Risk off selling hits commodity currencies; Fed set to hike for first time in 9-years; continued rout in energy markets and recent cracks in junk bond market causing headaches

By Ian Dobbs*:

The U.S. Federal Reserve is set to lift interest rates for the first time in over nine years on Thursday.

This comes after it has kept interest rates between zero and 0.25% since December 2008.

The steady U.S. growth of recent years and a strong labour market will allow the hiking cycle to begin this week, although the real interest will surround the indications given on how quickly the Fed will follow up with additional rate hikes in 2016.

The continued rout of the energy markets and recent cracks appearing in the high yield junk bond will give the Fed chair Yellen cause for concern when moving this week.

These concerns should likely see her express caution in signalling her approach for further moves as she attempts to reduce the likelihood of inducing further market volatility in the weeks after the announcement.

Major Announcements last week:

  • Japanese Q3 GDP 0.3% q/q vs. 0.0% exp.

  • Chinese November Trade balance $54.10B vs. $63.30B exp.

  • UK Industrial Production (Oct. 1.7% y/y vs. 1.2% exp.)

  • Chinese Inflation (Nov. 1.5% y/y vs. 1.4% exp.)

  • NZ cash rate 2.5%, 25 bps cut as expected.

  • Australian Employment change (Nov. +71.4k vs. -10k exp.)

  • Australian Unemployment rate (Nov. 5.8% vs. 6.0% exp.)

  • UK cash rate 0.5%, unchanged as exp.

  • US Retail Sales (Nov. 0.2% m/m vs. 0.3% exp.)

  • Chinese Retail Sales (Nov. 11.2% y/y vs. 11.1% exp.)

NZD/USD

The New Zealand dollar is trading on a firm footing currently (although off its overnight highs) after it overcame initial declines which started late on Friday. The declines came about on the back of the sentiment displayed towards the commodity currencies and the ‘risk-off’ selling seen after the falls in international equities. Focus for the NZD over the next 24 hrs will be on the latest GDT dairy auction tonight and NZ Q3 current account release tomorrow. The Q3 GDP release on Thursday whilst important will likely have taken a back seat to the sentiment post the earlier U.S. FOMC interest rate meeting.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6772 0.6600 0.6800 0.6596 – 0.6790

NZD/AUD (AUD/NZD)

The New Zealand dollar has continued to firm against the Australian dollar since our last report, although sits off its ~.9370 highs (lows 1.0672). Despite the recent solid Australian data (which included a strong employment report last week), focus for this cross continues to remain on the outlook for Australia’s key critical commodity pricing, which currently is very AUD negative. First key support for this cross lies near .9200 (1.0870 resistance), whilst first NZD resistance lies near the recent highs at .9376 (low 1.0665). Pressure on this pair looks to remain to the NZ dollar upside, especially while commodity pricing remains weak. The RBA minutes today and GDT dairy price auction overnight form the immediate focus for this pair.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9350 0.9200 0.9370 0.9133 – 0.9376
AUD / NZD 1.0651 1.0670 1.0870 1.0665 – 1.0949

NZD/GBP (GBP/NZD)

The New Zealand dollar continues to trade with a firm tone against the U.K. pound in recent trade. Last week’s gains were added to overnight and came about on the back of dovish comments from a BOE member and the rally seen in the commodity currencies (esp. the NZD and AUD). The next 48 hrs will be interesting for this cross as the releases of inflation and employment data in the U.K. combine with current account, GDP, and the latest GDT dairy price auction data in NZ. First support is seen at .4360 (resistance 2.2936), resistance continues to lie around the .4480/90 area (2.2321/2.2272 support).

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4468 0.4360 0.4490 0.4367 – 0.4486
GBP / NZD 2.2381 2.2272 2.2940 2.2290 – 2.2897

 NZD/CAD

The New Zealand dollar continued to significantly outperform the Canadian dollar since our last report, as the weakness in the oil price shows little signs of abating. The NZD/CAD has traded to fresh highs around .9325 overnight as the price of oil plumbed fresh lows near $34.50 (WTI). Gains last week were helped by the RBNZ comments which alluded to the possibility of the latest cash rate reduction being the last. First support is distant at the .9000 level, key resistance lies between .9620 and .9660. The topside levels look somewhat distant however, given the proximity of the oil price to the GFC lows (~32.70 WTI). Events to watch this week include the NZ GDP and GDT dairy price data, Canadian inflation data will feature on Friday.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9299 0.9200 0.9330 0.8961 – 0.9327

NZD/EURO (EURO/NZD)

The NZD is consolidating in current trade against the Euro. Comments from the RBNZ at last week’s cash rate meeting which alluded to the rate cut potentially being the last in the recent series helped drive the NZD off its lows. We lack any bias for this cross for now, and note first resistance around and ahead of .6215 (support 1.6090). Key support is seen at the .6000 (resistance 1.6667) level. Tests for this cross come from the overnight GDT dairy auction, and the NZ Q3 current account and GDP data on Wednesday and Thursday respectively.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6160 0.6000 0.6215 0.6009 – 0.6193
EUR / NZD 1.6233 1.6090 1.6667 1.6147 – 1.6641

