Soggy euro trading ahead of ECB meeting; AUD standout performer as RBA rate cut looks likely; NZD/USD relinquishes gains to trade under 65c

By Ian Dobbs*:

The Euro continues to be sold on any rallies in the current environment as investors fully embrace the idea of an imminent easing at next week’s ECB meeting. Notes released last week detailing the recent ECB meeting discussion showed that some committee members were already willing to move and ease policy at the last 22nd October meeting.

In contrast last week’s Fed minutes delivered on expectations signalling the real possibility of a rate hike at the next Fed meeting.

The AUD was a material out-performer last week amongst the key majors as odds for another rate cut lengthen, even despite continued pressure on key export commodity prices. The inability to break the key 70c level against the USD in recent weeks despite these pressures serves to heighten the chances of the rally extending in the near future.

Major Announcements last week:

  • Euro core Inflation (Oct. +1.1% y/y vs. +1.0% exp.)

  • U.K. core Inflation (Oct. +1.1% y/y vs. +1.0% exp.)

  • German ZEW current situation (Nov. 54.4)

  • U.S. Inflation ex. food and energy (Oct. 1.9% y/y on exp.)

  • NZ GDT Price Index -7.9%

  • U.K. Retail Sales (Oct 3.8% y/y, vs. +4.2% exp.)

  • U.S. Philly Fed Survey 1.9 vs. -1.0 exp.

  • Canadian core Inflation (Oct. 2.1% y/y vs. 2.0% exp.)

  • Canadian Retail Sales (Sep. -0.5% m/m vs. +0.2% exp.).

NZD/USD

The New Zealand dollar challenge of the .6600 area proved brief at the end of last week, as it has relinquished a large chunk of its gains falling to under .6500 overnight. Weakness in the AUD on the back of continued commodity price weakness and a generally firm USD have led to the slide. The NZD will take its cue from offshore this week starting with U.S. data tonight, we favour selling rallies should the NZD again challenge the .6600 level. Support should again be seen in the .6420/40 area.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6510 0.6420 0.6600 0.6433 – 0.6604

NZD/AUD (AUD/NZD)

There is little on the horizon this week to change the current momentum which has the New Zealand dollar depreciating against its Australian counterpart this week. Australian private capital expenditure data on Thursday will have some degree of influence though. We cautiously favour continuing to sell NZD rallies in this cross, although we note the weak recent run. Initial resistance is pegged around the .9160 level (1.0917) while on the downside first support should be seen around .9000 (1.1111).

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9055 0.9000 0.9160 0.9037 – 0.9161
AUD / NZD 1.1044 1.0917 1.1111 1.0916 – 1.1066

NZD/GBP (GBP/NZD)

The New Zealand dollar has recovered well from its lows seen against the U.K. pound last week after the latest weak dairy price auction. This was largely attributable to a weaker USD (which saw the AUD+NZD rally significantly into the end of the week) and a strong lift observed in the NZX dairy futures. Highs have so far been capped around the .4330 (lows 2.3095) level. We favour the .4330/50 (2.3040) zone capping in the short term during what should be a relatively quiet week for this cross. BOE Governor Carney’s speech later in the week is the main event of interest this week.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4305 0.4200 0.4335 0.4229 – 0.4330
GBP / NZD 2.3229 2.3068 2.3810 2.3095 – 2.3648

 NZD/CAD

The New Zealand dollar has eased from its highs seen against the Canadian late last week ahead of .8780. The highs were observed after a lift in the NZD/USD exchange rate which occurred on the back of a bounce in the NZX dairy futures and a surging AUD/USD. A soft Canadian retail sales number release on Friday had a more limited impact. Extremely quiet data calendar’s this week mean the cross will likely stay well within the bounds established by last week’s trade.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8698 0.8550 0.8780 0.8587 – 0.8776

NZD/EURO (EURO/NZD)

The New Zealand dollar has eased from its highs set around .6175 (lows 1.6194) which were seen late last week after the surge in the AUD/USD exchange rate (NZD/USD followed) and lift in the NZX dairy futures. Weakness in key commodity prices saw the AUD/USD fall heavily yesterday during our session, the NZD/USD was also dragged lower during the day, even after the recent NZD/AUD exchange rate decline. A quiet data calendar should see this cross well contained within recent ranges during trade this week.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6120 0.6035 0.6175 0.6045 – 0.6180
EUR / NZD 1.6340 1.6194 1.6570 1.6180 – 1.6543

