NZDUSD trapped in the 0.7250 and 0.7340 range for three weeks and a downside bias likely; NZDAUD also likely to have a downside bias; US data shows low unemployment but not broad based wage gains

By Ian Dobbs*:

The G20 meeting over the weekend failed to have any dramatic impact on financial markets. The communique made it clear they are not all on the same page when it comes to climate change and trade, with the group issuing dissenting conclusions for the first time. Cracks between the US and the rest of the G20 could not be glossed over and the potential for a trade war on steel is certainly there. It looks like the US made very clear it’s concerns about the glut of Chinese steel and the final agreement mentioned “legitimate trade defence instruments”.  It also demanded concrete policy solutions by November from a G20 sub-body set up last year to examine steel market imbalances.

US employment data on Friday highlighted the conundrum many western economies have found themselves in recently. That is that low unemployment hasn’t led to broad base wage gains, and as such, predictions of increasing inflation over the coming forecast horizon may well be optimistic. Central banks however are slowly starting to acknowledge the risks of overextended asset markets and we may find that becomes a key driver behind further interest rate hikes. Ultra-easy monetary policy settings, for what turned out to be much much longer than anyone originally thought, has likely sown the seeds for the next financial crises. It may not be just around the corner, but at some stage down the road increasing interest rates are going to put major pressure on extremely stretched valuations in bonds, equities, and real estate in many countries.

Major Announcements last week:

  • UK Services PMI 53.4 vs 53.6 expected
  • Australian Trade Balance 2.47b vs 1.00b expected
  • US ISM Non-Manufacturing PMI 57.4 vs 56.5 expected
  • UK Manufacturing Production -0.2% vs 0.5% expected
  • Canadian Employment Change 45.3k vs 11.4k expected
  • Canadian Unemployment Rate 6.5% vs 6.6% expected
  • US Non-Farm Payrolls Change 222k vs 175k expected
  • US Unemployment Rate 6.5% vs 6.6% expected

NZD/USD

The New Zealand dollar has been trapped in an increasingly tight range against the United States dollar over the past few weeks. Even Friday’s key US employment data couldn’t break the deadlock. Support comes in around 0.7250 with topside resistance around 0.7340, and these two levels have contained the pair for much of the past three weeks. Last night’s range was a decidedly anaemic 19 points! Although further attempts to rally can’t be ruled out, our view is that the greater risk is a significant pullback toward the 0.7000 area. At this stage however it’s hard to see what exactly could trigger that. In the meantime, those looking to purchase USD should take advantage of the current level, or any potential further strength we may see.

DIRECT FX Current level Support Resistance Last wk range
NZD/USD 0.7251 0.7250 0.7340 0.7245 – 0.7310

NZD/AUD (AUD/NZD)

The past month has seen the New Zealand dollar trapped within a 0.9480 to 0.9650 (1.0550 to 1.0363) range against its Australian cousin. The market is currently sitting bang in the middle of the range around 0.9565 (1.0455). We favour selling into strength for the pair as we don’t think interest rate differentials justify a move above the 0.9650 (1.0363) area. Both central banks are on hold until next year, when we believe they will both eventually hike rates. We believe a move back below 0.9300 (above 1.0753) holds a much greater probability than a move above 0.9700 (below 1.0309).

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9531 0.9480 0.9650 0.9477 – 0.9618
AUD / NZD 1.0492 1.0363 1.0550 1.0398 – 1.0552

NZD/GBP (GBP/NZD)

Like many New Zealand dollar pairings, the NZDGBP has been range bound over the past couple of weeks. The UK pound is struggling for direction at the moment, with disappointing data countering the Bank of England’s tightening bias. The NZD too has been treading water recently albeit at what we consider slightly elevated levels. This sideways price action won’t continue forever, but at this stage it’s hard to see what could trigger a move. The only data of significance this week comes from the UK in the form of their employment and earnings numbers. Maybe that will finally break the deadlock?

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5627 0.5595 0.5660 0.5597 – 0.5660
GBP / NZD 1.7772 1.7666 1.7873 1.7669 – 1.7867

 NZD/CAD

The Canadian dollar has been a strong performer over the past couple of weeks, buoyed by increasing expectation of an interest rate hike from Bank of Canada (BOC) this week. Friday’s strong Canadian employment numbers have only added to this expectation and they helped to push the NZDCAD cross down to is 0.9350 low.  There is solid support around 0.9325 however and that may well contain the downside leading into Wednesday night’s’ BOC announcement. Direction after that will largely depend on what the BOC signal going forward.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9352 0.9325 0.9525 0.9346 – 0.9473

NZD/EURO (EURO/NZD)

We favour the New Zealand dollar lower on this cross at some stage, but for the time being the pair remains very range bound. There are differing views with the ECB as to just when they should ease back on ultra easy monetary policy and such it’s hard to get too excited about Euro strength at the moment. We think an eventual decline will come from some broad based NZD weakness as it’s currently trading at somewhat elevated levels across the board. Until something triggers an NZD correction lower however the 0.6350 to 0.6450 (1.5748 to 1.5504) range will dominate.

