Market expectation is now 70% chance of US rate hike; pressure on ECB for December rate cut; dovish rhetoric from BoE sees no interest rate change in near term

By Ian Dobbs*:

The US dollar and U.S. Fed rate hike expectations surged on Friday after the release of a block-buster October non-farm payrolls report which saw a gain of 271,000 jobs, well above the 182,000 market expectations.

This was the largest monthly employment gain this year; the unemployment rate at 5.0% is now the lowest since 2008.

Fed rate hike expectations for a December lift-off have moved from ~55% before the number to around 70% now and should make the decision to move an easier one for Fed chair Janet Yellen.

In Europe expectations of a rate cut by the ECB in December continue to mount, whilst across the English Channel dovish rhetoric from the BOE have the market continuing to delay expectations of a move in the near-term from the BOE.

Major Announcements last week:

  • German Manufacturing PMI (Oct. 52.3, vs. 52.0 exp.)

  • UK Manufacturing PMI (Oct. 55.5, vs. 51.3 exp.)

  • Australian cash rate, 2.0% as exp.

  • UK Construction PMI (Oct. 58.8 as exp.)

  • NZ GDT Dairy index -7.4%.

  • NZ Q3 Employment (-11k, +10k exp.)

  • Australian Retail Sales (Sep. 0.4% as exp.)

  • US ISM Non-manufacturing PMI (Oct. 59.1 vs 56.5 exp.)

  • UK cash rate, 0.5% as exp.

  • Canadian Ivey PMI (Oct. 53.1 vs. 54.0 exp.)

  • US Non-farm Payrolls (Oct 271k vs. 182k exp.)

  • US Average Hourly Earnings (Oct. 0.4% vs. 0.2% exp.).

NZD/USD

The New Zealand dollar has fallen sharply against its U.S. counterpart over the last week. It was a perfect storm for the NZD after a soft GDT dairy auction combined with a softer than expected NZ Q3 employment report on Wednesday. A very strong U.S. labour report on Friday which has most in the market anticipating a Fed lift-off in December rounded off the poor week for the NZD. With a quiet data week locally we will look to offshore developments in risk sentiment and U.S data to drive the kiwi. With little to change momentum for now we favour selling, firstly near .6570, then .6615/20.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6542 0.6495 0.6570 0.6501 – 0.6778

NZD/AUD (AUD/NZD)

The New Zealand dollar fell sharply last week against the Australian dollar. NZD highs near .9500 (1.0526) were quickly left behind after a combination of factors pushed the pair to NZD lows around .9200 (highs 1.0870) later in the week. These included a lack of a rate cut by the RBA (2.0%) on Tuesday. Adding to this was worse than expected decline in the latest GDT dairy auction prices (Wednesday morning) was promptly followed by a miss in the NZ Q3 employment data (-11k, vs. +10k exp.). The NZD has recovered from its lows after Friday’s U.S. labour report induced heavy selling on the AUD as key commodity prices fell after chances of an imminent U.S. interest rate hike were upgraded.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9275 0.9200 0.9345 0.9190 – 0.9453
AUD / NZD 1.0782 1.0701 1.0870 1.0579 – 1.0882

NZD/GBP (GBP/NZD)

The New Zealand dollar has consolidated within a range against the U.K. pound over the last week. This comes after initially falling heavily post the latest weak GDT dairy auction and NZ Q3 employment data disappointment. It recovered well from lows near .4275 (highs 2.3392) after the dovish comments seen at the BOE monetary policy meeting later in the week. We favour more range trading this week, especially until Wednesday night’s U.K. employment report.  NZD sellers continue to be attracted to levels ahead of .4400 (2.2727).

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4325 0.4275 0.4400 0.4276 – 0.4396
GBP / NZD 2.3121 2.2727 2.3393 2.2750 – 2.3385

 NZD/CAD

The New Zealand dollar fell heavily against the Canadian dollar last week after GDT dairy auction and Q3 NZ employment data saw the NZD fall significantly over the week. Both the NZD and CAD have eased against the big dollar post the release of Friday’s strong U.S. employment report, although for now we favour moderate downside to this cross during what is a quiet week data-wise for both currencies. Risk sentiment and key commodity price movements will be important drivers.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8675 0.8615 0.8750 0.8623 – 0.8868

NZD/EURO (EURO/NZD)

The New Zealand dollar trades well down against the Euro over the last week after setting highs near .6150 (1.6260). The NZD downside momentum seen after the poor latest GDT dairy auction and weak NZ Q3 employment report has subsided in light of the recent increased speculation of an ECB easing at its next December meeting. With a light data calendar this week in both NZ and Europe, we expect this cross to be contained well within last week ranges.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6080 0.6035 0.6150 0.6039 – 0.6154
EUR / NZD 1.6447 1.6260 1.6570 1.6250 – 1.6560

