also an additional factor supporting the Australian dollar as it held over the 0.8000 level against its US counterpart.

New Zealand

Very light on the data front for New Zealand this week with only Q4 CPI data tomorrow being of note. Market consensus is that the YOY figure will come in around 1.9% in line with the previous release. Last week’s Consumer Confidence figures showed an interesting picture, with confidence in some regions showing sharp drops with weaker agricultural conditions and unease about government policy across a number of fronts being key drivers. Although we believe it is too early to be alarmed about government policy given little of it has yet to be properly formulated and overall, any changes are unlikely to be radical. The NZD is holding above the 0.7300 level against the US, but we view it as being susceptible to any snap-back in US strength which is likely as the next Fed rate hike approaches next month.

United States

With the government spending stalemate broken and a shaky agreement on the table to kick the can of government funding down the road to the 8th February, US equity markets bounced back overnight with the S&P500 extending gains to another record.  Investors are also awaiting about 80 earnings reports for corporates in the benchmark index this week, including from Netflix Inc. and Proctor & Gamble Co. President Trump is scheduled to give a speech at the World economic forum at Davos on Friday, but this is expected to have little effect on either the equity or currency markets, although he is expected to make comments around the recent US tax cut package and perhaps give some indication on future US direction on trade. Later in the week there are data releases for housing starts, jobless claims and on Friday Q4 GDP figures.  The week started in slow motion, with the USD under pressure against all of its major rivals amid the political headlines around the government shutdown over the weekend. The EUR/USD gapped higher at the opening but failed to breach the 1.2280 resistance area, retreating to consolidate around the 1.2240/50 level. We expect this level to hold over the next few days awaiting further US data releases to re-establish clear direction.

Europe

Talks continue around the formation of a new German government, with a new effort made by the German Social Democrats (SPD) on Sunday to finally end political deadlock, they have voted to proceed with coalition negotiations with Chancellor Merkel’s CDU and talks are scheduled to begin tonight. This Thursday’s ECB meeting is likely to be interesting, as expectations of hawkish language in the ECB’s policy statement combined with mixed sentiment seen on European equity markets keep the sentiment buoyed around the common currency. The growth outlook has improved in recent months for the Eurozone region with the ECB has repeatedly increasing its growth forecast for the Eurozone. The positive outlook for the Eurozone has also been confirmed by the World Economic Outlook from the International Monetary Fund that has increased the GDP growth estimate for 2018 and 2019 by 0.3% upwards to 2.1% and 2.0% respectively. The improved growth forecast is a justification for the previous ECB decision to halve its bond-buying program, but any aggressive pullback on monetary stimulus may be away off. At Thursday press briefing we look for ECB President Mario Draghi to talk the Euro down. A strong Euro is a detrimental element to ECB’s main inflation target. While the ECB sees better growth prospects, it still sees signs of the inflation very much subdued and with Euro’s appreciation chances of importing some of that inflation are diminishing.  Look for the EUR/USD values to consolidate at current levels ahead of Thursday’s meeting.

United Kingdom

UK retail sales data showed that retailers suffered the weakest Christmas shopping growth for five years as higher prices hit family spending. December’s retail sales rose by 1.4% by volume compared with the same month of 2016, the slowest growth since 2012. The UK pound (GBP) has crept higher as it heads towards the 1.40 level against the USD, it is now sitting comfortably above the $1.39 mark against the dollar and is on course to rack up a fifth consecutive weekly rise, its best weekly winning streak in just under three years. Brexit optimism is gradually creeping higher, with the likelihood of a more convenient trade deal with the EU increasing and lifting sterling against a basket of the leading currencies, but it has been given more than a helping hand by the US dollar slipping on investors becoming nervous, over sluggish inflation. Earlier comments from French President Macron, also underpinned the Sterling, by saying that the UK should get a better deal than a plain agreement between two independent countries after Brexit, although acknowledging that it could not have the same benefits as a Union member. The UK calendar will offer some minor figures tonight, with more relevant news on employment and GDP later in the week.

Japan

Later today there is the Bank of Japan (BoJ) monetary policy meeting. The central bank is largely expected to maintain its policy unchanged, despite having recently reduced its bond-buying and continued signs of economic strength. As usual, markets will be looking for hints on future moves on monetary policy. Governor Kuroda will offer a press conference after the event although as usual, there's no certain time for the event. Our expectations are that the current status quo on monetary policy will be maintained. The USD/JPY continues to trade around the 110.90/111.00 level, last week’s high of 111.47 is immediate resistance a break of which would target 112.00, support is back at 110.60. The BoJ decision is unlikely to provide any clearer direction.

Canada

NAFTA negotiations are still to the fore, as negotiations continue to drag on, there are some rumours that President Trump may use his address at Davos to announce a US withdrawal from NAFTA, which is creating nervousness around USD/CAD trading. Immediate support for the USD/CAD is near the 1.2430 level, below which the pair is likely to accelerate the fall back towards the 1.2400 handle before eventually dropping to test the 1.2360-55 strong support. Upside immediate resistance is around 1.2500 which if broken would test 1.2545. A break down in the NAFTA agreement would likely see a sharp move to 1.2585 and above.

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