By Ian Dobbs*:
The latest indicator on the US labour market, which came on Friday, continues to suggest a US labour market which is firing on all cylinders.
The gain of 255k in non-farm payrolls was 75k above the market consensus and was accompanied by a (more minor) beat in the monthly average hourly earnings also.
Having said that, the 2.6% y/y growth sits around a full percent below the more normal growth experienced prior to the global financial crisis.
Expectations for a Fed rate hike lifted after the data, from around 37% to near 47%, for a 25 bps lift before year’s end.
Expectations for a move as early as September now sit as high as 26%.
Focus this week will also be on NZ’s central bank as the RBNZ meets on Thursday. The market has fully priced in a 0.25% cut in rates (to 2.0%) and around a further 0.40% in cuts after Thursday’s move.
Whilst a cut on Thursday appears a given expect any disappointment on indicated further easing to meet with NZD short covering given the market’s relatively aggressive current stance on predicted interest rate cuts over the months ahead.
Major Announcements last week:
- US ISM Manufacturing PMI, 52.6 vs. 53.0 exp. (Jul.)
- Australian Interest Rate Decision, 1.5% as exp.
- Australian Building Permits, -2.9% m/m vs 0.5% exp. (Jun.)
- UK Construction PMI, 45.9 vs. 43.8 exp. (Jul.)
- EU Markit PMI Composite, 53.2 vs. 52.9 exp. (Jul.)
- US ISM Non-Manufacturing PMI, 55.5 vs. 56.0 exp. (Jul.)
- Australian Retail Sales s.a., 0.1% m/m vs. 0.4% exp. (Jun.)
- UK Interest Rate Decision, 0.25% as exp.
- US Nonfarm Payrolls Employment, 255k vs. 180k exp. (Jul.)
- US Average Hourly Earnings, 0.3% m/m vs. 0.2% exp. (Jul.)
- Canadian Net Change in Employment, -31.2k vs. 10.0k exp. (Jul.)
- Canadian International Merchandise Trade, -3.63B vs. -2.82B exp. (Jun.)
NZD/USD
The New Zealand dollar has eased in recent trade against the greenback. This comes on the back of much better than expected US employment data on Friday and ahead of this Thursday’s RBNZ interest rate decision. Expect the statement accompanying the decision to set direction over the ensuing days as the market looks for further indications of additional cuts in the months ahead. Expect a 0.25% cut on Thursday and any lack of an indication on additional reductions ahead to be accompanied by a short squeeze higher.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7154 | 0.6950 | 0.7260 | 0.7089 - 0.7255 |
NZD/AUD (AUD/NZD)
The New Zealand dollar has continued to fall against its Australian counterpart since our report on Friday. The move is a continuation of the trend in recent days which has seen the AUD in greater demand than the NZD. The relative AUD strength continued over Friday’s better than expected US employment data and comes ahead of this Thursday’s RBNZ interest rate decision which has seen at least one major local bank this week further reduce their path for NZ rates in 2016. Expect the statement to set the tone for the cross. Other interest will be on the RBA Governor Steven’s final speech tomorrow.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9339 | 0.9280 | 0.9570 | 0.9309 - 0.9567 |
| AUD / NZD | 1.0708 | 1.0449 | 1.0776 | 1.0453 - 1.0742 |
NZD/GBP (GBP/NZD)
The New Zealand dollar continues to trade with a firm tone against the UK pound in trade this week. The demand reflects the weakness that has been seen in the GBP after last week’s more dovish than expected BoE central bank meeting on Thursday. Look for Thursday’s RBNZ monetary policy statement to set direction for this week and over the day’s following. Momentum for now favours the NZ dollar topside, although the reaction of the cross will depend on whether the RBNZ can now satiate the market’s call for around 40 bps of further cuts after this week’s likely 25 bps reduction.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.5492 | 0.5350 | 0.5550 | 0.5361 - 0.5495 |
| GBP / NZD | 1.8207 | 1.8018 | 1.8692 | 1.8199 - 1.8652 |
NZD/CAD
The New Zealand dollar has strengthened against the Canadian dollar in trade since our last report. The move comes on the back of the relative underperformance in the CAD against the strong greenback after Friday’s much worse than expected Canadian employment and trade numbers. Firmer overnight oil prices have mitigated some of the move, although for now the cross remains firm. Look to this Thursday’s RBNZ interest rate decision for direction this week with the extent of foreshadowed central bank easing setting direction for the NZD (and this cross) over the ensuing days following the announcement.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9412 | 0.9240 | 0.9500 | 0.9337 - 0.9498 |
