USD weakness has been the main theme for the week, driven by Fed speakers, data and Trump administration; NZD has underperformed over this time and is lower on other crosses, not helped by soft inflation data this morning

By Ian Dobbs*:

The main theme of the past week has been broad based US dollar weakness. Dovish comments from Fed officials combined with soft US data have done the damage, but you can also add in the mix the continuation of Trump-Russia hysteria and its negative impact on the administration’s ability to push on with its policy agenda. Will this week be any different? Probably not on the political front, although there is always the chance of a data surprise. During this period of USD weakness the NZD has largely underperformed and as a result it has declined on many other crosses. The Australian dollar on the other hand has made the most of the current environment with gains across the board.  Against the USD on Friday the AUD reached its best level in almost a year.

Central bank meetings from the Bank of Japan and the European Central Bank this week will draw focus, although neither bank is likely to suggest they are ready yet to pull back from stimulus.

Major Announcements last week:

  • Bank of Canada hikes interest rates by 0.25%
  • US PPI 0.1% vs 0.0% expected
  • US Inflation 0.0% vis 0.1% expected
  • US Retail Sales -0.2% vs 0.2% expected
  • Chinese GDP 6.9% vs 6.8% expected
  • Chinese Industrial Production 7.6% vs 6.5% expected
  • NZ Inflation data 0.0% vs 0.2% expected

NZD/USD

New Zealand dollar gains last week were largely due to weakness in the United States dollar. Soft US inflation and retail sales data helped drive the pair up to a high of 0.7368 on Friday night. The pair consolidated in the early stages of this week above the 0.7310 level, but the just released NZ inflation data has dealt the local currency a significant blow. Inflation came in below expectation at flat, and the NZDUSD dropped from 0.7325 to 0.7265. Look for further tests of the downside of the next 24-48 hours. The 0.7250 area marks initial support, and any break below there will open the way for a test of 0.7190.

DIRECT FX Current level Support Resistance Last wk range
NZD/USD 0.7273 0.7250 0.7340 0.7202 – 0.7368

NZD/AUD (AUD/NZD)

The Australian dollar outperformed the New Zealand dollar last week helping to drive the cross rate down to the 0.9380 level, where it traded for much of yesterday. This morning however the NZD has been dealt a significant blow with softer than forecast inflation data hitting the wires and that’s seen the cross trade to a low of 0.9320 so far. The focus remains on the downside and a test of support around 0.9300. That may contain this initial bout of weakness, but if tonight’s dairy auction also produces a negative surprise, we can expect a break below that level. In that case the target would quickly move to 0.9100.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9335 0.9300 0.9500 0.9323 – 0.9542
AUD / NZD 1.0712 1.0526 1.0753 1.0480 – 1.0726

NZD/GBP (GBP/NZD)

Although price action over the past week in this pair had been volatile, the overall level of the New Zealand dollar vs the UK Pound started the week little changed from where it was at the beginning July. That all changed this morning however, with the release of soft NZ inflation data. The NZD immediately fell across the board and against the GBP the cross is currently testing initial support around 0.5560. A sustained break below that level will open the way for a test of the 0.5450 area. Those with GBP’s to sell should be patient and let this move develop.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.5568 0.5560 0.5660 0.5565 – 0.5703
GBP / NZD 1.7958 1.7668 1.7986 1.7536 – 1.7970

 NZD/CAD

The New Zealand dollar has seen a choppy week of trading vs the Canadian dollar. The lows at 0.9219 traded in the immediate aftermath of the Bank of Canada’s interest rate hike last week. The NZD then managed a decent recovery all the way to 0.9395, but it now looks like a retest of the lows is back on the cards. Soft NZ inflation data this morning has hurt the NZD and it’s likely to remain under pressure over the coming 24 – 48 hours. A dairy auction tonight may well influence, but unless it comes in very strong, the risks for the NZDCAD remain on the downside.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9233 0.9200 0.9400 0.9219 – 0.9399

NZD/EURO (EURO/NZD)

We have seen some volatile price action in this pairing over the past week or so. That is evidenced by the range of the past week of between 0.6290 and 0.6469. Those highs, set on Friday night, were short lived however and it looks like the risks are all now skewed to the downside, thanks in large part to this morning’s release of soft NZ inflation data. Another test of the 0.6290 low may well be on the cards in the next 24 hours. If tonight’s dairy auction also disappoints then key support around 0.6210 will likely be tested. Later in the week we have the ECB meeting to digest and that is only likely to add to the volatility.

