RBA likely to hold if market pricing is accurate; lack of inflation in Eurozone front of mind for ECB; global dairy auction and unemployment key drivers for NZD

By Ian Dobbs*:

This week shapes up as another important week for the markets starting with today’s RBA cash rate announcement and statement on monetary policy on Friday.

Current pricing only marginally favours the RBA remaining on hold at 2.0% today. Expectations of a rate cut have increased after the recent Q3 inflation report and lift in mortgage rates.

In the U.S. it will be all about the October employment report on Friday where market consensus forecasts centre on a 182k gain in jobs.

Last Friday’s BOJ meeting failed to ignite the market after the BOJ failed to add any extra stimulus to its current program. However, the market remains convinced of further easing in months ahead as inflation struggles to reach the 2.0% BOJ inflation target.

A lack of inflation also remains at the front of the ECB’s mind. ECB president Draghi said at the weekend that he expected inflation to remain near zero into 2016 and that the ECB was ready to do what it takes to keep medium-term inflation on course.

Tonight’s GDT dairy trade auction and NZ unemployment report tomorrow will be important drivers for the NZD this week.

Major Announcements last week:

  • German IFO Business climate 108.2 vs 107.8 exp.

  • NZ September Trade balance -1222M m/m vs -800M exp.

  • UK Preliminary Q3 GDP 0.5% q/q vs 0.6% exp.

  • US Durable Goods Orders -1.2% m/m on exp.

  • US CB Consumer Confidence 97.6 vs 103.0 exp.

  • Aus Q3 CPI 0.5% q/q vs. 0.6% exp.

  • NZ RBNZ cash rate 2.75% as exp.

  • US Preliminary Q3 GDP 1.5% q/q vs 1.6% exp.

  • NZ ANZ Business Confidence 10.5%

  • Japan Unemployment 3.4% as exp.

  • Eurozone Preliminary CPI 0.0% y/y vs. 0.1% exp.

  • Canadian GDP 0.1% m/m as exp.

  • US Employment cost index 0.6% q/q as exp.

NZD/USD

The New Zealand dollar has recovered well against the USD from its post RBNZ and FOMC inspired losses. A correction after the sharp USD rally and a strong recovery in the ANZ business confidence survey have helped the NZD pick up from its lows. Further gains are likely to be limited ahead of tonight’s GDT dairy auction and tomorrow’s NZ employment report. Friday’s U.S Nonfarm payrolls employment report will also be an important driver. The NZD has extended somewhat further than expected from its lows, although further gains above 68c would likely require significant surprises in the data flow, initial support should lie in the .6620/30 area.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6755 0.6620 0.6800 0.6635 – 0.6812

NZD/AUD (AUD/NZD)

Data-flow over the next 24 hours and the RBA meeting today hold the key to the NZDAUD this week. The New Zealand dollar continues to see supply on gains against the Australian above .9500 (1.0525). The cross has the potential for a decent downward NZD correction should the RBA remain on hold today, data flow which favours Australia over NZ would add to the impetus. Initial demand should be seen around .9320 (resistance 1.0730) although a larger correction could test .9260 support (~1.0800resistance).

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9435 0.9320 0.9525 0.9339 – 0.9529
AUD / NZD 1.0599 1.0730 1.0500 1.0494 – 1.0708

NZD/GBP (GBP/NZD)

The New Zealand dollar has consolidated against the U.K. pound within recent ranges since our last report, although trades lower than a week ago after last week’s currency strength warning from the RBNZ. The cross has failed to break the recent lateral price movement seen between .4340-.4460 (2.2420 – 2.3040) over the last 3 weeks. Support around .4335/40 (resistance 2.3070) appears the vulnerable side to this week’s key drivers which are the NZ unemployment report and dairy price data tomorrow and the BoE monetary policy statement on Friday.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4380 0.4340 0.4415 0.4348 – 0.4444
GBP / NZD 2.2831 2.2650 2.3041 2.2501 – 2.2999