NZD/EURO (EURO/NZD)
The New Zealand dollar continues to remain range bound in trade against the Euro and sits near Friday’s reported levels in current trade. This comes as both the EUR and NZD sit lower against the greenback after Friday’s better than expected US employment data. A sharp dip in the NZD yesterday tested support in the cross around the .6390 level (1.5649 resistance) which held, although better support remains at .6300 (1.5873 resistance). Expect the outcome of Thursday’s RBNZ monetary policy statement to set the tone of trade to close out the week. The move following this statement is difficult to foreshadow, although for now the risk appears to be a market that has pushed the boundary for the extent of further indicated easing.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6452 | 0.6300 | 0.6470 | 0.6392 - 0.6493 |
| EUR / NZD | 1.5499 | 1.5456 | 1.5873 | 1.5402 - 1.5644 |
NZD/YEN
The New Zealand dollar has moved higher in trade against the Japanese Yen so far this week. The move comes on the back of the easing seen in the Yen against the greenback in recent hours, although both currencies suffered at the hands of the USD on Friday after the better than expected US data. Look to Thursday’s RBNZ statement for direction this week on the cross. Markets are fully pricing in a 0.25% cut and around a further 0.40% in cuts beyond. The extent of the anticipated easing indicates a risk that the RBNZ may disappoint which would place upwards pressure on the NZD in the days following the decision.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 73.24 | 72.20 | 74.20 | 72.23 - 73.84 |
AUD/USD
The Australian dollar has remained remarkably resilient in trade against the USD since our report on Friday. The marginal gains against the greenback come on the back of the solid showing yesterday as support around the .7600 level held in the wake of Friday’s strong US employment data. Gains have been limited to the .7675 level so far, although for now the AUD has been the best performer of the currencies we cover against the USD since Friday’s data. This week looks set to be a relatively quiet one on the local data front, although RBA Governor Stevens’s speech tomorrow has the potential to stir. Resistance beyond the recent highs lies around .7720.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7656 | 0.7565 | 0.7675 | 0.7495 - 0.7672 |
AUD/GBP (GBP/AUD)
The Australian dollar has continued to advance against the UK pound since our last report. The move reflects the continued strong demand that has been seen for the AUD in recent days which has remained in place this week even despite Friday’s strong US employment data. For now this move looks set to continue based on the current relative outperformance of the AUD with next resistance at .6000 (1.6667 support) eyed in time. Look for minor influence to come from the UK data later today, whilst in Australia the speech tomorrow by RBA Governor Stevens has the most potential to cause a stir.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5878 | 0.5625 | 0.6000 | 0.5677 - 0.5882 |
| GBP / AUD | 1.7012 | 1.6667 | 1.7778 | 1.7002 - 1.7616 |
AUD/EURO (EURO/AUD)
The Australian dollar has continued to advance against the Euro in trade since our report on Friday. The move reflects the relative outperformance of the AUD in the face of the strong US employment data on Friday which has seen all the other key currencies we cover lose ground against the greenback since the data. Gains so far have been held in check by the 2016 .6925 highs (1.4440 lows). A break of this level would open up to the next resistance at .6950 (1.4388 support). Data from both regions is relatively light this week and this has us favouring continued support for the AUD on any dips, based on the current momentum. Events worth noting are RBA Governor Stevens’s speech tomorrow and the euro area Q2 GDP data on Friday.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6905 | 0.6710 | 0.6925 | 0.6710 - 0.6923 |
| EUR / AUD | 1.4482 | 1.4440 | 1.4903 | 1.4445 - 1.4904 |
AUD/YEN
