US data shows enough positives for a December rate hike; NZD higher on commodity prices, trading at 0.6945 USD, 0.6980 level expected to hold advances; NZD trading at 0.9025 against the AUD

By Howard Wilcox*:

The US Non-farm payroll data out on Friday contained mixed messages. On one hand it was softer than the 310 K+ job gain expected coming in at a 261k gain, however the previous month of September was upwardly revised to a 90K gain instead of the earlier -33K loss. Also of a positive note was a fall in the unemployment rate from 4.2% to 4.1%, a level not seen since 2000. Wage growth was lower dropping from 2.8% to 2.4% pointing to the scenario of the scenario where steady growth continues with not a lot of inflationary pressure. Enough positives for a December Fed rate hike to all but assured. ISM non-manufacturing data for October was also solid, up to 60.1 pointing to a strong start to Q4 activity. On release of the NFP report, the USD rallied against both the JPY and EUR, and US equities markets made new highs.

Over the weekend there were some interesting comments from China’s Central bank Governor, warning that China’s financial system is becoming significantly more vulnerable due to high leverage and that risks were accumulating that were “hidden, complex, sudden, contagious and hazardous”. These comments, although not new, are the latest in a string of rhetoric from the PBOC, signalling that policy makers remain committed to a campaign to reduce borrowing levels across China’s economy. There was little international market reaction, but Chinese 10 year bond yields pushed to a 3 year high.

After a week of heavy data releases, this week looks quiet, with no big movers in the US or Europe while in the UK, Brexit negotiations will resume on Thursday. The arrest in Saudi Arabia of several Princes and high placed officials on corruption charges could markets by surprise, oil has risen over 3% overnight, to levels not seen for just over two years. This is a story that will be watched closely over the coming weeks and has potential to elevate international risk levels significantly, if the situation begins to destabilise the region.

Major Announcements last week:

  • NZ Employment Change 2.2% vs 0.8% expected
  • UK Manufacturing PMI 56.3 vs 55.8 expected
  • US ISM Manufacturing PMI 58.7 vs 59.5 expected
  • FOMC leaves interest rates unchanged
  • Australian Trade Balance 1.75b vs 1.42b expected
  • UK construction PMI 50.8 vs 48.3 expected
  • Bank of England increases interest rates 0.25% to 0.50%
  • Australian Retail Sales 0.0 vs 0.4% expected
  • Canadian Employment Change 35.3k vs 15.3k expected
  • US ISM Non-Manufacturing PMI 60.1 vs 58.5 expected

NZD/USD

The New Zealand dollar opens higher this morning against the USD, helped by the rally in commodity currencies overnight. It now at 0.6945 and looks to have built good support at lower levels but we don’t expect this rally to have “legs’ and extend too far ahead of the RBNZ announcement on Thursday. 0.6980 should hold advances ahead of that meeting. Tonight’s Global Dairy auction may provide a damper.

DIRECT FX Current level Support Resistance Last wk range
NZD/USD 0.6942 0.6820 0.6980 0.6832 – 0.6956

NZD/AUD (AUD/NZD)

The NZD continues to hold firm against the Australian dollar after last week’s weak Aussie retail sales. It is now at 0.9025 with today’s Reserve Bank of Australia rate decision not expected to have much influence. The increasing rise in commodities will favour the AUD. A break of 0.9040 would target 0.9090, but we view this as unlikely ahead of Thursday’s RBNZ meeting.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9026 0.8820 0.9040 0.8911 – 0.9049
AUD / NZD 1.1079 1.1061 1.1337 1.1051 – 1.1223

NZD/GBP (GBP/NZD)

The New Zealand dollar is now back at 0.5273 after the UK Pound bounced back overnight. Expect this cross to trade a 0.5200-0.5300 range over the next few days until the RBNZ on Thursday. We favour the NZD/GBP to trade toward top of the range and consolidate around current levels.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5267 0.5150 0.5320 0.5146 – 0.5315
GBP / NZD 1.8987 1.8181 1.9417 1.8814 – 1.9431

 NZD/CAD

The NZDCAD has dropped to 0.8823 on this cross after the better than expected Canadian jobs figures on Friday and the extra support the Canadian dollar is enjoying from stronger oil prices. Immediate support is at 0.8775. CAD is the favourite of this pair as such the New Zealand dollar should struggle to make significant gains for now.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8826 0.8750 0.9000 0.8781 – 0.8929

NZD/EURO (EURO/NZD)

The New Zealand dollar is stronger on this cross, now at 0.5984 and with the Euro looking a little lethargic. We favour a test of upside around the 0.6000 level over the next day or so. There is some key resistance between 0.6000 and 0.6030 and that area will provide a tough initial barrier. A break above there would be a bullish signal, but we don’t expect that to happen ahead of Thursday’s RBNZ interest rate meeting.

