Australasian currencies overcooked; plenty of negative news already priced into NZD, Australian data could set tone for NZD this week

By Ian Dobbs*:

It seems the Australasian currencies may have become a little overcooked on the downside early last week, and as such we are seeing something of a recovery in both the NZD and the AUD.

The Australian dollar led the way last Tuesday after a very neutral RBA rate statement, but later in the week the NZD started to play some catch up.

A lot of negativity has been priced into the New Zealand dollar recently and the failure to sell off further after Fonterra’s downward revision to its forecasted pay-out on Thursday was a signal that it may be overdone, at least in the short term.

There is plenty of potential for the recovery in both currencies to extend a bit further this week, especially if commodity prices continue to bounce from the lows we have seen in the past 48 hours.

Major Announcements last week:

  • Dairy prices fall 9.3% at the latest auction
  • NZ Employment Change +0.3% vs +0.5% expected
  • UK Services PMI 57.4 vs 58.1 expected
  • US ISM Non-manufacturing PMI 60.3 vs 56.3 expected
  • Australian Employment Change 38.5k vs 10.2k expected
  • UK Manufacturing Production 0.2% as expected
  • Bank of England votes 8 to 1 to leave interest rates on hold
  • Canadian Building Permits 14.8% vs 5.1% expected
  • Canadian Employment Change 6.6k vs 5.3k expected
  • US Non-farm Payrolls Change 215k vs 222k expected
  • Canadian IVEY PMI 52.9 vs 51.8 expected

NZD/USD

The New Zealand dollar has managed to stage something of a recovery against the USD after testing support around 0.6500 on Thursday last week. The lack of follow through selling, especially in the wake of Fonterra’s downward revision to its forecasted pay-out, was a signal that enough negativity was already priced into the local currency. The US dollar then failed to gain any real support from Friday night non-farm payrolls data even though the result was close to expectation, and reasonably solid, at +215k. The NZD traded as high as 0.6635 in the hours after that release, but has since moderated a touch. Taking a look at the bigger picture, with support around 0.6500 looking pretty solid at this stage the local currency could try to extend gains toward 0.6700 over the coming week, especially if commodities continue the recovery we have seen over the past 24 hours. Ultimately though, any period of NZD strength will eventually run into good selling interest. I would expect the currency to struggle between 0.6700 and 0.6750.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6625 0.6500 0.6700 0.6494 – 0.6635

NZD/AUD (AUD/NZD)

This pair has staged a small recovery from 0.8850 support (1.1300 resistance) that was tested on Thursday last week. It’s fair to say that there has been very little real direction in recent days with a tight range above 0.8900 developing (below 1.1235). I suspect we could easily see a drift back up toward 0.9000 (1.1110) over the course of this week. I continue to see 0.8850 (1.1300) limiting the NZ dollar downside for now. There was little in the way of follow through selling in the NZD late last week and this is an indication that much negativity is already priced into the NZD. With only retail sales data set for release from NZ on Friday, the market is going to struggle to find fresh reasons to sell the NZD over the next few days. The real driver of the pair may come from Australian data in the form of business confidence, consumer sentiment, and the wage price index all set for release in the next 48 hours.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8917 0.8850 0.9050 0.8839 – 0.9034
AUD / NZD 1.1215 1.1050 1.1300 1.1069 – 1.1314

NZD/GBP (GBP/NZD)

After testing recent lows, and key NZD support, around 0.4150 (resistance 2.4100) late last week, this pair put in a significant reversal. A lack of follow through selling the NZD played a part with the local currency making moderate gains on most cross since Thursday. But broad based UK Pound weakness has also been a driver. A more ‘dovish’ tone from the Bank of England, and its Governor Mark Carney, has pressured the GBP with expectations for an interest rate hike getting pushed deeper into the first half of 2016 as a result. There is little from NZ over the coming days with just retail sales data set for release on Friday. As such the market may struggle to find fresh reasons to sell the local currency and this may well see the pair continue to drift higher. Minor support around 0.4200 (resistance 2.3800) may well contain the NZD downside as the pair looks toward 0.4300 (2.3250) or potentially further. Wednesday’s release of UK employment data will be a focus.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4247 0.4150 0.4320 0.4164 – 0.4282
GBP / NZD 2.3546 2.3148 2.4096 2.3355 – 2.4017

