RBNZ rate cut expectations heightened on pessimistic global commodity price outlook; US looks set to hike following solid non-farm payrolls data; continued volatility likely

By Ian Dobbs*:

Expectations of a rate cut this Thursday by the RBNZ heightened yesterday after the market took an increasingly pessimistic view on the global commodity price outlook.

The market also remains concerned over the relatively elevated level of the currency in relation to RBNZ forecasts.

The currency level remains a key consideration for the RBNZ and recent trading has the NZ-TWI well above those RBNZ forecasts.

In the U.S. a move in the opposite direction looks a done deal later this month after the release of another solid U.S. non-farm payrolls employment report on Friday.

Odds of a hike now sit at ~74% with a recent Bloomberg survey showing 68 of 73 economists polled expecting a rate hike in what will be the first monetary policy tightening in the U.S. since the 2004-2008 tightening cycle.

These factors point towards continued volatility in the coming weeks through the end of year period.

Major Announcements last week:

  • NZ Q3 terms of trade -3.7%

  • NZ GDT dairy price index +3.6%

  • Australian building permits (Oct. +3.9% m/m, vs. -2.3% exp.)

  • Australian cash rate, unchanged at 2.0%

  • German unemployment rate (Nov. 6.3%, vs. 6.4% exp.)

  • U.K. Markit manufacturing PMI (Nov. 52.7, vs. 53.6 exp.)

  • US ISM manufacturing PMI (Nov. 48.6, vs. 50.3 exp.)

  • Australian Q3 GDP (0.9%, vs. 0.8% exp.)

  • Eurozone core inflation (0.9% y/y, vs. 1.0% exp.)

  • US ISM non-manufacturing PMI (Nov. 55.9, vs. 58.0 exp.)

  • Australian retail sales (Oct 0.5% m/m, on exp.)

  • US Non-farm payrolls (Nov. 211k, vs. 200k exp.)

  • Canadian employment (Nov. -35.7k, vs. -10k exp.)

NZD/USD

The New Zealand dollar finished last week on a firm footing trading to highs near .6790 after the release of the U.S. non-farm employment data. Overweight U.S. positioning and weaker U.S. data helped drive the strong gains. This week has begun poorly for the NZD however. Losses have been driven by strong renewed weakness in commodity prices and commodity currencies. Oil prices have fallen to fresh lows below $US 38 per barrel (WTI) after OPEC’s decision on Friday not to cut current production levels.  Other focus for the NZD will be Thursday’s RBNZ interest rate decision; expectations have lifted in recent days of a cut to the current 2.75% cash rate.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6642 0.6600 0.6800 0.6592 – 0.6787

NZD/AUD (AUD/NZD)

The New Zealand dollar continued higher last week trading to highs near .9200 (1.0870) on Friday. Firm Australian data last week including Q3 GDP, which surpassed expectations, have been overlooked in recent days as the AUD has fallen victim to harsher commodity price inspired selling. Key iron ore prices which have recently broken below $US40/tonne continue to hurt the AUD. First support is noted around .9050 (1.1050). Thursday looms as a key day for this cross with the release of the RBNZ rate call and Australian employment data.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9145 0.9050 0.9200 0.9054 – 0.9198
AUD / NZD 1.0935 1.0870 1.1050 1.0872 – 1.1045

NZD/GBP (GBP/NZD)

The New Zealand dollar has eased from its highs seen against the U.K. pound on Friday after the U.S. employment report. A lack of liquidity in the NZD/USD exchange rate helped this cross trade to highs near .4480 (lows 2.2321), levels last seen in mid June. Whilst a touch surprising such moves can come from left-field as liquidity dries up nearer holiday periods. Fresh direction for this cross will come from the respective monetary policy meetings from both countries later this week. Minor support is noted near .4380 (resistance 2.2831) and then .4360 (2.2936). Key support is placed around .4330 (key resistance 2.3095).

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4415 0.4330 0.4480 0.4379 – 0.4480
GBP / NZD 2.2650 2.2321 2.3095 2.2320 – 2.2834

 NZD/CAD

The New Zealand dollar continues to trade firmly against the CAD in trade today, although sits well off its ~.9045 highs seen on Friday. The cocktail of weak Canadian employment data and the fallout from OPEC’s decision not to cut current oil production quotas helped drive the gains. Oil pricing and the RBNZ rate call (Thursday) will be the drivers of this cross this week. We favour higher levels in this weak oil price environment, although the RBNZ rate decision this week complicates the view.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8965 0.8775 0.9065 0.8802 – 0.9043

NZD/EURO (EURO/NZD)