DIRECT FX Current level Support Resistance Last wk range
NZD/EUR 0.6338 0.6210 0.6450 0.6290 – 0.6469
EUR/NZD 1.5777 1.5504 1.6103 1.5458 – 1.5897

NZD/YEN

The big uptrend that has dominated this pair since mid-May has been dealt a decisive blow this morning. Soft NZ inflation data has hurt the New Zealand dollar and against the Japanese Yen the cross has now broken key trend line support, which was at 82.15. That level will now provide resistance on any attempts to rally. The move today could well signal the end of the NZDJPY rally and the risks are now firmly on the downside. The initial target is now support around the 80.50 area. We do have a diary auction tonight which could easily influence the local currency, but it would take a very positive outcome to negate the big negative signal that is this morning’s break below trend line support. Those looking to buy JPY should deal at the current market, or take advantage of any potential bounce in the NZD.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.92 80.50 82.15 81.87 – 83.27

AUD/USD

The Australian dollar has had another very strong week buoyed by positive economic data, increasing gold prices, and broad based weakness in the United States dollar. To be fair, it was largely USD declines on Friday night, after soft US inflation and retails sales data, that drove the AUDUSD up to the recent highs at 0.7838. There is major resistance around 0.7850 and so far that’s contained the move. The pair opened the week consolidation between 0.7800 and 0.7850 and it remains to be seen if the market is willing to have another crack at that major resistance level. Today’s RBA minutes will draw attention, then on Thursday we have employment data to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7787 0.7725 0.7850 0.7603 – 0.7838

AUD/GBP (GBP/AUD) 

The Australian dollar has maintained a positive bias against the UK pound over the past week, supported by positive data and strong gold prices. That being said, the pair has failed on two occasions to hold onto gains over the 0.6000 level and that leaves the door open for a correction lower. We just need a trigger. Today’s RBA minutes may well provide just that. Later in the week we also have Australian employment data to digest. If the pair does have another crack above 0.6000, there is resistance at 0.6020 which marks the cycle high made back on 20th June.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5965 0.5925 0.6020 0.5889 – 0.6014
GBP / AUD 1.6765 1.6611 1.6878 1.6628 – 1.6981

AUD/EURO (EURO/AUD)

The Australian dollar was one of the best performing currencies last week and as such its gains against the Euro should be no major surprise. That being said, gains for the pair stalled at the 0.6840 level which marks the high from back on 20th June. After two failed attempts at that level we have seen the cross drift a touch lower overnight to now trade at 0.6790. This week should be a big one with plenty of potential volatility. From Australia we have the RBA minutes this afternoon the employment data on Thursday. While from Europe we have the ECB meeting on Thursday night to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD/EUR 0.6785 0.6760 0.6840 0.6651 – 0.6837
EUR/AUD 1.4738 1.4620 1.4793 1.4627 – 1.5035

AUD/YEN

The Australian dollar has been in a strong uptrend against the Japanese Yen since the beginning of June. That trend continued this week as the AUD outperformed most other currencies. The pair surged to cycle highs of 88.22 last night. That 88.20 area is however key resistance marking the high made back in early February. It should provide a tough barrier for further gains now as well. Today RBA minutes may well be the deciding factor in determining whether the pair can break above that level. Later in the week we also have Australian employment data and the Bank of Japan meeting to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD/YEN 87.70 86.60 88.20 86.66 – 88.22

AUD/CAD

We have seen some volatile price action this week as both the Australian and Canadian dollar have seen periods of relative outperformance. Ultimately the Australian dollar has prevailed and the pair has managed a decent bounce from the lows of 0.9735 set immediately after the Bank of Canada rate hike last Wednesday. The pair currently trades around 0.9900 and the immediate focus is now of the RBA minutes set for release early this afternoon.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9886 0.9750 0.9960 0.9744 – 0.9953

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Market commentary:

The main theme of the past week has been broad based US dollar weakness. Dovish comments from Fed officials combined with soft US data have done the damage, but you can also add in the mix the continuation of Trump-Russia hysteria and its negative impact on the administration’s ability to push on with its policy agenda. Will this week be any different? Probably not on the political front, although there is always the chance of a data surprise. During this period of USD weakness the NZD has largely underperformed and as a result it has declined on many other crosses. The Australian dollar on the other hand has made the most of the current environment with gains across the board.  Against the USD on Friday the AUD reached its best level in almost a year.

Central bank meetings from the Bank of Japan and the European Central Bank this week will draw focus, although neither bank is likely to suggest they are ready yet to pull back from stimulus.

