Soft commodity picture and Chinese growth concerns negative for markets; current environment tough one for NZD and AUD; market expecting US Fed to wait to initiate rate hikes

By Ian Dobbs*:

The current environment is a tough one for the New Zealand and Australian dollars with commodity prices remaining under pressure recently.

On top of this, it seems the Chinese authority’s attempts to stabilize the stock market have failed with the Shanghai Composite Index falling 8.5% yesterday.

That’s the biggest one day decline since 2007 and it is very surprising considering the government did it’s best to basically outlaw selling.

The market got jittery at the sight of further falls in Chinese stocks and ‘risk off’ was the theme in trading last night.

Somewhat counterintuitively, this saw the NZD and AUD make some gains, albeit temporarily, as the market is positioned long USD and short both the Australian duo.

The unwinding of those positions is providing some short term support for the NZD and AUD, but longer term, the soft commodity picture and Chinese growth concerns are a negative.

Against this back drop we also have the US Federal reserve interest rate meeting to digest this week. No change is expected but it’s possible they could signal a hike is coming in September.

Most in the market believe they will wait until December to initiate the tightening cycle, and this does seem more likely, but if they wait too long the global environment could be very different and potentially provide a significant hurdle. 

The commodity slump isn’t saying anything positive about the prospects for inflation or global growth, and neither are indicators of world trade with volumes slumping over 2% in the past five months.

That may not sound like much but it’s the steepest and longest decline in world trade since the financial crisis. The Fed could find it very difficult to hike rates if global growth hits a soft patch.

Major Announcements last week:

  • Australian Inflation YoY 1.5% vs 1.7% expected
  • RBNZ cuts cash rate to 3.00% as expected
  • Australian NAB Business Confidence 4 vs 0 previously
  • European manufacturing PMI 52.2 vs 52.5 expected
  • US Durable Goods Sales 3.4% vs 3.0% expected
  • Canadian retail Sales 1.0% vs .5% expected

NZD/USD

The New Zealand dollar has managed to hold above minor support around 0.6560 over the past week, no doubt helped by the short (sold) market. We saw a significant short squeeze in the wake of last Thursday’s RBNZ rate statement, and again last night the squaring up of sold NZD positions helped to support the local currency during wider market ‘risk aversion’. The key level to watch is downtrend resistance which now comes in around 0.6650. Any break above there would encourage further buying and position squaring from longer term shorts (sold positions). While below that level however, the risks remain skewed to the downside. We have a couple of key release this week, both of which could significantly impact the market. RBNZ Governor Wheeler speaks tomorrow and he will be talking about the outlook for the economy, inflation and interest rates. Then early on Thursday morning we have the US FOMC rate statement. All in all there is plenty of potential for volatility over the coming days.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6628 0.6500 0.6650 0.6558 – 0.6693

NZD/AUD (AUD/NZD)

Although the current environment is broadly negative for both currencies, the New Zealand dollar has managed to outperform the Australian dollar this past week. The AUD is suffering more than the NZD on the back of poor Chinese data, declining Chinese stocks, and the negative outlook for commodities. A very short (sold) NZD market is also playing a part with position squaring in the NZD providing a level of support for the currency. There is potential for this to continue when RBNZ Governor Wheeler speaks tomorrow. While still signalling further interest rate cuts are likely, Wheeler may well come across less ‘dovish’ than many expect, as was the case in the wake of last week’s RBNZ rate statement. RBA Governor Stevens is also set to speak this week and as such there is plenty of potential for volatility. The balance of risks at the moment suggest a test of key resistance around 0.9160 (support 1.0920) is on the cards. That should provide a tough NZD topside barrier, at least in the short term.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9127 0.9000 0.9160 0.8905 – 0.9092
AUD / NZD 1.0957 1.0917 1.1111 1.0999 – 1.1230

NZD/GBP (GBP/NZD)

The New Zealand dollar has continued its corrective bounce against the UK Pound this past week. Gains have come in the wake of the RBNZ rate statement, that was less ‘dovish’ as many had expected, as well as after UK retail sales data disappointed. The NZD also found support last night as ‘risk off’ sentiment in the wider market. Thanks to a further collapse in Chinese stocks, we saw short (sold) NZD positions unwound. The pair has tested key downtrend resistance on a number of occasions recently and is currently one again threatening it. That resistance is now seen around 0.4280 (support 2.3365) and any break through there will likely encourage further NZD buying. A move back toward 0.4400 (2.2730) could then easily develop. Until a break of that resistance is seen however, the risks will remain skewed to the downside for the NZD. RBNZ Governor Wheeler speaks tomorrow and this is the main focus for the NZD on the week. While from the UK we get GDP data along with net lending to individuals, mortgage approvals and consumer confidence.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4260 0.4150 0.4280 0.4200 – 0.4292
GBP / NZD 2.3474 2.3364 2.4096 2.3298 – 2.3809

