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Better readings for manufacturing out of Europe and the UK has meant the US$ has lost ground across the board

Currencies
Better readings for manufacturing out of Europe and the UK has meant the US$ has lost ground across the board
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By Sam Coxhead*:

Strong positive sentiment toward the US economy, which has been driving the USD strength recently, has taken a hit with the release of very weak manufacturing data.

This comes on the heels of better readings for manufacturing out of Europe and the UK. As a result the USD has lost ground across the board.

As expected, it seems volatility is picking up across a number of asset classes with equities, bonds and currencies, all putting in decent ranges. This can be expected to continue this week with plenty of significant events scheduled.

We have central bank rate decisions from Australia, UK and Europe, ahead of key US employment data on Friday.

Major Announcements last week:

·  Bank of Canada rate announcement. No change

· US GDP 2.4% vs 2.5% expected

·  Canadian GDP  0.2% vs 0.1% expected

·  Chinese Manufacturing PMI 50.8% vs 49.9% expected

NZD/USD 

The NZD spent most of last week holding above 0.8000 in sideways trade. Late on Friday though, that level gave way on the back of a strong reading in US consumer confidence. The NZD moved sharply down to just below 0.7950. With Monday a holiday here in NZ trade was quiet to start the week. However, last night’s very soft reading on manufacturing in the US has seen a quick reversal fortunes for the NZD. This saw it snap back above 0.8000 to trade just under 0.8100. There is little in the way of domestic data this week so the market will be taking its lead from offshore events. The most notable of these will be US employment data set for release on Friday. That will be the key for near term direction.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.8057 0.8000 0.8200 0.7947 - 0.8136

NZD/AUD (AUD/NZD)

This pair has staged a nice corrective pullback from the high of 0.8461 (low 1.1819) seen on Thursday last week. The driving force behind the move has been some better data out of Australia and China, improving the outlook a little for the AUD. The AUD also materially outperformed the NZD last night, after both currencies rallied against a weaker USD. This pullback in the pair has very quickly reached the initial target and first line of NZD support at 0.8280 (1.2077). This level has provided good buying since early May. Near term direction could well be decided by what the Reserve Bank of Australia have to say at their rate announcement today. Any break below 0.8280 (1.2077) will target the next line of support at 0.8220 (1.2165).

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8283 0.8220 0.8400 0.8264 - 0.8461
AUD / NZD 1.2073 1.1905 1.2165 1.1819 - 1.2101

NZD/GBP (GBP/NZD)

The NZD headed lower against the GBP late last week on the back of an improvement in UK data. That trend continued last night with better than expected figures on UK manufacturing. This has seen the cross rate pullback to trade below support 0.5250 (above 1.9047). It has since recovered to trade just through that level at the time of writing. With little in the way of NZ data this week the focus will again be on UK releases, of which there are plenty. The most notable will be data on the construction and service sectors, ahead of the Bank of England (BOE) monetary policy decision. If this week’s economic figures continue to show improvement, we can look for the pair to move back into the middle of the 0.5000 -0.5250 (1.9047 - 2.000) range that contained it for the second half of 2012.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5255 0.5200 0.5400 0.5214 - 0.5390
GBP / NZD 1.9029 1.8518 1.9230 1.8553 - 1.9179

 NZD/CAD

This pair continues to trade within the broader range that we have seen establish over the last month. The NZD saw periods of intense pressure in the later part of last week, as the upbeat US economic news pushed down all the currencies boasting higher cash rates, like the NZD. The beater than expected Canadian GDP data on Friday, further enhanced the pressure on the NZD. However, this week has started on a different note with some weaker than expected US data, and this saw the NZD surge higher in the overnight market. The Canadian economy provides the entire data focus this week. Building, manufacturing and employment numbers are joined by the first address by new BOC Governor Poloz on Thursday.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8290 0.8250 0.8450 0.8220 - 0.8364

NZD/EURO (EURO/NZD)

The NZ dollars march lower against the EURO over the last two months reached a key level in the last few days of 0.6110 (1.6366). That’s almost exactly the same level that marked a NZD low back on January 30th. We have seen a bounce from there, but it has done little to change the overall picture. So the focus will remain on further NZ dollar downside. Only a move back above 0.6230 (below 1.6051) would change the near term outlook. It’s a big week in terms of Euro-zone data with highlight being the ECB monetary policy decision on Thursday. Before that we get readings on the service sector and GDP. These releases will drive the pair as there is little in the way for domestic data out for NZ.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6164 0.6110 0.6300 0.6110 - 0.6298
EUR / NZD 1.5060 1.5873 1.6366 1.5878 - 1.6366

