Volatile period ahead with raft of data; NZD and AUD closer to fundamental value; weaker labour numbers could see USD sell off

By Ian Dobbs*:

Commodities in general continue to remain under pressure with Brent oil recently dropping below $50 a barrel for the first time since January.

This is keeping the commodity currencies broadly under pressure, although sellers aren’t comfortable pushing the New Zealand and the Australian dollar’s through recent lows at this stage.

Both currencies have lost a lot of ground over recent months and are much closer to fundamental value.

That’s not to say we won’t see more pressure, but it’s a much more dangerous game shorting (selling them) at these levels.

Data from the US isn’t doing a good job of supporting the prospect for a September interest rate hike by the Fed.

Another good jobs report this Friday will certainly help, but if it disappoints we could also see a good clean out of bought USD positions.

The coming week should prove volatile in general with a raft of key releases from a number of countries.

Major Announcements last week:

  • FOMC leave rates unchanged at 0-0.25%
  • Australian Building Approvals -8.2% vs -0.8% expected
  • US GDP 2.3% vs 2.5% expected
  • NZ Business Confidence -15.3 from -2.3 prior
  • Canadian GDP -0.2% vs 0.0% expected
  • US Employment Cost Index +0.2% vs +0.6% expected
  • UK Manufacturing PMI 51.9
  • US ISM Manufacturing PMI 52.7 vs 53.6 expected

NZD/USD

It has been a choppy past week of trading in the New Zealand dollar, but broad overall pressure from the US dollar remains. The highs traded last Wednesday in the wake of Governor Wheeler’s speech, but the local currency couldn’t kick on and with the market still happy to purchase USD’s on any periods of weakness, we saw relentless declines heading into Friday’s US data. When the US employment cost index printed at all-time lows, there was a sharp correction higher for the NZD, but again, US dollar weakness ran into buyers and the pair drifted lower again. Friday’s release of US employment data is shaping up to be a very interesting one. I can’t imagine the market will be so quick to buy US dollars again should non-farm payrolls also disappoint. Ahead of that release however, we have NZ data in the form of dairy prices and employment change to digest over the next 24 hours. There is minor support for the NZD around 0.6550, and then bigger support toward the cycle lows around 0.6500.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6570 0.6500 0.6700 0.6536 – 0.6739

NZD/AUD (AUD/NZD)

Some relative strength in the New Zealand dollar saw this pair peak mid last week around key resistance at 0.9160 (support around 1.0917). Since then the cross has drifted lower testing 0.9000 support (1.1111 resistance) on a couple of occasions. A sustained break below 0.9000 (above 1.1111) would open the way for a further NZ dollar losses potentially toward 0.8850 (1.1299). Longer term however, we may be in for further consolidation between 0.8850 and 0.9160 (1.1299 and 1.0917). There is plenty of data this week that could influence starting with Australian retail sales and the RBA rate statement this afternoon. Tonight we get the latest Fonterra dairy auction, then on Wednesday and Thursday respectively we get NZ and Australian employment data.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9025 0.9000 0.9160 0.8994 – 0.9177
AUD / NZD 1.1080 1.0917 1.1111 1.0897 – 1.1118

NZD/GBP (GBP/NZD)

The New Zealand dollar has remained under pressure from the UK Pound ever since making a short term peak at 0.4318 (low at 2.3159) on Wednesday last week. Price action has been choppy and minor support around 0.4200 (2.3810) has contained the downside so far. With downside momentum indicators weakening, I still believe there is potential for a correction higher toward 0.4400 (lower to 2.2727), but for the time being the NZD can’t seem to sustain any periods of strength. There is a raft of releases this week that could, and will, influence the pair. Tonight we have another dairy auction from Fonterra as well as UK construction PMI data. NZ employment data is out tomorrow, then later in the week we get UK service sector PMI and the Bank of England rate meeting.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4215 0.4150 0.4320 0.4196 – 0.4318
GBP / NZD 2.3725 2.3148 2.4096 2.3161 – 2.3830

 NZD/CAD

The Canadian dollar is one of the few currencies the New Zealand dollar has largely outperformed recently. This relative outperformance has been driven by Canadian weakness in the wake of their disappointing GDP data for May. That result caused the pair to rally back up toward 0.8700, but once again, resistance around that level managed to cap the topside. There is plenty of data out this week that could influence including a Fonterra dairy auction tonight and NZ employment data tomorrow. Later in the week from Canada we also have employment data along with building permits and the Ivey PMI. Look for support around 0.8500 to continue to contain any periods of weakness at this stage. I suspect the risks are increasing for a break above 0.8700 in light of further weakness in oil prices that will weigh on the CAD. The NZD just needs to navigate through the next 24 hours of local data.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8644 0.8500 0.8700 0.8519 – 0.8715