 NZD/CAD

The New Zealand dollar has outperformed the Canadian dollar this week. After spiking to just shy of 0.8700 in the wake of last Thursday’s RBNZ rate statement, the cross retraced all the way back to 0.8560 where it found support. From the the pair has built a base to have another crack higher and it currently trades around 0.8645. I expect to see the pair retest the 0.8700 level over the coming week. The New Zealand dollar market still feels very short (sold) and the squaring up of these positions should underpin demand for the NZD in the near term. We have a speech from RBNZ Governor Wheeler to digest tomorrow and this provides the main focus for the NZ market. From Canada this week we have the raw materials price index and then GDP data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8644 0.8560 0.8700 0.8541 – 0.8694

NZD/EURO (EURO/NZD)

The New Zealand dollar has made ground, or at least remained support, on most crosses this week. Against the Euro however, the local currency has underperformed. The EUR has made significant gains this past week, particularly in recent days, as short (sold) positions get squeezed out. Better than forecast German IFO Business Climate data last night only added to the waves of EUR buying that were seen as ‘risk off’ sentiment swept the market on the back of further falls in Chinese stocks. This helped to drive the pair down toward recent lows near 0.5950 (highs 1.6810). The pair hasn’t managed to break to fresh NZD lows however, and longer term downside momentum does seem to be lacking. I therefore favor a recovery back above 0.6000 (below 1.6667), and eventually back toward 0.6100 (1.6390), developing over the coming week. RBNZ Governor Wheeler speaks tomorrow and this is the main focus for the NZD. While from Europe this week we have data on inflation, unemployment and German retail sales, along with the ECB’s economic bulletin.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.5980 0.5950 0.6200 0.5951 – 0.6107
EUR / NZD 1.6722 1.6129 1.6807 1.6374 – 1.6805

 NZD/YEN

We have seen some good volatility in the pair over the past week, although the current level is not far from where it was trading last Tuesday. The highs of 82.85 traded in the wake of the RBNZ rate statement on Thursday as the NZD squeezed higher. The pair then moderated all the way back toward 81.20 where it found some support. The New Zealand dollar market still feels very short (sold) and with Governor Wheeler set to deliver a speech tomorrow we could see further volatility. Look for a range of 81.00 to 83.00 to dominate play over the coming days. From Japan this week we have retails sales data, along with household spending and inflation figures set for release.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.75 81.00 83.00 81.23 – 82.85

AUD/USD

The Australian dollar has continued to be pressured this past week, mainly on the back of soft commodity prices and poor Chinese data. The currency traded to fresh cycle lows below 0.7300 on Friday in the wake of declining Chinese manufacturing PMI data. Further volatility in Chinese stocks yesterday don’t help the outlook for the Australian dollar, although the wider market ‘risk off’ sentiment we saw as a result actually supported the local currency for a time. With the majority of the market positioned long (brought) USD and short (sold) AUD, the unwinding of some of those positions helped the local currency briefly recover back above 0.7300. Stronger US durable goods orders data eventually encouraged USD buyers back into the market and the pair fell back to recent lows. The risks remain skewed to the downside. Only a move back above 0.7330 would bring that into question. We have a couple of key releases from the US this week with the FOMC rate statement and GDP data out on Thursday and Friday respectively. While from Australia we have a speech from Governor Stevens to draw focus along with building approvals and the producer prices data.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7272 0.7200 0.7400 0.7261 – 0.7446

AUD/GBP (GBP/AUD)                            

It has been a tough week for the Australian dollar as soft commodity prices and disappointing Chinese data have weighed. Yesterday’s 8.5% decline in Chinese stocks hasn’t helped sentiment either and in recent hours the cross to the UK Pound has made fresh cycle lows at 0.4669 (highs 2.1418). For now the risks remain to the AUD downside with minor resistance around 0.4710 (support 2.1230) capping near term Australian dollar strength. A move above 0.4710 (below 2.1230) would open the way for a test of key downtrend resistance now seen around 0.4760 (2.1000). I expect that level to cap any potential strength on the week. From the UK this week we get GDP data along with net lending to individuals, mortgage approvals and consumer confidence. While from Australia we have a speech from Governor Stevens to digest along with building approvals and the producer prices data.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4675 0.4560 0.4760 0.4669 – 0.4785
GBP / AUD 2.1390 2.1008 2.1930 2.0900 – 2.1417