 NZD/CAD

We have seen some good swings in this pair over recent days, but ultimately it has remained within the broad range of 0.8500 to 0.8700 that has contained it for the past three weeks. In fact it’s fair to say that over that time minor support around 0.8560 has, for the most part, limited the downside. The New Zealand dollar has certainly had plenty of negativity already priced into it and this was evident in the lack of follow through selling late last week. We only have retail sales data out of NZ on Friday so the market may struggle to find fresh reasons to sell the NZD ahead of that. The Canadian dollar has also been struggling recently on the back of soft oil prices, although a bounce in the price of oil in the past 24 hours has lent some support to the CAD. At this stage I favour support at 0.8560 continuing to limit the downside and we could easily see a move back up toward 0.8700. Gains over 0.8700 are still probably a step too far however, so further range trading is expected in the near term.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8615 0.8500 0.8700 0.8566 – 0.8709

NZD/EURO (EURO/NZD)

This pair has spent much of the past month ranging sideways around 0.6000(1.6665). Dips toward support at 0.5950 (up to 1.6800) continue to find NZ dollar buyers and I wouldn’t expect that to change over the coming week. The New Zealand dollar has seen a lot of negativity priced into it recently, yet it hasn’t been able to break to fresh lows on many crosses. This suggests downside momentum is waning and unless the market gets a fresh reason to sell the local currency, a drift higher could develop. The only data from NZ this week comes in the form of retail sales on Friday. From Europe this week we get the ZEW economic sentiment index, GDP data, and the final reading of inflation. Look for a range of 0.5950 to 0.6100 (1.6395 – 1.6665) to contain trade in the coming days, which my short term preference being buying NZD into dips at this stage.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6007 0.5950 0.6100 0.5959 – 0.6054
EUR / NZD 1.6647 1.6393 1.6807 1.6517 – 1.6782

 NZD/YEN

The now well defined range of 81.00 to 83.00 continues to dominate trading in this pair. Pressure on the New Zealand dollar in the first half of last week saw the lower end of that range tested, but there was little in the way of follow through selling. As such the local currency staged something of a recovery which has taken it to 82.50 so far. NZ retail sales data is out on Friday, but until then the market may struggle to find fresh reasons to sell the local currency. As such a drift toward 83.00 could well eventuate. From Japan we had the BOJ meeting on Friday but it held no surprises for the market and the impact on the Yen was negligible. Over the coming week we have producer prices, tertiary industry activity and core machinery orders data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.40 81.00 83.00 81.10 – 82.50

AUD/USD

After surging toward 0.7425 this time last Tuesday, in the wake of the RBA’s rate statement, the Australian dollar has spent much of the past week consolidating those gains. A range of 0.7320 to 0.7420 has developed with the top of that range looking more at risk than the bottom. The USD  failed to gain any real support from Friday night non-farm payrolls data even though the result was close to expectation, and reasonably solid, at +215k. In the past 24 hours a bounce in commodity prices has also helped to support the AUD, and it this were to extend the local currency could eye a move toward 0.7500. Business confidence, consumer sentiment and wage price data from Australia will draw attention over the coming days. While from the US we get unit labour costs, retail sales, producer prices and consumer sentiment data.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7426 0.7320 0.7500 0.7264 – 0.7428

AUD/GBP (GBP/AUD)                            

The Australian dollar is in the throes of a significant corrective bounce against the UK Pound. The move started last Tuesday with Australian dollar strength in the wake of the RBA’s rate statement, then was driven higher by UK Pound weakness after the Bank of England’s releases on Thursday. Minor support now comes in around 0.4720 (resistance 2.1186) and as long as the pair holds above there another AUD leg higher could easily unfold. We do have Australian data in the form of business confidence, consumer sentiment and the wage price index to digest in the coming days and these could well dictate near term direction. In the UK this week the focus will be on Wednesday’s employment numbers. Commodity prices have staged a small recovery so in the early stages of this week and if that continues then we could see further AUD upside.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4764 0.4720 0.4850 0.4662 – 0.4790
GBP / AUD 2.0991 2.0619 2.1186 2.0876 – 2.1451

AUD/EURO (EURO/AUD)