NZD/EURO (EURO/NZD)

The broad parameters of 0.5950 to 0.6100 (1.6393 to 1.6807) have largely contained this pair since the start of July. Price action within those parameters has been choppy as both currencies have seen periods of weakness. There is little at this point to suggest a breakout from this increasingly familiar range, although a number of key releases over the coming days could easily influence. From NZ we another dairy auction from Fonterra tonight and this will be follow by employment data tomorrow. In Europe attention will turn to service sector PMI’s, retails sales and German factory orders.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.5996 0.5950 0.6100 0.5951 – 0.6092
EUR / NZD 1.6678 1.6393 1.6807 1.6415 – 1.6806

 NZD/YEN

It has been another week of choppy sideways price action between the broad parameters of 81.00 and 83.00. The 83.30 high trade in the wake of Governor Wheeler’s speech last Wednesday, but was very short lived. Since then we have seen the New Zealand dollar under perform with prices trading at 81.25 on a couple of occasions recently. At this stage this is nothing to suggest a breakout from the current range, although we do have data over the come days that could easily influence. From NZ we another dairy auction from Fonterra tonight and this will be follow by employment data tomorrow. From Japan we have average cash earnings and leading indicators data ahead of the Bank of Japan monetary policy statement on Friday.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.40 81.00 83.00 81.25 – 83.30

AUD/USD

Continued weakness in commodities and broad based unwavering support for the US dollar has kept the Australian dollar under pressure this past week. The local currency traded to fresh cycle lows, albeit briefly, on Friday at 0.7237. There was a sharp snap higher from those lows triggered by the release of the US employment cost index which printed with the weakest reading on record, but once again the market was happy to buy USD’s on any period of weakness and the pair eventually drifted lower. Friday’s release of US employment data is shaping up to be a very interesting one. I can’t imagine the market will be so quick to buy US dollars again should non-farm payrolls also disappoint. But between then and now we have plenty of other data to digest. In the next few hours Australian retail sales hit the wires followed by the Reserve Bank of Australia’s rate statement. Thursday then sees Australian employment change due for release. Absent of any big data surprises, the Australian dollar should find continued support on dips toward 0.7200, while the initial topside barrier comes in with resistance around 0.7350.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7275 0.7200 0.7350 0.7237 – 0.7362

AUD/GBP (GBP/AUD)                            

The past week has seen largely sideways trade with a very slight downside bias. A couple of tests below 0.4650 (above 2.1505) have both been short lived, while on the topside levels above 0.4700 (below 2.1277) have also been unsustainable. The broader trend is to the Australian dollar downside and there is nothing to indicate a change in at this stage. Key downtrend resistance now comes in around 0.4720 (uptrend support 2.1186) and it will take a break through there to relieve immediate AUD downside pressure. There are plenty of key data releases this week that could influence and I would be surprised if the pair hasn’t had a significant move by the end of the week. In the coming hours we have Australian retail sales and the RBA rate statement. Later in the week employment change and the RBA monetary policy statement hit the wires. From the UK this week we still have construction and service sector PMI’s set for release along with the Bank of England’s rate meeting.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4665 0.4600 0.4720 0.4647 – 0.4710
GBP / AUD 2.1436 2.1186 2.1739 2.1232 – 2.1521

AUD/EURO (EURO/AUD)

There has been little overall direction in this pairing over the past week. Both the Australian dollar and the Euro have been broadly under pressure and as such the cross has drifted sideways after bouncing from fresh cycle AUD lows at 0.6547 (highs at 1.5274) this time last week. The longer term trend is certainly to the  Australian dollar downside and the failure to recover above 0.6700 (under 1.4925) in recent days keeps the focus firmly on lower levels. However, we do have a number of key releases out in the coming days that could easily influence. Australian retail sales will be followed by the RBA rate statement this afternoon. Then on Thursday Australian employment data is set to hit the wires. While in Europe attention will turn to service sector PMI’s, retail sales and German factory orders. The key levels to watch are support toward 0.6500 and resistance around 0.6700. (1.5385 and 1.4925).

