Investors flock to USD as geopolitical risks heat up; Chinese growth prospects are again in spotlight

Short headline: 
US dollar buying re-emerges

By Ian Dobbs*:

The major theme of the past week has been the resurgence of USD strength.

The USD has quietly gone about regaining a significant amount of the ground lost the prior week. Increased geopolitical tensions may have helped the USD as Saudi Arabia launched a bombing campaign in Yemen.

Concerns about Chinese growth prospects are again in spotlight with authorities recently announcing a relaxation of deposit rules for mortgage lending.

The Chinese are trying to increase demand and lift a sagging housing market that has been in decline since 2014. The move follows comments from Peoples Bank of China Governor Zhou who said that China’s growth rate has tumbled a bit too much and that policy makers have room to act.

Major Announcements last week:

  • European Manufacturing PMI 51.9 vs 51.5 expected
  • European Consumer Confidence -3.70 vs -5.95 expected
  • UK Inflation +1.2% vs +1.3% expected
  • NZ Trade balance -2.18 B vs -1.82B expected
  • UK Retail Sales 5.1% vs 4.2% expected
  • Japanese Inflation 2.0% vs 2.1% expected

NZD/USD

Despite some mixed data from the US over the past week, along with downgraded expectations for first quarter growth, the USD has quietly gone about regaining a considerable amount of ground it lost the week prior. Against the New Zealand dollar this has seen a pull back from just under 0.7700 to 0.7500 so far. Data from NZ over the past week hasn’t had a big impact but tomorrow’s dairy auction from Fonterra could certainly influence the local currency. Another decline will raise doubts about the forecasted pay-out and could easily pressure the NZD back toward 0.7400. From the US there is plenty to digest this week starting with CB consumer confidence tonight. Later in the week we get ISM manufacturing PMI, the trade balance, and the all-important non-farm payrolls numbers.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7505 0.7400 0.7600 0.7487 – 0.7689

NZD/AUD (AUD/NZD)

The Australian dollar has been the big under-performer over the past week, losing ground on most crosses. Iron ore prices falling to a six year low hasn’t helped and concerns around Chinese growth prospects have also weighed. This relative weakness in the AUD has seen the NZDAUD cross trade to fresh post float highs at 0.9843 (AUDNZD to lows at 1.0159). Key for direction from here will be tomorrow night’s dairy auction. Another soft auction could well spark a NZD pullback in this pair to levels below 0.9700 (above 1.0310). Australian building consents and trade balance data over the coming days should only provide limited market impact.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9800 0.9650 0.9850 0.9671 – 0.9843
AUD / NZD 1.0204 1.0152 1.0363 1.0160 – 1.0340

NZD/GBP (GBP/NZD)

This pairs time above 0.5100 (below 1.6010) only lasted a few days and we have seen significant pullback from the 0.5162 (1.9375) NZ dollar peak seen last Wednesday. I expect the downside pressure to continue with the NZD likely to underperform heading into tomorrow night’s dairy auction. Another soft result there could well see the pair back toward the 0.5000 (2.0000) level. Retail sales data from the UK last week was positive although, we are yet to see a significant increase in support for the GBP. This week from the UK we have manufacturing and construction PMI’s to digest, both of which should indicate the UK’s economic recovery remains in good shape. We could easily see increased volatility in the GBP over the coming weeks with campaigning for what looks like a close election now under way. Selling into any periods of strength above 0.5100 (below 1.09610) remains the favoured play.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5068 0.5000 0.5200 0.5062 – 0.5162
GBP / NZD 1.9732 1.9231 2.0000 1.9371 – 1.9756

 NZD/CAD

This pair has spent the last two weeks establishing an increasing comfortable .9400-.9600 range. The NZ dollar was pressured from its highs, and the resistance at .9600, after the materially weaker than expected NZ trade balance numbers. This afternoons NZ Business Confidence numbers show a continuation of the relative positivity across most sectors. The Canadian monthly GDP numbers round out the economic data focus for the week later on today. Expect the establishing range to contain price action for the week, with any level above .9500 looking to offer good value buying of CAD with NZ dollars.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9415 0.9400 0.9600 0.9437 – 0.9612

