Prospect of higher US interest rates, excess supply and slowdown in demand from emerging markets to blame for commodity price decline

By Ian Dobbs*:

Commodities have been under pressure again recently and this has pressured the commodity currencies of New Zealand, Australia and Canada.

Oil has traded back below $50 a barrel for the first time since April. Iron ore has fallen from $62 a tonne in mid-June to just over $51 currently.

Yesterday we saw gold make multi year lows in a very sharp move, and dairy prices have continued their relentless decline.

Commodity indexes are close to levels not seen since 2002.

A broadly stronger US dollar, and the prospect of higher US interest rates, is partially to blame, but excess supply combined with a slowdown in demand from emerging markets, and China in particular, is playing a big part.

These influences are likely to remain prevalent over the coming months and the second half of this year could well prove to be another tough one for commodities.

Major Announcements last week:

  • US Retail Sales -0.3% vs +0.2% expected
  • Australian Consumer Sentiment -3.2%
  • Bank of Japan leaves rates unchanged
  • UK Claimant Count +7.0k vs -8.9k expected
  • UK Average Earnings 3.2% vs 3.3% expected
  • Canadian Manufacturing Sales 0.1% vs 0.3% expected
  • Bank of Canada cuts interest rate by 0.25%
  • NZ Inflation 0.4% vs 0.5% expected
  • ECB leaves policy settings unchanged
  • Canadian Inflation 0.2% vs 0.2% expected
  • US Inflation 0.3% vs 0.3% expected
  • US Consumer Sentiment 93.3 vs 96.0 expected
  • Canadian Wholesale Sales -1.0% vs +0.1% expected

NZD/USD

The New Zealand dollar traded to fresh cycle lows late last week just above the 0.6500 level. The currency started the week not far off the level in quiet trade, but comments from PM John Key yesterday afternoon did case a sharp move toward 0.6600. The immediate focus is on the RBNZ rate statement set for release on Thursday morning. A 0.25% interest rate cut is fully priced into the market at this stage and with the central bank expected to signal further easing’s to come, the NZD will find plenty of willing sellers into any further strength. Key downtrend resistance now comes in around 0.6720 and it would take a move above that level to warn a broader correction higher is unfolding. Until then, the downside remains the more vulnerable. Largely second tier data from the US this week shouldn’t have a major impact with the broader trend toward a stronger USD well intact at this stage.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6591 0.6500 0.6720 0.6502 – 0.6739

NZD/AUD (AUD/NZD)

After declining to .8789 (1.1378) late last week, we have seen the NZD recover some ground in recent days. The gains in New Zealand dollar performance were helped in large part by comments from PM John Key Yesterday. The bigger picture is one of consolidation for the cross between the broad parameters of 0.8750 and 0.9060 (1.1429 and 1.1038), after the steep NZD declines seen since late April’s test toward parity. The RBNZ’s rate statement on Thursday morning could well add some volatility, but further consolidation within those broad parameters is expected over the coming week. Tomorrow from Australia we have inflation data to digest, followed by a speech from Governor Stevens.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8930 0.8750 0.9060 0.8789 – 0.9042
AUD / NZD 1.1198 1.1038 1.1429 1.1060 – 1.1379

NZD/GBP (GBP/NZD)

Over the past month or so the medium term target for this pair has been a test of support around the 0.4150 level (resistance around 2.4096). That goal was all but achieved this past week with a dip to 0.4164 (spike to 2.4015). In the past 24 hours we have seen a small recovery off that low thanks in large part to comment from NZ PM John Key. There should continue to be good buying interest ahead of 0.4150 (2.4096) if only from profit takers who sold the NZD higher at higher levels. We could potentially see a bounce a high as key resistance now around 0.4310 (support around 2.3202). I would expect that level to cap potential gains in the near term. The big focus this week is on the RBNZ’s rate statement on Thursday morning. The market is expecting a 0.25% cut to the cash rate, along with a signal further cuts are coming. From the UK this week we have the Bank of England minutes as well as retail sales data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4325 0.4150 0.4310 0.4164 – 0.4330
GBP / NZD 2.3613 2.3202 2.4096 2.3096 – 2.4013

