By Ian Dobbs*:
Commentary emanating out the Jackson Hole Symposium from senior US Fed officials has seen the market move to re-price the odds on a Fed rate hike this year.
Current odds of over 40% for a move in September are nearly double that seen prior to the commentary.
This comes as Fed Chair Janet Yellen spoke of a continued solid performance in the US labour market and an outlook for economic activity and inflation which strengthened the case for an increase in the federal-funds rate.
The comments when combined with those of the Fed’s Fischer have seen support for the greenback rise in the wake of the meeting and puts additional emphasis on this Friday’s Nonfarm payrolls employment release.
Current expectations are for a gain of around 164k jobs in August. Look for stronger than expected jobs growth and higher wages to tip the odds firmly in favour of a move as early as next month.
Major Announcements last week:
- Japanese Nikkei Manufacturing PMI, 49.9 vs 49.3 prior (Aug.)
- EU Markit Manufacturing PMI, 51.8 vs. 52.0 exp. (Aug.)
- US New Home Sales Change, 12.4% m/m vs. -2.0% exp. (Jul.)
- NZ Trade Balance, -433M m/m vs. -320M exp. (Jul.)
- Australian Q2 Construction Work Done, -3.7% vs. -1.9% exp.
- German IFO - Business Climate, 106.2 vs. 108.5 exp. (Aug.)
- US Durable Goods Orders, 4.4% vs. 3.5% exp. (Jul.)
- US Markit Services PMI, 50.9 vs. 52.0 exp. (Aug.)
- Japanese Inflation, -0.4% y/y as exp. (Jul.)
- UK Q2 GDP (second est.), 0.6% q/q as exp.
- US Q2 GDP Annualized, 1.1% as exp.
NZD/USD
The New Zealand dollar has eased against the greenback following the comments on US rates from senior Fed officials at the weekend in Jackson Hole. Support at the .7200/10 area has held the sell-off so far in the wake of USD buying as expectations for a Fed move as early as next month nearly doubled to ~42%. Focus for this week is on Friday’s US employment data which will be critical to next month’s Fed decision. Look for resistance from Friday’s highs near .7380 to cap rallies over the days ahead whilst on the downside a break of .7200 brings more important support in the .7080/.7100 area into focus. We favour marginally selling around .7260/70 prior to Friday’s data.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7253 | 0.7200 | 0.7380 | 0.7211 - 0.7376 |
NZD/AUD (AUD/NZD)
The New Zealand dollar is trading unchanged against the Australian dollar since Friday’s report. The lack of volatility was to be expected given the USD Jackson Hole focus and lack of important data from either country. This week look’s to lack data which should move the cross materially in either direction, although for now we favour the NZ dollar downside based on the waning upside momentum. Indicators of interest start with Australian building approvals numbers this afternoon. Australian retail sales on Thursday should offer up some volatility, although on balance liquidity over the US data on Friday may offer the best chance of a more sizeable move.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9577 | 0.9470 | 0.9615 | 0.9551 - 0.9620 |
| AUD / NZD | 1.0442 | 1.0400 | 1.0560 | 1.0395 - 1.0470 |
NZD/GBP (GBP/NZD)
The New Zealand dollar is trading at similar levels against the UK pound to those reported on Friday. Some volatility was noted towards the end of the week on the fall-out of the Jackson Hole comments (on the USD) as the GBP continued to remain more relatively in demand than the NZD. This is a natural reaction as the prospect of higher USD rates in the future impacted on the relatively higher yielding NZD. Economic leads for a potential move this week start in the UK on Thursday (Manufacturing PMI) so for now we favour more trade in the .5490-.5570 (1.7953-1.8215) range until then.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.5533 | 0.5490 | 0.5570 | 0.5499 - 0.5573 |
| GBP / NZD | 1.8073 | 1.7953 | 1.8215 | 1.7944 - 1.8186 |
NZD/CAD
The New Zealand dollar is trading at similar levels against the Canadian dollar to those reported on Friday. Highs near .9480 again capped trade on Friday over the comments on US rates which came from Fed officials at Jackson Hole (USD supportive). Lows around .9380 which were seen early yesterday came as the market absorbed those remarks of the Fed’s Fischer who spoke of Yellen’s comments being consistent with two rate hikes this year (this hurt the high yielders like the NZD more so than the likes of the CAD). Focus for this week will be on the energy markets and Canadian GDP numbers on Wednesday. For now we favour more trade within those ranges seen last week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9438 | 0.9380 | 0.9480 | 0.9377 - 0.9480 |
NZD/EURO (EURO/NZD)
