Skirmish on property prices in NZ; majority of US data continues to disappoint

By Ian Dobbs*:

The New Zealand government this week joined the Reserve Bank in a war on Auckland property prices.

The new measures resemble more of a skirmish than a full on attack however, and they are a little late to the party.

The time to act was years ago when it was clear to everyone except the government, that investors, both onshore and offshore, where having a major impact on prices.

In the US the majority of economic data continues to disappoint with little in the way of a recovery from the poor first quarter evident just yet.

Very tame consumer sentiment and retail sales data will add to other indicators that suggest the Fed will be on hold for the next few months.

Major Announcements last week:

  • RBNZ introduces lending restrictions on property speculators
  • UK Claimant Count Change -12.6k vs -20.5k expected
  • UK Average Cash Earnings +1.9% vs +1.7% expected
  • US Retail Sales 0.0% vs 0.3% expected
  • US Producer Prices -0.4% vs +0.1% expected
  • US Unemployment Claims 264k vs 272k expected
  • Canadian Manufacturing Sales +2.9% vs +1.2% expected
  • US UoM Consumer Sentiment 88.6 vs 95.8 expected

NZD/USD

The New Zealand dollar managed something of a recovery against the USD in the latter stages of last week helped by disappointing US economic data. The pair traded up to 0.7559 before running out of steam. In the early stages of this week we have seen the local currency back under pressure thanks largely to the government’s announcement around taxing property speculators. Any measures implemented to help cool the Auckland property market only serve to increase the chances of an eventual rate cut from the Reserve Bank. This afternoon we have the release of inflation expectations data and the central bank will be concerned if we see a further significant fall. If we do see further weakness in inflation expectations the NZD may well target support down around 0.7300. From the US this week we have building permits, the FOMC meeting minutes, the Philly Fed manufacturing index, and inflation data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7373 0.7300 0.7500 0.7328 – 0.7559

NZD/AUD (AUD/NZD)

After the big declines of the past month, this pair seems to be taking a breather as trade consolidates between the levels of 0.9220 and 0.9320 (1.0846 and 1.0730). Key downside support comes in around 0.9170 (topside resistance 1.0905) and while above that level a broader correction toward 0.9360 or potentially 0.9420 (1.0684 or 1.0616) could still unfold. Over the coming hours we have the Reserve Bank of Australia minutes to digest along with NZ inflation expectations. Both these releases could easily add volatility to the market. Later in the week from Australia we also get inflation expectations data along with consumer sentiment numbers. From NZ the latest Global Dairy Trade auction will draw focus as will the government’s budget release.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9228 0.9170 0.9360 0.9187 – 0.9313
AUD / NZD 1.0837 1.0684 1.0905 1.0737 – 1.0885

NZD/GBP (GBP/NZD)

The New Zealand dollar staged something of a corrective bounce against the UK Pound last week briefly touching 0.4800 (2.0833). Since then however we have seen a gradual decline, largely driven by weakness in the local currency. This recent weakness comes on the back of the NZ government’s announcement to tax property speculators, which in combination with the central bank’s recent lending restrictions, should have a dampening effect of property price gains. Minor support around 0.4675 (resistance around 2.1390) provides the initial downside barrier, while on the topside 0.4800 (2.0833) is likely to continue to cap any periods of strength. NZ inflation expectations data this afternoon will draw focus and attention will then turn to Fonterra’s latest dairy auction. From the UK this week we have minutes from the Bank of England rate meeting to digest and then later in the week we get the latest reading of retail sales. Governor Carney is also due to speak on Friday evening.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4710 0.4620 0.4800 0.4680 – 0.4802
GBP / NZD 2.1231 2.0833 2.1645 2.0823 – 2.1368

 NZD/CAD

After a brief flurry toward 0.8800 early last week, the New Zealand dollar staged a small recovery against the Canadian dollar, and in the last few days a tight range has developed between 0.8920 and 0.9020. With the topside capped by 0.9020 the risks remain skewed to further weakness. That would change however if the market can overcome 0.9020. This would signal a broader correction toward 0.9170 was developing. We have NZ inflation expectations data out this afternoon to draw focus, with attention then turning to Fonterra’s latest dairy auction. From Canada this week we have a speech from Bank of Canada Governor Poloz tonight then later in the week we get wholesale sales, retail sales, and inflation data.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8960 0.8820 0.9020 0.8818 – 0.9034

NZD/EURO (EURO/NZD)

The New Zealand dollar has been under relentless pressure from the Euro recently and early this week fresh cycle lows traded just below 0.6500 (above 1.5385). The driver for the latest declines was the NZ government’s announcement to tax property speculators, which in combination with the central bank’s recent lending restrictions, should have a dampening effect of property price gains. There are indications that this downtrend is starting to run out of steam and as such any further tests below 0.6500 (above 1.5385) are likely to be short lived. A move up through 0.6560 (down below 1.5244) would then open the way for broader gains toward 0.6650 or even 0.6700 (1.5038 or 1.4925). We have NZ inflation expectations data out this afternoon to draw focus, with attention then turning to Fonterra’s latest dairy auction. From Europe this week we have manufacturing and service PMI data along with German ZEW economic sentiment and IFO business climate index.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6510 0.6400 0.6560 0.6492 – 0.6656
EUR / NZD 1.5361 1.4793 1.5244 1.5025 – 1.5403