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6645 0.6500 0.6700 0.6547 – 0.6682
EUR / AUD 1.5049 1.4925 1.5385 1.4965 – 1.5274

AUD/YEN

After bouncing from 89.40 around this time last week, this pair has spent much of the past seven days trading sideways between 90.00 and 91.00. A break out from that range is likely over the coming days however, with a number of key releases to digest. Australian retail sales will soon be followed by the RBA rate statement this afternoon. Then on Thursday Australian employment data is set to hit the wires. While from Japan we have average cash earnings and leading indicators data ahead of the Bank of Japan monetary policy statement on Friday. Any break below 90.00 will target recent cycle lows near 89.20. If the market manages to overcome 91.00 on the topside, look for the move to extend toward 92.30.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 90.15 89.20 91.00 89.37 – 91.01

AUD/CAD

The Australian dollar has managed to outperform the Canadian dollar this week, thanks largely to disappointing Canada GDP for May. That data hit the wires on Friday evening and caused a sharp move from 0.9440 up to 0.9600. The pair is currently trading a little below that peak, and we have some key data out in the coming hours. Australian retail sales will be followed by the RBA rate statement this afternoon. Then later in the week Australian employment data is set to hit the wires. From Canada this week we also have employment data along with building permits and the Ivey PMI. Expect plenty of volatility over these releases, but with oil prices continuing to decline I suspect the CAD will struggle. Any dips toward 0.9400 remain a buying opportunity with the risks growing for a move toward 0.9700.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9575 0.9400 0.9600 0.9412 – 0.9603

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Market commentary:

Commodities in general continue to remain under pressure with Brent oil recently dropping below $50 a barrel for the first time since January. This is keeping the commodity currencies broadly under pressure, although sellers aren’t comfortable pushing the New Zealand and the Australian dollar’s through recent lows at this stage. Both currencies have lost a lot of ground over recent months and are much closer to fundamental value. That’s not to say we won’t see more pressure, but it’s a much more dangerous game shorting (selling them) at these levels. Data from the US isn’t doing a good job of supporting the prospect for a September interest rate hike by the Fed. Another good jobs report this Friday will certainly help, but if it disappoints we could also see a good clean out of bought USD positions. The coming week should prove volatile in general with a raft of key releases from a number of countries.

Australia

Last week was a quiet one in terms of market moving data from Australia. This week should prove a lot more interesting with a number of key releases. Later this afternoon we get retail sales data and the trade balance along with the Reserve Bank of Australia (RBA) rate statement. On Thursday we get employment data, then on Friday the RBA release their quarterly monetary policy statement. Although the RBA maintain a slight easing bias, they are widely expected to leave the cash rate unchanged after their meeting today. Over recent weeks Governor Steven’s has made hints the that bar for further interest rate cuts is now set pretty high. On top of suggesting that cuts below the current 2% level are unlikely to support the economy as much as previous interest rate reductions, he has also hinted that the bank is starting to believe the trend growth rate for the economy is a lot lower than previously. The Australian dollar is also trading a lot closer to fair value and continued softness in commodity prices will keep the pressure on the downside for now. The central bank is still likely to try and talk the currency lower in their statement.

New Zealand

In the second half of last week the New Zealand dollar unwound all the gains it made in the wake of Governor Wheeler’s speech on Wednesday morning. His speech was less ‘dovish’ than many in the market had expected and it saw the NZD move sharply higher. Those gains were short lived however, as the currency ground its way lower again. Friday’s release of ANZ business confidence did help either with a big decline to -15.3 from -2.3 prior. That’s effectively means a net 15% of respondents are now pessimistic about the economy, which is the lowest level since March 2009. Business may be getting a little too pessimistic though. With all the focus on weakness in the dairy sector is easy to overlook other areas of the economy that are doing ok. In the three months to June exports of meat were up 11%, fruit up 28% and timber up 4.1%. Add to this the tourism sector which is literally booming. In fact tourism is on track to overtake dairy as NZ’s biggest export earner. Visitor arrivals are growing significantly particularly from the US and China. The lower NZ dollar will support this sector further and see tourists spend more while in the country. Dairy prices will continue to draw the headlines, and potentially move the currency this week with another Global Dairy Trade auction tonight. Tomorrow then sees the release of employment data with the market expecting the unemployment rate to tick up to 5.9%.