NZD/YEN

The New Zealand dollar currently sits near the middle of its range seen against the Japanese Yen last week. We continue to favour selling rallies for now (esp. above 81.00) although see little to move this cross beyond last week’s extremities, Fridays Japanese inflation and household spending data will be of interest though. The risk to this view would be an unforeseen meltdown is risk sentiment.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 80.02 79.25 81.20 79.50 – 81.16

AUD/USD

The Australian dollar surged late last week against the United States dollar to highs around the .7250 level after breaking recent down-trend resistance at the .7125 level. This move came post the Fed minutes as extended bought USD positions partially unwound after a release. This merely served to reinforce growing expectations of a December rate hike. The gains were partially relinquished in trade yesterday as the AUD fell victim to declining commodity prices. Focus will now turn to the U.S. GDP release tonight before the Australian private capital expenditure data release on Thursday. The trend-line break has us now favouring buying dips around the .7150 level.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7188 0.7000 0.7250 0.7074 – 0.7250

AUD/GBP (GBP/AUD)                            

The Australian dollar had a solid end to the week last week against the U.K. pound This came as the AUD/USD exchange rate out-performed after the USD saw some profit taking on long positions post the FOMC minutes. A weaker than expected U.K. retail sales release on Thursday was also to a lesser extent partly to blame. This cross looks likely to trade higher over coming days targeting .4800 again. Australian private capital expenditure data on Thursday will be of interest this week, other focus will be commodity prices (AUD), U.K. GDP data (Friday) and BOE Governor Carney’s inflation report testimony.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4755 0.4620 0.4810 0.4649 – 0.4768
GBP / AUD 2.1030 2.0790 2.1645 2.0973 – 2.1512

AUD/EURO (EURO/AUD)

The Australian dollar has rallied strongly against the Euro in recent days helped by continued focus on an imminent easing by the ECB at next week’s monetary policy meeting. Comments from ECB president Draghi on Friday and notes from the ECB minutes (Thursday night) which saw some members wanting to ease policy at the 22nd October ECB meeting, have placed the Euro under further pressure. A relatively quiet data calendar should see the current upwards momentum maintained this week.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6760 0.6670 0.6825 0.6636 – 0.6803
EUR / AUD 1.4793 1.4652 1.4993 1.4700 – 1.5070

AUD/YEN

The Australian dollar has firmed against the Japanese Yen over the last week. It currently sits off its 89.00 Yen highs however, after yesterday’s commodity price inspired fall in the AUD/USD exchange rate. The BOJ monetary policy meeting last week was largely a non-event after no further stimulus was added to the current program. Gains in this cross can be put down to a charge higher in the AUD/USD on position paring after the FOMC minutes towards the end of the week. We cautiously favour higher levels, although resistance levels in the 89.00/40 region are noted.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 88.39 87.95 89.00 87.26 – 89.01

AUD/CAD

The Australian dollar trades strongly against the Canadian dollar currently despite weak commodity prices which are impacting both the AUD and CAD. The AUD/USD exchange rate move post the FOMC minutes late last week was the primary driver of the gains seen in this cross as AUD/USD sold positions were paired. A light data calendar and a view towards higher levels in the AUD/USD has us marginally favouring a move higher in this cross, the caveat being a strong move higher in oil pricing (CAD+).

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9605 0.9500 0.9680 0.9437 – 0.9665

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Market commentary:

The Euro continues to be sold on any rallies in the current environment as investors fully embrace the idea of an imminent easing at next week’s ECB meeting. Notes released last week detailing the recent ECB meeting discussion showed that some committee members were already willing to move and ease policy at the last 22nd October meeting. In contrast last week’s Fed minutes delivered on expectations signalling the real possibility of a rate hike at the next Fed meeting. The AUD was a material out-performer last week amongst the key majors as odds for another rate cut lengthen, even despite continued pressure on key export commodity prices. The inability to break the key 70c level against the USD in recent weeks despite these pressures serves to heighten the chances of the rally extending in the near future.

Australia

The Australian dollar has had a poor start to the week which has seen it give up much of the gains it experienced late last week. Concerns over a China slowdown impacting global demand for key commodities saw the AUD come under selling pressure during Asian trade yesterday. Declines in gold, copper, zinc and iron ore led to a lack of demand for the AUD during the session. Private capital expenditure data due for release on Thursday and construction work data on Wednesday are of interest in Australia this week. Immediate focus will turn to the U.S. tonight with the release of preliminary Q3 GDP data, the RBA Governor is also scheduled to speak later today. Key commodity price movements will continue to be an important driver of sentiment.

