Road to interest rate normalisation in US a long one; NZD well bid against AUD and many other trading partners

By Ian Dobbs*:

The widely anticipated U.S. FOMC meeting passed last week and as widely expected saw the Fed increase the target funds rate from 0-0.25% to 0.25-0.50%.

The decision is the first time since June 2006 that the Fed has raised rates and marks seven years since the FOMC took the rate to zero.

The road back to a more normal rate setting will be a long one however. Despite indicating a path which would see a further 4 hikes in 2016 the Fed made it excessively clear that the pace of increases would be gradual and dependant on the quality of incoming economic data.

All but three members expect rates to be at or below 1.5% by the end of 2016; members expect the funds rate to be 2.4% in 2017, down from the 2.6% projection in September.

U.S. equities took the move in their stride, the prolonged period of low rates coupled with $3.7 trillion in quantitative easing have boosted U.S. equities by over 200% since the 2009 March lows, although during the period the U.S. economy has had the worst recovery since the great depression.

Major Announcements last week:

  • EU Industrial Production (Oct. 0.6% m/m vs. 0.3% exp.)
  • UK Core Inflation (Nov. 1.2% y/y as exp.)
  • German ZEW (Current situation 55.0 vs. 54.2)
  • US Core Inflation (Nov. 2.0% y/y, as exp.)
  • UK ILO Unemployment rate (5.2% vs. 5.3% exp.)
  • US FOMC, +0.25% as exp.
  • US Industrial Production (Nov. -0.6% m/m, vs. 0.1% exp.)
  • NZ Q3 GDP 0.9% vs. 0.8% exp.
  • UK Retail Sales (Nov. 5.0% y/y vs. 3.0% exp.)
  • US Philly Fed Manufacturing (Dec -5.9 vs. 1.5 exp.)
  • NZ ANZ Business Confidence (Dec. 23.0, 14.6 prior).
  • Canadian Core Inflation (Nov. 2.0% y/y, vs. 2.3% exp.)

NZD/USD

The New Zealand dollar has firmed in recent trade after the USD ended last week on a soft footing. The U.S. interest rate decision dominated the market interest last week, although failed to break the NZD out of its recent ranges. The local data schedule is quiet over the holiday break and will leave the NZD to trade mainly on the back of flow and commodity currency sentiment. Liquidity issues are typical during this period, although even with the thin markets we anticipate the NZD/USD to remain well within the .6600- .6900 range.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6783 0.6600 0.6850 0.6687 – 0.6831

NZD/AUD (AUD/NZD)

The New Zealand dollar remains well bid against the Australian dollar although sits off its recent highs in present trade. AUD sensitivity to key commodity price weakness has been the primary driver of AUD underperformance in recent weeks. It should again be a key driver over the holiday break, given the light data calendars in both countries. Liquidity is also often a significant factor for this pairing over the holiday period, so any moves can be accentuated at times.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9423 0.9350 0.9520 0.9331 – 0.9445
AUD / NZD 1.0611 1.0504 1.0695 1.0588 – 1.0717

NZD/GBP (GBP/NZD)

The New Zealand dollar continues to trade with a firm tone against the U.K. pound this week. It drifted higher last week mainly on the back of a weak GBP/USD exchange rate, which presently languishes near lows not seen since April. U.K. GDP and current account data tomorrow has the potential to incite some movement in the cross, although thin holiday market liquidity especially in the NZD is likely to be the more critical driver. The NZD appears high on a number of cross rates and this may limit its ability to easily  drive higher from its current levels.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4555 0.4450 0.4600 0.4461 – 0.4554
GBP / NZD 2.1960 2.1740 2.2470 2.1957 – 2.2418

 NZD/CAD

The New Zealand dollar remains in a strong position against the Canadian dollar in recent trade this week. This sentiment comes on the back of the continued bearish sentiment displayed towards the CAD as weak energy market pricing weighs on its fortunes. Barring a reversal in the oil price, the recent gains in this cross look set to continue in the foreseeable future. On the data front Canadian retail sales and GDP data is slated for announcement on Christmas Eve day, NZ trade data tomorrow is unlikely to concern.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9462 0.9000 0.9620 0.9243 – 0.9478

NZD/EURO (EURO/NZD)

The NZD is languishing in recent trade against the Euro and presently trades near the middle of the range seen over the last week. Current momentum appears to be for marginal NZD losses in this cross over the holiday period, although the unpredictable nature of the thin holiday trading markets will likely provide for spikes in both directions. The data calendar is light out of both regions over the Christmas break. Key support is seen at .6000 (1.6667 resistance). Resistance above last week’s .6235 (1.6038) highs is pegged around the .6320 (1.5823) level.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6213 0.6000 0.6320 0.6154 – 0.6240
EUR / NZD 1.6097 1.5823 1.6670 1.6025 – 1.6250

