Of all the central banks only the ECB looks likely to alter their monetary policy

By Ian Dobbs*:

The wider markets have had an interesting last week or so.

The primary theme of central bank focus remains in place. Last weeks’ unchanged monetary policy announcements from the US Federal Reserve, the RBNZ and BOJ were expected, and come ahead of this week’s decisions from the RBA, ECB and BOE.

Only the ECB looks to have any chances of altering their monetary policy, as deflationary fears again build in the European markets.

Correspondingly, the Euro was the weakest performing major currency last week. Accentuating this move was the continuation of the grinding recovery from the US dollar. This recovery has been across the board as a pick-up in the economic news has seen investors ease back pressure on the greenback.

In terms of the Australasian duo, a rebound in Chinese sentiment has coupled with a stabilisation of the Australian economic news to increase demand for the Australian dollar. The improved AUD sentiment has seen it outperform the NZ dollar, as the expectations of further easing to the cash rate from the RBA are again lowered.

Major Announcements last week:

·  US Retail Sales +.4% as expected

·  US Consumer Sentiment 71.2 vs 75.2 expected

·  US Inflation +.1% vs +.2% expected

·  US Fed leave monetary policy unchanged as expected

·  RBNZ leave monetary policy unchanged as expected

·  BOJ leave monetary policy unchanged as expected

·  Canadian GDP +.3% vs +.2% expected

·  Chinese Manufacturing PMI 51.4 vs 51.2 expected

·  UK Manufacturing PMI 56.0 vs 56.3 expected

·  US Manufacturing PMI 56.4 vs 55.3 expected

·  Australian Retail Sales +.8% vs +.5% expected

·  UK Construction 59.4 vs 58.9 expected

NZD/USD

There has been little in the way of overall direction for the New Zealand dollar against the USD in the past week. Support towards 0.8200 seems to have contained the downside, while moves above 0.8300 have been short lived. We are very likely however, to get some action this week with a number of key releases due. Tomorrow sees NZ unemployment rate which will drive the local currency, after which the focus will turn to US. To the extent we get GDP on Thursday and the employment report on Friday. In the short term expect the rangey nature of the price action to continue. The prospect of a cash rate increase in the first half of 2014 with support the NZD in any periods of softness.

NZD/AUD (AUD/NZD)

The NZD recovered off lows against the AUD around 0.8640 (1.1574) in the early stages of last week and since then has maintained a small upside bias. This has seen the pair test the key 0.8740 (1.1442) level which is where the cross broke through during the previous week. It would take a sustained move above this level (now good NZD resistance) to bring the topside back into focus. The pair did have an attempt up through this level in the dying hours of last week amid very thin liquidity, but it seems that move was more about triggering orders stop loss orders above 0.8740 (down through 1.1442) than a genuine NZD break higher (AUD lower). As a result the cross drifted back in the early stages of Monday and currently trades around the more comfortable 0.8710 (1.1481) area. Key influences this week will be the RBA statement today and then employment data from both countries later in the week. The RBA a likely to suggest the Australian dollar is overvalued and this could see it depreciate against the NZD somewhat. Whether it falls far enough to push the cross to the NZD back above 0.8740 (1.1442) remains to be seen.

NZD/GBP (GBP/NZD)

The New Zealand dollar has seen grinding appreciation against the UK Pound for much of the past week. The appreciation accelerated at the end of last week as the GBP came under a little pressure. Data out of the UK continues to support the outlook for the GBP, while expectations of a rate hike in NZ next year are underpinning the NZD.  This leaves the broader picture consistent with the range trading we have seen for the last five months. The downside is supported around 0.5000 (resistance 2.0000) and NZD buying toward there is recommended, while resistance on the topside towards 0.5300 (1.8868) represents good NZD selling. Data from both countries could impact this week. From NZ, we have employment numbers tomorrow, while from the UK the highlight will be the Bank of England (BOE) monetary policy decision on Thursday. Ahead of that we get data on the UK service sector and manufacturing production.

 NZD/CAD

With the expected “no change” from the RBNZ last week, the focus quickly moved to the Canadian GDP numbers on Friday. The positive result saw the CAD attempt to place the NZD under some pressure to end the week. However, this pressure has not been sustained, as positive news from both China and Australia have helped stabilise demand for the NZD. Tomorrow sees the release of the important 3rd quarter NZ employment numbers and these provide the focus ahead a raft of Canadian news later on in the week. This Canadian data comes in the form of building permits, the purchasing managers index and the monthly employment numbers. Barring any real surprise, it is hard to see the pair breaking out of an increasingly familiar .8500 - .8700 wider trading band. If we are to see a break of this range, it will likely following the NZ employment numbers.

NZD/EURO (EURO/NZD)

The past week has seen this pair put in a strong recovery from lows around 0.5980 (down from highs 1.6722). The majority of these gains have come on the back of weakness in the Euro. Recent data from Europe has been less than inspiring and a substantial fall in inflation has raised expectations of action from the European Central Bank (ECB) at this week’s meeting. The currency has moved to reflect this. It will be a close call whether or not the bank cuts the cash rate and the market is divided in its expectations. This means there is potential for a decent move in either direction. 0.6230 (support1.6051) will provide resistance on any potential NZD upside, while the down side will find support around 0.6000 (resistance 1.6667). Ahead of the ECB decision on Thursday we have NZ employment data due out tomorrow.