DIRECT FX Current level Support Resistance Last wk range
NZD/EUR 0.5978 0.5800 0.6020 0.5862 – 0.5987
EUR/NZD 1.6728 1.6611 1.7241 1.6704 – 1.7059

NZD/YEN

The New Zealand dollar is currently sitting around 78.97 and we look for a test of 79.25 over the next 12/24 hrs. If no major RBNZ change we look for the NZD to continue to recover lost ground against the Japanese Yen. Any uptick in Nth Korean tensions will see a JPY bounce however.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 78.96 75.50 79.80 77.36 – 79.20

AUD/USD

The Australian dollar has bounced back to 0.7685 against the USD, supported by the uptick in commodity prices. It has lost some momentum close to the 0.7700 level ahead of this afternoon’s RBA rate decision and we would expect another test of 0.7700 after the RBA, if there are no surprises. The AUDUSD rally could then extend to 0.7750 on the way to 0.7800 if commodities stay firm. Sport at 0.7625 is unlikely to be visited today.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7687 0.7610 0.7750 0.7639 – 0.7725

AUD/GBP (GBP/AUD) 

Currently sitting around 0.5836 the AUDGBP is back from the 0.5912 high on Friday. The overnight boost in UK Pound has knocked this cross, but given the ongoing Brexit issues we still look for a retest of 0.5930 later in the week, especially given commodity strength should continue to support the Australian dollar.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5835 0.5770 0.6080 0.5758 – 0.5889
GBP / AUD 1.7137 1.6477 1.7331 1.6982 – 1.7366

AUD/EURO (EURO/AUD)

The stronger Australian dollar is now at 0.6620 and consolidation at this level would see a move to immediate resistance at 0.6650. Support at 0.6582 not likely to be tested as long as commodities stay firm.

DIRECT FX Current level Support Resistance Last wk range
AUD/EUR 0.6620 0.6550 0.6760 0.6565 – 0.6627
EUR/AUD 1.5107 1.4792 1.5267 1.5089 – 1.5233

AUD/YEN

Currently around 87.45 up from a 3 day low of 87.14 seen yesterday…barring any RBA surprises today, we look for a test of 88.00 over the next 12/24 hrs , immediate support is at 86.90.

DIRECT FX Current level Support Resistance Last wk range
AUD/YEN 87.43 85.40 89.70 86.70 – 88.00

AUD/CAD

Down at 0.9766 after good Canadian jobs figures on Friday and stronger crude oil prices strengthened the CAD….immediate support is at 0.9740 which should hold in the short term..then 0.9700….continued strong oil prices will pressure the AUD on this cross.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9772 0.9670 0.9905 0.9751 – 0.9916

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Market commentary:

The US Non-farm payroll data out on Friday contained mixed messages. On one hand it was softer than the 310 K+ job gain expected coming in at a 261k gain, however the previous month of September was upwardly revised to a 90K gain instead of the earlier -33K loss. Also of a positive note was a fall in the unemployment rate from 4.2% to 4.1%, a level not seen since 2000. Wage growth was lower dropping from 2.8% to 2.4% pointing to the scenario of the scenario where steady growth continues with not a lot of inflationary pressure. Enough positives for a December Fed rate hike to all but assured. ISM non-manufacturing data for October was also solid, up to 60.1 pointing to a strong start to Q4 activity. On release of the NFP report, the USD rallied against both the JPY and EUR, and US equities markets made new highs.

Over the weekend there were some interesting comments from China’s Central bank Governor, warning that China’s financial system is becoming significantly more vulnerable due to high leverage and that risks were accumulating that were “hidden, complex, sudden, contagious and hazardous”. These comments, although not new, are the latest in a string of rhetoric from the PBOC, signalling that policy makers remain committed to a campaign to reduce borrowing levels across China’s economy. There was little international market reaction, but Chinese 10 year bond yields pushed to a 3 year high.

After a week of heavy data releases, this week looks quiet, with no big movers in the US or Europe while in the UK, Brexit negotiations will resume on Thursday. The arrest in Saudi Arabia of several Princes and high placed officials on corruption charges could markets by surprise, oil has risen over 3% overnight, to levels not seen for just over two years. This is a story that will be watched closely over the coming weeks and has potential to elevate international risk levels significantly, if the situation begins to destabilise the region.

Australia

The disappointing Australian retail sales data on Friday, which came in flat for September against forecasts of a 0.4% advance, saw the Australian dollar sold lower, as the softer data continued in line with previous releases. The RBA is having its exchange rate announcement later today and is expected to maintain interest rates at current levels for the 15 month in a row and continue with its dovish stance. After today’s Board meeting, focus will then shift to the Statement of Monetary Policy (SoMP) on Friday. Also this week there are multiple Chinese data releases, including trade balance figures, inflation, PPI and money supply all of which has potential to affect Australian dollar direction.