NZD/YEN

The New Zealand dollar continues to trade near the middle of the last weeks range against the Japanese Yen in current trade. Moves after the BOJ meeting have been bounded by ~ 81.20/82.60. Key resistance remains around 83.35, while on the downside key support lies around the 79.65 level. Liquidity considerations in the NZD will be a key motivator of movements over the holiday period. Japanese inflation, retail sales and industrial production data are all scheduled over the week ahead but should take a back seat to risk sentiment and liquidity concerns.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 82.15 79.65 83.35 81.17 – 83.03

AUD/USD

The Australian dollar has drifted higher against the USD since our last report. This has mainly been on the back of a more generalised USD easing post Friday’s weaker than expected U.S. PMI data. Last week’s losses were limited to the .7100 area. Support below .7100 is seen around .7070, and then critically .7000. First building resistance is seen in the .7275/90 zone and then .7385/90 (important). Commodity pricing and U.S. data will drive the moves over the holiday break. The first Australian data of note in 2016 is trade and building approvals data on January 7th.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7195 0.7100 0.7300 0.7908 – 0.7282

AUD/GBP (GBP/AUD)                            

The Australian dollar remains near its recent highs (.4830,  low 2.0704) against the U.K. pound in current trade. Trade over the holiday period will likely be dictated by thinning market liquidity and the prevailing commodity/risk sentiment. U.K. GDP and current account data is set for release tomorrow. Resistance beyond the recent highs lies around .4915 (2.0346 support), support is seen around .4710 (2.1231 resistance).

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4831 0.4710 0.4915 0.4753 – 0.4837
GBP / AUD 2.0699 2.0350 2.1230 2.0674 – 2.1040

AUD/EURO (EURO/AUD)

The Australian dollar lies near the middle of its range of the last week against the Euro currently. We expect this cross to be bounded by the support/resistance levels over the holiday period. Quiet data calendar’s out of both regions mean that moves will likely be dictated by the thinning market liquidity and commodity currency sentiment. We lack any real bias over the break.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6597 0.6520 0.6685 0.6546 – 0.6652
EUR / AUD 1.5165 1.4960 1.5340 1.5034 – 1.5276

AUD/YEN

The Australian dollar has rebounded from its lows below 86.50 seen last week after the JPY gained post the BOJ monetary policy meeting.  Trade over the holiday period will become increasingly prone to swings brought about by the reducing market liquidity conditions. The various Japanese data events over the coming week should have a limited impact at best. The momentum for now is marginally to the upside, although we lack any real bias and expect moves to be dictated by JPY safe-haven demand and commodity currency pricing sentiment.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 87.18 86.25 88.60 86.23 – 88.43

AUD/CAD

The Australian dollar continues to surge higher against the Canadian dollar in recent trade, and presently sits on its highs. Depressed oil prices and a soft Canadian inflation print on Friday have been the key contributors to the gains. The earlier 2015 highs around 1.0085 are the next topside target prior to more important resistance around 1.0250. . First support is seen in the .9840/50 area. Oil pricing and thinning market liquidity will be the key issues to consider over the holiday period. Canadian retail sales and GDP data are set for release on Christmas Eve day.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 1.0043 0.9840 1.0085 0.9839 – 1.0051

————————————————————————————————————————-

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

Email:  

————————————————————————————————————————–

Market commentary:

The widely anticipated U.S. FOMC meeting passed last week and as widely expected saw the Fed increase the target funds rate from 0-0.25% to 0.25-0.50%. The decision is the first time since June 2006 that the Fed has raised rates and marks seven years since the FOMC took the rate to zero. The road back to a more normal rate setting will be a long one however. Despite indicating a path which would see a further 4 hikes in 2016 the Fed made it excessively clear that the pace of increases would be gradual and dependant on the quality of incoming economic data. All but three members expect rates to be at or below 1.5% by the end of 2016; members expect the funds rate to be 2.4% in 2017, down from the 2.6% projection in September. U.S. equities took the move in their stride, the prolonged period of low rates coupled with $3.7 trillion in quantitative easing have boosted U.S. equities by over 200% since the 2009 March lows, although during the period the U.S. economy has had the worst recovery since the great depression.

Australia

A quiet local calendar saw the AUD take its cue from offshore events last week. The U.S. FOMC meeting was the main event of the week, this saw the Fed raise rates by 0.25% as expected. Interestingly, the USD received an additional boost after the Fed failed to lower their forward interest rate path as far as many had expected. Last week’s RBA minutes delivered a relatively upbeat assessment of the Australian economy. The minutes noted an improving growth outlook and positive trends in the labour market. Weaker U.S. data and consolidating commodity pricing on Friday has helped the AUD lift marginally since our last report. The local data schedule is quiet over the holiday break, private and housing sector data will feature on New Year’s Eve day, building approvals and trade data will feature on January 7 prior to November retail sales on the 8th.