Australia

Last week’s data from Australia was mostly better than forecast although it was largely a second tier affair. This week however we have a couple of key releases to digest. The Reserve Bank of Australia’s (RBA) minutes hit the wires in the next couple of hours and then on Thursday employment data is set for release. With the economic outlook improving in Australia most forecasters expect the RBA to remain on hold for the foreseeable future, certainly well into 2018. The RBA minutes should affirm this neutral setting. Employment data on Thursday should also be very interesting. The last three months figure have all come in significantly stronger than forecast and another strong print this month would suggest a definite trend of improvement in the job sector. Expectations are for a gain of 15.3k in employment. The previous 3 months readings have been 61.1k, 37.8k and 42.5k.

New Zealand

Last week was a very quiet one on the data front from NZ. The New Zealand dollar largely underperformed most other currencies during the bout of USD weakness we’ve seen. So while the NZD has gained against the USD, it lost ground on many other crosses. This morning we saw the key economic release of inflation data. It came in on the soft side printing at flat. The market was expecting a gain of 0.2%. The prior reading was +1.0%. The data weighed on the NZD which immediately lost half a cent or so against the USD. We expect the NZD to remain under some pressure over the coming days. Tonight we have another dairy auction to digest and then on Friday we get the latest migration data. That should prove interesting with the record high level of migration likely to be a key topic during the upcoming election.

United States

The United States dollar ended last week on a very soft footing hurt by a raft of disappointing data. Inflation came in at flat vs expectations of 0.1%, while retail sales fell 0.2% vs expectations of a 0.2% gain. On top of this we saw University of Michigan Consumer Sentiment fall from 95.1 to 93.1. The USD was already feeling a little vulnerable after somewhat dovish comments from Yellen earlier in the week and once the data hit the screens there was across the board dollar selling. Interest rate markets also reacted and the chance of another interest rate hike by the Fed by the end of this year fell to around 40%.  It would now be extremely unlikely we get another interest rate hike before December, and a hike in December at this stage is a coin toss. This week to draw focus we have data on Building Permits, Unemployment Claims, and Housing starts.

Europe

Data from Europe last week continued to suggest the European economy is slowly improving and it helped the Euro make significant gains. All eyes this week however will be on Thursday’s main event, the European Central Bank’s (ECB) interest rate meeting. The market is starting to look forward to an eventual exit from the ECB’s quantitative easing policy and it’s hastily bid up the Euro over recent months in anticipation of such an announcement. The market may be getting well ahead of itself though and there is every chance ECB President Draghi will pour cold water on this expectation during his press conference after the meeting. He has stated previously the central bank will fully implement the QE programme and although he’s acknowledged the improving economic outlook, he’s given no hint that QE will be abandoned any time soon. If market expectations are disappointed on Thursday, the Euro could fall. Ahead of the ECB meeting we get Final CPI data and the German ZEW Economic Sentiment Index.

United Kingdom

Solid employment data released from the United Kingdom last week was in large part negated by soft wages data. It’s been a similar trend in many western economies in recent years. The Bank of England (BOE) certainly have a tightening bias at the moment, but there are big divisions within the Monetary Policy Committee (MPC) as to the timing of any potential interest rate hike. This week we hear from BOE Governor Carney and the market will be keen to get a better feel for his outlook. Ahead of that speech we have inflation data set for release on Tuesday, then on Thursday we get the latest reading of retails sales.

Japan

A Japanese holiday yesterday meant it’s been a quiet start to the week for the Yen. There is little on the calendar until Thursday’s main event being the Bank of Japan Monetary Policy Statement. The Japanese economy is slowly gaining momentum and the BOJ are expected to be somewhat optimistic about the economic outlook. It is however too early for them to make any significant changes to monetary policy at this stage with inflation still far from their 2% target.

Canada

Last week’s hawkish interest rate hike from the Bank of Canada (BOC) lit a fire under the already strengthening Canadian dollar and it ended the week in good shape. Friday then saw the release of the New Housing Price Index and it came in stronger than forecast at +0.7%. While that sounds positive, another metric on the Canadian housing market released last night paints a different picture. House prices nationally are now down nearly 10% from their peak in April. Prices are declining on slowing sales volumes with June activity down 11.4% year on year. It remains to be seen if this is the start of something much bigger for the housing market, which has long been a point of concern in Canada. Longer term there are big questions as to the viability of the current housing market valuations in light of increasing interest rates. Although that’s likely to be a story for 2018 or 2019. Later this week we have inflation data and retail sales figures to draw focus.

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