NZD/EURO (EURO/NZD)

The past week has seen choppy trading for this pair largely contained between 0.6900 and 0.7000 (1.4285 – 1.4492). The failure of the pair to be able to maintain any NZD gains over the 0.7000 (under 1.4285) level this past week has increased the potential for a more substantial pullback from the NZ dollar. A break below 0.6900 (above 1.4492) would be the first indication this is underway and a move towards 0.6770 (1.4770) should follow. European data has certainly seen a gradual improvement recently, but the Greek situation is limiting any potential gains for the Euro as a result. If some sort of agreement is reached this week to enable the release the next tranche of bailout funds to Greece, the Euro certainly has room to appreciate. Key to near term direction will also be the outcome of Fonterra’s latest dairy auction tomorrow night. Another soft result should pressure the NZD to the downside.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6928 0.6900 0.7100 0.6899 – 0.7020
EUR / NZD 1.4434 1.4085 1.4493 1.4245 – 1.4495

 NZD/YEN

Throughout the last week the NZD has struggled against the Japanese YEN, even in the face of some weak Japanese data. After failing to break the resistance at 92.00, a test lower was always expected. The lower trade balance numbers and general market risk aversion have enabled the move and the support at the 89.80/90.00 level seems to have contained the move so far. However, we remain right on that level and the focus remains on whether or not that level holds in the wake of the NZ business confidence numbers today and the Fonterra auction results later in the week. From Japan there are the usual number of releases this week, but the Tankan report will provide the primary focus. Consolidation through the 90.00 level would open the way for another leg lower for this pair.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 90.12 90.00 92.00 89.72 – 91.89

AUD/USD

The past week has seen the Australian dollar give back a considerable amount of the gains seen the week prior. The AUD has been weighed on by further falls in iron ore prices and general concerns about Chinese growth. The USD itself has seen broad based gains over the past week despite mixed data and some sharp revisions to first quarter growth projections. There is support for the pair around 0.7600 and below that the 2015 low of 0.7558 looms. At this stage I don’t expect the Australian dollar to plummet through there and I think USD gains will run out of steam ahead of Friday’s key employment report. A big payrolls number may well see that low under pressure, but until then expect the 0.7600 area to contain this weakness. Australian building consents and trade balance data over the coming days should only provide limited market impact.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7600 0.7600 0.7800 0.7634 – 0.7933

AUD/GBP (GBP/AUD)                            

This pair has seen a sharp Australian dollar pullback from just over the 0.5300 (1.8870) level where it was trading less than a week ago. A better than expected UK retail sales result certainly helped, but the majority of the losses have come on the back of Australian dollar weakness. The AUD has been weighed on by further falls in iron ore prices and general concerns about Chinese growth. Initial support comes in around 0.5140 (resistance 1.9455) and the pair may well look to test that over the coming days. Reaction at that level will be key and if it can contain the AUD weakness a recovery back over 0.5200 (1.9230) will likely eventuate. Australian building consents and trade balance data over the coming days should only provide limited market impact. While from the UK this week we have manufacturing and construction PMI’s to digest, both of which should indicate the UK’s economic recovery remains in good shape. We could also easily see increased volatility in the GBP over the coming weeks with campaigning for what looks like a close election now under way.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5174 0.5100 0.5300 0.5156 – 0.5309
GBP / AUD 1.9327 1.8868 1.9608 1.8837- 1.9393

AUD/EURO (EURO/AUD)

