Political paralysis has weighed on the USD; NZD consolidating around the 0.7430 USD area and has bounced back against AUD to 0.9379 AUD; Fed Funds rate meeting this week expected to have no surprises

By Ian Dobbs*:

Broad based USD weakness continued to be the main theme of last week. Political paralysis in Washington has weighed on the USD and until the market starts to believe the Trump administration can pass key legislation, it’s hard to see the United States dollar making a significant recovery. We do have the Fed Funds rate meeting this week, although it’s not expected to contain any surprises. While no change in interest rates is expected, we may get further clarity on impending balance sheet reductions from the central bank. Tighter monetary policy throughout much of the developed world is going to be the dominant trend over the coming years. The Bank of Canada recently raised interest rates for the first time in seven years, and the ECB are likely to decide later this year just when to scale back monthly bond purchases. The Bank of England too are expected to join the party and be forced to raise interest rate sometime next year due to rising inflation. Although the process of interest rate increases will be a very gradual one by any historical standard, at some stage asset market valuations are going to come under pressure as a result. Despite central bank’s best efforts the process of interest rate normalization is unlikely to a smooth one.

Major Announcements last week:

  • US Building Permits 1.25m vs 1.20 expected
  • Australian Employment Change 14.0k vs 14.4k expected
  • Australian Unemployment Rate 5.6% as expected
  • BOJ Leaves interest rates unchanged
  • UK Retail Sales 0.6% vs 0.4% expected
  • ECB Leave interest rates unchanged
  • Canadian CPI -0.1% as expected
  • Canadian Core Retails Sales -0.1% vs 0.0% expected

NZD/USD

After failing to make significant gains against a broadly weakening USD in the first half of last week, the New Zealand dollar eventually came to the party and jumped to 10 month highs on Friday at 0.7459. Since then the pair has been consolidating those gains trading back for fourth around the 0.7430 area. It may well be trying to build a base for another crack higher toward the 2016 high at 0.7485. I’m not convinced the NZD has the momentum to break above that high, at least not at the moment, so those looking to purchase USD in the near term should take advantage of any further strength we see. A large part of New Zealand dollars recent rally has been on the back of a broadly weakening United States dollar. Political paralysis in Washington has played a big part in driving the USD’s decline, and for tide to really turn on this move the market is going to need to believe the Trump administration can get some of its key policies passed into law. This week from the US we have the FOMC statement, which shouldn’t provide and major surprises, along with along with Durable Goods order and Advance GDP.

DIRECT FX Current level Support Resistance Last wk range
NZD/USD 0.7437 0.7375 0.7485 0.7268 – 0.7459

NZD/AUD (AUD/NZD)

One of the most surprising aspects about last week’s price action was the strength of the bounce the New Zealand dollar made of its 0.9222 low (1.0844 high) against its Australian cousin. The NZDAUD bounced in quick fashion all the way to 0.9429 (1.0606), before the recovery eventually ran out of steam. Positive comments from Finance Minister Joyce certainly helped the move and it now leaves near term direction a little undecided. We do favour the downside been tested again over the coming week, but after such a strong recovery sellers will be a little more cautious. I would expect resistance around 0.9460 (support around 1.0571)  to cap and further attempts to rally over the course of this week, that is assuming we don’t get a negative surprise from Australian inflation data on Wednesday. That data will be the highlight from an otherwise light economic calendar.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9379 0.9220 0.9460 0.9222 – 0.9424
AUD / NZD 1.0062 1.0571 1.0846 1.0611 – 1.0844

NZD/GBP (GBP/NZD)

The New Zealand dollar outperformed the UK Pound last week, even though both countries produced softer than forecast inflation data. The GBP also has Brexit concerns weighing and those are unlikely to dissipate any time soon. There is pretty solid resistance around the 0.5755 area (support around 1.7377) and that may well cap the pair this week. Any significant decline in the pair however will need to come from some GBP strength, and the only thing this week that could potentially cause that is UK GDP data on Wednesday. A positive surprise there should see the UK Pound stage something of a recovery. At this stage the market is looking for a quarterly gain of 0.3%.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5704 0.5650 0.5755 0.5565 – 0.5741
GBP / NZD 1.7531 1.7377 1.7699 1.7420 – 1.7970

