US Fed's downgraded economic assessment drives USD down; AUD and NZD benefactors from USD slide; NZD continues to climb against AUD

Short headline: 
USD correction continues

By Ian Dobbs*:

The foreign exchange market has been dominated the past week by volatility in the US dollar in the wake of Thursday’s FOMC rate statement.

We have seen some big swings in price action, but ultimately the Fed’s downgraded economic assessment has seen the USD lose ground.

The NZD and AUD in particular have been big benefactors of this USD weakness, making gains on many other crosses.

This move has been driven as much by market positioning as anything else. Being long (bought) US Dollars has been the favoured play for much of the past year, and we are now see many of those positions getting squeezed out.

With both the NZD and AUD breaking above key resistance levels in the past 24 hours, there is plenty of opportunity for further gains. US macro data this week will play a key role driving direction from here.

Major Announcements last week:

  • US Industrial Production +.1% vs +.2% expected
  • BOJ leave monetary policy unchanged as expected
  • European Inflation (YoY) +.7% vs +.6% expected
  • BOE leave monetary policy unchanged as expected
  • UK Ave. Earnings +1.6% vs +1.8% expected
  • US FED leave monetary policy unchanged as expected
  • NZ GDP +.8% as expected
  • Canadian Inflation 1.0% as expected
  • Canadian Retail Sales -1.7% vs -.7% expected

NZD/USD

The New Zealand dollar bounced strongly from levels just below 0.7200 late last week. The move was driven by the RBNZ, who are likely to remain on hold for the foreseeable future, and by softer than forecast US economic releases. Disappointing data from the US continued in the early stages of this week and it is causing some profit taking on long (bought) USD positions ahead of the FOMC statement. That statement hits the wires early on Thursday morning and is a major focus for the markets. The Fed are expected to ‘tweak’ the wording of the statement which would be a signal they remain on track to hike rates around June. If however, they acknowledge the recent weakness in many economic indicators the USD could see further pressure. With key support around 0.7200 and strong resistance around 0.7600, that leaves plenty of room for the New Zealand dollar to range around in over the coming weeks and potentially months. Ahead of 0.7600 there is minor resistance at 0.7450 and so far this has capped the recent NZD strength. A dovish statement from the Fed would see this level come under serious pressure. From New Zealand this week we have another dairy auction from Fonterra along with quarterly GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7670 0.7600 0.7850 0.7276 – 0.7674

NZD/AUD (AUD/NZD)

After bouncing off support around 0.9500 (resistance 1.05025) late last week, in the wake of the RBNZ monetary policy statement, the New Zealand dollar has continued to grind higher against its Australian cousin. The Australian dollar is seeing some pressure in the lead up to the RBA minutes set for release this afternoon. The market is expecting this to confirm the central bank remains on course to cut interest rates again over the coming months. If this is indeed the case the NZD should continue to grind higher and the pair to test levels around 0.9700 (1.0310) again. With the interest rate differential between the two countries expected to widen further, I continue to see support around 0.9500 (resistanc3e 1.0525) containing any periods of AUD strength/NZD weakness in the near term. Other data to watch out for this week includes another dairy auction from Fonterra along with NZ GDP.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9720 0.9700 0.9900 0.9575 – 0.9784
AUD / NZD 1.0288 1.0101 1.0309 1.0221 – 1.0444

NZD/GBP (GBP/NZD)

The New Zealand dollar has been making relentless gains against the UK Pound ever since last Thursday’s RBNZ monetary policy statement. Gains have come on the back of both NZD strength, and GBP weakness. The GBP has seen a fair amount of selling pressure recently and it’s hard to point a finger at exactly why. A number of data releases from the UK did come in worse than expected last week, but these haven’t impacted the overall economic outlook at all. Upcoming UK elections are probably still a little too far away to really impact the currency, although confidence indicators may see some moderation due to uncertainty over the coming weeks. The most likely driver of recent GBP supply is probably profit taking on the EURGBP cross which has seen a big move over the past couple of months, and recently approached the key psychological level of 0.7000. This combined with some better than forecast EUR data has seen those holding GBP’s against the EUR unwind positions and lock some profit in. This increased supply of GBP’s has helped the cross to the NZD trade back up to resistance around 0.5000 (support at 2.0000). As this move has not been driven by economic fundamentals and more by just market positioning, I would expect the 0.5000 (2.0000) level to continue to cap the NZD outperformance. Those looking to purchase GBP’s should therefore take advantage of this period of relative NZD strength. From the UK this week we have employment data and the Bank of England minutes to digest. While from NZ we have another dairy auction from Fonterra along with GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5125 0.5000 0.5200 0.4933 – 0.5130
GBP / NZD 1.9512 1.9231 2.0000 1.9493 – 2.0272