This pair failed a number of times to hold onto gains over the 0.7200  (under 1.3890) level this past week, and with the AUD topside firmly capped, the path of least resistance was toward further AUD weakness. Gradually improving data out of Europe has helped the Euro a touch, but uncertainty around the Greek situation is limiting potential gains. A good portion of the pairs move has come on the back of Australian dollar weakness. The AUD has been weighed on by further falls in iron ore prices and general concerns about Chinese growth. The pair looks like it will test initial support around the 0.7030 (resistance 1.4225) level. Australian building consents and trade balance data over the coming days should only provide limited market impact. The market will be paying close attention to how the EU receives Greece reform proposal this week. If some sort of agreement is reached this to enable the release the next tranche of bailout funds to Greece, the Euro certainly has room to appreciate.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7070 0.7030 0.7230 0.7053 – 0.7230
EUR / AUD 1.4144 1.3831 1.4225 1.3832 – 1.4178

AUD/YEN

This pairing has seen the Australian dollar under real pressure from the YEN over the last week. The pressure has been relentless and comes on the back lower iron ore prices and further concerns of the profile of growth in the Chinese economy. For the time being the support at 91.50 has curbed further AUD weakness. In the absence of top tier economic data in Australia this week, the driving for with come from the commodity market performance and the results from the Japanese Tankan report due tomorrow. If the support level continues to hold the 91.50-93.50 range should establish itself for the remainder of the week.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 92.00 91.50 93.50 91.66 – 94.67

AUD/CAD

This last week has seen the Canadian dollar put pressure on the beleaguered AUD. In the absence of any material economic news, the heavy commodity markets combined with lowering Chinese growth prospects to undermine support for the Australian dollar. The pair is now back toward the middle of the 0.9600 to 0.9900 range that has contained trading since the beginning of February. Expect the coming week to see a continuation of choppy trading within that range. Canadian GDP and the trade balance proved the focus from Canada over the coming days. While from Australia we also get the trade balance along with building consents.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9613 0.9600 0.9900 0.9677 – 0.9879

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Market commentary:

The major theme of the past week has been the resurgence of USD strength. The USD has quietly gone about regaining a significant amount of the ground lost the prior week. Increased geopolitical tensions may have helped the USD as Saudi Arabia launched a bombing campaign in Yemen. Concerns about Chinese growth prospects are again in spotlight with authorities recently announcing a relaxation of deposit rules for mortgage lending. The Chinese are trying to increase demand and lift a sagging housing market that has been in decline since 2014. The move follows comments from Peoples Bank of China Governor Zhou who said that China’s growth rate has tumbled a bit too much and that policy makers have room to act.

Australia

There has been nothing of substance released from Australia since last Wednesday’s Financial Stability Review from the RBA. The Australian dollar has remained under pressure however, trading particularly heavily in the early stages of this week. This weakness comes on the back of further commodity price declines and concerns about Chinese growth. Iron ore recently fell to fresh six year lows and the Chinese have announced a relaxation of mortgage down payment rules in order to try and support the housing market. We do get some data to digest over the coming days with building approvals and the trade balance the main focus.

New Zealand

The only data released from New Zealand since last Wednesday’s disappointing trade balance has been building consents and business confidence. Building consents hit the wires earlier this morning and came in at -6.3%, down from the prior -3.8%. This marks the third decrease in a row and it seems that although we have seen a doubling in new dwelling consents since early 2011, the trend has now turned. Business confidence data released in the past hour was largely in line with expectations and supportive of the outlook going forward. Still to come this week we have the latest Fonterra dairy auction. The last auction saw prices tumble 8.8% and another decline here would bring into question the viability of Fonterra’s $4.70 per kg forecasted pay-out.