 NZD/YEN

The New Zealand dollar managed something of a recovery against the Japanese Yen in the middle of last week trading up to resistance around 90.00. Since then however we have seen the local currency back under pressure thanks in large part to an announcement from the NZ government. Their decision to tax property speculators comes on top of recent lending restriction announced by the central bank and should at least have a dampening effect of price gains. This gives the central bank more room to cut interest rates and as such has undermined support for the NZD. Support for the pair still comes in around 88.00, while on the topside 90.00 will continue to prove a tough barrier. Those two levels may well contain trade over the coming week. In terms of local data we have NZ inflation expectations and Fonterra’s latest dairy auction to digest. While from Japan this week we have GDP data to digest along with the BOJ monetary policy statement.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 88.45 88.00 90.00 87.99 – 90.05

AUD/USD

The Australian dollar remains well supported against the USD, although we have seen a pullback from the highs of 0.8161 that traded late last week. Initial support comes in at 0.7970 and while the market holds above there, the risks are skewed to further gains. The immediate focus is on the release of the RBA minutes out in the next couple of hours. The minutes shouldn’t hold any big surprises but the market will be keen to gauge just how much of an easing bias the central bank currently has. From the US this week we have building permits, the FOMC meeting minutes, the Philly Fed manufacturing index, and inflation data to digest. Although the US dollar has recovered some ground in the past couple of days, these gains won’t be sustained if data continues to disappoint.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7988 0.7970 0.8160 0.7886 – 0.8161

AUD/GBP (GBP/AUD)                            

The Australian dollar staged something of a recovery against the UK Pound in the middle stages of last week although the move ran out of steam at the first resistance level of 0.5190 (support 1.9268). Since then some relative weakness in the Australian dollar has seen a move back to 0.5100 (1.9608) where this pair currently trades. The immediate risks remain skewed to further weakness and a test of support around 0.5000. Selling into any periods of strength toward 0.5190 (buying towards 1.9268) remains the favoured play. We have the RBA minutes to digest in the coming hours, then later in the week we get inflation expectations and consumer sentiment data. From the UK this week we have minutes from the Bank of England rate meeting to draw focus and then later in the week we get the latest reading of retail sales. Governor Carney is also due to speak on Friday evening.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5102 0.5000 0.5200 0.5063 – 0.5180
GBP / AUD 1.9600 1.9231 2.0000 1.9305 – 1.9753

AUD/EURO (EURO/AUD)

A strong run by the Australian dollar in the first half of last week saw this pair trade up to 0.7185 (down to 1.3918). Since then however the AUD has drifted lower with the pair eventually bouncing from just above 0.7000 (below 1.4286) in the past 12 hours. The immediate focus now turns to the RBA minutes out in the next couple of hours. These could provide some volatility for the AUD as the market tries to gauge the potential for another rate cut. Later in the week from Australia we have inflation expectations and consumer sentiment data to digest. From Europe this week we have manufacturing and service PMI data along with German ZEW economic sentiment and IFO business climate index. Expect the range of 0.7000 to 0.7200 (1.4286 to 1.3389) to continue to dominate this pair over the rest of the week.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7060 0.7000 0.7200 0.7005 – 0.7185
EUR / AUD 1.4164 1.3889 1.4286 1.3917 – 1.4276

AUD/YEN

This Australian dollar has been in a strong uptrend against the Yen for much of the past month. In the middle of last week the cross traded up to 97.25 before a small pullback ensued. That pullback has found support just above 95.60 and a tight range has developed in the past 24 hours. With nothing to suggest the broader rally is done yet, the immediate focus remains on the topside and another crack toward 97.25. Only a move below 95.60 would call that outlook into question. The immediate focus now turns to the RBA minutes out in the next couple of hours. Later in the week from Australia we have inflation expectations and consumer sentiment data to digest. From Japan this week we have GDP data to draw focus along with the BOJ monetary policy statement.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 95.82 95.60 97.25 94.75 – 97.25

AUD/CAD

Despite an encouraging result from Canadian manufacturing sales on Friday, the Australian dollar continues to make gains against the CAD. The pair managed to break above 0.9620 resistance mid last week and that level now provides the first line of support. While above that level the risks are skewed to the topside and further gains are expected. The immediate focus now turns to the RBA minutes out in the next couple of hours. Later in the week from Australia we have inflation expectations and consumer sentiment data to digest. From Canada this week we have a speech from Bank of Canada Governor Poloz tonight then later in the week we get wholesale sales, retail sales, and inflation data.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9715 0.9620 0.9820 0.9542 – 0.9741

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Market commentary:

The New Zealand government this week joined the Reserve Bank in a war on Auckland property prices. The new measures resemble more of a skirmish than a full on attack however, and they are a little late to the party. The time to act was years ago when it was clear to everyone except the government, that investors, both onshore and offshore, where having a major impact on prices. In the US the majority of economic data continues to disappoint with little in the way of a recovery from the poor first quarter evident just yet. Very tame consumer sentiment and retail sales data will add to other indicators that suggest the Fed will be on hold for the next few months.