DIRECT FX Current level Support Resistance Last wk range
NZD/EUR 0.6364 0.6350 0.6450 0.6361 – 0.6434
EUR/NZD 1.5714 1.5504 1.5748 1.5541 – 1.5721

NZD/YEN

Unlike many other New Zealand dollar pairings, the NZDJPY has been in the midst of a significant rally over recent weeks. This move has largely come from weakness in the Japanese Yen as the BOJ continue to reaffirm their determination of keep ultra easy monetary policy until 2% inflation is reached. At this stage there is no sign the rally is over so the risks remain skewed to the topside. That being said, there is key resistance not far away at 83.70 and it should prove very tough to overcome. The pair failed at that level twice back in December and January and it may well cap this rally as well. Those looking to purchase Yen should take advantage to the current strength. Any move back below 81.80 would be a negative signal and would likely encourage further selling.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 82.75 81.80 83.70 82.07 – 83.16

AUD/USD

It’s been a week of sideways price action for the Australian dollar vs the USD. Trading has been contained between the tight parameters of 0.7570 and 0.7630. Even Friday’s key US employment data failed to break the deadlock and for the time being we can expect more of the same. There is little in the way of significant data set for release from Australia this week. On the US side of the equation we do have testimony from Janet Yellen to digest on Wednesday night, followed by inflation and retails sales data on Friday night.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7606 0.7570 0.7630 0.7572 – 0.7681

AUD/GBP (GBP/AUD) 

After declining against the UK Pound for much of last week, the Australian dollar bounced off support around 0.5850 on Friday. Some disappointing UK data last week no doubt helped turn the pair around as it’s acted to counter the current Bank of England tightening bias. Initial resistance comes in around 0.5935 and that levels is likely to be tested this week.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5904 0.5850 0.5935 0.5841 – 0.5932
GBP / AUD 1.6937 1.6850 1.7094 1.6858 – 1.7121

AUD/EURO (EURO/AUD)

The Australian dollar has been losing ground to a resurgent Euro over the past few weeks. It’s been a messy sort of decline but the trend remains intact for the time being. It would take a move above 0.6705 to bring the downtrend into question. If that level was overcome the focus would turn to 0.6760. On the downside there is minor support around 0.6635 and then again at 0.6570.

DIRECT FX Current level Support Resistance Last wk range
AUD/EUR 0.6673 0.6570 0.6760 0.6634 – 0.6754
EUR/AUD 1.4985 1.4793 1.5221 1.4807 – 1.5074

AUD/YEN

Japanese Yen weakness has been the dominant driver of this pair over recent weeks as prices have been trending higher. Resistance around 87.50 is now in sight and it would take a move below support at 85.80 to suggest the uptrend has run its course. Until then, look for further tests higher.

DIRECT FX Current level Support Resistance Last wk range
AUD/YEN 86.77 85.80 87.50 85.67 – 86.93

AUD/CAD

The Canadian dollar has been a strong performer over the past couple of weeks, buoyed by increasing expectation of an interest rate hike from Bank of Canada (BOC) this week. Friday’s strong Canadian employment numbers have only added to this expectation and they helped to push the AUDCAD cross down to is 0.9771 low. Further loses from here may be harder to come by as much of the expected interest rate hike is now priced in. Key to direction going forward will be the outlook from the BOC in terms of potential future rate hikes.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9807 0.9750 0.9960 0.9772 – 0.9978

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Market commentary:

The G20 meeting over the weekend failed to have any dramatic impact on financial markets. The communique made it clear they are not all on the same page when it comes to climate change and trade, with the group issuing dissenting conclusions for the first time. Cracks between the US and the rest of the G20 could not be glossed over and the potential for a trade war on steel is certainly there. It looks like the US made very clear it’s concerns about the glut of Chinese steel and the final agreement mentioned “legitimate trade defence instruments”.  It also demanded concrete policy solutions by November from a G20 sub-body set up last year to examine steel market imbalances.

US employment data on Friday highlighted the conundrum many western economies have found themselves in recently. That is that low unemployment hasn’t led to broad base wage gains, and as such, predictions of increasing inflation over the coming forecast horizon may well be optimistic. Central banks however are slowly starting to acknowledge the risks of overextended asset markets and we may find that becomes a key driver behind further interest rate hikes. Ultra-easy monetary policy settings, for what turned out to be much much longer than anyone originally thought, has likely sown the seeds for the next financial crises. It may not be just around the corner, but at some stage down the road increasing interest rates are going to put major pressure on extremely stretched valuations in bonds, equities, and real estate in many countries.