The New Zealand dollar is trading at similar levels against the Euro to those reported on Friday. Some volatility has been noted within a .6440-.6520 (1.5528-1.5337) range which has been noted since the USD supportive comments on US rates which came out of Jackson Hole. We maintain a marginal NZD upside bias for now given the ECB’s confirmed signalling of an easing bias at the weekend’s meeting, although this week’s data looks unlikely to be able to drive the cross materially in either direction. So we favour .6400-.6550 (1.5625-1.5267) at a stretch on the week.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6483 | 0.6360 | 0.6520 | 0.6434 - 0.6524 |
| EUR / NZD | 1.5424 | 1.5337 | 1.5723 | 1.5327 - 1.5542 |
NZD/YEN
The New Zealand dollar has lifted in trade against the Japanese Yen since our report on Friday. The move comes on the back of comments at the Jackson Hole meeting of economic leaders which saw the BoJ Governor Kuroda emphasise his commitment in boosting monetary stimulus if required. This saw the Yen come under further pressure following those comments of Fed officials on US rates (which were seen as USD supportive). Data this week looks unlikely to play a large part in the direction of this cross, although Wednesday’s Japanese industrial production numbers may provide a passing interest. We have a marginal NZD upside bias for now.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 73.87 | 72.20 | 74.30 | 72.93 - 74.14 |
AUD/USD
The Australian dollar has eased in trade against the greenback since our report on Friday. The move comes on the back of the comments which came from senior US Fed officials at the Jackson Hole meeting over the weekend. These saw the markets increase the odds for Fed rate hikes this year. The comments, particularly those of the Fed’s Fischer (who spoke of Yellen’s comments being consistent with two rate hikes in 2016), focuses’ attention on this Friday’s US employment data which looks likely to cement a September hike should it once again exceed expectations. We favour selling rallies, although resistance nearer .7700 should not be challenged ahead of Friday’s commentary.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7569 | 0.7520 | 0.7700 | 0.7526 - 0.7689 |
AUD/GBP (GBP/AUD)
The Australian dollar is trading at levels similar to those reported on Friday against the UK pound. Some volatility was seen on Friday during the comments which came from senior US Fed officials which initially saw the USD ease (Yellen comments), and then rally sharply (Fed’s Fischer comments). The prospect of higher USD rates hit relatively high yielders like the AUD harder than the GBP, and this effect saw the cross trade to AUD lows near .5730 (1.7452 highs). We have little bias this week and expect only moderate moves ahead of Friday’s US Nonfarm payrolls employment data.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5774 | 0.5625 | 0.5810 | 0.5738 - 0.5815 |
| GBP / AUD | 1.7318 | 1.7212 | 1.7778 | 1.7198 - 1.7427 |
AUD/EURO (EURO/AUD)
The Australian dollar is trading marginally higher against the Euro since our report on Friday. Most of the volatility seen in the interim occurred during the comments from the senior US Fed officials who spoke at Jackson Hole over the weekend (and Friday). For now support around .6710 (1.4903 resistance) has again held well following those comments from the Fed’s Fischer. These lent support to the USD (and reduced the appeal of high yielders like the AUD as the market increased the odds on Fed rate hikes). Data from neither region looks likely to drive the cross materially in one direction this week, although fallout from Friday’s US employment data has the potential to change that view.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6766 | 0.6710 | 0.6820 | 0.6722 - 0.6803 |
| EUR / AUD | 1.4780 | 1.4663 | 1.4903 | 1.4700 - 1.4876 |
AUD/YEN
The Australian dollar has rallied against the Japanese Yen since our report on Friday. The move comes on the back of the relative underperformance in the Yen in the wake of the comments which came out of Jackson Hole at the weekend. Both currencies have weakened against the greenback, although BoJ Governor Kuroda’s commitment to further easing in commentary at Jackson Hole (if required) has placed additional pressure on the Yen. Look to Friday’s US employment data for a pickup in volatility in the cross. For now we continue to see a break of 76.00 being required to renew the downside pressure.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 77.09 | 76.10 | 78.65 | 76.11 - 77.41 |
AUD/CAD
The Australian dollar is trading unchanged against the Canadian dollar since our commentary on Friday. Some volatility has been noted in the interim however, on the back of relative moves in the AUD which reflected the markets change in USD sentiment (and the appeal of high yielders) after the speeches by the Fed’s Yellen and Fischer. Canadian GDP data on Wednesday looks to be the most high impact release coming from either country this week, although we expect the cross to remain with ~.9800-.9890 until Friday’s US employment data.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.9850 | 0.9800 | 0.9890 | 0.9800 - 0.9883 |