 NZD/YEN

This pair continues to trade in the relatively narrow and increasingly familiar 80.50- .8200 range that we have seen for the last couple of weeks. Certainly the better news from both Australia and China has seen some grinding appreciation from the NZD, but the 82.00 resistance has not been under serious threat as yet. In the near term, tomorrow’s 3rd quarter NZ employment numbers provide the primary focus. These come ahead of the BOJ monetary policy meeting minutes that should be of limited impact. The NZ unemployment rate is expected to fall from 6.4% to 6.2% with a +.5% increase in employment on the quarter. Certainly the aforementioned 82.00 resistance offers the initial target, should the release beat the market expectations. Following that release the lead will come from the wider markets appetite for risk.

AUD/USD

There has been little overall direction for the Australian dollar over the past week. In fact the pair is trading at almost the same level is was this time last Tuesday. We did see some weakness heading into the weekend on the back of solid US manufacturing data, but levels below 0.9440 could not be sustained and the pair has recovered back over 0.9500. The Reserve Bank of Australia (RBA) are likely to talk about the overvalued AUD at their monetary policy meeting today, but the reality is the currency is here for a reason. An improving outlook for the Australian economy and a delay in tapering from the US Fed has combined to see the Australian dollar recover much of the ground lost earlier in the year. We may struggle to see significant weakness until we get a lot closer to a time when the Fed is likely to reduce quantitative easing (QE) purchases. At this point that could be around March next year, although upcoming data will play a significant role in shaping that expectation. To that extent we have key employment data from both Australia and the United States toward the end of the week.

AUD/GBP (GBP/AUD)                            

This AUD has put in some decent gains from lows seen late last week. The appreciation of the Australian dollar over the UK Pound in the last few days has come even as data from the UK continues to support the on-going recovery. But it seems weakness in the Euro-area and the Euro currency recently has weighed on the GBP to a degree. There will be plenty to digest this week that could influence the pair. The Reserve Bank of Australia (RBA) cash rate decision later this afternoon could easily impact. Although it’s becoming more and more likely we have seen the end of rate cuts from the bank, they will still try to talk the currency down by mentioning it’s ‘overvalued’ or ‘not supported by fundamentals’. Then on Thursday we have Australian employment data ahead of the Bank of England (BOE) monetary policy decision later that evening.

AUD/EURO (EURO/AUD)

The past week has seen this pair put in a strong recovery from lows around 0.6880 (highs around 1.4535). The majority of these gains have come on the back of weakness in the Euro. Recent data from Europe has been less than inspiring and a substantial fall in inflation has raised expectations of action from the European Central Bank (ECB) at this week’s meeting. The currency has moved to reflect this. It will be a close call whether or not the bank cuts rates and the market is divided in its expectations. If we do get a cut from the ECB this pair could well see a move up toward 0.7200 (down toward 1.3889). The downside is now supported by 0.6880 (resistance 1.4535) and this level should contain any weakness. We also have the Reserve Bank of Australia (RBA) monetary policy announcement later this afternoon which could provide some volatility. Although it’s becoming more and more likely we have seen the end of rate cuts from the bank, they will still try to talk the currency down by mentioning it’s ‘overvalued’ or ‘not supported by fundamentals’. Later in the week we get Australian employment data to throw in the mix.

AUD/YEN

This pair has seen trade contained by a relatively tight trading range for much of last week. The short term resistance at 93.50 was broken yesterday in the wake of the materially stronger than expected Australian retail sales numbers. Since then the pair has consolidated through that resistance and has seen sideways trade ahead of the RBA monetary policy announcement later on today. No change is expected from the RBA, but any further move back towards a neutral bias will continue to provide underlying support for the AUD. The focus will then move to tomorrow’s release of the meeting minutes from last weeks unchanged BOJ monetary policy decision. Thursday offers the monthly Australian employment numbers, and these will be keen watched as usual. Barring any surprise, expect the current 92.50 - 94.50 wider range to continue in the short term.

AUD/CAD

The Australian dollar finally saw some pressure from the recently beleaguered CAD last week. The inability to consolidate above parity saw the pair push fairly quickly down to test the initial support at .9900. However, the pressure has not been maintained, as better than expected news in China (AUD positive) and strong retail sales numbers in Australia has seen the AUD recover some of its lost ground to the CAD. The RBA monetary policy announcement later on today provides the near term focus in what is a busy week for news in both economies. Thursday sees the latest Australian employment numbers, ahead of the quarterly RBA Monetary Policy statement on Friday. From Canada we get the industry wide purchasing managers index and building permits on Wednesday and the monthly employment stats on Friday. In the context of the recent more positive news from Australia, it is hard to see a large period of weakness in the short term. However, considering the elevated current levels, the resistance around the parity level should prove a bridge too far, even in the event of increased AUD demand this week.