Australia

The Reserve Bank of Australia’s Deputy Governor Lowe delivered a speech yesterday that highlighted the balancing act the bank is performing in order to get policy settings just right. The bank would certainly like to see the currency lower and cutting interest rates would help to achieve this, as well as provide a boost to consumer demand and home construction. But having interest rates too low is not in the long term interest of Australia as it could help create a debt fuelled consumption boom. This is of particular concern as debt levels are already high and the prospects for future income growth are somewhat subdued. We get the minutes from the last RBA meeting this afternoon and it will be interesting to try and gauge just how much of an easing bias the bank maintains. Later in the week to draw focus we have consumer sentiment and inflation expectations data.

New Zealand

Last week saw some very strong retail sales data from New Zealand which will have reduced the chances of a near term rate cut from the Reserve Bank. Over the weekend however the chances of a rate cut increased just a bit after the government announced it will tax property investors who purchase and then sell investment properties within a two year time period. These new rules come into effect on the 1st of October, exactly the same day as the RBNZ’s new minimum deposit ratios for investors. This two pronged approach may well have an impact on the Auckland market and anything that serves to cool price gains, will increase the chances of an interest rate cut over the coming months. I still feel June is just a little too early for such a cut, as RBNZ will want time to assess how the Auckland real estate market reacts before deciding whether or not to adjust interest rates. This afternoon we have inflation expectations data out that will be closely watched. This will be followed by Fonterra’s latest dairy auction and the government’s annual budget release.

United States

Economic data from the United States continues to raise some worrying questions about the underlying state of the economy. Apart from employment indicators, most other data releases have been coming in on the soft side. This is helping to push out rate hike expectations and therefore undermine support for the USD. The latest key release to disappoint was Friday’s University of Michigan consumer sentiment. The prior reading was 95.9 and the market was expecting only a small decline to 95.8, but the actual result came in at 88.6. That’s the lowest reading since October 2014 and the biggest month on month drop since December 2012. This comes on top of last week’s poor retail sales number and it really suggests that the US consumer, traditionally the powerhouse of the US economy, is being extremely cautious. Last night we saw comments from the Fed’s Evans who said he’s in no hurry to tighten monetary policy. He added he doesn’t expect a pothole for growth like that in the first quarter, and that he’s still optimistic for 2.5% – 3.0% growth in the second half of the year. Still to come this week we have building permits, the FOMC meeting minutes, the Philly Fed manufacturing index, and inflation data.

Europe

There has been little data of significance from Europe since last Wednesday’s GDP result. That figure came in at +0.4% which was a small improvement over the previous reading of 0.3%. Since then Greece has remained in the headlines, although we did hear from ECB President Draghi who said the current “monetary policy stimulus (quantitative easing) will stay in place as long as needed for its objective to be fully achieved on a truly sustained basis”. In terms of Greece, the negotiations continue with recent hints that the two sides might be coming closer together, although progress is painfully slow. Greece has said that four red lines remain in talks with lenders. These are pension cuts, a growth plan, the primary surplus target, and debt restructuring. Time is running out however, with Greece only able to cover its obligations for a few weeks at best. Still to come this week we have manufacturing and service PMI data along with German ZEW economic sentiment and IFO business climate index.

United Kingdom

The UK Pound continues to be a strong performer buoyed by supportive economic data and the market friendly election outcome. The latest piece of positive data came in the form of construction output which jumped +3.9% from a prior reading of -0.3%. This came on top of positive readings earlier last week from manufacturing and industrial production as well as average cash earnings. Tonight we have inflation data to draw focus and the market is expecting a reading of flat. The Bank of England has warned that inflation may even turn negative at some stage over the coming months. If we do get a negative reading it will be the first time since March 1960. Tomorrow we get minutes from the Bank of England rate meeting and then later in the week we get the latest reading of retail sales. Governor Carney is also due to speak on Friday evening.

Japan

Recent data out of Japan has been mixed at best. Consumer confidence released late last week took a small fall and came in below expectations. Core machinery orders released yesterday was much stronger than forecast printing at +2.9% versus expectation of +1.7%. This was countered however by negative revisions to industrial production data and softer than forecast reading from tertiary industry activity. The Bank of Japan’s (BOJ) chief economist has been on the wires saying he expects the Japanese economy to move to an expansionary phase from the recovery phase later this year. He added they need to be mindful of potential problems in the Greek and Chinese economies. Over the coming days we have GDP data to digest along with the BOJ monetary policy statement.

Canada

Canadian manufacturing sales data released late last week provided a sign that the economy may well be recovering from the poor first quarter. Manufacturing sales increased 2.9% which was much stronger than the forecast of just 1.0%. The prior reading was -2.2%. The economy still has a long way to go in recovering from the oil shock although Moody’s Investor Service predicts growth of between 1.5% and 2.0% this year. We will hear from Bank of Canada Governor Poloz tonight then later in the week we get wholesale sales, retail sales, and inflation data.

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