 NZD/CAD

The New Zealand dollar is drifting against the Canadian dollar for the time being after undergoing a solid downwards correction from its highs last week post the RBNZ cash rate announcement. Dairy price and NZ unemployment data over the next 24 hours will be pivotal for the next move. In Canada IVY PMI and unemployment data on Friday should be watched. First resistance lies around .8900/05 and .9010 beyond. A break of .8715 should place much of the gains seen since mid September under threat.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8845 0.8715 0.8905 0.8753 – 0.9009

NZD/EURO (EURO/NZD)

The New Zealand dollar remains well supported against the Euro for now, although we note a failure to post any further upside over the last nearly 2 weeks. The .6035/50 (~1.6570-1.6530) zone now appears to be key NZD support and may be tested if the NZ data-flow in the next 24 hours disappoints materially. First resistance is around the .6160 (support 1.6234) level and .6185 (1.6168) beyond. The NZD downside appears quite vulnerable given the solid gains seen since mid-September should the data not meet expectations. Especially consider in light of Governor Wheeler’s expressed concern over the recent NZD strength.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6130 0.6050 0.6160 0.6056 – 0.6164
EUR / NZD 1.6313 1.6520 1.6234 1.6223 – 1.6513

NZD/YEN

The lack of any action by the BOJ at its meeting on Friday has meant the New Zealand dollar has traded well within recent ranges against the Yen. Key to further gains will be the data out of NZ over the next 24 hours (dairy price and unemployment), especially given the light Japanese data flow this week and the recent reduced market turmoil which has limited JPY safe-haven flow. The bias is moderately higher for the time being while the support around 80.20 holds although the data will dictate.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.60 80.20 82.25 80.29 – 82.02

AUD/USD

The RBA cash rate announcement later today will be pivotal for the Australian dollar fortunes, especially given the markets even split of opinions. A lack of cut should bring .7200 quickly into view with next resistance likely ahead of .7250. The RBA statement on monetary policy and U.S. employment report on Friday will also be key drivers. First support is seen around .7050/60 and then around the .7000 level. We have a moderate bias to the upside for now ahead of the RBA meeting.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7155 0.7060 0.7200 0.7069 – 0.7257

AUD/GBP (GBP/AUD)                            

The Australian dollar has lost ground against the U.K. pound over the last week after the soft Australian inflation report and more hawkish than expected U.S. Fed talk. The RBA cash rate announcement (today) and BoE statement on Friday (likely to a lesser extent) will be important for the next move. Solid resistance is much higher near .4740 (support 2.1097) should the data flow and RBA favour the AUD, whilst a break of .4600 (2.1739) should likely see the recent AUD down-leg continue. Australian retail sales tomorrow (to a lesser extent) and the RBA monetary policy statement on Friday will also be drivers.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4640 0.4600 0.4670 0.4599 – 0.4731
GBP / AUD 2.1552 2.1413 2.1739 2.1135 – 2.1743

AUD/EURO (EURO/AUD)

The Australian dollar remains well below its highs seen against the Euro from the start of last week (.6590, 1.5175). This has come about as the market sold the AUD on the back of increasing expectations of an RBA rate cut at its announcement this afternoon, and to a lesser extent the more hawkish than expected U.S. Fed at last week’s FOMC meeting. We moderately favour gains in this cross, although this will be very dependent on the RBA course of action. A break of resistance around .6515 (1.5349) will open upside towards last week’s highs.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6495 0.6400 0.6515 0.6421 – 0.6571
EUR / AUD 1.5396 1.5625 1.5349 1.5219 – 1.5574

AUD/YEN

The Australian dollar has fallen sharply against the Yen over the last week as RBA rate cut expectations at today’s meeting have grown. The soft Australian Q3 inflation report and more hawkish than expected U.S. Fed FOMC statement released last week also weighed. Direction for this cross will be dictated by events in Australia this week, a lack of a cut by the RBA should see this cross move beyond 87.00 Yen, whilst a breach of 85.50 exposes lower levels.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 86.50 85.40 88.00 85.46 – 87.66

