Failure of ECB to meet market expectations will force a squeeze on the Euro; RBA expected to keep interest rates unchanged; a miss in US employment data will disrupt Fed plans

By Ian Dobbs*:

It will be a busy week for forex markets this week despite a quiet start to the week, as the markets gear up for the ECB’s policy decision on Thursday.

The Euro has traded heavily over recent weeks. This is in anticipation of an expansion and/or extension to the current EUR 60Bn per month bond buying programme, which for now is set to continue until September 2016.

A failure to satiate market expectations could therefore lead to a nasty squeeze higher in the Euro exchange rate.

Later today will see the RBA in focus; whilst the meeting is likely to be uneventful (rates to stay at 2.0% after last week’s RBA Governor Stevens comments), the comments which accompany the cash rate announcement will be closely examined.

The focus will be on any signs of a change bias given the recent data which has included strong employment and weak capital expenditure numbers.

The U.S. employment report on Friday will round out the busy week; where a large downside miss would likely be required to disrupt the FOMC from raising rates later this month.

Major Announcements last week:

  • German Q3 GDP 1.8% y/y, on exp.
  • German IFO 109.0 vs. 108.2 exp.
  • US Q3 GDP 2.1% ann. vs 2.0% exp.
  • US Consumer confidence 90.4 vs. 99.5 exp.
  • US Durable goods orders (Oct. 3.0% vs. 1.5% exp.)
  • US Markit PMI composite (Nov. 56.1, 55.0 prior).
  • NZ Trade balance (Oct. -3.24Bn vs. -3.37Bn exp.)
  • Australian Q3 CAPEX -9.2% vs. -4.4% prior.
  • UK Q3 GDP 2.3% y/y on exp.

NZD/USD

The New Zealand dollar sits near its recent upper bound .6610 in current trade after again finding support ahead of .6500 yesterday. A firmer AUD and some weaker second tier U.S. data overnight have helped the recovery. Outlook for the NZD in the near-term hinges on tonight’s GDT dairy auction result, although the more important longer term direction for this cross should come from U.S. events and the ECB monetary policy meeting later in the week. The ECB meeting has the potential to be risk-asset supportive (NZD+) should the markets embrace this theme on the event of a larger-than-expected easing.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6598 0.6500 0.6700 0.6503 – 0.6608

NZD/AUD (AUD/NZD)

The New Zealand dollar trades around the .9120 (1.0965) level against its Australian counterpart today ahead of a heavy schedule of data which has the potential to move this cross considerably throughout the week. The first cue will come from the accompanying commentary to the RBA interest rate decision this afternoon (the RBA is extremely likely to keep rates unchanged at 2.00%). Australian Q3 GDP data tomorrow and the earlier GDT dairy price auction also will have a high chance of inducing further volatility. Initial resistance is pegged around .9160 (support~1.0915). First support is eyed around .9060 (resistance1.1038) and then .9015 (1.1093). Australian trade data on Thursday and retail sales on Friday should also be noted.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9110 0.9015 0.9160 0.9020 – 0.9141
AUD / NZD 1.0977 1.0915 1.1093 1.0940 – 1.1086

NZD/GBP (GBP/NZD)

The New Zealand dollar has continued to trade with a firm tone against the U.K. pound this week. This comes as the GBP continues to be weighted by the Euro, and the NZD supported by a firm AUD. The data calendar is relatively light out of both countries this week, although tonight’s GDT dairy price data and U.K. manufacturing PMI data will influence. Initial support for this cross is now placed around .4330 (resistance 2.3095). Nearby initial resistance at .4380 (support 2.2831) if breached opens, the potential for a move to .4410 (2.2676) and the .4440/50 (2.2523/2.2472) zone being key beyond. The ECB meeting on Thursday should be noted if the market decides that a larger than expected easing programme is risk-asset supportive (NZD+).