The Australian dollar has continued to firm against the Japanese Yen since Friday’s commentary. The move up is a reflection of the continued support for the AUD which has been seen in recent hours, even after Friday’s better than expected US employment data (which has seen the Yen marked down against the greenback). This week looks set to be a quiet one for this cross, at least from a scheduled event point of view, although RBA Governor Steven’s speech tomorrow should be noted. We favour any further gains being limited to first resistance on the week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 78.39 | 76.50 | 79.60 | 76.51 - 78.66 |
AUD/CAD
The Australian dollar has continued to rally strongly against the Canadian dollar since our commentary on Friday. The move higher reflects the strong demand for the AUD (even despite Friday’s strong US employment numbers) and the weaker CAD which has felt the weight of both a strong greenback and local data (on Friday), which was also very disappointing. There are few market moving scheduled events for the cross this week, although RBA Governor Stevens’s speech tomorrow should be noted. This has us favouring this move extending to the late 2015 highs around 1.0170 based on current momentum.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 1.0073 | 0.9970 | 1.0170 | 0.9846 - 1.0093 |
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Market commentary:
The latest indicator on the US labour market, which came on Friday, continues to suggest a US labour market which is firing on all cylinders. The gain of 255k in non-farm payrolls was 75k above the market consensus and was accompanied by a (more minor) beat in the monthly average hourly earnings also. Having said that, the 2.6% y/y growth sits around a full percent below the more normal growth experienced prior to the global financial crisis. Expectations for a Fed rate hike lifted after the data, from around 37% to near 47%, for a 25 bps lift before year’s end. Expectations for a move as early as September now sit as high as 26%. Focus this week will also be on NZ’s central bank as the RBNZ meets on Thursday. The market has fully priced in a 0.25% cut in rates (to 2.0%) and around a further 0.40% in cuts after Thursday’s move. Whilst a cut on Thursday appears a given expect any disappointment on indicated further easing to meet with NZD short covering given the market’s relatively aggressive current stance on predicted interest rate cuts over the months ahead.
Australia
Stronger than expected US employment data on Friday and a firmer greenback has so far failed to make any real impression on appetite for the AUD in trade this week. The strength continues the theme which began last week after the RBA cut rates (a move expected by most) as they moved to address their modest assessment of the future inflation outlook. Last week’s statement on monetary policy (for August) which was delivered on Friday noted that underlying inflation was predicted to remain below or at the bottom of the 2-3% target band for four consecutive years (underlying inflation printed at 2% for 2015). Data released last week included weak latest building approvals numbers, a miss in the June trade balance and further disappointing numbers from the retail sector which continued the trend of weakness already witnessed so far in 2016. Strength was seen in the AIG manufacturing index and the latest HIA new home sales read, although none of the data releases had a lasting impact on trade. Focus for this week begins with the NAB business confidence indicator today, whilst tomorrow will see the delivery of the final speech of RBA Governor Steven’s tenure.
New Zealand
Stronger than expected US employment data on Friday and focus which is on this Thursday’s RBNZ interest rate decision has seen the NZD move lower in trade against the greenback since Friday. Expectations are for a 0.25% cut in rates and for the indication of further cuts to come before year’s end as the central bank acts to address an elevated local currency and soft inflationary pressures. Data released last week had little impact on proceedings. The latest dairy price data saw a 6.6% gain in overall prices on the GDT auction, whilst data from the labour market pointed to weak inflation pressures in local wages. Electronic card retail sales numbers released this morning posted a smaller 0.3% rise which comes on the back of June’s 1.2% gain. Business PMI data and numbers from the retail sector will round out the event calendar on Friday.