AUD/CAD

The Australian dollar has fallen sharply against the Canadian from highs set around .9578 early last week. Today’s RBA cash rate announcement will be pivotal to the next move in this cross. Expectations for a rate cut from the current 2.0% cash rate have lifted after last week’s soft Australian Q3 inflation report. Canadian unemployment data and IVY PMI along with the RBA statement on monetary policy on Friday will also be important drivers. We see the upside as being especially vulnerable given the swift down-leg last week, although naturally the RBA is paramount.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9375 0.9290 0.9400 0.9294 – 0.9578

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Market commentary:

This week shapes up as another important week for the markets starting with today’s RBA cash rate announcement and statement on monetary policy on Friday. Current pricing only marginally favours the RBA remaining on hold at 2.0% today. Expectations of a rate cut have increased after the recent Q3 inflation report and lift in mortgage rates. In the U.S. it will be all about the October employment report on Friday where market consensus forecasts centre on a 182k gain in jobs. Last Friday’s BOJ meeting failed to ignite the market after the BOJ failed to add any extra stimulus to its current program. However, the market remains convinced of further easing in months ahead as inflation struggles to reach the 2.0% BOJ inflation target. A lack of inflation also remains at the front of the ECB’s mind. ECB president Draghi said at the weekend that he expected inflation to remain near zero into 2016 and that the ECB was ready to do what it takes to keep medium-term inflation on course. Tonight’s GDT dairy trade auction and NZ unemployment report tomorrow will be important drivers for the NZD this week.

Australia

The RBA interest rate decision later today is the major event on the Australian calendar this week. Market pricing puts the chance of a cut from the present 2.0% at marginally less than 50%. The recent lift in mortgage rates and low-side inflation reading last week (+0.5% vs.+0.7% exp. q/q) have added fuel to the rate cut debate. Whilst the decision is a close call we see the RBA remaining on hold as the underlying inflation measure printed within the 2-3% RBA target (headline 1.5% p.a.). Data released late last week was mixed, HIA new home sales for September fell 4.0% whilst September private sector credit at 0.8%, exceeded the 0.5% expectations. Chinese manufacturing PMI data released over the weekend remained below the 50.0 expansionary level for the third straight month (49.8), the Caixin measure released yesterday was also soft although improved to 48.3 from 47.2. Chinese non-manufacturing PMI data slowed to 53.1 as small firms continue to feel the strain. Australian building approvals data for September rose 2.2% slightly exceeding the 2% expectations. Trade and retail sales data tomorrow are of note before the more important RBA statement on monetary policy on Friday.

New Zealand

Unemployment data due for release tomorrow for Q3 and the latest GDT dairy auction (tonight, futures currently imply a ~ 5% decline) will dominate sentiment towards the NZD this week. The unemployment rate is forecast to rise above 6 % as record migration numbers boost the working age population. The economy is forecast to have created an additional 10k jobs in the 3 months to September 30. Trade last week was heavily influenced by the cash rate announcement where the RBNZ was seen leaving the cash rate on hold at 2.75%. Comments from the RBNZ may limit the NZD’s upside in the near term after the Governor expressed concern over the recent currency strength and the impact it may have on inflation and economic activity. The ANZ business confidence survey released on Friday showed a widespread boost in confidence after the large improvement seen in dairy prices since their August trough. Seasonally adjusted the bounce was the largest 1-month lift seen in 20 years.