 NZD/CAD

The New Zealand dollar staged something of a recovery against the Canadian dollar late last week driving the cross up to a 0.9375 high. Positive comments from NZ Finance Minister Joyce helped to support the move, but decent data from Canada on Friday night, in the form of Wholesale Trade Sales, once again saw the CAD take the ascendancy. The pair currently trades around the 0.9300 level and while we suspect it may test a little lower yet, we don’t have a firm view on near term direction. Support comes in around 0.9220 while on the topside there is resistance around 0.9380.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9301 0.9220 0.9380 0.9221 – 0.9375

NZD/EURO (EURO/NZD)

We have seen mostly sideways price action for this pair over the past week. Both the New Zealand dollar and the Euro have seen periods of strength, and while this has caused some volatility in the cross rate, overall there has been no real direction. The market has been bouncing around the 0.6380 level (1.5674) and at this stage it’s hard to see what will break it out of the increasingly tight range. There is little of significance in terms of data releases from NZ this week, and while the European economic calendar looks a little more interesting, it’s still mostly second tier stuff. If the pair does decide to try and move, there is support down around 0.6210 and resistance up at 0.6430 (resistance 1.6103 and support 15552).

DIRECT FX Current level Support Resistance Last wk range
NZD/EUR 0.6389 0.6210 0.6430 0.6319 – 0.6406
EUR/NZD 1.5651 1.5552 1.6103 1.5611 – 1.5826

NZD/YEN

Although the NZDJPY has given some indications recently that the broader rally is running out of momentum, the pair is yet to see any significant pullback. The being said, the New Zealand dollar couldn’t make fresh highs against the Yen last week, failing on any attempt toward the 83.20 level. That doesn’t mean it won’t stage some further attempts to rally, but with key resistance coming in around the 2016 high at 83.80, gains past that level seem unlikely. We favour selling into any potential further strength.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 82.72 82.00 83.80 81.69 – 83.18

AUD/USD

Most of last week was spent consolidating the Australian dollar’s recent gains against the USD. Immediate support for the pair is seen around 0.7870 while the recent cycle highs around 0.7988 provide the first level of resistance. These are reasonably lofty levels for the AUD and tomorrow’s Australian inflation data will likely be key in deciding whether or not the rally can continue. This week from the US we have the FOMC statement, which shouldn’t provide and major surprises, along with along with Durable Goods order and Advance GDP.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7925 0.7870 0.7990 0.7787 – 0.7985

AUD/GBP (GBP/AUD) 

The Australian dollar made fresh cycle highs against the UK Pound last week, trading to 0.6146 (low at 1.6271). Brexit concerns and soft UK inflation data have weighed on the GBP which struggled throughout much of the week. Over the past couple of days we’ve seen the pair consolidate around the 0.6075 (1.6461) level as the market awaits further direction. That direction may came from tomorrow’s release of Australian inflation data. A strong inflation result may well see the recent highs tested again, while a soft outcome could spark a significant correction lower. Immediate support comes in around 0.6060 (resistance 1.6502) and any break below there would be a signal further declines are likely.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.6083 0.6060 0.6150 0.5963 – 0.6146
GBP / AUD 1.6440 1.6260 1.6502 1.6271 – 1.6770

AUD/EURO (EURO/AUD)

The Euro staged a decent recovery against the Australian dollar in the second half of last week. The pair had previously traded to a high of 0.6929 (low of 1.4433), but by the end of the week a resurgent EUR had driven the cross back to support around 0.6770 (resistance around 1.4771). The market currently trades around 0.6810 (1.4684) as it awaits the key data release of the week in tomorrow Australian inflation figure. The data outcome may well dictate direction over the coming days. The market is expecting a quarterly inflation outcome of 0.4%.