United States

Although data from the United States has been very mixed recently, the market continues to be a happy to buy US dollars on any period of weakness. The Fed gave little away, in terms of potential timing for an interest rate hike, when they released the statement following their rate meeting last week. GDP came in a touch below expectation, but the market took heart from the details of the report which were more positive. Friday saw a slight downward revision to University of Michigan consumer sentiment data and a better than forecast outcome for Chicago PMI, but the big surprise was the employment cost index. It’s not usually a big market mover, but it certainly got a reaction this time. Employment costs for the second quarter were up just 0.2% which was well below the expectation of 0.6%. That’s also the slowest pace of gains in wages and salaries since records began in 1982 and it’s going make for a very tough decision for the Fed come September. They desperately want to start raising rates, but they need to be confident inflation will pick up. The Fed believes as the unemployment rate drops, and spare capacity in the economy is used up, this will put upward pressure on wages and inflation. But Friday’s data suggests the only jobs the US economy is adding are low paid ones. The US dollar snapped lower after the release, but did eventually recover around half its losses heading into the close. Last night’s release of ISM manufacturing PMI will also complicate the Fed’s decision. The market was expecting a reading in line with last month around 53.5, but the index fell to 52.7. Friday’s release of non-farm payrolls is shaping up to be a key figure. If it disappoints it could be the straw that breaks the camel’s back and see a significant negative reaction in the USD. Ahead of that release we have ISM non-manufacturing PMI and the trade balance to digest.

Europe

Data out of Europe recently has been mixed at best. Late last week we saw disappointing readings for German retail sales, French consumer spending, and Eurozone unemployment which remains stagnant at 11.1%. On the positive side core inflation was a touch stronger than forecast at 1.0%. The headline inflation reading came in on forecast at +0.2%. Eurozone manufacturing PMI data last night was also a touch better than forecast at 52.4, but it was completely side-lined with the market focusing on the Greek stock market that re-opened after a lengthy period of non-trading. It was absolute carnage with Greek stocks opening down 22%. By the close of trading the market had recovered a touch to be down ‘only’ 16%. The true cost of the protracted Greek negotiations is only really starting to hit home. Their economy was in poor shape earlier this year, but it’s been decimated now. There is a raft of second tier data set for release over the rest of this week, the highlights of which will be Spanish unemployment and German factory orders and Eurozone retail sales.

United Kingdom

This week should be an interesting one for the UK economy and the UK Pound. There are a number of key releases scheduled that all have the potential to move the market. The highlight will be the Bank of England’s (BOE) rate meeting on Thursday. Although they are not expected to adjust policy settings at all, many in the market expect we will see one of two of the nine member MPC (monetary policy committee) vote for a hike. The Bank will also release its quarterly inflation report on Thursday and this should be consistent with interest rate hike coming around the turn of the year. Last night we got manufacturing PMI data which improved a touch to 51.9 from 51.4 prior. Although not a stellar result at all, the gains do put an end to the declines we have been seeing in the index for the past four months. Manufacturing is also only a small part of the UK economy. We get construction PMI tonight and service sector PMI tomorrow. Other data to watch out for this week comes in the form of manufacturing and industrial production as well as the trade balance.

Japan

Japan released a rash of data on Friday that overall has done little to suggest the central bank’s 2% inflation target will be achieved any time soon. Although there are some signs inflation is picking up slightly, consumer spending is very weak having fallen to the lowest levels since last year’s sales tax hike. The Bank of Japan (BOJ) has been expecting a strong rebound in demand, which would eventually flow through to support inflation, but recent data suggests that’s just not happening. Many economists expect the central bank to add stimulus at some stage over the coming months. The BOJ’s Kuroda was on the wire saying there is ‘no immediate need for additional monetary easing’ with the underlying trend for prices steadily improving, but even he must be starting to have doubts. Later today we get average cash earnings data and toward the end of the week the BOJ release their monetary policy statement.

Canada

At the end of last week Canada released GDP data for May and the risks were there that is could print negative again. Unfortunately for Canada that’s exactly what happened with economic activity falling by 0.2%, marking the fifth straight month of negative growth. Barring a ridiculously strong reading for June, it looks like Canada was officially in recession in the first half of this year. May’s GDP decline was lead by manufacturing (-1.7%) along with mining and oil and gas extraction (-0.7%). Goods producing industries also fell 0.6% while the service sector declined 0.1%. The Bank of Canada (BOC) is expecting growth to return in the second half of this year as other exports start to offset weakness in the energy sector. For the time being however, the Canadian dollar will find it difficult to make gains with oil prices continuing to see pressure.

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