 NZD/CAD

The New Zealand dollar has staged a significant bounce from last week’s low of 0.8412. Comments from PM John Key gave the local currency a decent boost yesterday, in otherwise quiet trade. Both currencies are under pressure from declining commodity prices and the RBNZ are set to match the recent Bank of Canada’s interest rate cut, when they release their rate statement on Thursday morning. As such we are seeing the pair continue to trade within the broad parameters of 0.8400 to 0.8600 that has dominated trade for the most part since mid-June. Any sustained break above 0.8600 would signal a broader correct higher is unfolding that will likely target 0.8760. If 0.8600 resistance can contain the topside the pair should turn back down toward 0.8400.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8560 0.8400 0.8600 0.8412 – 0.8580

NZD/EURO (EURO/NZD)

Both the New Zealand dollar and Euro have seen periods of pressure this past week. During one period of NZD underperformance the pair traded to fresh cycle lows at 0.5951(highs at 1.6804), but a NZD recovery since then leaves the cross little changed from where it was a week ago. Downside momentum looks to be lacking for this pair now and for the time being I expect dips to continue to be support. I would also not be surprised to see a broader correction higher, initially targeting 0.6200 (1.6129), unfold over the coming week or two. The first hurdle to overcome however, is the RBNZ’s rate statement set for release on Thursday morning. A 0.25% cut to the cash rate is fully expected, but the statement could easily provide some volatility. From Europe this week we have manufacturing and service sector PMI’s along with Spanish unemployment to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6090 0.6000 0.6200 0.5951 – 0.6110
EUR / NZD 1.6420 1.6129 1.6667 1.6367 – 1.6802

 NZD/YEN

We have seen this pair stage something of a recovery off last week’s 80.53 cycle low. Indicators are suggesting downside momentum is waning and as such any potential dips toward support around 80.00 may well provide a buying opportunity. The pair is currently trading around 81.75 and we have the RBNZ’s rate statement on Thursday morning to digest. This release could provide significant volatility. Key to NZD direction will be just how strongly the central bank indicates further interest rate cuts are coming. A cut this week of 0.25% is fully priced into the market. The Yen itself is seeing some pressure in the wake of a downgrade to growth and inflation forecast by the Bank of Japan and this is expected to continue in the near term. A target on the topside would be a test of resistance around 83.00.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.97 80.00 83.00 80.53 – 82.98

AUD/USD

The Australian dollar continues to etch out fresh cycle lows against the USD. Yesterday’s dip to 0.7330 was just the latest in a long list of lower lows and lower highs. Broad based weakness in commodities and the trend toward a stronger USD are doing the damage to the AUD for the time being. Key downtrend resistance is now seen around 0.7560, and while below that level the risks remain skewed toward further AUD weakness. Today’s RBA minutes will provide some further insight into the central bank’s thinking, and they should also reflect the slight easing bias the bank maintains. The bank will be pleased with recent Australian dollar weakness, although they are likely to repeat further declines are necessary. Largely second tier data from the US this week shouldn’t have a major impact, with the broader trend toward a stronger USD well intact at this stage.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7376 0.7300 0.7500 0.7330 – 0.7488

AUD/GBP (GBP/AUD)                            

The Australian dollar has remained under pressure from the UK Pound this past week, with the current level not far off recent AUD cycle lows. Declining commodity prices are weighing on the AUD, while the GBP has gained from talk of approaching interest rate hikes by BOE Governor Carney. Major downtrend resistance now comes in around 0.4810 (uptrend support around 2.0790) and that is the key level to watch on any period of strength. A break above that level will encourage further buying. Until then however, the risks are all skewed to further AUD downside for the pair. The RBA minutes in the next hour will provide some focus, then tomorrow we have inflation data to digest, followed by a speech from Governor Stevens. From the UK this week we have the Bank of England minutes as well as retail sales data to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4740 0.4700 0.4925 0.4702 – 0.4806
GBP / AUD 2.1097 2.0305 2.1277 2.0805 – 2.1267

AUD/EURO (EURO/AUD)

