Small chance of Fed rate hike in December; argument against raising rates centres on low US inflation; markets susceptible to swings in sentiment and commodities

By Ian Dobbs*:

Current market pricing places only around a 25% chance of a Fed rate hike in December and this appears at odds with recent comments from Fed officials.

In September, 13 of the 17 FOMC members indicated that they expected rates to be rising by years end, thoughts backed up the Fed’s Lockhart overnight.

Arguments against raising rates centre around the current low levels of inflation in the U.S, sentiment shared by most of the major central banks currently.

The markets will also continue to remain susceptible to swings in risk sentiment and commodity price movements ensuring that volatility should remain elevated for the foreseeable future.

Major Announcements last week:

  • UK Markit Services PMI 53.3 vs. 56.0 exp.

  • US ISM Non-Manufacturing 56.9 vs 57.7 exp.

  • RBA rates on hold at 2%, as expected.

  • BoE rates on hold at 0.5%, as expected.

  • Canadian Housing Starts 230.7k vs. 200k exp.

  • US Jobless Claims 263k vs. 274k exp.

  • Canadian Unemployment rate 7.1% vs 7.0% exp.

  • UK Trade Balance -GBP 3.3bn vs -2.15 bn exp.

NZD/USD

The New Zealand dollar has continued to gain over the weekend trading up to .6740 highs on the backdraft of firming commodity prices, increased global risk appetite and a paring in the expectations of U.S. Fed rate hike initiation. The focus for the week will be  the release of the NZ Q3 inflation data on Friday, where the market forecasts a 0.2% rise for the latest quarter, below the 0.3% RBNZ expectations. Given the rapidly improving outlook for dairy prices it would likely require a significantly weaker result to prompt the RBNZ to cut rates at their October 29 review. REINZ house price and sale data will also be released during the week, indications presently point to an active month for September ahead of the upcoming pending restrictions being implemented from October. We expect reasonable headwinds for further gains from here beyond .6770/80.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6712 0.6640 0.6780 0.6479 – 0.6739

NZD/AUD (AUD/NZD)

The New Zealand dollar has remained well bid against its Australian counterpart, although short term resistance nearby around .9215/20 (1.0845/50 support) continues to hold after last week’s strong NZ GDT auction result. Further resistance is pegged around .9260 (1.0800 support). The AUD is benefitting from firming commodity prices, for now Australian employment data next Thursday and NZ Q3 CPI on Friday will be pivotal for fresh direction in this cross, although the momentum for a higher NZ dollar seen over recent weeks now appears to be waning.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9125 0.9000 0.9220 0.9103 – 0.9208
AUD / NZD 1.0959 1.0845 1.1111 1.0860 – 1.0985

NZD/GBP (GBP/NZD)

The New Zealand dollar continues to trade well against the Pound on the back of improving risk sentiment and stronger dairy prices. Slippage in the timing of BoE rate hikes in 2016 has also contributed to the tone. Resistance near .4400 (2.2727 support) is expected to cap further NZD appreciation time being. On the downside, first support lies around .4357 (2.2950 resistance) and then .4275/80 (~2.3365). This week’s data releases to watch include U.K. Inflation/PPI data today and U.K. August ILO unemployment data tomorrow, NZ Inflation data this Friday will also impact.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4375 0.4280 0.4400 0.4268 – 0.4392
GBP / NZD 2.2857 2.2727 2.3365 2.2770 – 2.3431

 NZD/CAD

The Canadian and New Zealand dollars continue to both benefit presently from firming commodity prices. The New Zealand dollar has gained against the CAD since our last report, after a weaker than expected September Canadian employment report released on Friday. The current upswing in risk appetite continues to bolster the NZD also, relative to the CAD.  Immediate minor resistance for this cross lies just above around 0.8750, and then further resistance comes in at .8830. With the data calendar light in Canada this week, expect the NZ Q3 Inflation report on Friday to help set additional impetus for this cross.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8730 0.8640 0.8750 0.8482 – 0.8747

NZD/EURO (EURO/NZD)