AUD/EURO (EURO/AUD)

It has been one way traffic for this pair over the past week. The EUR has made significant gains, particularly in recent days, as short (sold) positions get squeezed out. Better than forecast German IFO Business Climate data last night only added to the waves of EUR buying that were seen as ‘risk off’ sentiment swept the market on the back of further falls in Chinese stocks. The Australian dollar on the other hand has only seen pressure on the back of soft commodities and poor Chinese data. Sentiment was then dealt another blow with Chinese stock collapsing another 8.5% yesterday. As a result of this pair has been one of the worst performing currency pairs over the past week.(EURAUD one of the best performing) Although we could easily see a corrective AUD  bounce in the near term, the longer term trend is firmly to the downside and as such any periods of strength will eventually run into willing AUD sellers.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6560 0.6500 0.6700 0.6551 – 0.6820
EUR / AUD 1.5244 1.4925 1.5385 1.4663 – 1.5266

AUD/YEN

The Australian dollar lost ground to the Japanese Yen this week with sharp declines for the cross back below 90.00. Soft commodities and disappointing Chinese data did the damage for the AUD, and yesterday’s 8.5% plunge in Chinese stocks didn’t help sentiment either. The pair may well have a crack at the 2015 low of 89.12. That level may well contain the downside for now, but longer term the risks remain toward further losses at this stage. RBA Governor Stevens speaks on Thursday and we also have building approvals and producer prices to digest. From Japan this week we have retails sales data, along with household spending and inflation figures set for release.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 89.65 89.00 91.00 89.55 – 92.25

AUD/CAD

With both respective currencies seeing periods of intense pressure for much of last week, this pairing saw mostly sideways movement within a contained range through the belly of the last week. The materially better than expected Canadian retail sales data was a catalyst for a break of that contained range as the CAD saw a jump in demand following the 1.00% result. Expect the recent theme of slumping commodity demand to continue to provide the lead for both currencies in the near term and trade should be contained by the wider .9450- .9650 recent range. A speech from RBA Gov. Stevens on Thursday will be close watched, along with the following building approval and producer price releases. In Canada we look forward to the latest raw material numbers and monthly GDP data to provide the focus.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9480 0.9450 0.9650 0.9454 – 0.9635

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Market commentary:

The current environment is a tough one for the New Zealand and Australian dollars with commodity prices remaining under pressure recently. On top of this, it seems the Chinese authority’s attempts to stabilize the stock market have failed with the Shanghai Composite Index falling 8.5% yesterday. That’s the biggest one day decline since 2007 and it is very surprising considering the government did it’s best to basically outlaw selling. The market got jittery at the sight of further falls in Chinese stocks and ‘risk off’ was the theme in trading last night. Somewhat counterintuitively, this saw the NZD and AUD make some gains, albeit temporarily, as the market is positioned long USD and short both the Australian duo. The unwinding of those positions is providing some short term support for the NZD and AUD, but longer term, the soft commodity picture and Chinese growth concerns are a negative. Against this back drop we also have the US Federal reserve interest rate meeting to digest this week. No change is expected but it’s possible they could signal a hike is coming in September. Most in the market believe they will wait until December to initiate the tightening cycle, and this does seem more likely, but if they wait too long the global environment could be very different and potentially provide a significant hurdle.  The commodity slump isn’t saying anything positive about the prospects for inflation or global growth, and neither are indicators of world trade with volumes slumping over 2% in the past five months. That may not sound like much but it’s the steepest and longest decline in world trade since the financial crisis. The Fed could find it very difficult to hike rates if global growth hits a soft patch.

Australia

There has been very little in the way of market moving data from Australia over the past week. However, the Australian dollar has been under pressure on the back of soft commodity prices and disappointing releases from China. Chinese manufacturing PMI for July was well under expectations, and further in contractionary territory, at 48.2. Chinese industrial profits fell by 0.3% year on year and it seems the Chinese stock market is far from being stabilized with yesterday’s 8.5% decline the biggest one day move in eight years. These factors are seeing the Australian press, along with a number of economic forecasters, lining up to suggest the local currency could trade below 0.7000 to the USD. We have a speech from Governor Stevens on Thursday to draw focus and this will be followed by building approvals data and the producer prices index.