 NZD/YEN

Last week was a very interesting one for this pair. After some initial NZD demand to start the week, the NZD saw a material drop in demand as the economic news in the US undermined the higher yielding currencies. The theme of increased volatility has continued this week. Overnight the weaker than expected US economic data gave relief to the NZD and it recovered over 100 points from its lows. The pair looks to be establishing a new range having bounced off support at 79.50. This week sees little in the way of material economic data in either economy, so expect the lead to continue to come from the wider market.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 80.35 79.50 81.50 79.62 - 81.82

AUD/USD

The AUD tested toward recent lows on Friday night after strong US consumer confidence, but the weakness was short lived. Better data from China provided the initial support for the AUD, but the biggest move higher in the AUD came on the back of very weak manufacturing data out of the US. This saw the currency up through 0.9700, a level that had capped it for much of last week. The high reached was actually not far short 0.9800. Speculators who have been following the trend of the last month and have sold AUD, will now be thinking about buying it back. In which case, this move higher could have further to run and 0.9700 will now provide support on the downside. The topside sees initial resistance at 0.9840. We can expect lots more action with the RBA rate announcement this afternoon, and key US employment data on Friday.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.9720 0.9700 0.9840 0.9528 - 0.9791

AUD/GBP (GBP/AUD)                            

The strong AUD downtrend of the past two months is still in place, although the market is close to key levels that could change the near term picture. Recent improved data out of Australia and China has driven the recovery in the pair. Calling a change in trend is an unwise move, as it remains a low probability outcome. However, if this pair trades up through 0.6400 (1.5625), the odds of a bigger corrective rally will increase substantially. In the event of such a move the initial target would be 0.6548 (1.5270). Until then the focus will be on further AUD weakness. The Reserve Bank of Australia will most likely dictate near-term trade with the release of their rate decision today.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6346 0.6300 0.6500 0.6293 - 0.6414
GBP / AUD 1.5758 1.5380 1.5870 1.5590 - 1.5890

AUD/EURO (EURO/AUD)

Much like against the GBP, the AUD has been in a strong downtrend against the EUR for much of the last two months. This trend is still the dominant force driving the pair. However, some recent better data out of Australia and China has seen a corrective bounce that is approaching key levels. With the RBA rate decision out this afternoon we can expect some volatility and this will dictate near term direction. If the pair trades up through 0.7480 (below 1.3368), then we will likely see a move to 0.7580 (1.3192) at least. If the pair turns back down then we will most probably see a retest of recent lows around 0.7360 (1.3587).

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7443 0.7100 0.7600 0.7357 - 0.7508
EUR / AUD 1.3435 1.3160 1.3510 1.3319 - 1.3592

AUD/YEN

It was a curious week’s price action for this pair last week. The AUD saw initial demand before coming under some real pressure as the slower Chinese economic numbers, coupled with stronger data in the US. This week has seen a reversal of some of last week’s moves. This comes as the data in the US took a turn, and today’s RBA monetary policy meeting approaches. Expect no change from the RBA, and this pair to have its fate decided by the upcoming US economic data in the short term, along with the first quarter Australian GDP number on Wednesday. Further weak data in the US will see the AUD further its recovery, while the opposite is true if the data recoups its sentiment from last week.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 97.00 96.00 98.00 96.06 - 97.44

AUD/CAD

The volatility has continued throughout the last week for this pair. For most of last week the support at .9950 held. However, the better US data late in the week was joined by better than expected monthly GDP numbers in Canada. This saw the .9950 support finally capitulate and the pair quickly traded below 0.9900. The weakness didn’t last long however as better Chinese manufacturing data coupled with weak US numbers last night provided support. This combination has once again increased demand for the AUD over the CAD and propelled the pair through parity once again. The volatility will continue this week following today’s RBA monetary policy decision. Expect no change at this meeting and the focus will move to Australian GDP Wednesday, and the flurry to Canadian data also due for release.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 1.0005 0.9880 1.0080 0.9886 - 1.0065

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Market commentary:

Strong positive sentiment toward the US economy, which has been driving the USD strength recently, has taken a hit with the release of very weak manufacturing data. This comes on the heels of better readings for manufacturing out of Europe and the UK. As a result the USD has lost ground across the board. As expected, it seem volatility is picking up across a number of asset classes with equities, bonds and currencies, all putting in decent ranges. This can be expected to continue this week with plenty of significant events scheduled. We have central bank rate decisions from Australia, UK and Europe, ahead of key US employment data on Friday.