Australia

The Reserve Bank of Australia made it clear last week they remain very neutral and monetary policy is likely to remain on hold well into next year. Until recently there had been a big split in market expectations for the next move in interest rates, with some prediction a cut while other saw the next move as a hike. Recent economic data from Australia however is starting to see those who were predicting a cut in interest rates, re-asses their forecasts. Employment data has surprised on the strong side for three months in a row and last week’s key releases, those of retail sales and the trade balance, both came in better than forecast. The economic calendar is a lot lighter this week with only second tier data scheduled for release. Business confidence, consumer sentiment, and inflation expectations will hit the wires over the coming days but they are unlikely to elicit any significant market response.

New Zealand

There has been little data of significance from New Zealand over the past week. This coming week also looks very light on the economic calendar. It’s not so surprising then that the NZD remains largely range bound on many crosses at the moment. It’s starting to feel like Groundhog day with the NZDUSD trading in a sideways range for much of the past month. We’ve seen a little more volatility against the Australian dollar, but again overall prices are around the same level they were in early June. Against the GBP the NZD has been range bound for the past two weeks, while movements in the JPY, EUR and CAD have driven those particular crosses.

United States

Non-farm payrolls data on Friday came in better than forecast at 222k. The market had been expecting a gain of around 175k. Tempering any potential positive impact on the USD was the unemployment rate which actually ticked up to 4.4%, and the fact that wage gains disappointed again. Creating jobs is all well and good, but if wages aren’t going up, it’s hard to imagine where all the expected inflation is going to come from down the road. Janet Yellen seems determined to continue tightening policy however with indications that the Fed is waking up to the risks of overvalued asset markets. Yellen is set to testify to the US Congress and Senate this week and we are likely to see her confirm that the gradual move higher in interest rates is set to continue. We also have inflation data and retails sales figures to digest later in the week.

Europe

The European economy remains on the gradual improve and this is helping to support the EUR. Last week saw largely positive numbers from the manufacturing and service sectors as well as strong French and German industrial production data. It does seem however there is a lack of consensus within the European Central Bank about just how long they should continue with the ultra loose monetary policy. Governing Council member Klaas Knot said over the weekend “if we carry on with this policy for too long, that is absolutely a potential danger”. He added “I think that we have gotten very close to that moment”. His concerns have been echoed by a number of German officials. On the other side of the coin we have Peter Praet who is the ECB’s chief economist and Executive Board Member. He has recently been quoted as saying “underlying inflationary pressure remains subdued” and “the process of reflation is a long one that remains highly dependent on accommodative monetary policy”. The economic calendar this week looks pretty light so the market will pay particular attention to any further comments from ECB officials.

United Kingdom

The UK Pound is struggling for direction at the moment, caught between opposing forces. On the one hand we have the Bank of England (BOE) who have indicated a tightening bias while on the other hand recent economic data has been less than stellar. Last week saw disappointing results from the Manufacturing and Service sector PMI’s, along with declines in Manufacturing and Industrial Production numbers. There has also been whispers of discontent with PM May which are not surprising really given what was effectively a disaster for her in the UK election. We have a couple of BOE speakers this week along with employment data to draw focus. As has been the case in the US recently, the market will likely focus more on the earnings figures than the actual jobs numbers.

Japan

The Japanese economy does seem to be on the improve, but the Bank of Japan (BOJ) are far from even considering winding back stimulus. The BOJ released their quarterly Regional Economic Report yesterday and in it they raised their economic assessment for 5 of the 9 regions. It’s their most optimistic report for the past 12 years with momentum seen gaining in exports and consumption. A speech from Governor Kuroda over the weekend however, made it clear the bank will continue to expand the monetary base until consumer inflation is stable above the 2% target. The commitment to continue the aggressive stimulus has seen the Japanese Yen weaken across the board over recent days.

Canada

The Canadian dollar has been the top performing currency over the past two weeks, driven largely by expectations that the Bank of Canada will lift interest rates when they meet on Wednesday. Economic data out of Canada recently has been better than forecast and that trend continued on Friday with the release of the employment figures. Canada gained 45.3k jobs last month with the unemployment rate dropping to 6.5% from 6.6% prior. The central bank is nearly certain to raise interest rates and that expectation has now been largely priced into the market. The reaction in the Canadian dollar after the event will come down to the tone of the statement and just what signals the BOC send out re future hikes.

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