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Market commentary:

The wider markets have had an interesting last week or so. The primary theme of central bank focus remains in place. Last weeks’ unchanged monetary policy announcements from the US Federal Reserve, the RBNZ and BOJ were expected, and come ahead of this week’s decisions from the RBA, ECB and BOE. Only the ECB looks to have any chances of altering their monetary policy, as deflationary fears again build in the European markets. Correspondingly, the Euro was the weakest performing major currency last week. Accentuating this move was the continuation of the grinding recovery from the US dollar. This recovery has been across the board as a pick-up in the economic news has seen investors ease back pressure on the greenback. In terms of the Australasian duo, a rebound in Chinese sentiment has coupled with a stabilisation of the Australian economic news to increase demand for the Australian dollar. The improved AUD sentiment has seen it outperform the NZ dollar, as the expectations of further easing to the cash rate from the RBA are again lowered.

Australia

Today will be a big one for Australia markets, with the RBA rate statement late this afternoon. No change in the cash rate is expected, and it’s now very likely that we have seen the bottom in the rate cut cycle. Any hike is still a long way off, but there is less and less need for further cuts. At the end of last week we got producer prices data that came in well above expectation and showed the fastest year on year rise since last 2011. Yesterday saw the release of retail sales data for September, which was also much stronger than expected at +0.8%. Recent data from China has also showed improvement and this should lend support to the Australian economy going forward. All the signs are that the economy is slowly making a transition away from mining led growth, and the RBA will likely be happy to hold rates steady for an extended period to foster this change. Over the rest of the week there are more key releases with trade balance tomorrow and unemployment rate on Friday along with the RBA’s quarterly Monetary Policy Statement.

New Zealand

Late last week the New Zealand Treasury published its monthly economic indicators. In that release they said the outlook is for stronger growth in the coming quarters, and that loan limits are dampening mortgage demand. This they say leaves the RBNZ with more flexibility on rate rises. Although the loan limits are likely to have an impact it’s hard to see it being material enough, in the absence of further measures, to change the expectation of rate hikes starting next year and totalling at least 2% by 2016. Tomorrow we get employment numbers which will be closely watched. That however will be it for domestic data on the week and the focus will turn to offshore events, the highlight of which will be the US employment report on Friday.

United States

Data from the US continues to suggest the economic recovery is on track, despite the government shutdown in October. Activity in the manufacturing sector expanded in October for the fifth consecutive month and actually showed the highest reading since April 2011. Last night we saw data on factory orders for September, and although it came in a touch below expectation, it was a big improvement over the previous month. All this is helping the USD to a degree, as is some talk that a Fed QE tapering in December is not off the table. This obviously can’t be ruled out with the trend of improving data, but it seems unlikely given the potential in January and February for more political brinkmanship with regards to the debt ceiling. There is plenty of data out this week to draw focus. Non-manufacturing index, GDP, consumer confidence, and the employment report will all be closely watched.

Europe

It is going to be a very interesting week for Europe and the Euro. The main event will be the European Central Bank (ECB) rate announcement on Thursday evening. In the past week calls have been growing for action of some kind from the bank. It seems the market is split 50/50 on whether we will get a cut, but that’s a big increase on expectations of only a few weeks ago. The inflation environment certainly leaves them plenty of room to cut and we don’t have to go back far to remember the ECB saying they have discussed the potential for negative interest rates. President Draghi has certainly proved to be a man of action and there seems little risk in cutting rates again to support the very tentative recovery. Recent readings on manufacturing have been a mixed bag with improvements in Germany and Spain, while French and Italian readings decreased. Ahead of the ECB meeting we get data on retail sales and German industrial production.

United Kingdom

UK data continues to support the outlook for a solid economic recovery going forward. Late last week we got the latest reading on the manufacturing sector and although it was a touch below expectation, it is still at very healthy levels which represent decent expansion in the industry. Last night we saw data on the construction industry which accounts for around 6% of GDP. It was another strong reading gaining on last month and printing at the highest level in six years. We have also seen the Confederation of British Industry (CBI) revise higher their forecasts for growth in 2014 to 2.4%. This will all be welcome news for the Bank of England (BOE) who have their monetary policy meeting on Thursday. We can expect no change in interest rates and a reaffirmation of their forward guidance to keep rates low until unemployment hit 7%. That trigger could be hit a lot sooner than they think if the economy keeps up its current form. Ahead of the BOE meeting we get data on the service sector and manufacturing production.

Japan

There have been no economic releases from Japan since last week’s BOJ monetary policy statement. The bank was somewhat upbeat in that release and reaffirmed to keep policy very stimulatory until inflation reaches their 2% target. There isn’t going to be a lot to digest this week with only a speech from BOJ governor Kuroda this evening and the minutes from last week’s meeting tomorrow.

Canada

The Canadian dollar put in a bit of a recovery late last week, helped by better than expected GDP data. There is certainly room for the currency to recover more ground although with the central bank now very much in the neutral camp (from a previous tightening bias), broad based gains seem unlikely. Upcoming data this week will play a big part with building permits, business diffusion index, housing starts, and employment numbers all set for release.

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