United States

Last week provided a mixed bag of data from the United States. On the soft side we saw durable goods orders and the final reading of fourth quarter GDP both miss expectations. While on the other side of the coin we had better than forecast results for core inflation, consumer sentiment, manufacturing PMI and services PMI. GDP for the fourth quarter of last year ended up at +2.2%, which although below expectation, is still a healthy result. The first quarter of 2015 is shaping up to be a lot worse than that however. Within the last couple of weeks forecasts have been slashed with Goldman Sachs reducing their estimate from 2.0% down to 1.2%. Other institutions see growth below 1.0%. The weather is partially to blame, but that doesn’t change the fact that combined with very low inflation, it’s going to make it very hard for the Fed to increase interest rates in June. September would be a much more likely time for a lift off in rates, but even then, only if second quarter growth is showing a sold bounce back. Fed Chair Yellen spoke on Friday and although she said a rate rise may well be warranted later this year, she added the economy in an ‘underlying’ sense remains quite weak by historical standards. She also said that the Fed doesn’t have to wait for inflation to actually pick up before hiking, they just have to be confident that it will pick up. She then put a lot of emphasis on continued improvement in the labour market as key to providing that confidence. We get the latest non-farm payrolls data on Friday night, and as always they will be closely watched. Ahead of that release we have consumer confidence, ISM manufacturing PMI and the trade balance.

Europe

While the Greek situation is drawing the majority of headlines and focus at the moment, actual data out of Europe continues to show a gradual improvement. German inflation increased 0.5% which was a touch above the expectation of 0.4%. Spanish inflation at -0.7% was still stronger than forecast and an improvement from the prior -1.1%. Some of this improvement is likely down to the weaker Euro, but we are also seeing improving confidence readings at both the business and consumer level. We get the Eurozone flash estimate of inflation tomorrow evening and this is expected to remain steady at -0.3%. Other data to draw focus this week includes Eurozone unemployment, German retail sales and French consumer spending. The Greek government has apparently submitted a list of 18 reforms to the EU and these need approval before any further bailout funds will be released. Time is running out however, with Greece needing to make a number of significant payments over the coming weeks.

United Kingdom

Although inflation in the UK printed at 0.0% last week, the Bank of England’s (BOE) Broadbent said over the weekend that the “public isn’t worried about deflation and neither am I.” He added that rates are likely to rise over the next 2 – 3 years. Governor Carney was on the wires last night and he said the next rate move is likely to be up. Those comments are probably the last we will see from BOE officials for the next five weeks. The UK has now officially entered into election campaign mode and as such the BOE enter a blackout period where they refrain from making any economic or monetary policy speeches. The market will now start reacting to poll results and the first of those show PM Cameron’s Conservatives have a small four point lead over the opposition Labour Party. Expect increased volatility as we draw close to the May 7th election. The UK consumer seems in good spirits with both retail sales and CBI realized sales coming in stronger than expected last week. This week to draw focus we have the current account, the final reading of GDP, manufacturing PMI and construction PMI.

Japan

Late last week Japan released a rash of economic data and some if it won’t have made great reading for the government or Bank of Japan (BOJ). Inflation rose by 2.2% in the year to February which was lower than the 2.3% expected – but that number includes the sales tax hike imposed by the government in April last year. Stripping out that affect puts inflation back at zero. Governor Kuroda said inflation will stay low in the first half of the year and will rise from early autumn. That remains to be seen. Retail sales also disappointed printing at -1.8% versus -1.4% expected. The only encouraging result was household spending which came in at -2.9% against expectations of -3.1%. Unemployment came in as forecast at 3.5%. Yesterday we saw preliminary industrial production number which fell 3.4% against an expected fall of only 1.8%. This afternoon we get average cash earnings figures and then tomorrow we have the quarterly Tankan report.

Canada

Bank of Canada Governor Poloz spoke late last week and he said the Canadian economy still requires a considerable monetary stimulus to prevent it falling back into recession. He said when the oil shock came it was clear they would no longer be able to close the output gap by 2016 or 2017 and as they still had some firepower they took some insurance by cutting rates. He added the first quarter of 2015 will look atrocious as energy companies cut back investment. On the positive side he believes the improving US economy and weaker Canadian dollar will help exports to recover. He also made it clear the bank still has options to boost the economy if needed. Tonight we get monthly GDP data and then on Thursday night we have trade balance data to digest.

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