The New Zealand dollar recovered well against the Euro on Friday after the sharp ECB inspired falls seen earlier in the day. having said that, it remains on the back foot again in current trade on the back of commodity inspired selling.  First resistance for this cross is around .6215 (support 1.6090) where it reached in late Friday trade, and then the important .6325 (1.5810) level. Critical support is seen at .6035 (resistance 1.6570) and should be tested if the RBNZ cuts interest rates as most predict on Thursday. We favour selling NZD rallies for now, but note the extreme RBNZ risk should an interest rate cut not come.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6130 0.6035 0.6215 0.6066 – 0.6319
EUR / NZD 1.6313 1.6090 1.6570 1.5825 – 1.6486

NZD/YEN

The New Zealand dollar has fallen sharply against the Yen after Friday’s post U.S. non-farm payrolls employment report liquidity surge, which took it to highs around the 83.35 level. Some support is seen around 81.20, although more key support is distant at 79.65. The next key driver for this cross will come from Thursday’s RBNZ rate call. We lack any real bias at current levels based on a very tough RBNZ rate call.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.85 79.65 83.35 81.24 – 83.37

AUD/USD

The Australian dollar is trading with a soft tone today after it again tested resistance on Friday around the .7385 level. The test came after the U.S. non-farm payrolls employment report. However, it has been quickly rejected on the back of renewed commodity price inspired selling (note extremely weak oil and iron ore prices). Key support comes in near .7150; key resistance is still around .7385. Australian employment data on Thursday is the next test for this cross, although NAB business confidence later today will be of some interest. The weak commodity price environment has us favouring selling rallies towards .7320 for now.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7256 0.7150 0.7385 0.7227 – 0.7385

AUD/GBP (GBP/AUD)                            

The Australian dollar has continued to ease against the U.K. pound since our last report. The falls come from the weakness seen in the AUD on the back of the continued declines seen in key commodity pricing and commodity linked currencies. Initial support for this cross lies in the .4785-.4805 (resistance 2.0899-2.0812) region, whilst first resistance now forms around .4875 (support 2.0513). Direction for the cross this week will continue to derive from commodity price movements. Also in the mix are Thursday’s release of the Australian employment data and the BOE monetary policy meeting.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4825 0.4785 0.4875 0.4801 – 0.4914
GBP / AUD 2.0725 2.0513 2.0899 2.0349 – 2.0829

AUD/EURO (EURO/AUD)

The Australian dollar is trading heavily against the Euro in current trade. This comes on the back of the fallout from the sharp rally seen in the EUR post the ECB meeting last week. Commodity inspired selling of the AUD sees this cross currently trading near its recent lows. Support is eyed at the .6670 (resistance 1.4993) level, immediate resistance is seen near .6775 (support 1.4760). We favour the AUD to trade heavily in the lead up to Thursday’s Australian employment data, especially whilst key commodity pricing remains weak.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6700 0.6670 0.6775 0.6683 – 0.6954
EUR / AUD 1.4925 1.4760 1.4993 1.4380 – 1.4963

AUD/YEN

The Australian dollar is presently trading with a weaker tone against the Japanese Yen in current trade. Declines from highs around 90.70 seen on Friday have occurred on the back of commodity inspired losses in the AUD. The commodity price environment will continue to be critical for the AUD this week, especially in the lead up to the Australian employment data due for release on Thursday. First support is noted near 89.00, although better support is seen near 88.00 for now.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 89.45 88.00 90.75 89.06 – 90.71

AUD/CAD

The Australian dollar continues to trade well against the Canadian dollar, although presently sits shy of its recent .9845 highs. The Australian dollar should continue to outperform the Canadian in the current weak oil price environment, but having said that, Australian employment data to be released on Thursday has the potential to alter proceedings (at least temporarily).

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9800 0.9580 0.9880 0.9650 – 0.9844

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Market commentary:

Expectations of a rate cut this Thursday by the RBNZ heightened yesterday after the market took an increasingly pessimistic view on the global commodity price outlook. The market also remains concerned over the relatively elevated level of the currency in relation to RBNZ forecasts. The currency level remains a key consideration for the RBNZ and recent trading has the NZ-TWI well above those RBNZ forecasts. In the U.S. a move in the opposite direction looks a done deal later this month after the release of another solid U.S. non-farm payrolls employment report on Friday. Odds of a hike now sit at ~74% with a recent Bloomberg survey showing 68 of 73 economists polled expecting a rate hike in what will be the first monetary policy tightening in the U.S. since the 2004-2008 tightening cycle. These factors point towards continued volatility in the coming weeks through the end of year period.

Australia

The AUD has eased in trade overnight and sits well off its highs seen on Saturday morning which were set after the release of the U.S. non-farm payrolls employment report. Renewed commodity price weakness in trade this week has been behind the souring in sentiment seen towards the AUD. A decision by OPEC on Friday to maintain current oil production levels has helped the price of oil plumb fresh six and a half year lows in trade overnight. Australian data was largely positive last week and was led by a firm Q3 GDP data release on Wednesday. October retail sales was seen matching market expectations on Friday and hence failed to excite. Data released yesterday showed ANZ job ads rising 1.3% m/m in November. The outlook for the AUD this week will depend on Thursday’s November employment data release and movements in the key underlying commodities. Westpac consumer confidence and home lending data on Wednesday also feature. NAB business confidence data will be released later today.