The New Zealand dollar continues to remain well bid against the EUR having benefitted from the latest solid GDT auction and improving risk sentiment. Continued dovish comments from the ECB which noted inflation and growth concerns have added to the EUR pressure. Initial resistance lies around .5945 (support 1.6821) and then ahead of .6000 (1.6667). First support now comes in at .5874 (resistance 1.7025) and then around .5840 (1.7125). This week’s data of influence includes the German ZEW confidence survey today, although the NZ Q3 Inflation release on Friday and prevailing risk sentiment will be far more critical in setting fresh direction.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.5910 0.5840 0.6000 0.5770 – 0.5937
EUR / NZD 1.6920 1.6667 1.7123 1.6844 – 1.7330

NZD/YEN

The New Zealand dollar continues to remain well sought after against the JPY on the back of renewed risk appetite and rallying commodity prices which are helping lift the NZDUSD significantly. The Japanese Yen has been mainly range-bound against the USD over recent weeks and comments from BOJ Governor Kuroda at the weekend quashed expectations of additional stimulus at the coming BOJ meeting, meaning further losses by the JPY against the USD in the short term may be limited. Fresh upside in this cross is therefore likely to be induced by further gains in the NZDUSD. Immediate resistance lies at 81.00 and beyond this the 83.00/30 zone.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 80.55 78.90 81.00 77.98 – 80.98

AUD/USD

The Australian dollar continues to make ground against its U.S. counterpart as global risk appetite remains improved and expectations for a Fed rate lift-off are pushed out. Critical to further gains this week will be the release of the Australian September employment data on Thursday. U.S. focus will be on their inflation data release the same day, and US retail sales numbers on Wednesday. Key commodity price movements and Chinese trade data later today will also influence. Whilst further gains in the AUD appear possible, the strong rally in the last week gives some cause for concern, meaning a consolidation is quite likely.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7355 0.7300 0.7450 0.7072 – 0.7381

AUD/GBP (GBP/AUD)                            

The Australian dollar continued its move higher against the pound as the tailwind of firming commodity prices and improving risk sentiment drove the AUDUSD higher. Cautionary comments from the BoE and a paring back in rate hike expectations by the BoE in 2016 have seen the GBPUSD post more moderate gains against the easing USD back-drop. Employment data in both Australia and the U.K. along with commodity price/risk sentiment movements will help drive this cross during the week. Current momentum indicates a reasonable likelihood of further AUD gains towards resistance near .4840/45 (support ~2.0650).

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4795 0.4720 0.4840 0.4668 – 0.4809
GBP / AUD 2.0855 2.0650 2.1186 2.0793 – 2.1423

AUD/EURO (EURO/AUD)

The Australian dollar has continued to make further inroads against the Euro over recent days, aided by further key commodity price gains and improving risk sentiment. Critical to further gains will be the release of Thursday’s Australian September employment report and to a lesser extent Chinese trade data later today. Challenges of resistance near .6530 (support1.5314) and .6550 (1.5267) appear possible given current momentum. First support lies near .6427 (resistance 1.5560).

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6477 0.6427 0.6530 0.6318 – 0.6492
EUR / AUD 1.5439 1.5314 1.5559 1.5403 – 1.5829

AUD/YEN

Commodity price gains and improving global risk appetite have seen the Australian dollar continue to outperform the Yen since our last report. The Yen appears likely to remain within recent ranges against the USD for now. We see the next move for this cross being dictated by Thursday’s Australian unemployment data, although risk sentiment and commodity price movements will also be pivotal. The possibility of further large gains from current levels is likely to be reducing for the time being given the extent of the recent move.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 88.30 87.40 89.15 85.18 – 88.60

AUD/CAD

The Australian dollar continues to outperform the Canadian dollar trading near its recent highs of the current move. Both currencies have been benefitting from firming commodity prices. The AUD has gained additional impetus from improving risk sentiment, whilst the CAD improvement has been tempered somewhat by last Fridays’ weaker than expected Canadian employment data. Australian employment data this Thursday is to be watched, although for the time being momentum is to the upside.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9565 0.9435 0.9680 0.9256 – 0.9583

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Market commentary:

Current market pricing places only around a 25% chance of a Fed rate hike in December and this appears at odds with recent comments from Fed officials. In September, 13 of the 17 FOMC members indicated that they expected rates to be rising by years end, thoughts backed up the Fed’s Lockhart overnight. Arguments against raising rates centre around the current low levels of inflation in the U.S, sentiment shared by most of the major central banks currently. The markets will also continue to remain susceptible to swings in risk sentiment and commodity price movements ensuring that volatility should remain elevated for the foreseeable future.