 NZD/CAD

The New Zealand dollar recovered sharply against the Canadian dollar late last week in the wake of the RBNZ’s monetary policy statement. The initial gains were driven by NZD strength, but recent appreciation has come thanks to some Canadian dollar weakness. Further declines in oil prices have again weighed on the CAD and this pressure seems unlikely to abate in the near term. We may well see the pair test recent highs around 0.9520 over the coming week. There are some key releases to digest from Canada this week. Manufacturing sales, wholesale sales, inflation, and retail sales are all set to hit the wires. While from NZ this week we have another dairy auction from Fonterra along with GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9595 0.9450 0.9650 0.9317 – 0.9617

NZD/EURO (EURO/NZD)

The New Zealand dollar has eked out fresh cycle highs against the Euro at 0.7016 (1.4253) in the past 24 hours. A relatively strong performance from the NZD since last Thursday’s RBNZ statement has seen the currency gain on most crosses. These most recent highs have however, been accompanied by declining momentum indicators and this suggests a period of consolidation, or a corrective pullback is likely over the coming week(s). The pair could easily pull back toward 0.6800 (upto 1.4705) without threatening the broader uptrend. Recent improvements in data from the Eurozone would also support this outlook for a consolidation/correction in the pair, however with QE from the ECB now in full swing, any period of relative EUR strength, is likely to be short lived. Expect a range of 0.6800 to 0.7000 (1.4285 – 1.4705)  over the coming week. Tonight we get German ZEW economic sentiment data and the final reading of Eurozone inflation. Later in the week the ECB economic bulletin and the EU economic summit will draw focus. While from NZ this week we have another dairy auction from Fonterra along with GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.7000 0.6900 0.7100 0.6856 – 0.7075
EUR / NZD 1.4286 1.4085 1.4493 1.4134 – 1.4586

 NZD/YEN

The New Zealand dollar bounced from 87.33 Yen in the wake of the last Thursday’s RBNZ monetary policy statement. Since then the pair has traded sideways below resistance around 90.00. We are likely to see more of the same price action over the coming days, with the risks slightly skewed toward a potential break back above 90.00. The Bank of Japan monetary policy statement is set to hit the wires later this afternoon and this provides the immediate focus for the  market. From NZ this week we have another dairy auction from Fonterra along with GDP data.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 91.78 90.00 92.00 88.23 – 91.90

AUD/USD

The Australian dollar remains entrenched in a downtrend against the USD. The local currency did see a bounce late last week off recent lows which was driven in large part by softer than forecast US data. But that bounce struggled at the first line of resistance around 0.7730 and this keeps the focus on the downside, at least for now. We do have a couple of key releases this week which could easily impact. The RBA minutes are set for release this afternoon. The market is expecting this to confirm the bank remains on course to cut rates again over the coming months. Focus will then turn to the FOMC rate statement out early on Thursday morning. The Fed are expected to ‘tweak’ the wording of the statement which would be a signal they remain on track to hike rates around June. If however, they acknowledge the recent weakness in many economic indicators the USD could see further pressure. If we do get a ‘dovish’ statement from the Fed, the key topside level to watch in the AUD comes in around 0.7770. Any sustained break above there would be a warning signal that a much bigger correction is unfolding. Until that level breaks however, the major downtrend that started in early September 2014 remains intact.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7892 0.7760 0.7900 0.7592 – 0.7899

AUD/GBP (GBP/AUD)                            