New Zealand

The New Zealand dollar has started the week by losing ground yesterday. This came after being weighed down by its trans-Tasman counterpart which lost significant ground in Asian trade on the back of declines in the prices of key trading commodities. Intensifying concerns over a China slowdown impacting global demand led to the latest round of commodity price declines. The NZD had a strong finish to the week last week, helped by generalised USD selling and a surge in the NZX dairy futures. NZ migration data released yesterday showed a net gain in migrants from Australia for the first time in 24 years. Total net NZ immigration rose to record 62,477 in the year to October, immigration continues to be a key concern for the strong local housing market. It is a quiet week locally on the data front with only October trade data on Thursday of any note, this will see the NZD take its cue from offshore developments.

United States

The USD remains well supported this week as the market continues to focus on the likelihood of a rate hike at the next FOMC meeting. Comments from Fed officials on Friday reiterated a December hike message. U.S. data released late last week included the Philly Fed survey which at 1.9 (Nov.) was above the -1.0 print expected, the continuing and initial jobless claims numbers both printed close to expectations. Data released overnight missed expectations however. The November Markit Manufacturing PMI fell to 52.6 from 54.1 (53.9 exp.) and October existing home sales fell 3.4% m/m (-2.3% exp.). Immediate focus for the dollar will be tonight’s U.S. Q3 GDP release, the Richmond Fed and consumer confidence data will also be of interest. There is a raft of data scheduled for release tomorrow night including durable goods data, weekly jobless claims, personal income/spending and house price data amongst others.

Europe

The EUR continues to trade poorly this week after the ECB president Draghi gave a dovish presentation to the European Banking Congress on Friday. This reinforced expectations of an easing of monetary policy at next week’s ECB meeting. Draghi noted that whilst monetary policy to date has been effective in supporting the euro area economy, growth momentum and inflation in the euro area were well below their targets and that the risks to the outlook had deepened. Data released overnight showed a surprise to the upside in the Euro-zone flash PMI’s. The aggregate composite at 54.4 (Nov.) registered its highest level since May 2011. The services sector was seen to be outperforming the manufacturing sector, a theme which also registered in the French and German national data. Immediate attention for the Euro now turns to the release of the German confidence IFO and GDP data later today. The remainder of the week will be relatively quiet on the data front, services sentiment and confidence data due for release on Friday are unlikely to excite.

United Kingdom

The GBP has ebbed lower in early trade this week weighed down by a soggy EUR as the market awaits the BOE Governor Carney’s testimony to the U.K. Treasury select committee on the recent inflation report later in the week. U.K. retail sales data released late last week disappointed after it fell 0.6% m/m in October (-0.5% exp.), partially reversing September’s rugby world cup inspired boost. The ex-auto fuel sales number fell by 0.9% m/m against the -0.5% fall expected. Public sector borrowing data released on Friday showed an increase in borrowing requirements. U.K. GDP data on Friday is the only other key release of note this week; this leaves the GBP looking to seek direction from the Euro and key U.S. data, including the important GDP data tonight.

Japan

The JPY has had a quiet start to the week this week after the BOJ was seen leaving its monetary stimulus unchanged last week at its latest monetary policy meeting. Data which showed Japan entering its second recession since PM Shinzo Abe took office wasn’t enough to alter BOJ Governor Kuroda’s view that the inflationary trend is improving. The central bank said that “inflation expectations appear to be rising on the whole from a somewhat longer-term perspective”. The increase in monetary base stands at 80 trillion yen currently. Approximately 50% of economists still expect the BOJ to add stimulus by April next year however. Manufacturing PMI data due for release this afternoon is the immediate focus now for the yen before the release of the BOJ minutes tomorrow. The week is rounded off with household spending and inflation data on Friday.

Canada

The CAD has firmed in trade overnight on the back of a turnaround in oil prices which lifted after Saudi Arabia repeated its intent to cooperate with OPEC in order to stabilise oil markets. Canadian data released on Friday showed September retail sales falling short of expectations after both the headline and ex-autos number fell 0.5%. Cheaper gasoline prices contributed to the result. October headline inflation data printed largely in line with expectations at 1% y/y although the core number of 2.1% y/y marginally exceeded the 2.0% expectations. A quiet week is expected this week with only low impact raw material and industrial product price data scheduled for release on Friday. Energy market developments will therefore be closely followed.

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