Australia

Thursday’s release of the Australian September employment data is the key event this week. Market median forecasts centre around a rise of 7k jobs (down from 17.4 k the month prior) and a steady 6.2% unemployment rate. Chinese trade data out later today will also be keenly awaited as investors closely watch for any signs of a further slowdown with Australia’s largest trading partner. Later in the week the RBA Financial Stability Review will be released, investors will continue to closely monitor the RBA commentary surrounding the buoyant Sydney and Melbourne property markets. Volatility in key commodity prices will also continue to be a significant driver of the AUD over the coming week.

New Zealand

The 3rd quarter NZ inflation release on Friday will dominate the data calendar this week. The data will be key for the RBNZ ahead of the next OCR decision later in the month, with current RBNZ expectations centering on a print of +0.3%. Commentary this week from a leading NZ bank warned that cheaper borrowing costs may not solve the problem of low inflation as technology allows better consumer access to cheap goods and that cheaper mortgages will add more fuel to the already hot Auckland housing market. This week’s number and the strong rebound in dairy prices will give the RBNZ plenty to think about when considering their interest rate setting at the next meeting on October 29. RBNZ Governor Wheeler will speak at a private event on Wednesday.

United States

The release of September retail sales (Wednesday) and inflation data (Thursday) are the key data events of note this week. Retail sales are forecast to rise 0.2% on the month (0.2% last) as low petrol prices remain a significant drag. The headline inflation number is anticipated to fall 0.2% m/m as like retail sales energy prices have been a notable negative for headline inflation through 2015. The recent rally in oil prices should mean this bout of deflation will prove temporary as they provide a boost this month. After last week’s Fed meeting minutes. the current market pricing is for a 25% chance of a rate hike in December and only two hikes in total by the end of next year. Recent comments from Fed officials would indicate that the market is underestimating the timing of a Fed lift off in rate normalisation however. The larger data window before the December meeting and recent softer jobs data may favour a December move over October at present.

Europe

Comments from the ECB president Draghi over the weekend further reduced hopes for a rise in the intensity of QE. Draghi said the ECB was satisfied with the current QE and that it had met and “even surpassed our initial expectations”. Draghi noted that the delay in inflation reaching 2% was largely because of the drop in oil prices. Comments from ECB member Lautenschlager echoed those of Draghi recently.  She noted the limitations of monetary policy when addressing the burden induced by the vulnerabilities of Eurozone countries with high stocks of debt and structural rigidities. German inflation for September and the ZEW survey of the German economy are scheduled for release later today, Friday will see the release of Eurozone inflation and trade data.

United Kingdom

U.K. inflation data later today is the first event of note. Today’s data is expected to confirm the markets perception that inflation is not a pressing concern. The market has recently pared expectations for a rate hike from the BOE, a rate hike is currently no longer fully priced within 2016. Trade data for August released on Friday showed the U.K. trade deficit narrowing to GBP 3.3bn (mkt. -GBP2.15bn) from -GBP4.4bn in July, gains were driven by the goods sector. August ILO unemployment data will be released on Wednesday, expectations are for the unemployment rate to remain at 5.5% as employment growth continues to moderate through 2015. Average weekly earnings are expected to remain firm at 3.0%.

Japan

BOJ Governor Kuroda quashed mounting expectations for a fresh round of quantitative easing (QE) at the IMF meeting in Peru over the weekend. The Governor saying that Japan’s inflation rate was in line with the central bank’s expectations, reducing expectations of fresh additional monetary stimulus at the October 30th BOJ meeting. Core consumer prices showed at 0.1% contraction in August after July’s flat outcome. Governor Kuroda anticipates a move towards the 2% target next year, given the reduced output gap and tight labour market conditions as the negative impact from falling oil prices dissipates. Currently energy items are reducing the CPI rate by about 1 percent.

Canada

The release of September employment data has been the key data release since Friday’s’ report. The report was disappointing as the unemployment rate rose to 7.1% (7.0% exp.) and now stands 0.5% higher than the 6.6% level seen at the start of this year. Whilst the headline number was marginally better than expectations (+12k vs. +10k exp.), it was the large fall in full-time jobs that led to the weakness as they saw their largest decline in nearly 4 years. Energy market developments will continue to be a large driver for the CAD, especially this week where other data events of note are lacking.

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