NZD/YEN

The New Zealand dollar sits near the middle of its range seen against the Yen currently after finding some support under 80.00 following the latest soft GDT dairy auction and NZ Q3 employment report last week. The strong U.S. non-farm payrolls report on Friday has helped bolster the USD significantly against the Yen and has contributed to the NZDJPY staying within a range as the NZD/USD exchange rate found buying interest around the .6500 level. With a light data calendar from both countries this week we see this cross as likely continuing to stay with a 79.85/81.10 type range, although marginally favour the downside. Global risk sentiment is likely to be the key driver.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 80.46 79.85 81.10 79.92 – 81.84

AUD/USD

After holding up well initially last week against its U.S. counterpart, the Australian dollar has fallen sharply post Friday’s release of a very strong U.S. non-farm payrolls employment report. The lack of interest rate cut by the RBA saw the AUD find some support early in the week, although the divergent monetary policy paths of the Fed and RBA were highlighted by the strong U.S. employment data. Thursday’s Australian October employment release will be important if the AUD is to arrest it’s downwards trajectory, although a sell rallies in the AUD sentiment is favoured.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7050 0.7000 0.7125 0.7018 – 0.7223

AUD/GBP (GBP/AUD)                            

The Australian dollar has relinquished much of its gains seen against the U.K. pound last week. These gains occurred after the RBA failed to cut interest rates and the BOE was seen issuing a more dovish than expected monetary policy statement (which saw it downgrade its inflation expectations). Employment data from both countries this week will be pivotal for the next move in this cross, especially if the AUD is to arrest the downside momentum that has been seen after the U.S. employment report. Key commodity price movements will therefore continue to important also for the AUD.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4663 0.4630 0.4740 0.4632 – 0.4730
GBP / AUD 2.1445 2.1097 2.1598 2.1143 – 2.1590

AUD/EURO (EURO/AUD)

The Australian dollar remains firm against the Euro, although off its highs (.6608, 1.5133) after the strong U.S. employment report release on Friday. Heightened talk of an ECB rate cut at its December meeting should see this AUD remain in demand, although Thursdays Australian employment data will be an important driver of the next move. First support should be seen around the .6520 (resistance 1.5337) level. European wide GDP data on Friday and commodity price movements (AUD) will also be noted.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6552 0.6520 0.6610 0.6485 – 0.6607
EUR / AUD 1.5263 1.5129 1.5337 1.5136 – 1.5421

AUD/YEN

The Australian dollar is drifting off its highs against the Yen seen last week (~87.60) after the RBA remained on hold at Tuesday’s monetary policy meeting. The prospect of pending Fed rate hikes has dampened general risk sentiment and placed some pressure on the key AUD commodity price drivers. Thursday’s Australian employment data release could be important for the next move in this cross should it vary greatly from the market consensus. For now we favour moderate downside bias for this pair.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 86.75 85.50 87.60 86.22 – 87.58

AUD/CAD

The Australian dollar has eased against the Canadian dollar post the release of a better than expected U.S. employment report on Friday. The increased market expectation of a December Fed rate hike has dampened risk enthusiasm, somewhat placing pressure on the AUD. Better than expected Canadian employment data also released on Friday has helped moderate any CAD underperformance. Australian employment data due for release on Thursday should be watched closely.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9355 0.9300 0.9450 0.9337 – 0.9444

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Market commentary:

The US dollar and U.S. Fed rate hike expectations surged on Friday after the release of a block-buster October non-farm payrolls report which saw a gain of 271,000 jobs, well above the 182,000 market expectations. This was the largest monthly employment gain this year; the unemployment rate at 5.0% is now the lowest since 2008. Fed rate hike expectations for a December lift-off have moved from ~55% before the number to around 70% now and should make the decision to move an easier one for Fed chair Janet Yellen. In Europe expectations of a rate cut by the ECB in December continue to mount, whilst across the English Channel dovish rhetoric from the BOE have the market continuing to delay expectations of a move in the near-term from the BOE.

Australia

Last week saw the RBA leave interest rates on hold at the historic low of 2.0%, a level it has been at since May this year. However, the RBA board said that the soft inflation outlook could open the door for a further rate cut if required. The RBA lowered their underlying inflation outlook on Friday to 2.00% from 2.50% for this calendar year and forecast a 2.00% rate for the year to June 2016 also. Data released over the weekend saw Chinese exports fall 6.9% in October, worse than the 3.0% decline expected. The trade balance marginally missed expectations after China posted a $61.4 Bn surplus for the month ($62.0 Bn exp.). Australian ANZ Job Ads for October released yesterday rose 0.4%, well down from the 3.8% print registered last month. This week we look forward to the NAB Business Confidence survey and RBA housing credit data later today before the more important October employment data on Thursday.