United States

The U.S. FOMC meeting dominated dollar sentiment last week. This saw demand for the dollar increase as the market raised the prospects for a December rate lift off after the Fed’s more bullish than expected assessment of the U.S. economy. GDP data showed a slowing in growth in Q3 as expected. The U.S. PCE deflator (the Fed’s preferred inflation measure) rose 0.1% (0.2% exp.) and year-ended growth was unchanged at 1.3%. Employment cost data met expectations in Q3 (0.6% q/q) after a soft Q2 result, although both the pending home sales (-2.3% m/m) and CB consumer confidence failed to meet expectations. The ISM manufacturing survey released overnight whilst broadly in line with market expectations (50.1, vs. 50.0 mkt.) shows that manufacturing activity continues to slow throughout the course of 2015. Data flow this week will help drive Fed rate hike expectations, with Friday’s October Nonfarm Payroll report being of critical importance. Expectations centre on a 182k gain in jobs and no change in the unemployment rate at 5.1%. ISM Non-Manufacturing PMI data and a testimony from the Fed chair Janet Yellen (both on Thursday morning NZ time) will also be of interest.

Europe

The Euro suffered last week on the back of a surge in the dollar post the U.S. FOMC meeting. Increasing expectations of ECB easing before the end of the year have also weighed. German data was largely solid. The unemployment rate at 6.4% remains at post-reunification lows, German inflation at 0.2% y/y exceeded expectations, although flat September retail sales failed to meet the 0.4% rise expected. Flat y/y euro zone inflation data released on Friday was an improvement on the -0.1% y/y decline recorded in September, although still remains well below the ECB’s near 2% target. ECB President Draghi said in comments at the weekend that he expected inflation in the Eurozone to remain close to zero, if not negative, into 2016. He also added that the ECB is ready to do what it takes to keep its medium-term inflation target on course. Yesterday saw the final euro zone area manufacturing PMI data upgraded modestly to 52.3 (from 52.0). It was driven by improved revisions in the German PMI data, the French and Spanish numbers were revised lower however. The remainder of the week will be punctuated by more PMI data. German factory data on Thursday night and industrial production on Friday will be of some interest.

United Kingdom

The BoE meeting (Friday morning NZ time) hogs the focus in the U.K. this week in what is otherwise a quiet week data wise. No change in monetary policy is expected, although the market will closely watch the bank’s comments for thinking on future BoE action. Currently the market is not looking for a first rate hike until 2017. Data released last week mainly disappointed. GDP for Q3 showed a moderation in growth to 0.5% q/q from 0.7% in Q2, the mortgage approval and CBI industrial order indicators also failed to meet expectations. On a positive note U.K. manufacturing PMI data for October rose to its highest level since June 2014 in data released overnight (55.5 vs. 51.3 exp.). The data was helped by strong export orders, the employment component remained in expansionary territory for the 30th consecutive month. Construction PMI data due for release tonight and Services PMI data (tomorrow night) will also be of interest.

Japan

The BOJ interest rate meeting was the key event in Japan last week. The central bank left its policy settings unchanged on Friday and pushed back the timing for its expectations of achieving its 2% y/y inflation target to H2 2016. The market will continue to price the potential for further easing in the months ahead whilst the BOJ continues to struggle to achieve this target. Despite September core inflation data marginally topping expectations on Friday (-0.1% y/y vs -0.2% exp.), it did little to change the markets thinking. Other data released last week was mixed. Industrial production data improved sharply (+1% m/m) in September, although retail sales fell 0.2% y/y. September household spending and start data both failed to meet expectations. October manufacturing PMI data released yesterday showed growth in production increasing to its fastest rate since February (52.4) and new orders increasing at their sharpest rate in a year.

Canada

Losses for the CAD for most of last week reversed late in the week to leave it moderately higher today on levels a week ago. Canadian August GDP data released on Friday met expectations rising 0.1% m/m. Whilst posting a third straight month of growth the levels were less than those posted a month prior. RBC October manufacturing PMI data released overnight fell to 48.0 against the 48.5 expectations. The CAD has eased somewhat in recent trade on the back of sliding oil prices although sits well above levels seen after last week’s more hawkish than expected U.S. FOMC statement. The IVY PMI release on Friday morning (NZ time) and Canadian October employment data on Saturday morning are the key events to watch this week.

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