NZD/YEN

The New Zealand dollar sits near the centre of its recent ranges seen against the Japanese Yen in trade today. Highs last week topped around the 82.65 level on Friday, safe haven Yen demand and risk-off selling saw this cross fall heavily later in the session to eventual lows under 81.00 yesterday. It is likely to be another volatile week for the cross this week with the BOJ monetary policy meeting on Friday, the U.S. FOMC/NZ GDP on Thursday and GDT dairy auction overnight. Key support remains around 79.65. We lack any real bias for the time being.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 82.01 79.65 83.35 80.36 – 82.65

AUD/USD

The Australian dollar has enjoyed a decent bounce from its lows set yesterday around the .7160 level. Further declines in key commodity pricing and risk-off selling on the back of weakening international equities drove the losses to its lows. Subsequent highs have been seen around the .7270 level. Key resistance remains around .7385, although the .7335/50 zone should also provide a test to a topside push. Support around and above .7150 remains critical to the downside. The RBA minutes this afternoon should provide some movement although the real test this week comes from Thursday’s FOMC meeting.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7244 0.7150 0.7385 0.7161 – 0.7333

AUD/GBP (GBP/AUD)                            

The Australian dollar recovered well from its lows set against the U.K pound near .4710 (high 2.1231) yesterday. Declines in the AUD/USD on the back of further commodity declines and ‘risk-off’ selling led to the test of the lows. Gains overnight have come on the back of bearish BOE member comments and a reprieve for the commodity currencies (esp. the AUD and NZD). Resistance beyond the .4800 highs (support 2.0833) comes in around .4830 (2.0704 support). U.K. inflation and employment data and further commodity price volatility are the key tests for the cross this week.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4781 0.4710 0.4830 0.4713 – 0.4831
GBP / AUD 2.0916 2.0705 2.1230 2.0700 – 2.1217

AUD/EURO (EURO/AUD)

The Australian dollar currently sits near the middle of its range seen against the Euro of the last few days. AUD declines on Friday eventually waned around .6520 (1.5337) yesterday and form the immediate AUD support area. ‘Risk-off’ selling and commodity price weakness were the primary contributors to the fall. Resistance is pegged around .6685 (1.4959 support). With a light data calendar out of both regions this week we expect this cross to remain within these recent bounds over coming days

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6595 0.6520 0.6685 0.6520 – 0.6709
EUR / AUD 1.5163 1.4959 1.5337 1.1906 – 1.5338

AUD/YEN

The Australian dollar fell heavily against the Japanese Yen since our last report to trade to lows near the 86.50 level yesterday. The losses came about on the back of ‘risk-off’ AUD selling and safe-haven JPY demand as weaker international equity bourses on Friday weighed on risk sentiment. The poor commodity price outlook also pressured commodity prices and commodity currencies. We continue to favour selling the cross in this environment and expect rallies to falter in the 88.80/89.15 region (if reached). The BOJ meeting on Friday and FOMC meeting on Thursday are also very important drivers this week.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 87.77 86.50 89.20 86.54 – 89.65

AUD/CAD

The Australian dollar has continued to rally against the Canadian dollar since our last report, peaking at highs around .9980 so far. Firm Australian data and the continued weakness in oil and energy pricing (WTI oil pricing set fresh lows at $US 34.50 overnight) have been the main contributors to the continued strength. Further gains appear likely for the time being, although the risk for a correction lower looks to be increasing, especially as the oil price moves towards the lows seen during the GFC which may signal the area for a subsequent rally from over-sold levels.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9950 0.9850 1.0000 0.9751 – 0.9981

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Market commentary:

The U.S. Federal Reserve is set to lift interest rates for the first time in over nine years on Thursday. This comes after it has kept interest rates between zero and 0.25% since December 2008. The steady U.S. growth of recent years and a strong labour market will allow the hiking cycle to begin this week, although the real interest will surround the indications given on how quickly the Fed will follow up with additional rate hikes in 2016. The continued rout of the energy markets and recent cracks appearing in the high yield junk bond will give the Fed chair Yellen cause for concern when moving this week. These concerns should likely see her express caution in signalling her approach for further moves as she attempts to reduce the likelihood of inducing further market volatility in the weeks after the announcement.