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Market commentary:
Commentary emanating out the Jackson Hole Symposium from senior US Fed officials has seen the market move to re-price the odds on a Fed rate hike this year. Current odds of over 40% for a move in September are nearly double that seen prior to the commentary. This comes as Fed Chair Janet Yellen spoke of a continued solid performance in the US labour market and an outlook for economic activity and inflation which strengthened the case for an increase in the federal-funds rate. The comments when combined with those of the Fed’s Fischer have seen support for the greenback rise in the wake of the meeting and puts additional emphasis on this Friday’s Nonfarm payrolls employment release. Current expectations are for a gain of around 164k jobs in August. Look for stronger than expected jobs growth and higher wages to tip the odds firmly in favour of a move as early as next month.
Australia
Last week was a quiet one in Australia that saw investors holding out for direction from the weekend’s Jackson Hole meeting of economic leaders. This saw US Fed leaders note the strengthening case for an increase in the Fed funds rate, perhaps up to twice in 2016 based on the remarks from the Fed Vice Chair Fischer as he noted Janet Yellen’s earlier hawkish speech. Events in Australia last week included data on construction activity which fell by more than expected in the June quarter. This came as the sharp slump in mining related engineering activity once again weighed. The data shows engineering construction work has now fallen back to near its long term trend which indicates that the winding down in the mining investment boom is nearing completion and should be less of a drag on growth in 2017. Data on skilled vacancies showed a slowing again in July which points to slowing jobs growth, whilst numbers on consumer confidence which hit three year highs indicates robust consumer spending currently. Look for data on building approvals today which should spark more interest than yesterday’s volatile HIA new home sales indicator which slumped 9.7% in July.
New Zealand
Headlines out of the Jackson Hole Economic Symposium over the weekend have dominated trade in the currency markets since our last commentary. Comments from Fed Chair Janet Yellen included one that noted the continued solid performance of the US labour market and the Fed outlook for economic activity and inflation which had strengthened the case for a rate rise in recent months. It wasn’t until further comments from Fed Vice Chair Fischer however, who noted that Yellen’s comments were consistent with two rate increases this year, which finally saw the greenback rally strongly as the market re-priced the odds of 2016 rate hikes. Last week in NZ was a very quiet one for local leads which included a lift in the latest forecast dairy payout from Fonterra and trade numbers for July which revealed a moderately largely than expected trade deficit. Building consents data for July released this morning fell 10.5% m/m from June, although the volatile series had no impact on trade.
United States
Trade in the US last week was dominated by the sharp rally that was seen in the greenback after the comments that came out the Jackson Hole Economic Symposium. These included remarks from Fed Chair Yellen which pointed to the strengthening case for rates hikes given the recent months indicators, including those of the labour market. Initial reaction to the comments was muted given the lack of indication on timing and the range of rate forecast possibilities (to 2018) which were presented to the market. Later comments from the Fed Vice Chair Fischer bolstered rate hike expectations for 2016 after he spoke of Yellen’s comments being consistent with two rate increases this year. Key data last week from the US was mixed, although positive on balance. Data included new home sales which grew at the fastest rate since 2007 and existing home sales which fell 3.2% in July, far greater than the 0.4% decline expected. Data on manufacturing included a weak Richmond and Kansas Fed and fall in the Markit PMI. Durable goods orders were seen beating expectations, whilst US Q2 GDP was revised down a tenth to 1.1% (annualized)- although contained detail which was more upbeat. Data released already this week has included numbers on personal income and spending for July which showed signs of positive momentum for Q3. Focus for this week is on Friday’s Nonfarm payrolls employment data which will take on additional importance in light of Yellen’s comments at the weekend.