New Zealand

The NZD has eased off highs ahead of .6790 (set on Saturday morning) at the start of the week. Extended positioning saw the USD sell-off at the week’s end after the solid U.S. non-farm payrolls employment report, a report which has cemented markets expectations of a Fed rate hike on December 17. A combination of factors including firm ANZ business confidence and an uptick in dairy prices helped the NZD firm during the week, although the story was more one of weaker U.S. data and a surging Euro post the delivery of an underwhelming ECB package. Commodity prices have been under intense pressure this week (NZD negative) and were not helped by OPEC’s decision on Friday to maintain current oil production levels. This has helped the Bloomberg commodity index crash to new 16 year lows overnight, some 22% below its 2009 lows. Other critical focus for the week is Thursday’s RBNZ interest rate decision where expectations have now moved to 65% in favour of a rate cut after yesterday’s fresh commodity price meltdown.

United States

Data out of the U.S. on Friday continued to raise the spectre of a lift in rates by the U.S. Fed on December 17. The key November non-farm payrolls employment report printed broadly in-line with market expectations, after the gain of 211k jobs were posted in the month. The unemployment rate was unchanged at 5%, although the underemployment rate ticked marginally higher and re-enforces the message of a gradual tightening path. The result and revisions to the prior month puts the 3-month average gain in payrolls at 215k. Comments from Fed officials Harker and Bullard backed those of Janet Yellen’s in maintaining expectations of an imminent U.S. rate lift off. It is a relatively quiet week on the data front in the U.S. until Friday where the raft of data releases includes retail sales, Michigan consumer sentiment and producer price data.

Europe

The Euro continues to sit at levels well above those seen pre the ECB meeting in trade today. The gains have moderated somewhat from those seen when the market rushed to cover Euro shorts last week following the delivery of a stimulus package that largely failed to meet the high expectations. Comments from unnamed ECB sources have criticised ECB president Draghi for trying to pressure the governing council into taking bigger action beyond those measures announced, and for raising market expectations of expanded stimulus too high. Data released overnight had little impact after German industrial production was seen rising less than expectations. Last week saw the German unemployment rate reach fresh lows of 6.3%, whilst German inflation data met market expectations. Data this week includes the second read of the euro-zone Q3 GDP tonight, German trade data tomorrow and inflation data on Friday will be of limited interest.

United Kingdom

It has been a quiet start to the week for the GBP as the market focus chooses to concentrate on the BOE interest rate meeting on Thursday. Monetary policy settings are not expected to change at the meeting, although the market will closely monitor for any signs that the minutes may show of risks to the BOE normalising sooner than expectations. Mixed U.K. data last week meant the GBP was unable to enjoy any further gains on the back of the USD repositioning post the U.S. non-farm payrolls employment report on Friday. U.K. industrial and manufacturing production data is set for release tonight, although should have a relatively low impact ahead of Thursday’s BOE meeting.

Japan

Trade in the JPY has been relatively well contained in recent days as the market has focussed on the more pressing issues of U.S. employment, ECB stimulus, and energy market developments. Recent comments from the BOJ Governor Kuroda included one which said that there was no need for Japan to adopt negative deposit rates. This comment indicates that pressure is mounting on the BOJ to provide additional stimulus, although indications point to the BOJ having little enthusiasm for extending its huge asset purchase programme at this stage. The deflationary effects of the weakness seen in the oil and energy markets will continue to place pressure on the Japanese central bank to achieve the targeted 2% inflation rate. It is a relatively light data calendar out of Japan this week with just the Q3 GDP data of any real note.

Canada

The story for the CAD continues to deteriorate this week as oil prices were seen plumbing fresh six and a half year lows overnight (WTI $37.80 last). The fresh weakness in oil prices (and the CAD) comes after Friday’s decision by the OPEC oil cartel to maintain oil production at current levels and leave the current production ceiling at 30 million barrels per day. Difficulty in enforcing quotas has seen current production levels run at more like 32 million barrels a day however, and the outlook is even more clouded with the expectation that Iran will soon join the exporting production ranks. Canadian employment data released on Friday did the CAD little favour after the data revealed the loss of 35.7 k jobs, much higher than expectations. The unemployment rate at 7.1% was also worse than expectations.  The October trade data also disappointed as exports declined for the third straight month, the Ivey purchasing manager’s report was strong however, although provided little reprieve as CAD investors continue to focus on the dour energy market outlook.

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