Australia

It’s been an interesting few days for the Australian dollar, and the rest of the week looks set to offer lots more action. The AUD has suffered badly over the last few weeks at the hands of a strong USD and a softening outlook for the Australian economy. Over the weekend however, stronger data out of China tempered that view, and started a turnaround in demand for the AUD. The recovery in the AUD really gathered steam after soft US manufacturing data last night. The AUD surged up over 0.9750 where it currently trades. The RBA rate decision today will offer further volatility, as will GDP data that follows later in the week. Although the RBA retains an easing bias, it seems unlikely we will get another cut from them today.

New Zealand

This week looks set to be a very quiet one for domestic economic news in New Zealand, with little in the way of scheduled economic data due for release. That being said, the recent pickup in volatility has seen the NZD being anything but quiet. The last few days have seen some good ranges on most NZD pairings, as offshore factors provide the lead. The NZD broke below 0.8000 against the USD at the very end of last week, and was holding below there for much of yesterday. However weak data out of the US overnight has seen a snap higher and the currency now trades just below 0.8100. We can expect more of this volatility going forward as the market tries to asses just when the US Fed with start easing back their programme of asset purchases. Key to that decision will be employment data out in the US on Friday.

United States

The US dollars strong run of the past few weeks looks to have hit a snag. Manufacturing data out last night was surprisingly weak. In fact it was the weakest reading in four years, and the third consecutive fall in the reading. The USD was sharply lower on the back of the result. This was compounded by soft data on the construction sector. We could easily see further weakness as speculators who have bought USD’s to take advantage of the recent run, look to sell and get out of their positions. Although over the last few days there have been further comments from Fed officials suggesting the possibility of tapering quantitative easing purchases over the coming months, this recent data makes it less likely. Key figures on employment to be released at the end of this week will be even more closely watched than normal.

Europe

This week is a big one for the Euro-zone, with the ECB meeting and GDP data just two of the highlights. Throw US employment data into the mix and we have a recipe for all sorts of volatility. Things have started out well for Europe this week, with the release of manufacturing data last night beating expectations across the board. That was in contrast to US manufacturing data which was very disappointing. The result was a surge in the EUR to the best levels seen in month. Where it goes from here is in the hands of the ECB. Another cut from them this week seems unlikely, but we know they are very keen to get credit flowing to small and medium sized enterprises. How they are going to achieve that remains to be seen.

United Kingdom

Data out of the UK seems to be heading back in the right direction. Late last week saw an improvement in consumer confidence, and last night’s reading on the manufacturing sector was much better than expected. This has served to support the GBP across the board as growth forecasts for the second quarter could now get revised higher. The rest of the week sees data on the construction and service sectors ahead of the Bank of England (BOE) monetary policy decision on Thursday. The recovery in the GBP took a pause in the second half of May as data started to disappoint a little. If this recent turn back to stronger economic releases continues over the coming days, the GBP’s upward march will continue.

Japan

Japan had some better than expected data out on capital spending yesterday. which has supported the improving outlook. However, the Bank of Japan (BOJ) continues to look for ways to stimulate their economy further. The latest news is that they are looking to extend the terms of low interest lending to banks. It’s not a game changing move in itself, but it shows that even after all the policy moves they have made so far, the BOJ still looking to do more to get their economy moving. Volatility in stock and bonds hasn’t abated however, and remains a significant risk for the wider economy.

Canada

The end of last week saw Canadian GDP figures that lent support to their currency. Coming in better than expected, the figures for the first quarter have improved the outlook going forward. This comes on the back of a slightly improved tone from the Bank of Canada (BOC) after last week’s rate announcement. This week’s employment data will be closely watched to see if it can confirm a solid outlook for the economy.

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Sam Coxhead is a currency analyst with Direct FX You can contact him here »

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