The Australian dollar saw a decent recovery against the UK Pound late last week, driven as much by weakness in the UK Pound as anything else. This saw the pair testing initial resistance around 0.5180 (1.9305 support) and although a number of attempts have been made since then to sustain a break above that level, ultimately the topside attempts failed. A pullback toward 0.5100 (up to 1.9610) could now easily unfold over the coming week. The RBA minutes are set for release this afternoon and the market is expecting this to confirm the bank remains on course to cut rates again over the coming months. This should keep some downside pressure on the Australian dollar. I also believe recent GBP weakness has more to do with market positioning than economic fundamentals and could therefore easily be reversed. For these reasons, I expect resistance around 0.5180 (support 1.9305) to continue to cap the AUD topside and a pullback toward 0.5100 (rally to 1.9610), or through, to unfold over the coming days. From the UK this week we have employment data and the Bank of England minutes to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5272 0.5180 0.5350 0.5137 – 0.5280
GBP / AUD 1.8968 1.8692 1.9305 1.8939 – 1.9467

AUD/EURO (EURO/AUD)

The Australian dollar continued to make ground against the Euro last week trading to cycle highs at 0.7287(lows 1.3723). However, there are indicators that the AUD momentum is weakening and we could easily see a period of consolidation or a correction lower unfold. The RBA minutes are set for release this afternoon and the market is expecting this to confirm the bank remains on course to cut rates again over the coming months. If we do see a pullback, the initial target will be 0.7150 (1.3985). Any move below that level will open the way for a test of 0.7030(1.4225). Tonight we get German ZEW economic sentiment data and the final reading of Eurozone inflation. Later in the week the ECB economic bulletin and the EU economic summit will draw focus.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.7200 0.7165 0.7350 0.7126 – 0.7240
EUR / AUD 1.3889 1.3605 1.3957 1.3812 – 1.4032

AUD/YEN

The past week has seen a continuation of choppy price action for this pair, but little overall direction. The broad parameters of 92.00 to 94.00 have contained price action for much of the past month and I expect more of the same over the coming week. The immediate focus is on the Reserve Bank of Australia minutes set for release today. The market is expecting these to confirm the bank remains on course to cut rates again over the coming months, and this should pressure the AUD to a degree. This will be followed by the Bank of Japan monetary policy statement is set to hit the wires later this afternoon. The BOJ are expected to leave policy setting unchanged.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 94.38 94.00 96.30 92.02 – 94.58

AUD/CAD

The Australian dollar remains trapped between the broad parameters of 0.9650 and 0.9850 to the Canadian dollar. Some recent pressure on the Canadian dollar, thanks in part to further declines in oil prices, has seen the pair trade toward the upper end of that range. But in the near term we have the Reserve Bank of Australia minutes to digest and these could weigh on the AUD. The market is expecting this to confirm the bank remains on course to cut rates again over the coming months. So for the time being we can expect a continuation of the current range. We do however have some key releases to digest from Canada this week. Manufacturing sales, wholesale sales, inflation, and retail sales are all set to hit the wires and these will likely add to recent volatility.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9870 0.9750 0.9950 0.9698 – 0.9873

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Market commentary:

The foreign exchange market has been dominated the past week by volatility in the US dollar in the wake of Thursday’s FOMC rate statement. We have seen some big swings in price action, but ultimately the Fed’s downgraded economic assessment has seen the USD lose ground. The NZD and AUD in particular have been big benefactors of this USD weakness, making gains on many other crosses. This move has been driven as much by market positioning as anything else. Being long (bought) US Dollars has been the favoured play for much of the past year, and we are now see many of those positions getting squeezed out. With both the NZD and AUD breaking above key resistance levels in the past 24 hours, there is plenty of opportunity for further gains. US macro data this week will play a key role driving direction from here.

Australia

There has been very little in the way of economic releases from Australia over the past week. Reserve Bank of Australia (RBA) Governor Stevens spoke on Friday and he said the transition from the mining boom has not been as seamless as the central bank would like and that they would continue to lend what support they could to the economy. He added that although the decline in the exchange rate is assisting the transition, Australian firms and households are becoming less optimistic. He certainly sounded like a man prepared to cut interest rates again. The RBA’s Assistant Governor Edey is due to speak later this afternoon and tomorrow we have the RBA’s Financial Stability Review.