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4380 0.4330 0.4410 0.4306 – 0.4389
GBP / NZD 2.2831 2.2676 2.3095 2.2784 – 2.3224

 NZD/CAD

The New Zealand dollar is trading near highs not seen in almost a month against the Canadian dollar presently. Near-term direction will come from the next GDT dairy auction and Canadian Q3 GDP release overnight, before the BOC monetary policy meeting tomorrow. Canadian unemployment data on Friday and risk sentiment (NZD) will also be important drivers. Next resistance sits around the .8900 level and may be tested over time should the ECB deliver larger than expected stimulus this Thursday which has the potential to bolster risk sentiment.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8810 0.8680 0.8900 0.8686 – 0.8822

NZD/EURO (EURO/NZD)

The New Zealand dollar continues to perform well against the Euro ahead of this Thursday’s key ECB monetary policy meeting. Direction for this cross for the immediate future will be determined by the outcome of the extent of the likely expansion of stimulus seen from the ECB. Whilst current momentum for this cross is for higher NZD levels, the current EUR positioning would likely see this cross retrace should the ECB under deliver on the market’s stimulus expectations. Key support is distant at .6035 (resistance 1.6570), although initial support is seen around .6150 (resistance 1.6260). A risk-on theme which may develop should the market see a larger than expected stimulus programme as risk-asset supportive should open the .6325 (1.5810) level.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6242 0.6035 0.6325 0.6107 – 0.6253
EUR / NZD 1.6021 1.5810 1.6570 1.5991 – 1.6374

NZD/YEN

The New Zealand dollar is trading firmly against the Japanese Yen this week, settling above first resistance around the 81.00 level for the time being. Risk sentiment will be an important driver for whether this cross can build on its recent gains and extend to next resistance near the 82.00 level. This is especially pertinent given the light data calendar out of both NZ and Japan (GDT dairy price auction tonight aside). Increased risk sentiment following a larger than expected stimulus programme from Thursday’s ECB meeting may be the catalyst for the move higher, at least prior to next week’s RBNZ cash rate decision.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.25 79.65 82.00 79.70 – 81.44

AUD/USD

The Australian dollar remains supported against the USD in recent trade. This comes despite the poor Australian CAPEX data (-9.2% in Q3) released last Thursday and heavy key commodity prices which include a 20% decline observed in iron ore prices since September. Immediate focus for this cross will be the accompanying commentary to the RBA cash rate decision this afternoon, especially since Governor Stevens comments last week indicated that the rate will be left at the current 2.00% today. The heavy data calendar for the remainder of the week includes Australian Q3 GDP tomorrow, Australian retail sales and the U.S. employment report on Friday. These events make near-term direction difficult to pick, although for now we favour higher levels, while the .7150 level supports.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7242 0.7150 0.7285 0.7172 – 0.7280

AUD/GBP (GBP/AUD)                            

The Australian dollar remains firm against the U.K. pound this week despite soft Australian CAPEX data released last Thursday and continued weak key commodity prices. Key to near-term direction will be they accompanying commentary to today’s RBA cash rate decision and the Australian data calendar which includes the key Q3 GDP release tomorrow. Thursday’s Australian trade data and ECB meeting along with Friday’s Australian retail sales and U.S. employment report will all be important contributors to volatility.  The cross may push higher should the GBP follow the Euro lower on a larger than expected stimulus package from the ECB, especially if the markets see such an announcement as risk-supportive.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4807 0.4730 0.4820 0.4751 – 0.4822
GBP / AUD 2.0803 2.0747 2.1142 2.0739 – 2.1049

AUD/EURO (EURO/AUD)

The Australian dollar remains well bid against the Euro this week in the lead up to Thursday’s all important ECB meeting. Direction for this cross will come from the raft of Australian announcements (including comments to the RBA cash rate decision this afternoon, GDP tomorrow, trade data on Thursday and retail sales on Friday) and the ECB meeting, where the markets expect an expansion and/or extension to the current bond buying programme. Current momentum is higher, but the outcomes to this event ridden week will ultimately determine the next broader move.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6852 0.6670 0.7000 0.6748 – 0.6860
EUR / AUD 1.4594 1.4286 1.4993 1.4577 – 1.4819