After seeing the AUD jumping higher on Tuesday last week in the wake of the RBA rate statement, this pair has since consolidated those gains trading around the 0.6740 (1.4837) level. I would expect to see another test toward, and potentially over, 0.6800 (under 1.4705) develop over the coming days. Minor support now seen around 0.6700 (resistance 1.4925) is key. As long as the market holds above there the risks are skewed toward further AUD strength. Commodity prices have also staged a small recovery in the early stages of this week and if that continues it will also underwrite further AUD upside. From Australia this week we get business confidence, consumer sentiment, the wage price index and inflation expectations. While from Europe we have the ZEW economic sentiment index, GDP data, and the final reading of inflation.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6734 0.6600 0.6800 0.6637 – 0.6788
EUR / AUD 1.4850 1.4706 1.5152 1.4733 – 1.5066

AUD/YEN

The Australian dollar has had a positive week against the Yen and currently trades close to the best levels of the past month. The move started last Tuesday in the wake of the RBA rate statement and was helped along by Australian employment data later in the week. From Japan we had the BOJ meeting on Friday but it held no surprises for the market and the impact on the Yen was negligible. The risks remain skewed to the topside, although direction may well be decided by data over the coming days. From Australia this we get business confidence, consumer sentiment, the wage price index and inflation expectations. While from Japan we have producer prices, tertiary industry activity and core machinery orders data to digest. Look for a range of 92.00 to 94.00 this week.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 92.35 92.00 94.00 90.06 – 92.43

AUD/CAD

Since jumping higher this time last week in the wake of the RBA rate statement, the AUDCAD pairing has swung wildly between the broad parameters of 0.9620 and 0.9740. Commodity prices have been one driver with a bounce in oil supporting the Canadian dollar in the early stages of this week. That helped drive the pair from the top of that range to the lows in the past 24 hours. Direction from here is a tough call, but while the market holds above 0.9620 I favour a recovery back above 0.9700. A move back below 0.9600/20 however, would turn the picture negative again. Business confidence, consumer sentiment and wage price data from Australia will draw attention over the coming days. While from Canada we just have the new house price index and manufacturing sales to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9630 0.9600 0.9750 0.9564 – 0.9747

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Market commentary:

It seems the Australasian currencies may have become a little overcooked on the downside early last week, and as such we are seeing something of a recovery in both the NZD and the AUD. The Australian dollar led the way last Tuesday after a very neutral RBA rate statement, but later in the week the NZD started to play some catch up. A lot of negativity has been priced into the New Zealand dollar recently and the failure to sell off further after Fonterra’s downward revision to its forecasted pay-out on Thursday was a signal that it may be overdone, at least in the short term. There is plenty of potential for the recovery in both currencies to extend a bit further this week, especially if commodity prices continue to bounce from the lows we have seen in the past 48 hours.

Australia

The Australian dollar saw gains on most crosses this past week buoyed by better than forecast data and a somewhat more ‘neutral’ sounding central bank. On the data front we saw better than forecast readings for retail sales, trade balance and employment change. The unemployment rate did jump from 6.1% to 6.3%, but this was largely the result of an increase in the participation rate. The Reserve Bank of Australia (RBA) released their quarterly Monetary Policy Statement on Friday and it’s fair to say they seem very comfortable with current policy settings and the broad level of Australian dollar depreciation seen so far. The chance of further interest rate cuts has certainly diminished, although they are not completely out of the question. This week to draw focus we get readings on business confidence and consumer sentiment, along with the wage price index and inflation expectations.

New Zealand

A lack of follow through selling on the back of softer than expected economic releases last week has seen the New Zealand dollar put in something of a recovery from recent lows. Falling dairy prices and Fonterra’s significant downward revision to its forecasted pay-out certainly weigh on the medium term outlook for the currency, but it seems the market was well positioned for negative news. The failure to break through recent lows has seen some short term profit taking emerge from sold positions and this acted to support the currency in recent days. There is potential for this move to extend further, especially in light of the lack of key releases scheduled over the coming week. Friday’s retail sales data will provide the only real focus with the market expecting a gain of 0.5%.