New Zealand

Last week’s 8.8% fall in dairy prices drew the majority of focus from the financial markets and saw the NZD come under some pressure, at least temporarily. The GDP result came in bang on expectation at 0.8% for the quarter and as such didn’t have much impact. On Friday we got the latest NZ migration data and this posted the highest single month gain, at 7101, since records began in 1978. For the year ended February NZ saw net migration of 55,121 people, also an all-time high. Economists expect migration to peak this year around the 60k mark, and with all these people needing to find places to live it only adds heat to the property market. Yesterday’s release of consumer sentiment data saw a solid jump to 117.4 from the prior reading of 114.8. The gains have been driven in part by cheaper petrol prices and strong house price increases. The only other data this week is the trade balance set for release tomorrow.

United States

Last week proved to be a volatile one for the US dollar, and this week could hold just as many fireworks. The USD came under all sorts of pressure in the immediate aftermath of the FOMC rate statement. With the Fed all but acknowledging that the economy is not in as greater shape as the employment data suggests, the market started to reassess the likelihood of a June rate hike, and as such the USD lost ground. Some significant volatility followed with the US dollar recovering a large part of the losses over the following 12 hours, only to turn around again and head back to its lows heading into the weekend. Key to whether the dollar continues to lose ground from here will be the outcome of inflation data tonight, and durable goods orders tomorrow night. A couple of soft results here could well spark another down leg for the USD as even more longs (bought USD positions) stop out. Later in the week we have the final reading of GDP and a speech from Fed Chair Yellen to digest.

Europe

Last week saw some further encouraging data from Europe, with Eurozone economic sentiment readings increasing, inflation a touch better than expected and the current account also coming in better than forecast. The EU Economic Summit failed to provide any fresh agreement on Greece. The next tranche of bail-out funds is still conditional on Greece presenting a comprehensive reform package, which then needs to be endorsed by EU finance ministers. Greece could be out of money by mid-April and desperately needs the EUR7.2bln bailout payment scheduled for the end of April brought forward. The new Greek government isn’t doing itself any favours though with their ‘confrontational’ style. A recent poll showed more than half of all Germans would like Greece to leave the Eurozone. That’s up more than 10% since February. This week to draw focus we have manufacturing and services sector PMI data, German IFO business climate, and German consumer climate readings.

United Kingdom

The UK Pound continued to struggle last week weighed on by softer than forecast wage data. The actual employment numbers weren’t bad and the unemployment rate remained stable at 5.7%, but without more in the way of wage pressure, the chance for a quick turnaround in inflation is very slim. The Bank of England’s (BOE) Chief economist recently said he sees the risks to inflation on the downside, and former MPC member Posen agreed in a weekend article. He said labour market tightness is overstated and there is not enough inflation pressure to raise rates. We get the latest reading of inflation tonight and it is expected to fall to its lowest reading on record, at 0.1%. On a more positive note Friday’s release of Public Sector Net Borrowing showed the government borrow less than expected in February. It seems improvements in the economy have finally started to flow through into a greater tax take. This combined with budget cuts made over the past couple of years, means the government borrowed about a third less this February than at the same time last year. Later in the week we have retail sales data and a speech from Governor Carney to digest.

Japan

The only release of note since last Tuesday’s Bank of Japan (BOJ) monetary policy statement has been the trade balance. This came in significant better than forecast at -0.64trln Yen. Compared with a year ago, the deficit has fallen by 47.3%. The improvement has been driven cheaper oil pushing down the value of imports, along with an improvement in exports, thanks in large part to a weak Yen. Governor Kuroda was on the wires this weekend saying “people’s perception of inflation has clearly changed.” He said “This is the first time ever for people in their 20s or younger to experience rising prices.” He added that the across the board wage increases now underway “represent landmark changes for Japan.” The key data this week all comes out on Friday when we get household spending, inflation, unemployment, and retail sales.

Canada

There was little in the way of support for the Canadian dollar in last week’s economic releases from the country. While core inflation came in right on expectation at 0.6%, we saw significant declines in manufacturing sales, wholesale sales, and retail sales. Low petrol prices certainly had an impact on the retail sales number with gasoline sales down 8.8%, the largest decline since November 2008, but weakness was more widespread than just that with seven of the 11 sectors tracked posting declines. This data is certainly consistent with the Bank of Canada’s pessimistic expectations for the first quarter of 2015. We only have a speech by Governor Poloz and the annual budget release to draw focus this week.

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