The Australian dollar has managed to outperform the Euro this past week, thanks largely to weakness in the Euro. Over the past few days minor support around 0.6770 (resistance around 1.4771) has contained the downside and while that remains the case a broader recovery toward 0.6950 (1.4388) could well unfold. We have the RBA minutes set for release in the next hour, then tomorrow we have Australian inflation data to digest, followed by a speech from Governor Stevens. From Europe this week we have manufacturing and service sector PMI’s along with Spanish unemployment to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6815 0.6700 0.6950 0.6708 – 0.6825
EUR / AUD 1.4674 1.4380 1.4925 1.4653 – 1.4907

AUD/YEN

There has been no overall direction for this pair over the past week with a tight range around 91.60 developing. Both currencies have seen pressure recently. The Australian dollar has been weighed on by declining commodity prices, while the Yen as drifted lower after the Bank of Japan downgraded growth and inflation forecasts last week. Direction from here is a tough call. If minor support around 91.00 continues to contain the downside a recovery back toward 93.00 could develop. That would be my base case scenario at this stage. A break below 91.00 would however bring that outlook into question.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 91.80 91.00 93.00 91.03 – 92.42

AUD/CAD

Although both the Australian dollar and the Canadian dollar have been under pressure recently on the bank of declining commodity prices, it is the CAD that has underperformed. That underperformance has been driven by the Bank of Canada’s interest rate cut last week and it helped to drive the pair up toward 0.9600 from levels just above 0.9400 a week ago. If the cross can sustain a break above 0.9600 then a move toward 0.9700 should develop. For the time being though, levels just above 0.9600 have been a step too far for the pair. I expect a range of 0.9500 to 0.9700 over the coming week.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9582 0.9500 0.9700 0.9424 – 0.9620

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Market commentary:

Commodities have been under pressure again recently and this has pressured the commodity currencies of New Zealand, Australia and Canada. Oil has traded back below $50 a barrel for the first time since April. Iron ore has fallen from $62 a tonne in mid-June to just over $51 currently. Yesterday we saw gold make multi year lows in a very sharp move, and dairy prices have continued their relentless decline. Commodity indexes are close to levels not seen since 2002. A broadly stronger US dollar, and the prospect of higher US interest rates, is partially to blame, but excess supply combined with a slowdown in demand from emerging markets, and China in particular, is playing a big part. These influences are likely to remain prevalent over the coming months and the second half of this year could well prove to be another tough one for commodities.

Australia

Data from Australia last week didn’t have much impact on the Australian dollar with a mixed bag of results from business confidence, consumer sentiment and inflation expectations. This week to draw focus we have the Reserve Bank of Australia (RBA) minutes set for release in the next couple of hours. These should give us a bit more insight into the current thinking with the RBA. We expect the minutes to confirm the bank’s soft easing bias. The central bank will no doubt be happy to see the current weakness in the Australian dollar, but the cold hard reality is it’s yet to boost other segments of the economy. Business investment remains disappointing and economic growth is largely reliant on continued gains in the housing market. Tomorrow we have inflation data to digest, followed by a speech from RBA Governor Stevens.

New Zealand

This is only one focus in NZ at the moment and that is on the result Thursday mornings RBNZ interest rate meeting. Economists and forecasters are unanimously calling for an interest rate cut from the central bank, with one going as far suggesting we could see a 0.5% reduction. That should be a step too far for the RBNZ, but with a 0.25% cut this week well priced into the market, attention will turn to the rate statement and the signals that it sends out in regard to potential further cuts this year. It is expected the bank will suggest further readings may be appropriate, with many in the market already expecting another two cuts after this one. That outlook, assuming it’s backed up by the RBNZ, should broadly keep the NZD under pressure in the near term. However, the currency is much more realistically priced now than it was only a month or so ago. The easy work on the downside has therefore been done. The weaker currency will also have done some of the easing work for the RBNZ and as the Prime Minister said yesterday, the economic outlook is not completely gloomy. The NZ economy is still growing at a good rate and some sectors will really start to benefit from the lower NZD. We can expect a greater demand for NZD’s on any further weakness, than we have seen in recent weeks, if only from profit takers who sold the currency higher. But overlaying this is broad based weakness in commodity prices in general, which is weighing on all commodity currencies at the moment.