United States
Friday’s much better than expected employment data helped the USD lift to close near it highs for the week in trade on Friday. The July non-farm payrolls print of 255k was much higher than the 180k consensus and was supported by an upwards revision to June’s data. Seasonal adjustments were generous and bolstered the result and come as average earnings growth remained at just 2.6% y/y. This is well below the more normal number of around 3.6% which was evident prior to the 2008 GFC. Higher labour force participation helped the unemployment rate remain unchanged at 4.9%. Expectations for a Fed rate hike this year firmed by nearly 10 % (to ~47%) after the data. Other data released last week included ISM manufacturing which failed to match expectations. Personal spending data topped the consensus whilst the ISM Non-manufacturing print came in marginally under that expected. Trade numbers released on Friday displayed further weakness and point to the potential for a reduction in the Q2 GDP revision. Looking ahead to later this week we have numbers from the retail sector and Michigan consumer sentiment (Friday) and data on non-farm productivity and unit labour costs (later today).
Europe
There were few local leads last week in Europe which saw the single currency close near its lows for the week after the better than expected US employment numbers on Friday. Economic indicators included a minor lift in the German and euro area Markit manufacturing PMI and slightly better than expected results from the euro area composite and services reads. Euro-zone retail sales posted a flat result for June whilst the latest producer prices lifted marginally from a month earlier, although still remain 3.1% lower on an annualized basis. The week finished with indicators on German factory orders and Spanish and Italian industrial output of which all managed to disappoint. This week has started with German industrial production numbers which rose by slightly more than expectations, although created little interest. Expect a quiet week which peaks on Friday with numbers on the second quarters euro area GDP and June industrial production.
United Kingdom
The GBP finished the week trading on its lows on Friday against the greenback after stronger than expected US employment data sealed what had already been a poor weak for the local currency. Dominating the week was Thursday’s BoE central bank meeting which saw the bank lower interest rates as expected. The more dovish than expected outcome included details of a potential GBP170 billion expansion of the bank’s balance sheet. In addition to this were forecasts for growth which were reduced significantly as Governor Carney alluded to the possibility of additional rate cuts down the track. Economic data released during the week was dominated by the PMI indicator revisions which saw both the manufacturing and construction PMI numbers reduced. Halifax house prices were seen falling 1% in July compared with the month prior, although still stand 8.4% above those levels witnessed a year ago. Focus for this week locally will peak with today’s manufacturing and industrial production numbers and accompanying June trade balance.
Japan
Better than expected US employment data saw the greenback break higher in trade against the Yen when released on Friday. It was a relatively quiet week in Japan last week which was dominated by the release of more detail on the government stimulus and minutes from the June BOJ meeting. The former revealed additional spending on infrastructure and a cash boost to low income earners. The BOJ June minutes added little to excite investors, whilst the July minutes released at the weekend continued to show a member split over future policy direction. Data released last week included a small uptick in the latest manufacturing PMI indicator. Household confidence eased from a month earlier, although the latest labour cash earnings beat expectations after it posted a 1.3% y/y gain in June, well up from the revised -0.2% posted in May. Data released yesterday included a minor miss in the June current account and lift in the latest economy watchers current index, although neither provided any impetus. Expect a quiet week locally for data which peaks with the low impact core machinery order and producer price indicators tomorrow.
Canada
Fortunes for the Canadian dollar last week were dominated by the events on Friday which saw the simultaneous release of key data on employment from both Canada and the US. The data saw the CAD fall sharply against the greenback on the back of the combination of a very weak local outcome and much stronger than expected US numbers. The Canadian net change in employment of -31.2k was a long way off the 10k gain expected. This number included another poor result from the full-time component that lost 71.4k jobs, which followed the poor result in this indicator from last month. The unemployment rate which ticked higher was expected, although the June trade deficit miss was a continuation in the recent trend of disappointing trade prints and record deficits. Other data released last week included a much better than expected Ivey PMI (a volatile series) and marginal uptick in the RBC Manufacturing PMI indicator. A miss in the latest building permits data overnight has failed to have any impact on trade. The data came against a back-drop of firming oil prices which rose on the back of increased speculation of a potential freeze from OPEC next month. Data scheduled for later this week includes housing starts (today) and new house prices on Thursday.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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