Australia

The AUD eased lower in trade late last week as the market chose to overlook Thursday’s solid Australian employment report in favour of selling on the back of the continued weakness seen in commodity prices and falling international equities. The health of the high yield U.S. junk bond market which has a large exposure to the energy sector weighed on sentiment towards U.S. equities in trade on Friday. The AUD lifted in early trade yesterday after the release of solid Chinese retail sales and industrial production data over the weekend. The gains were initially short lived however, before the strength renewed in trade overnight. This strength came on the back of more generalised USD selling prior to this week’s Fed interest rate decision. Investors generally expect the Fed to deliver a cautious forward statement, given the elevated market concerns around the vulnerabilities of emerging markets and the U.S. energy sector to an overly aggressive U.S. rate tightening path. Immediate focus for the AUD will be this afternoons RBA minutes.

New Zealand

The NZD has rallied well in trade overnight after starting the week on a soft footing. Initially it sunk on the back of further commodity currency selling and weakness in U.S. equities (risk-off selling). Concerns over the health of the high yield junk bond market which has a heavy exposure to the energy sector helped contribute to the weakness seen in U.S. equities on Friday. These concerns amongst others have many fearing the fallout that may result from a Fed rate hike this week. These fears have compounded given the current vulnerability of the energy sector. The USD eased in trade overnight ahead of the Fed decision, investors are expecting the hike to be accompanying by a cautious forward statement given the current volatility seen in international markets. Immediate focus for the NZD will be the overnight GDT dairy auction, and NZ Q3 current account data tomorrow. The FOMC decision and the NZ Q3 GDP release on Thursday will set the tone for trade into the end of the week.

United States

The USD has had a quiet start to the week into the lead up to this Thursday’s key FOMC interest rate meeting. Last week was a relatively quiet one for the USD which saw if drift lower as the week progressed. Data releases on Friday eclipsed the largely soft second tier U.S. releases of earlier in the week. November retail sales rose 0.2%, whilst the important retail control reading (which feeds into GDP) beat market expectations. The University of Michigan consumer sentiment number was broadly in line with expectations, producer price data which beat expectations failed to excite. However, the data took a back seat to headlines out of China over the release of a new currency index which fuelled expectations that the Yuan may weaken as Chinese reserves are re-weighted, this led to buying of EUR’s, GBP and the JPY. Immediate focus for the USD now turns to tonight’s U.S. inflation data release. This comes before the key FOMC interest rate meeting on Thursday, where expectations remain high for the first interest rate hike in nearly a decade. The accompanying statement will be closely monitored especially in light of the crack’s appearing in the U.S. high yield junk bond market and the concerns that exist over the impact that rate hikes may have on emerging market economies and U.S. equities.

Europe

It has been a quiet start for the Euro this week in what is likely to be a week which will see the EUR moves dictated by events in the U.S. German inflation data released on Friday met the market’s expectations, whilst the overnight release of European industrial production saw an expansion at double the rate of that expected by the market. The final read of Italian inflation also beat expectations, although all the releases took a back seat to the general USD sentiment. German IFO confidence data on Thursday is the main local event of note for the EUR this week. USD sentiment post the FOMC meeting on Thursday will be the key driver for EUR pricing later in the week, expectations are for a Fed rate hike although interest will also centre on the forward outlook especially given the recent declines seen in the global equity bourses.

United Kingdom

The GBP has eased in trade early this week, after posting solid gains into the end of last week. These gains were helped to some extent by speculation on Friday that the new Chinese trade weighted currency index will lead to an increase in Chinese reserves allocated to the GBP. Last week’s BOE meeting was seen to provide little in the way of fresh news to move the market. Dovish comments last night from BOE member Shafik has placed the GBP under pressure in recent hours. Her comments included ones which noted the need for a pick-up in wage growth in order for inflation to recover towards the BOE’s 2% inflation target. This is seen as a necessary requirement before the BOE would be seen to be seriously considering raising rates. It should be a busy week for the GBP this week, starting with the release of inflation data tonight before the latest employment data tomorrow. November U.K. retail sales on Thursday will follow on from the earlier all important U.S. FOMC interest rate meeting.

Japan

The JPY has continued to firm in recent trade on the back of safe-haven demand and the solid round of local data releases seen last week. Safe haven JPY demand spiked in trade on Friday on the back of the weakness seen in international equities. The recent heavy declines seen in the commodity space spread to the wider equities market last week, concerns remain high over the fall-out that the sector may have on the wider generalized economies. The Japanese Tankan survey released yesterday showed a general theme of better than expected current conditions and pessimism regarding the outlook. The focus for the remainder of the week will be dominated by the BOJ monetary policy meeting on Friday; yesterday’s Tankan survey contained very little good news for the BOJ’s current low inflation nemesis.

Canada

The story for the CAD this week continues to be a familiar one as it struggles under the weight of a depressed oil price which has traded to fresh cyclical lows in trade overnight (WTI lows $US 34.50). News from the International Energy Agency which said that it expected the current glut in oil supply to continue until late 2016 helped contribute to the latest oil price falls.  Energy market developments will continue to be the primary driver of the CAD in trade this week. Canadian inflation data on Friday will be of interest but will likely quickly take a back seat to the high CAD$/oil price trading correlation.

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