DIRECT FX Current level Support Resistance Last wk range
AUD/EUR 0.6809 0.6760 0.6840 0.6768 – 0.6929
EUR/AUD 1.4687 1.4620 1.4793 1.4433 – 1.4776

AUD/YEN

Although the Australian dollar has had a significant pull back from recent highs against the Japanese Yen, it has yet to even test key trend line support currently around 87.40. It would take a break below that level to signal the broader uptrend has come to an end. The pair made fresh cycle highs at 89.28 last week, before correcting low to now trade around 88.00. It has been as low as 87.64, but while key support at 87.40 contains any period of weakness, the focus remains on the topside and potential further gains. Key to near term direction however is likely to be tomorrow’s release of Australian inflation data which will be closely watched.

DIRECT FX Current level Support Resistance Last wk range
AUD/YEN 88.16 87.40 89.30 0.9875 – 1.0056

AUD/CAD

The Australian dollar traded to highs of 1.0056 against the Canadian dollar last week, but decent Canadian economic data on Friday night helped the CAD recover some of the lost ground. Wholesale Trade Sales came in much stronger than forecast and that caused the pair decline back to support around 0.9900. Direction over the rest of this week will likely be driven by tomorrow’s release of Australian inflation data. The market is looking for a gain of 0.4% for the quarter and a stronger result than that could easily see the AUDCAD back up over parity. If inflation data disappoints, the market may well set its sights on key support around 0.9750.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9912 0.9750 1.0050 87.50 – 89.28

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Market commentary:

Broad based USD weakness continued to be the main theme of last week. Political paralysis in Washington has weighed on the USD and until the market starts to believe the Trump administration can pass key legislation, it’s hard to see the United States dollar making a significant recovery. We do have the Fed Funds rate meeting this week, although it’s not expected to contain any surprises. While no change in interest rates is expected, we may get further clarity on impending balance sheet reductions from the central bank. Tighter monetary policy throughout much of the developed world is going to be the dominant trend over the coming years. The Bank of Canada recently raised interest rates for the first time in seven years, and the ECB are likely to decide later this year just when to scale back monthly bond purchases. The Bank of England too are expected to join the party and be forced to raise interest rate sometime next year due to rising inflation. Although the process of interest rate increases will be a very gradual one by any historical standard, at some stage asset market valuations are going to come under pressure as a result. Despite central bank’s best efforts the process of interest rate normalization is unlikely to a smooth one.

Australia

After the Reserve Bank of Australia’s (RBA’s) meeting minutes were released these helped to propel the Australian dollar higher early last week, the central bank went into damage control on Friday. Deputy Governor Guy Debelle was scheduled to speak and he used the opportunity to try and rein the currency in. He said a rising AUD is not welcome as it lessens the benefits of faster global growth for Australia and that Australian interest rates do not have to rise in line with global peers. He added that “no significance” should be read into the fact that the neutral rate was discussed at the July policy meeting. In the minutes it was revealed the bank believes the neutral rate is now around 3.5%. The discussion around the currently perceived neutral rate has no bearing on the current course of monetary policy, and the market may have got a little over excited when analysing that particular part of the minutes. These comments seemed to have helped in keeping something of a lid on the AUD’s gain, at least for now. Of interest this week will be the release of inflation data on Wednesday along with a speech from Governor Low later that same afternoon. We can expect him to try and talk the currency down as well.

New Zealand

Last Tuesday’s soft NZ inflation result only seemed to temporarily limit the New Zealand dollars gains. By late in the week the NZD was surging ahead once again, making across the board gains as the USD came under broad pressure. Strong migration and credit card spending data certainly didn’t hurt the NZD, and neither did Finance Minister Joyce’s comments that hit the wires on Friday. He was quoted as saying he’s unperturbed by New Zealand dollar strength, that it reflects a strong NZ economy, and that NZ firms are coping well with the currency at current levels. He added consumers are benefiting from low levels of imported inflation. The NZD finished the week on a very solid footing trading to a ten month high against the USD and recovering sharply against the AUD after losing significant ground earlier in the week. The economic calendar is very quiet this week with just the Trade Balance on Wednesday of any note.