United States

Data from the United States in the second half of last week was largely positive. All indications are that the housing market remains strong with positive readings from both building permits and housing starts. Permits are actually running at the highest level since 2007. Inflation data came in bang on expectation at 0.3% month on month, but consumer sentiment did dip to 93.3 from 96.1 prior. Concerns about Greece and China may well have weighed on consumer sentiment, but even so the current level is still consistent with solid economic growth. The Fed’s Bullard was on the wires last night suggesting there is a 50% chance of an interest rate hike in September. He said “the economy as a whole – you can complain about this or that being sluggish – but it’s not in emergency mode. We’ve got unemployment very close to the natural rate. Inflation is a little low, but will probably return to target.” If the Fed firmly believes inflation is going to pick up, then a September hike may well be on the cards. If they are not that confident of a pick-up they may choose to wait for further confirmation, in which case December would be more likely. Data wise this week we have only have the second tier indicators of existing home sales, manufacturing PMI and new home sales set for release along with weekly unemployment claims.

Europe

Things are slowly starting to return to normal in Greece, or as normal as they can be with a completely unsustainable debt load, crushing austerity and almost no sovereignty. The banks are re-opening and the country made a EUR 6.8bln payment to creditors last night. Germany’s Merkel was interviewed over the weekend and she again repeated that there will be no haircut for Greek debt. She said they can talk about changing maturities and lowering interest rates, but a classic haircut within the currency union is not possible. How Greece is ever supposed to manage its current debt load is beyond the realms of economic and even simple maths. Greece, and the Eurozone as a whole, would have to grow at fantasy levels for the debt pile to become sustainable. Germany is making a big mistake and is increasingly been seen as vindictive county abusing its position of power. The first Greek bail out back in 2010 was all about saving the European banking system, which at the time couldn’t have withstood a Greek default. That not the case now as banks are better capitalised and their exposure to Greece dramatically reduced. If you’re not going to dramatically reduce Greece’s debt load, why pump more European taxpayers money into a third bailout programme of a country that is ultimately going to default? It makes no economic sense. For the time being however, the markets can start to focus back on data from the wider Eurozone. This week we have manufacturing and service sector PMI’s to digest. Both are forecast to improve slightly from the prior levels. Spanish unemployment is also set to hit the wires and it should come in around 23%.

United Kingdom

Although data from the United Kingdom last week was a little softer than forecast, it wasn’t soft enough to impact the current economic outlook, or dent the UK Pound to any real degree. The GBP actually had a reasonably positive week thanks in large part to comments from Bank of England (BOE) Governor Carney. He said the point at which interest rates will begin to rise is coming closer.  Those comments were echoed in a weekend article in which he was also quoted. The article points toward a rate hike around the turn of this year, with a slow path to a “level about half as high as historical averages” to quote Carny himself. This week from the UK we have the BOE minutes to digest along with retails sales data. The minutes should show a continuation of a 9-0 vote in favor of keeping interest rates steady, with a couple members suggesting they are close to voting for a hike. In terms of retail sales, the market is forecasting a gain of 0.4%, up from the prior +0.2%.

Japan

There has been nothing of significance released from Japan since last Wednesday’s central bank monetary policy statement. The Yen has weakened somewhat since that release in which the bank cut its growth and inflation forecasts. This week we have the BOJ minutes to digest (unfortunately they are from the meeting prior to last Wednesday’s), along with the trade balance and manufacturing PMI.

Canada

Canadian inflation came in a touch stronger than forecast on Friday. Headline inflation increased 0.2% on the month in June, while the core reading remained flat. The market was expecting core inflation would decline by -0.1%. The result will have little bearing on monetary policy going forward. Last week’s decision by the Bank of Canada (BOC) to cut interest rates by 0.25% was driven by disappointing growth figures that suggest the economy has failed to recover from the very poor first quarter. This weighed heavily on the currency and with oil prices dipping back below $50 a barrel on Monday for the first time since April, it seems the Canadian dollar is likely to remain on the back foot in the near term. Last night we saw wholesale sales data for May and this only confirmed the soft economic picture. Wholesale sales fell 1.0% against expectations for a reading of flat. At the end of this week we get the latest reading from retail sales. The market is expecting a gain of 0.4%, with the ex autos number forecast to increase 0.7%. It seems the risks to those forecasts are on the downside.

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