AUD/YEN

The Australian dollar continues to trade well against the Japanese Yen currently. This is despite the soft Australian Q3 CAPEX data released last Thursday and continued weak key commodity prices. Whilst the current momentum is higher further gains will be contingent on the results of the heavy Australian data calendar due this week. This starts with the comments which accompany the RBA cash rate announcement today. Risk sentiment will also be important, especially given Thursday’s ECB meeting.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 89.20 88.00 90.00 88.07 – 89.35

AUD/CAD

The Australian dollar sits just adrift of its recent highs against the Canadian dollar today. The current momentum should take this cross higher especially given the continued weakness seen in the oil market. A heavy data calendar out of both countries has the potential to change proceedings however, and makes calling the next move a difficult one. Cash rate decisions and GDP data from both countries over the next 48 hours form the immediate threat.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9670 0.9580 0.9750 0.9588 – 0.9681

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Market commentary:

It will be a busy week for forex markets this week despite a quiet start to the week, as the markets gear up for the ECB’s policy decision on Thursday. The Euro has traded heavily over recent weeks. This is in anticipation of an expansion and/or extension to the current EUR 60Bn per month bond buying programme, which for now is set to continue until September 2016. A failure to satiate market expectations could therefore lead to a nasty squeeze higher in the Euro exchange rate. Later today will see the RBA in focus; whilst the meeting is likely to be uneventful (rates to stay at 2.0% after last week’s RBA Governor Stevens comments), the comments which accompany the cash rate announcement will be closely examined. The focus will be on any signs of a change bias given the recent data which has included strong employment and weak capital expenditure numbers. The U.S. employment report on Friday will round out the busy week; where a large downside miss would likely be required to disrupt the FOMC from raising rates later this month.

Australia

It has been an innocuous start to the week for the Australian dollar as the market awaits today’s RBA cash rate decision and Australian Q3 GDP data tomorrow. Odds of a cut in rates from the current 2.0% cash rate are low despite last Thursday’s weak Q3 private capital expenditure data (-9.2%) release. Market focus has instead centred on last week’s surprise comments which indicated that the RBA is comfortable with the current cash rate setting and would likely remain in monitor and assessment mode (Governor Stevens words were “chill out”) over the Christmas period. However, the tone of today’s accompanying statement will attract considerable interest. Data released yesterday was mildly positive although elicited little market response. Private sector credit was seen rising 0.7% m/m in October (vs. +0.6% exp.). Q3 company profits rose 1.3% q/q, higher than the 1.1% expectations. October trade data on Thursday and retail sales data on Friday round out what should be a busy week for the AUD. Chinese PMI data due for release this afternoon will also be eyed.

New Zealand

The NZD sits near the upper end of its recent .6500/.6600ish range in recent trade as it followed a firming AUD higher in overnight trade. NZ ANZ business confidence data for November released yesterday was solid after it was seen rising to six month highs at 14.6, well up from the 10.5 print seen last month. October building consents rose 5.1% m/m, a sharp improvement from last month’s revised 5.8% decline and well above the 3.0% expectation. The Q3 terms of trade index showed a larger than expected decline this morning as import prices rose sharply. Next focus for the NZD will be tonight’s release of the GDT dairy price data, where current indications point to a 5% lift in prices. Direction for the remainder of the week will come from offshore, with Thursday’s ECB monetary policy meeting and Friday’s U.S. employment data being amongst the most important events to watch. Next week’s RBNZ decision also looms, market pricing currently indicates a 50/50 chance of a cut to the present 2.75% cash rate. The case for a cut includes low inflation, pressure on the dairy sector and global uncertainty as potential reasons for a move. Built-up housing market pressures and a continued decline in fixed mortgage rates are amongst the key reasons that we consider a cut unlikely.