United States

The United States dollar lost further ground last week still suffering the hangover from soft retail sales and inflation data earlier in the month. The currency was also weighed on by turmoil in Washington and the very real prospect that the Trump administration may struggle to pass any of its key legislation. Multiple failures to repeal and replace, or even just repeal, Obama care, despite a republican majority, raises questions about a whole host of other issues. Tax reform, the budget, and the debt ceiling all loom large as hurdles in the not too distant future. The debt ceiling is going to need to be sorted by late September or early October to avoid what would no doubt be a devastating government shut down for the Trump administration. Trump needs a policy win, and he needs one soon, to get the entire administration, and the USD, back on track. A credible tax reform package would certainly turn the USD around, but that could be a long way off. Other things that could see the USD stage a significant recovery would include inflation and wages finally breaking higher, or perhaps rising capex growth along with significant infrastructure spending. None of these things seem likely in the very near term, but all the market really needs to begin buying USD’s again, is a renewed belief in Trumps ability to enact his agenda. Until he gets a policy win under his belt, the USD is likely to continue to struggle. The main focus this week will be on the FOMC meeting, although it’s unlikely to deliver any major surprises.

Europe

The Euro had a positive week last week supported by expectation that the central bank will, in the not too distant future, be forced to scale back the ultra-easy monetary policy settings they currently have in place. ECB president Draghi tried hard to water down those expectations when he spoke in the wake of the bank’s latest policy meeting, but the market wasn’t buying it. The Euro area economy is on the mend, albeit slowly. Overnight we have seen Manufacturing and Service sector PMI’s from both France and Germany with most of the data seeing small declines from the prior readings. The data has helped to take a little heat out of the EUR, but the PMI’s are still at healthy levels and they don’t materially impact the current positive economic outlook. The EUR may have just come a little too far too fast some consolidation, or even a corrective pullback, seems likely over the course of this week.

United Kingdom

The UK Pound has struggled over the past week, weighed on by soft inflation data and Brexit concerns. Even better than forecast retails sales data late last week failed to turn the GBP around. The IMF just released their latest GDP forecasts and they have revised down UK growth for 2017 by 0.3% to 1.7%. They’ve left their 2018 forecast at 1.5%. Brexit concerns do seem now to be impacting consumers with the monthly Household Finance Index survey falling to its lowest level since July 2014. The survey showed household willingness to make big purchases fell to its lowest level in 4 years, reflecting an ongoing squeeze on incomes as inflation rises faster than wages. There are signs that this squeeze has started to spill over to consumer spending patterns. This week’s main focus will be on Preliminary GDP data set for release on Wednesday. The market is looking for a quarterly figure of 0.3%, up from the 0.2% prior.

Japan

Last week’s Bank of Japan Monetary Policy Statement was only notable for the moving target that is the 2% inflation goal. The bank once again delayed the date they expect to achieve the target, with them now saying it will take until 2019. This week should prove interesting with a raft of data out on Friday. Household spending, unemployment, and retail sales data are all set for release along with the latest reading on inflation.

Canada

The Canadian dollar had a mostly positive week last week, although some heat did come out of it on Friday in the wake of soft retail sales data. All in all though, the earlier hawkish interest rate hike by the Bank of Canada is still broadly supporting the CAD. Friday’s data saw core retail sales come in at -0.1% vs a forecast of flat, while inflation came in as expected at -0.1%. Last night saw Wholesale Trade Sales data that came in at 0.9% vs 0.5% expected. This stronger than forecast release saw the CAD back on the front foot making gains again. Later this week we have monthly GDP data to draw focus, although if forecasts are correct it shouldn’t negatively impact the CAD.

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