Europe
Commentary coming out of the weekend’s meeting of key economic and central bank leaders at Jackson Hole has dominated trade since Friday. Those of the US Fed were watched keenly for any sign of thinking on the US economy and US rates moving forward. Investors weren’t disappointed after both the Fed Chair Yellen and Vice Chair Fischer talked about the strengthening case for US rate hikes. This saw the USD move higher especially after those of Fischer, who unlike Yellen prior, had noted an element of timing in his interview (he noted that Ms. Yellen’s comments were consistent with two hikes this year). Comments from ECB Executive Board member Coeure which reinforced the current ECB easing bias highlights the diverging policy themes which are emanating from the Fed and ECB. Data last week included various PMI indicators from across Europe. The Services reads were seen remaining firm, although the manufacturing PMIs displayed some weakness in the euro-zone and the economic heavyweights, France and Germany. Other data included numbers out of Germany included the second quarter’s final GDP data which showed growth of 1.8% y/y (work-day adjusted) and the IFO business confidence series which posted its largest decline in four years. Data of interest this week includes regional inflation prints and updates on last week’s manufacturing PMI reads.
United Kingdom
The holiday shortened week has started quietly in the UK which has seen the focus come from the more bullish USD sentiment which had spiked following the comments from US Fed officials (which lifted pricing for US rate hikes this year) at Jackson Hole over the weekend. UK data last week provided little direction for the GBP given its low impact nature, particularly so after the second estimate of Q2 GDP remained unchanged on Friday which was as expected. Other indicators released during the week included numbers on the second quarter’s business investment which beat expectations by rising 0.5% (q/q), and CBI Industrial Trends Orders which highlighted export orders that have reached two year highs. Data on BBA mortgage approvals showed a small decline on the month prior, although remained healthy. The CBI Distributive Trades Survey noted an expansion in retail sales volume in the year to August. Items of interest this week starts with data on consumer credit and mortgage lending/approvals today which will be followed by Nationwide House Prices and GfK Consumer Confidence tomorrow. Key releases for the week will be Thursday’s Manufacturing PMI indicator and Friday’s Construction PMI.
Japan
Trade in the Yen like the other major currencies covered was heavily influenced by the headlines coming out over the weekend at Jackson Hole. These included ones from Fed Chair Yellen which spoke of the strengthening case over recent months for Fed rate hikes and those of the Fed’s Fischer which noted Yellen’s comments as being consistent with a case for two hikes this year. The latter comments have bolstered recent support for the greenback. Comments from BoJ Governor Kuroda, who also attended the Jackson Hole meeting, spoke of the willingness to boost monetary stimulus if needed and the space for further easing via asset buying, monetary base guidance and negative interest rates. Kuroda’s comments underline his commitment to current stimulus efforts despite the growing doubts over its effectiveness. This comes as the BoJ is presently engaged in a review of its monetary policy settings which is due to be completed next month. Data from Japan last week included a rise manufacturing sector output and numbers on inflation which highlighted the current poor inflationary environment being targeted by the central bank. Data released this morning showed both unemployment and household spending beating expectations, whilst other local focus will be on industrial production numbers tomorrow.
Canada
The Canadian dollar has eased in recent trade against the greenback after the USD bullish comments out of Jackson Hole’s meeting of economic leaders and oil prices fell nearly 2% on Monday. The oil price decline was on the back of numbers which showed crude production surging in the Middle East. Local economic leads had little impact on trade last week given their low impact nature. Wholesale sales, which rose in June beat expectations and were helped by strength in autos, whilst local corporate profits for Q2 were seen dropping to their lowest levels since 2010, were impacted by falling profits amongst insurance carriers in the finance sector. Data this week starts with the Q2 current account and numbers on raw material and industrial product pricing today, GDP on Wednesday, manufacturing on Thursday and trade and labour productivity on Friday.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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