New Zealand

The only data released from NZ since last week’s RBNZ interest rate cut has been the trade balance. NZ actually printed the first trade deficit for June in six years with an outcome of -$60m. The market was looking for a result of +$100m. Increasing imports did the damage to the overall figure, but looking into the detail showed exports to China actually rose for the first time since August, and exports rose on an annual basis for the first time in nearly a year. Further steep declines in Chinese stock markets in recent days are worrying signs for Chinese growth, and therefore commodity prices, going forward. RBNZ Governor Wheeler will likely touch on this when he delivers a speech tomorrow entitled “Outlook for the New Zealand Economy, Inflation and Interest Rates in 2015”. The market will be very keen to get further insight into thinking within the central bank, particularly in respect to how much lower the cash rate is likely to go. The rate statement that accompanied the 0.25% cut last week was not a ‘dovish’ (negative) as some had expected and this helped to trigger a significant short squeeze in the currency. If the tone of Wheeler’s speech tomorrow is in line with that statement it may provide further short terms support for the New Zealand dollar. The week will be rounded out with the release of ANZ Business Confidence on Friday.

United States

Recent data from the United States has generally been supportive of the economic outlook and will be encouraging for the Federal Reserve who meet this week. Most housing market indicators have been positive, although we did see a weaker than expected reading from new home sales on Friday. The longer term trend in new home sales is more encouraging and sales of existing homes are running at their strongest pace since 2007. Jobless claims fell to a 42 year low last week and last night we saw a better than forecast reading from durable goods orders. There were some negative revisions to prior durable goods data, and in general it has been a very soft series over the past year, but the latest figures offer some hope of stabilization in capital expenditure. The focus this week is all on just what, if any, signal the Fed will give in relation to the timing of a potential interest rate hike. The other release to watch out for is GDP, set to hit the wires on Thursday night. The market is expecting it to show annualised growth of around 2.5% in the second quarter which would be a solid, if unspectacular result.

Europe

At the end of last week we saw PMI data from France, Germany and the Eurozone as a whole hit the wires. Although in general the results were softer than forecast and down on the previous month, they weren’t all that bad considering the recent tensions we have seen around Greece’s brush with bankruptcy. Eurozone manufacturing PMI came in at 52.2, down from 52.5 last month, while the services PMI came in at 53.8, down from 54.4 prior. On a slightly more positive note, last night we get the latest reading of the German IFO business climate index and this improved by more than forecast to 108.00 in July. The Euro, which was already benefiting from some ‘risk off’ sentiment in the market surged further in the wake of the release. Still to come this week we have data on inflation, unemployment and German retail sales, along with the ECB’s economic bulletin.

United Kingdom

UK retail sales unexpectedly fell by 0.2% in June on the back of consumers buying less household goods, food and petrol. The market had forecast a gain of 0.4%, so the surprise decline weighed on the UK Pound somewhat. The rate of annual growth in retail sales slowed to 4.0% in June from 4.7% in May. Although the June figures were a little disappointing, the annual rate of growth is still very healthy and it suggests consumer spending will contribute significantly to GDP growth. We get the latest reading of GDP tonight and the market is expecting a gain of 0.7% for the second quarter following a 0.4% gain in the first three months of the year. Although an increase in GDP of 0.7% would be a nice improvement in growth over the first quarter it’s unlikely to push the Bank of England into making an early move on interest rates. At this stage the best guidance we have on the timing of a potential rate hike came from Governor Carney himself last week when he said that decision “will likely come into sharper relief around the turn of this year.” Other data to watch out for this week includes net lending to individuals, mortgage approvals and consumer confidence.

Japan

There has been little to get excited about in terms of economic data from Japan over the past week. The trade balance came in bang on expectation at -0.25T while manufacturing PMI picked up a touch to 51.4 from 50.1 prior. Yesterday we saw producer prices data come in below forecast at 0.4% year on year. It’s certainly not a market moving piece of data, but what it does suggest is there is little in the way of pipeline inflation pressure in the economy. The Bank of Japan’s (BOJ) deputy governor Nakaso was on the wires saying inflation is likely to hover around zero per cent until summer, then pick up pace rather quickly. He expects the CPI to reach 2 per cent around the first half of fiscal 2016. The current route in oil, and commodities in general, may make that forecast exceptionally hard to achieve. Still to come this week we have retails sales data, along with household spending and inflation figures.

Canada

Like the commodity currencies of New Zealand and Australia, the Canadian dollar has been under pressure recently, weighed on by renewed declines in oil prices. The Canadian economies failure to recovery from the poor first quarter triggered the recent interest rate cut from the Bank of Canada (BOC) and this has only added to the currencies woes. However, there was a little piece of good news late last week with retail sales increasing by more than forecast at +1.0%. That data will go a small way to easing growth concerns with GDP data from May set for release on Friday. Canada’s gross domestic product contracted in each of the first four month this year and the market is looking for a somewhat improved reading of flat, for May. Ahead of that release we have the raw materials price index to digest tonight. Forecasts are for a gain of 1.1%.

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