New Zealand

The NZD sits marginally higher in trade this week as the markets begin to wind down for the holiday break. Last week’s trade was dominated by the U.S. FOMC meeting. This saw the Fed hike rates for the first time in nearly a decade and issue a forward path which included another 4 hikes for 2016. The main local event was the NZ Q3 GDP release, which marginally beat the market’s expectations. The numbers included encouraging strength in services and investment demand. Softer U.S. data releases and improving ANZ Business Confidence data helped support the NZD into the end of the week. Immigration data released yesterday showed immigration inflows which continue to hit record highs. The local data calendar is largely empty over the holiday break, although November trade data will be released on Wednesday this week. The 2016 NZ calendar begins with November building consents on January 11. Market liquidity and commodity/risk sentiment will be the primary drivers of NZD moves in the New Year.

United States

Sentiment for the USD last week was dominated by the FOMC monetary policy meeting which saw the Fed raise interest rates by 25 bps. This was the first U.S. rate hike seen since June 2006. A further four hikes were indicated for next year, although Fed chair Yellen indicated the hikes would remain data dependant. Data released last week was mixed. It included a core inflation rate which printed in line with the FOMC’s 2% target, solid housing starts and building permit data, and a miss in the services sector PMI data amongst others. Tonight sees the release of the Richmond Fed manufacturing data and existing home sales numbers. The third read of the Q3 GDP is unlikely to elicit a significant market response. Christmas Eve day will see the release of durable goods data and the Fed’s favored inflation measure (PCE inflation); this is expected to remain subdued at 1.3% y/y for the core index.

Europe

The EUR has firmed marginally in trade this week after easing late last week post the U.S. FOMC meeting. Data releases were mainly second tier and took a back seat to the predominant USD sentiment, which took a boost after the Fed surprised many in the market by pointing to a further four rate hikes in 2016. European industrial production data was strong and rose at double the rate forecast in October. Other data was mixed and included a rise in the German/European ZEW confidence data and a slight miss in the French/German PMI data. Misses in the U.S. PMI data on Friday helped the Euro lift from its weekly lows. The market chose to ignore the deadlock in the Spanish elections ,which sees no clear proposition for the formation of a coalition government. The local data calendar is relatively light weight for the euro-area over the holiday period.

United Kingdom

The GBP continues to ebb lower in trade this week, despite generally solid local data-flow last week.The data included labour market numbers that showed the unemployment rate at near 10-year lows and retail sales data which exhibits annual growth of 5%. Concerns over the inflation outlook and wages growth were brought into focus after dovish comments from BOE board members last week. Weak U.K. public finances are also in focus presently, data released later today is expected to show a further increase in public borrowing. U.K. GDP and current account data will feature tomorrow. Of note is the fact that the U.K. current account deficit is currently one of the widest in the developed world. Data in the New Year prior to our next update includes consumer credit, trade and mortgage approvals data.

Japan

The JPY has firmed in recent trade on safe-haven demand and after the BOJ announced a surprise shift in its asset-buying program on Friday. The program is to now  include purchasing new exchange-traded funds, longer-dated bonds and more risky assets. The moves are further measures which are aimed at addressing the BOJ’s inflation problem, although on current trends the BOJ likely has little chance of meeting its 2% target in the next couple of years. The latest Tankan survey last week showed that Japanese firms expect prices to rise just 1% next year. Concerns over the credibility of Governor Kuroda’s policy response and difficulty in implementing effective larger asset purchases to address the persistent inflation problem were key factors behind the Yen surge. The holiday period sees the release of inflation data on Christmas day and retail sales/industrial production data on Monday next week.

Canada

The CAD continues to trade near its multi-year lows this week as the continued weak sentiment shown towards countries with a heavy oil exposure shows little signs of abating. Brent crude oil prices have traded to 11-year lows this week on the back of continued supply concerns. Data released on Friday showed an uptick in the U.S. weekly oil rig count. This came on the back of data earlier in the week which showed U.S. commercial crude inventories rising to their highest levels in more than 80 years. Canadian inflation and wholesale trade data on Friday missed the market’s expectations. The data combined with dovish comments from the BOC Governor Poloz (over the Q4 growth outlook) to add to the negative sentiment. Local data over the holiday break includes the retail sales and GDP releases on Christmas Eve, and the RBC manufacturing PMI release early in the New Year. Energy market developments will continue to be the key driver however.

<!–

//–>

—————————–

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