New Zealand

The main event this week will be the RBNZ Monetary Policy Statement release on Thursday, the first under Acting Governor Grant Spencer. No change to interest rates is expected, with the OCR forecast to remain consistent with that in August which is for rates to remain unchanged until 2019 and only gradually rise thereafter. However there may be some subtle changes, with the RBNZ downgrading GDP and housing market expectations to reflect the cooling seen in recent data. GDP has been below forecasts, building sector growth has plateaued for most of the year and businesses’ confidence has dropped. The booming house price growth is now showing initial signs of shifting into decline and consumer spending remains flat. Inflation still remains below the 2% RBNZ target. On top of this is a new Government finding its feet in what is shaping up to be an economically challenging next 12 months. There is also a Global Dairy auction on Tuesday night, results will be known early Wednesday morning NZ time, expectations are for prices to stay relatively steady.

United States

Last week’s positive US economic data allied with solid, albeit not spectacular, Non-farm payrolls data on Friday added to the story that the U.S. economy appears to have bottomed out during the June/July summer months and has embarked on a clear upward trend since then. Investors are still reviewing the payrolls figures from Friday along with the potential for the tax reform prospects to pass in some form by the Thanksgiving holiday on 23rd of November.  However Friday’s payrolls data continued to solidify the view that the US economy is back on solid footing and that the Fed will continue the course of a slow gradual return to normalise interest rate policy.  President Trump embarked on Friday on his longest foreign trip to date, heading for the Asian region. The trip is ostensibly about trade, with a full trade delegation of US businessmen accompanying the President, but given geopolitical tensions in the region, security concerns and North Korea are likely to overshadow the agenda. There is little in the way of data releases for the US this week, with markets likely to take their cue from the progress of the tax reform bill through Congress and any highlights of Trump’s Asian tour. The USD/JPY rallied up to 114.73 last night, a 7 month high , on continued evidence that the monetary policy path between both central banks of US and Japan will diverge over the coming years, it is now back around 113.76 but look for a target of 115.00 over the next week or so. The EUR/USD is at 1.1605 with immediate support at the 1.1572 level, initial resistance around 1.1625…USD downside looks limited.

Europe

More positive data out yesterday for the Eurozone’s main driver, the German economy, which showed German factory orders unexpectedly increased in September with the report revealing factory orders increased by 1% following August’s 4.1% surge and surprising economists who had forecast orders to decrease by 1.1%. The report also revealed that although domestic orders remained the increase was driven once again by offshore demand. The outcome of the German elections last month has still not been settled with German coalition discussions likely to be protracted and so policy clarity is unlikely before 2018. Across in Spain although the Catalan political debacle appears to have been contained it will continue to rumble on, although Spanish Economy Minister Luis de Guindos recently commented  that he was expecting the Catalan issue to have only a small impact on overall Spanish economic growth. Italy looks to be the next political inflection point with the potential now being floated for an early election to be called. The EUR/USD is currently trading around 1.1609 with support at 1.1572 and immediate resistance up at 1.1625. We look for further EUR weakness

United Kingdom

The Brexit situation grinds on with talks set to resume on Thursday between the European Commission’s chief Brexit negotiator Michel Barnier and UK Brexit Secretary, David Davis. Hopes for progress remain thin at this stage, with only three full rounds of talks pencilled in before the EU summit in December. With the BoE rate hike of 0.25% to 0.5% now out of the way, attention on Friday centred on the PMI data which saw the services sector extended its rebound into a second month. October saw business activity across services, manufacturing, and construction grow at its fastest rate for six months. After Thursday’s sharp drop of the GBP/USD to the 1.3042 the GBP has managed to rally back overnight on a softer USD, weighed down by the higher oil price, to the 1.3170 level. Also helping GBP strength was an article in the UK Times newspaper, suggesting that the EU has started work on a Brexit trade deal. Immediate resistance is at 1.3175 then 1.3200, support at 1.3125. We view any GBP rally as temporary and shallow given the ongoing in certain Brexit situation.

Japan

Yesterday, Bank of Japan Governor Haruhiko Kuroda stressed the need for powerful easing to continue as he stated that the BoJ is still a long way from achieving their 2% inflation goal. The statement reiterates what we heard from the BoJ last week at their monetary policy meeting that left rates unchanged, and saw the USD/JPY hit a seven month high at 114.73. The main news from Japan over the last few days has centred around the Trump visit and trade/foreign policy discussions he has had with Japanese PM Abe. The visit has now concluded with Trump heading to the Philippines, but it would appear that he has left without securing any major trade concessions or deals from Japan to narrow the $69 billion trade deficit with Japan, driven largely by U.S. imports of cars and electronics.

Canada

Canadian jobs data on Friday was better than expected, with employment up 35K, above market expectations in October with the unemployment rate ticking up to 6.3%. The data was CAD supportive and saw the USD/CAD drop to 1.2714 in late Friday trading. It has opened for the week around 1.2763 and is currently trading down at 1.2705 as the rally in oil prices helps fuel demand for the commodity linked CAD. USD/CAD resistance is up at 1.2800 with support now at the physiological 1.2700 level then down at 1.2620. The CAD is favoured with the prevailing stronger crude prices.

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