New Zealand

Sentiment towards the local currency soured last week after another fall in the GDT dairy auction which saw the GDT-TWI register a 7.4% decline. The NZ Q3 employment report released the same day showed a loss of 11,000 jobs during the quarter (+10,000 exp.) as the NZ economy struggles to generate the degree of new jobs required to accommodate the surging migration numbers. The currency faced further headwinds at the end of the week after the release in contrast of an exceptionally strong U.S. October employment report on Friday. This saw U.S. non-farm payrolls swell by 271,000 jobs, well above the 182,000 expectations. The report also showed falling U.S. underemployment and a lift in the annual pace of growth in average hourly earnings to 2.5%. Expectations for a Fed-lift in rates in December spiked as a result of the release and contrast sharply with NZ’s bias towards lower rates in the months ahead. A speech by the RBNZ Governor Wheeler tomorrow dominates an otherwise quiet local calendar this week.

United States

Expectations of a Fed rate hike in December surged on Friday after the release of a very strong U.S. October non-farm payrolls report (+271k, vs. +182k exp.). The figures showed the largest monthly employment gain this year and the lowest unemployment rate since 2008 (5.0%, from 5.1%). Average earnings growth posted its largest rise since 2009 (+0.4% m/m vs. 0.2% exp) whilst the underemployment rate also fell further to 9.8%, some 1.7% lower than levels seen a year ago. The fact that U.S. equities were largely unperturbed by the data and with market expectations for a December lift-off now at 70% should help make the transition to rate hikes more easy for the U.S. Fed Chair Janet Yellen. ISM manufacturing data released earlier in the week met expectations, whilst the non-manufacturing survey was stronger than expected after it increased to 59.1 in October from 56.9 the month prior. U.S. data releases this week concentrate on Friday and will be dominated by the October retail sales report and producer price data.

Europe

ECB monetary policy discussion and a strong U.S. labour report dominated sentiment towards the Euro over the last week. Media reports released overnight suggested that the ECB are preparing for rate cuts in December and that some Governing council members were pushing for a ‘big cut’. Last week ECB President Draghi noted concerns over price stability in the medium term and the effectiveness of the current Asset Purchase Programme (APP) in achieving this goal. Weak German factory order (-1.7% m/m) and industrial production data (1.1% y/y vs. 1.3% exp, 1.8% prior)  released towards the end of the week also placed the EUR under pressure. Tonight sees the release of relatively low impact French and Italian Industrial Production data before German and French inflation data on Thursday and Euro-wide GDP data on Friday.

United Kingdom

The BoE meeting dominated trade in the GBP last week. The local currency fell sharply after the BoE was seen lowering its near-term inflation forecasts on the back of continued weak oil prices, an elevated currency and concern over global growth. A strong U.S. non-farm employment report release on Friday only added to the GBP’s woes. U.K. industrial production also released on Friday showed a 0.2% decline m/m in September and a decline in the annual pace of growth to 1.1% from 1.8%. The simultaneous release of better than expected U.K. trade data was largely overlooked by the market. Construction and Services PMI data released earlier in the week was generally solid and showed that activity remained well into expansionary territory. This week will be dominated by U.K. employment data to be released on Wednesday night.

Japan

It was a slow week for data-flow in Japan last week. Sentiment towards the JPY has been dominated by the end of week release of a strong U.S. October employment report. This has the market lifting its expectations for a Fed rate lift-off in December. Locally the BOJ released the minutes to its monetary policy meeting which noted concern over the impact of low oil prices on the bank’s 2.0% medium-term inflation target. The market expects the BOJ Governor Kuroda to be proactive in easing monetary policy further should offshore risks pose a threat to the moderate Japanese recovery. Later today will see the release of Japanese current account data which is expected to expand from last month’s reading (2.235Tn JPY exp.). Thursday will see the release of Japanese Machinery orders data before the week is rounded off with Industrial production and Capacity Utilization data of Friday. These second tier data releases should be dominated by USD sentiment.

Canada

Friday’s better than expected Canadian employment release took a back seat to the strong U.S. employment data report. Canadian employment rose by 44,000 in October, well above the 10k market consensus, although the number was dominated by a large rise in part-time employment (35.4k). Much of the increase being official roles related to the recent Canadian election. The unemployment rate fell to 7.0%. RBC Manufacturing PMI data and the Ivey purchasing managers index releases both fell short of their expectations. Canadian Housing Starts data for October released overnight marginally missed the 200k expectations at 198.1k, well down from last month’s 231.3k print. Oil market developments and U.S. data flow should drive the CAD given this week’s empty Canadian data calendar.

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