United States

The US economy continues to recover and the Fed are getting closer to raising interest rates for the first time since 2006. The market is very undecided on whether that lift off in rates will be seen in September or December. In the longer term picture, the timing is largely irrelevant, but it will certainly impact the shorter term performance of the USD. This issue the Fed need to debate is that there are some very mixed signals coming from the US economy. Although they desperately want to move away from zero interest rates, they are afraid to move too early and negatively impact the recovery. The bright spot of the economy is the job market and if it was down to employment alone, the Fed would have already hiked. At the end of last week we saw the US produce another solid employment report. The economy added 215k jobs which, when taken together with positive revisions, was pretty much in line with expectation. The unemployment rate remained steady at 5.3%, which isn’t far off the Fed’s definition of full employment. The problem the Fed has is employment is only half of their mandate. The other half is inflation and there is little evidence that inflation is going to pick up any time soon. Wage growth remains weak, as does consumer spending. Add to this the very soft commodities picture along with weakening indicators of global trade and it gets very hard to see where any inflation pressure will come from. Legendary bond investor Bill Gross summed it up best recently when he said the world is lurching dangerously close to deflation. The Fed has a very difficult decision on their hands and we can expect plenty of volatility in the USD as the ebb and flow of data releases swings opinion one way then another. This week the focus will be on unit labour cost data, retail sales, producer prices and consumer sentiment.

Europe

Not having Europe dominate the headlines has been something of a refreshing change recently. Economic data over the past week suggests the region has continued its very gradual, and potentially fragile, recovery. Retail sales were a disappointment printing at -0.6% but this was countered by better results from German factory orders and the French trade balance. Investor confidence failed to make any gains last month printing largely unchanged from the prior number at 18.4. This week to draw focus we have the ZEW economic sentiment index, GDP data, and the final reading of inflation.

United Kingdom

Economic releases from the UK over the past week have undermined some of the recent support for the GBP and seen expectations for a rate hike pushed out into the first half of next year. Only one member of the MPC (Monetary Policy Committee) voted for a rate hike at last week’s Bank of England (BOE) meeting which disappointed the market who were expecting the two most hawkish members to put their hands up. Governor Carney then stuck a somewhat ‘dovish’ tone clarifying earlier comments he made about rate hikes coming into focus around the turn of the year. He said the media got it wrong and what he meant is that the BOE will start looking at rate hikes around that time, not actually make them. In recent days we’ve also seen comments from the BOE’s Broadbent is said there is currently no urgency to hike interest rates. Add to this last week’s small pullback in services sector PMI and there just haven’t been that many reasons to buy GBP’s recently. Longer term, as we get closer to an eventual interest rate hike, the UK Pound should continue to appreciate. But in the near term it might find further gains a lot harder to come by. The focus this week will be on employment data set for release on Wednesday.

Japan

The Bank of Japan (BOJ) met on Friday and left monetary policy settings unchanged as widely expected. However, many in the market do believe the bank will be forced to add stimulus over the coming months in order to help achieve it’s 2% inflation target. BOJ Governor Kuroda said they “would consider adjusting policy if oil rates affect the price trends and impact on underlying price movements,” but he added “that’s not the situation right now.” Although last month the bank cut its economic growth and inflation forecasts, they still expect consumption and exports to gradually increase along with wages. The question is will that be enough to lift inflation from near zero currently. Yesterday we saw small declines in consumer confidence and the economy watchers sentiment index, and later this week we have producer prices, tertiary industry activity and core machinery orders data to digest.

Canada

The Canadian dollar continues to be held hostage to movements in the price of oil. In the past 24 hours that has helped to see the CAD make some gains with oil bouncing from recent lows, but longer term it’s been pressuring the currency badly. At the end of last week Canada produced some slightly more positive data with building approvals and the Ivey PMI both improving by more than forecast. However, the key employment numbers were pretty close to expectation with employment change printing at a very modest +6.6k and unemployment steady at 6.8%. That will have done little to support the central bank’s view that an economic rebound is on the cards for the second half of this year. The Canadian economy contracted in each of the first five months of this year, triggering two interest rate cuts from the Bank of Canada. Those cuts have underpinned an already hot housing market, but the rest of the economy has been struggling. The most positive aspect about the Canadian economy is that their large neighbour to the south, the USA, is growing steadily and this should support exports going forward. This week is looking pretty light in terms of economic data with just the new house price index and manufacturing sales of any note.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »