Inventories of stored oil at highest point since 1982; if Iran commence exporting again further downward pressure on oil prices; profit taking on USD ahead of FOMC meeting

Short headline: 
Oil prices remain vulnerable

By Ian Dobbs*:

The USD is seeing some profit taking ahead of what could be a very interesting FOMC statement on Thursday morning.

The language used in that statement will be closely analysed for signals the Fed remain on course to hike rates in June.

Recent soft US data releases do raise the prospect the Fed could come across somewhat ‘dovish’ and this would likely see a much broader period of USD weakness.

Oil prices remain focus with crude trading to fresh six year lows in recent days. It’s hard to see a significant recovery in prices in the near term. Inventories of stored oil are at their highest level since 1982 and if a deal is reached with Iran on its nuclear programme, they could then restart oil exports. This would add further downside pressure to oil prices and have implications for global inflation.

Major Announcements last week:

  • Chinese Inflation +1.2% vs .8% expected
  • Australian Home Loans -3.5% vs -2.0% expected
  • Chinese Retail Sales 10.7% vs 11.7% expected
  • UK Manufacturing Prod. 1.9% vs 2.6% expected
  • RBNZ leaves monetary policy unchanged as expected
  • Australian Unemployment rate 6.3% as expected
  • US Retail Sales +.6% vs +.3% expected
  • Canadian Unemployment rate 6.8% vs 6.7% expected

NZD/USD

The New Zealand dollar bounced strongly from levels just below 0.7200 late last week. The move was driven by the RBNZ, who are likely to remain on hold for the foreseeable future, and by softer than forecast US economic releases. Disappointing data from the US continued in the early stages of this week and it is causing some profit taking on long (bought) USD positions ahead of the FOMC statement. That statement hits the wires early on Thursday morning and is a major focus for the markets. The Fed are expected to ‘tweak’ the wording of the statement which would be a signal they remain on track to hike rates around June. If however, they acknowledge the recent weakness in many economic indicators the USD could see further pressure. With key support around 0.7200 and strong resistance around 0.7600, that leaves plenty of room for the New Zealand dollar to range around in over the coming weeks and potentially months. Ahead of 0.7600 there is minor resistance at 0.7450 and so far this has capped the recent NZD strength. A dovish statement from the Fed would see this level come under serious pressure. From New Zealand this week we have another dairy auction from Fonterra along with quarterly GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7380 0.7200 0.7450 0.7192 – 0.7438

NZD/AUD (AUD/NZD)

After bouncing off support around 0.9500 (resistance 1.05025) late last week, in the wake of the RBNZ monetary policy statement, the New Zealand dollar has continued to grind higher against its Australian cousin. The Australian dollar is seeing some pressure in the lead up to the RBA minutes set for release this afternoon. The market is expecting this to confirm the central bank remains on course to cut interest rates again over the coming months. If this is indeed the case the NZD should continue to grind higher and the pair to test levels around 0.9700 (1.0310) again. With the interest rate differential between the two countries expected to widen further, I continue to see support around 0.9500 (resistanc3e 1.0525) containing any periods of AUD strength/NZD weakness in the near term. Other data to watch out for this week includes another dairy auction from Fonterra along with NZ GDP.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9655 0.9500 0.9700 0.9494 – 0.9662
AUD / NZD 1.0357 1.0309 1.0526 1.0350 – 1.0533

NZD/GBP (GBP/NZD)

The New Zealand dollar has been making relentless gains against the UK Pound ever since last Thursday’s RBNZ monetary policy statement. Gains have come on the back of both NZD strength, and GBP weakness. The GBP has seen a fair amount of selling pressure recently and it’s hard to point a finger at exactly why. A number of data releases from the UK did come in worse than expected last week, but these haven’t impacted the overall economic outlook at all. Upcoming UK elections are probably still a little too far away to really impact the currency, although confidence indicators may see some moderation due to uncertainty over the coming weeks. The most likely driver of recent GBP supply is probably profit taking on the EURGBP cross which has seen a big move over the past couple of months, and recently approached the key psychological level of 0.7000. This combined with some better than forecast EUR data has seen those holding GBP’s against the EUR unwind positions and lock some profit in. This increased supply of GBP’s has helped the cross to the NZD trade back up to resistance around 0.5000 (support at 2.0000). As this move has not been driven by economic fundamentals and more by just market positioning, I would expect the 0.5000 (2.0000) level to continue to cap the NZD outperformance. Those looking to purchase GBP’s should therefore take advantage of this period of relative NZD strength. From the UK this week we have employment data and the Bank of England minutes to digest. While from NZ we have another dairy auction from Fonterra along with GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4975 0.4800 0.5000 0.4800 – 0.4999
GBP / NZD 2.0101 2.0000 2.0833 2.0003 – 2.0834

 NZD/CAD

The New Zealand dollar recovered sharply against the Canadian dollar late last week in the wake of the RBNZ’s monetary policy statement. The initial gains were driven by NZD strength, but recent appreciation has come thanks to some Canadian dollar weakness. Further declines in oil prices have again weighed on the CAD and this pressure seems unlikely to abate in the near term. We may well see the pair test recent highs around 0.9520 over the coming week. There are some key releases to digest from Canada this week. Manufacturing sales, wholesale sales, inflation, and retail sales are all set to hit the wires. While from NZ this week we have another dairy auction from Fonterra along with GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9430 0.9300 0.9500 0.9174 – 0.9456

NZD/EURO (EURO/NZD)

The New Zealand dollar has eked out fresh cycle highs against the Euro at 0.7016 (1.4253) in the past 24 hours. A relatively strong performance from the NZD since last Thursday’s RBNZ statement has seen the currency gain on most crosses. These most recent highs have however, been accompanied by declining momentum indicators and this suggests a period of consolidation, or a corrective pullback is likely over the coming week(s). The pair could easily pull back toward 0.6800 (upto 1.4705) without threatening the broader uptrend. Recent improvements in data from the Eurozone would also support this outlook for a consolidation/correction in the pair, however with QE from the ECB now in full swing, any period of relative EUR strength, is likely to be short lived. Expect a range of 0.6800 to 0.7000 (1.4285 – 1.4705)  over the coming week. Tonight we get German ZEW economic sentiment data and the final reading of Eurozone inflation. Later in the week the ECB economic bulletin and the EU economic summit will draw focus. While from NZ this week we have another dairy auction from Fonterra along with GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6980 0.6800 0.7000 0.6725 – 0.7016
EUR / NZD 1.4327 1.4286 1.4706 1.4254 – 1.4870

 NZD/YEN

The New Zealand dollar bounced from 87.33 Yen in the wake of the last Thursday’s RBNZ monetary policy statement. Since then the pair has traded sideways below resistance around 90.00. We are likely to see more of the same price action over the coming days, with the risks slightly skewed toward a potential break back above 90.00. The Bank of Japan monetary policy statement is set to hit the wires later this afternoon and this provides the immediate focus for the  market. From NZ this week we have another dairy auction from Fonterra along with GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 89.60 88.00 90.00 87.33 – 89.88

AUD/USD

The Australian dollar remains entrenched in a downtrend against the USD. The local currency did see a bounce late last week off recent lows which was driven in large part by softer than forecast US data. But that bounce struggled at the first line of resistance around 0.7730 and this keeps the focus on the downside, at least for now. We do have a couple of key releases this week which could easily impact. The RBA minutes are set for release this afternoon. The market is expecting this to confirm the bank remains on course to cut rates again over the coming months. Focus will then turn to the FOMC rate statement out early on Thursday morning. The Fed are expected to ‘tweak’ the wording of the statement which would be a signal they remain on track to hike rates around June. If however, they acknowledge the recent weakness in many economic indicators the USD could see further pressure. If we do get a ‘dovish’ statement from the Fed, the key topside level to watch in the AUD comes in around 0.7770. Any sustained break above there would be a warning signal that a much bigger correction is unfolding. Until that level breaks however, the major downtrend that started in early September 2014 remains intact.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7645 0.7630 0.7850 0.7561 – 0.7724

AUD/GBP (GBP/AUD)                            

The Australian dollar saw a decent recovery against the UK Pound late last week, driven as much by weakness in the UK Pound as anything else. This saw the pair testing initial resistance around 0.5180 (1.9305 support) and although a number of attempts have been made since then to sustain a break above that level, ultimately the topside attempts failed. A pullback toward 0.5100 (up to 1.9610) could now easily unfold over the coming week. The RBA minutes are set for release this afternoon and the market is expecting this to confirm the bank remains on course to cut rates again over the coming months. This should keep some downside pressure on the Australian dollar. I also believe recent GBP weakness has more to do with market positioning than economic fundamentals and could therefore easily be reversed. For these reasons, I expect resistance around 0.5180 (support 1.9305) to continue to cap the AUD topside and a pullback toward 0.5100 (rally to 1.9610), or through, to unfold over the coming days. From the UK this week we have employment data and the Bank of England minutes to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5157 0.5000 0.5200 0.5037 – 0.5194
GBP / AUD 1.9391 1.9231 2.0000 1.9253 – 1.9854

AUD/EURO (EURO/AUD)

The Australian dollar continued to make ground against the Euro last week trading to cycle highs at 0.7287(lows 1.3723). However, there are indicators that the AUD momentum is weakening and we could easily see a period of consolidation or a correction lower unfold. The RBA minutes are set for release this afternoon and the market is expecting this to confirm the bank remains on course to cut rates again over the coming months. If we do see a pullback, the initial target will be 0.7150 (1.3985). Any move below that level will open the way for a test of 0.7030(1.4225). Tonight we get German ZEW economic sentiment data and the final reading of Eurozone inflation. Later in the week the ECB economic bulletin and the EU economic summit will draw focus.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7230 0.7150 0.7300 0.7072 – 0.7287
EUR / AUD 1.3831 1.3699 1.3986 1.3723 – 1.4140

AUD/YEN

The past week has seen a continuation of choppy price action for this pair, but little overall direction. The broad parameters of 92.00 to 94.00 have contained price action for much of the past month and I expect more of the same over the coming week. The immediate focus is on the Reserve Bank of Australia minutes set for release today. The market is expecting these to confirm the bank remains on course to cut rates again over the coming months, and this should pressure the AUD to a degree. This will be followed by the Bank of Japan monetary policy statement is set to hit the wires later this afternoon. The BOJ are expected to leave policy setting unchanged.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 92.75 92.00 94.00 91.80 – 93.58

AUD/CAD

The Australian dollar remains trapped between the broad parameters of 0.9650 and 0.9850 to the Canadian dollar. Some recent pressure on the Canadian dollar, thanks in part to further declines in oil prices, has seen the pair trade toward the upper end of that range. But in the near term we have the Reserve Bank of Australia minutes to digest and these could weigh on the AUD. The market is expecting this to confirm the bank remains on course to cut rates again over the coming months. So for the time being we can expect a continuation of the current range. We do however have some key releases to digest from Canada this week. Manufacturing sales, wholesale sales, inflation, and retail sales are all set to hit the wires and these will likely add to recent volatility.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9762 0.9650 0.9850 0.9632 – 0.9806

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Market commentary:

The USD is seeing some profit taking ahead of what could be a very interesting FOMC statement on Thursday morning. The language used in that statement will be closely analysed for signals the Fed remain on course to hike rates in June. Recent soft US data releases do raise the prospect the Fed could come across somewhat ‘dovish’ and this would likely see a much broader period of USD weakness. Oil prices remain focus with crude trading to fresh six year lows in recent days. It’s hard to see a significant recovery in prices in the near term. Inventories of stored oil are at their highest level since 1982 and if a deal is reached with Iran on its nuclear programme, they could then restart oil exports. This would add further downside pressure to oil prices and have implications for global inflation.

Australia

Last week from Australia we saw declines in business confidence and consumer sentiment readings. Both of these support the case for further easing’s, as did a decline in inflation expectations. However, the key employment data was a touch better than forecast coming in at +15.6k, with unemployment falling to 6.3%. Although the fall in unemployment was welcome, the Reserve Bank of Australia (RBA) expects that rate to continue to climb in the near term, and this recent data won’t have impacted their bias for another interest rate cut in the coming months. That outlook should continue to weigh on the Australian dollar, or at least limit any periods of strength from current levels. This week to draw focus we have the RBA minutes, the quarterly RBA bulletin, and a speech from Governor Stevens.

New Zealand

The Reserve Bank of New Zealand (RBNZ) reaffirmed last week they are comfortably ‘neutral’ in terms of an interest rate bias at this stage. Inflation may well fall to zero over the coming months, but the bank believes it will gradually return toward two percent. They also believe the level of the New Zealand dollar remains unjustified and unsustainable. The reaction of the currency to last week’s RBNZ statement suggests the market is not so convinced. On Friday we saw the Business NZ manufacturing PMI and it rose to 55.9 from 50.7 prior. That marks the 29th straight month in expansion (i.e. over 50), and the new orders component was the strongest since November 2013. This week to draw focus we have another dairy auction from Fonterra along with quarterly GDP data. The market is expecting a GDP result of 0.8% which would be down slightly from the prior 1.0%.

United States

A couple of releases from the United States late last week suggested that the economy may not be as strong as employment data suggests. US retail sales figures were particularly disappointing, as they contracted for the third month in a row. More than any other indicator, the divergence between retail sales and employment is starting raise some real concerns. Supporting the slightly less optimistic outlook for the economy was consumer sentiment data released on Friday. The index dropped to 91.2 from 95.4 prior. The market was expecting a small increase. Although this marks the second straight decline, the index is coming off a very healthy peak and its current level is still consistent with GDP growth around 3.3 percent, according the survey director. Producer prices were also released on Friday and these came in at -0.5% vs +0.1% expected. This is the fourth straight monthly decline and it suggests there are no pipeline inflation pressures, even though energy prices seem to have stabilised somewhat recently. A stronger US dollar will certainly be having an impact here by lowering costs for many American firms. This week is all about the Fed. They release their rate statement early on Thursday morning and the market is very keen to see if they are still on track for a potential rate hike around June.

Europe

For the most part, data out of Europe last week continued to show the ‘green shoots’ of recovery. Sentix investor confidence improved for the third straight reading, French industrial production came in stronger than expected, as did French inflation and the German wholesale price index. ECB President Draghi was on the wires last night conveying an optimistic tone. He said indicators suggest a sustained recovery is taking hold, with confidence amount firms and consumers rising. The added the nascent recovery offers a window of opportunity for much needed structural and governance reforms. Tonight we get German ZEW economic sentiment data and the final reading of Eurozone inflation. Later in the week the ECB economic bulletin and the EU economic summit will draw focus.

United Kingdom

Apart from the trade balance that came in better than forecast, data from the UK last week was somewhat disappointing. Manufacturing production, industrial production, and construction output all missed expectations and declined from the prior readings. These results by themselves haven’t been enough to impact the current optimistic outlook for the UK economy which remains on track for an interest rate hike by the Bank of England (BOE) either late this year or early 2016. We get the minutes from the bank’s latest monetary policy meeting this week, which always make interesting reading. We also have the annual budget release and employment change data to digest. UK elections are also just around the corner, set for May 7th, and uncertainty in the lead up to these may weigh on confidence data over the coming weeks.

Japan

Over the past week a number of forward looking indicators have shown some improvement in Japan. The economy watches sentiment index, consumer confidence, tertiary industry activity and core machinery orders all came in better than forecast. The Bank of Japan (BOJ) will be pleased to see some improvement in the data and it should serve to reinforce their commitment to maintain current policy settings. They release they monetary policy statement later today and no change is expected in terms of their policy framework. Low oil prices will continue to weigh on near term inflation figures, but this shouldn’t be enough to trigger additional easing’s from the bank at this stage. Key wage negotiations are set to commence this week for a number of corporates and these are hugely important for the longer term inflation outlook.

Canada

Key employment data from Canada on Friday proved to be something of a mixed bag. The economy lost 1,000 jobs in February which was better than the forecast for -3.5k. However, it was enough to push the unemployment rate up to 6.8%. Not surprisingly the biggest job losses came from oil producing regions with Alberta posting a 14k decline in employment and its highest jobless rate since 2011. The fear is that this is just the beginning of the impact from declining oil prices. This week’s sees a number it top tier economic releases for the market to digest. Manufacturing sales, wholesale sales, inflation, and retail sales are all set to hit the wires.

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