United States

The USD remains well sought after in current trade and near the 5 year highs set in March this year (Dollar index 100.39 highs, ~120.20 last). An empty data calendar on Friday helped bring a quiet finish to the holiday shortened week last week. Little changed in trade overnight despite some weak releases which included a 0.2% m/m gain in October pending home sales data (1.0% exp.) and a decline to 48.7 in the Chicago PMI in November from 56.2 the month prior (54.0 exp.). The subdued volatility of the last few days comes mostly as a result of focus being on Friday’s U.S. Non-farm payrolls employment report and two scheduled appearances by Fed Chair Janet Yellen this week (Thursday and Friday). Only an extremely poor result on Friday would have a chance of scuppering this month’s likely rate hike at the December 17th FOMC meeting. Currently the market pricing apportions around a 70% chance of a hike. Markit/ISM manufacturing and construction spending data is due for release tonight, ADP employment data tomorrow night will also be of some interest.

Europe

The Euro remains heavy in early trade this week as focus on this Thursday’s ECB monetary policy meeting continues to dominate investor sentiment. Expectations of an expansion and/or extension to the current EUR 60Bn per month bond buying programme (currently in place till Sept. 2016) and a cut to the present -0.2% deposit rate are high, although market positioning is well placed for such an outcome. Data released overnight failed to excite after the German November inflation data printed exactly on expectations. The equivalent Italian data disappointed falling 0.5% m/m, which helped served to offset Friday’s better than expected Spanish print. Euro area confidence data also released on Friday showed a lift in the consumer, services and economic indicators and came on the back of a solid German IFO release earlier in the week. Euro area manufacturing PMI data and German unemployment numbers will feature later today before the scheduled release of euro-zone inflation numbers tomorrow. Euro area services PMI and euro-zone retail sales data on Thursday will take a back seat to the all important ECB meeting later in the day.

United Kingdom

The GBP continues to trade with a heavy tone mirroring a heavy Euro, this sees both currencies trading near their recent lows presently. The second estimate of the U.K. Q3 GDP released on Friday met expectations after posting growth of 0.5% q/q and 2.3% y/y. Strength in domestic activity drove the result, notably investment rose 1.3% q/q vs. expectations of a 0.9% rise. In data released overnight U.K. Mortgage approvals for October at 69.6k surpassed last month’s 68.9k print, mortgage lending at GBP 3.6bn was unchanged on the month prior. U.K. consumer credit was a touch weaker than expected at GBP 1.2bn. M4 money supply and lending secured on dwellings continued to show strong gains. The data brings into focus tonight’s BOE Financial Stability report especially given the recent steps which have been taken to reign in the robust U.K. housing market. Manufacturing PMI data is also due for release later today; this is expected to show a continuation in the slowing of activity. The construction and services PMI data releases will follow on Wednesday and Thursday respectively.

Japan

It has been a slow start to the week for the JPY so far after the market showed little interest in yesterday’s commentary from the BOJ Governor Kuroda and raft of second tier data releases. Governor Kuroda’s comments included one which indicated his belief (again) that extra monetary easing wouldn’t be required to revive inflation. Inflation data released on Friday showed just a 0.3% rise y/y in October, well below the BOJ’s 2.0% target. Amongst yesterday’s releases was housing starts data which showed a 2.5% y/y slide in October, well below the +2.6% consensus forecast. Vehicle production was seen falling 0.5% y/y (prior -2.6%) whilst preliminary industrial production data for the same month rose 1.4% m/m, less than the 1.8% expectations. Retail sales data showed a 1.1% m/m gain, above the 0.3% rise expected. Direction for the remainder of the week should now come from any safe haven flow before the important U.S. employment data due for release on Friday.

Canada

It has been a relatively quiet start to the week for the CAD with any movement again being dictated by gyrations in the oil price. Initial oil price gains from overnight were erased after data which was released in the past few hours showed OPEC oil output rising 130k bpd in November. The OPEC oil cartel meets on Friday, current indications point to there being no change in output of the (commonly flouted) production quotas. The market showed little interest in the Canadian Q3 Current Account release overnight which showed a small improvement on the prior period’s revised number (-16.21B vs. -16.57B and -15.1B exp.). Immediate focus for the CAD now turns to today’s Canadian Q3 GDP data and the later RBC manufacturing PMI release. The BOC interest rate decision on Thursday will be followed by market moving Canadian and U.S. employment data and the Ivey PMI on Friday.

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