By Ian Dobbs*:
Friday’s weaker than expected August US Nonfarm payrolls report, saw the addition of 151k jobs, has seen the market move to lower the odds on the expectations of Fed rate hikes this year.
The move lower was only marginal however, from 24% to 21% in September and also 3% by December to around 50%.
The meeting on September 21st will be an interesting one. The “breakeven” pace that Fed officials believe is consistent with unchanged labour market slack in the medium term is less than 100k per month, a number which has been easily outstripped given the 2016 year-to-date average gain of 182k.
Comments from Fed Chair Yellen at Jackson Hole also may point to a potential underestimation by the market for a move this month given that her words “ in light of the continued solid performance of the labor market” and that the data must “continue to confirm” appear to indicate a predisposition that the outlook is on track, a view which Friday’s data looks unlikely to change.
Major Announcements last week:
- NZ Building Permits s.a., -10.5% m/m vs. 21.9% prior (Jul.)
- German Harmonised Inflation, -0.1% m/m vs. 0.1% exp. (Aug.)
- Japanese Industrial Production, 0.0% m/m vs. 0.8% exp. (Jul.)
- Australian Private Sector Credit, 0.4% m/m as exp. (Jun.)
- EU Inflation, 0.2% y/y vs. 0.3% exp. (Aug.)
- Canadian GDP, 0.6% m/m vs. 0.4% exp. (Jun.)
- US Chicago PMI, 51.5 vs. 54.0 exp. (Aug.)
- Australian Retail Sales s.a., 0.0% m/m vs. 0.3% exp. (Jul.)
- UK Markit Manufacturing PMI, 53.3 vs. 49.0 exp. (Aug.)
- US ISM Manufacturing PMI, 49.4 vs. 52.0 exp. (Aug.)
- UK Construction PMI, 49.2 vs. 46.1 exp. (Aug.)
- US Nonfarm Payrolls, 151k vs 180k exp. (Aug.)
- US Unemployment Rate, 4.9% vs. 4.8% exp. (Aug.)
NZD/USD
The New Zealand dollar has firmed against the greenback in the wake of Friday’s weaker than expected US employment data. With little in the way of key US or NZ data (dairy prices tonight) we expect the current support for the NZD to remain in place this week given the current yield appeal of the NZD and likely long wait for the next Fed rate hike. This has us favouring buying dips towards .7200 on the week, although the quiet calendar means any topside much beyond the recent highs (.7380) looks unlikely.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / USD | 0.7307 | 0.7200 | 0.7380 | 0.7205 - 0.7350 |
NZD/AUD (AUD/NZD)
The New Zealand dollar is drifting in trade against the Australian dollar ahead of today’s key RBA interest rate meeting. Expectations are near unanimous for no change today so look to the commentary for direction. The other indicator of key interest on the week will be tomorrow’s Australian GDP report. We continue to favour buying the AUD over the NZD at these levels overall, but are cautious with the event risk of the next 24 hours.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / AUD | 0.9603 | 0.9550 | 0.9700 | 0.9566 - 0.9671 |
| AUD / NZD | 1.0414 | 1.0309 | 1.0471 | 1.0341 - 1.0454 |
NZD/GBP (GBP/NZD)
The New Zealand dollar is trading largely unchanged against the UK pound since our report on Friday. Highs in the interim have been limited to ahead of .5520 (lows 1.8116) and came during the spike over the US employment data on Friday. The solid performance of the NZD reflects the relative yield appeal in the wake of the reduced Fed rate hike expectations, although is a touch surprising given the further solid UK data that we have had since our report on Friday. We continue to favour taking advantage of selling NZD spikes in this cross to buy the GBP. Items of interest this week include data on dairy prices tonight (NZ) and in the UK numbers on manufacturing and the BoE inflation report hearings/speech from Governor Carney) tomorrow.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / GBP | 0.5486 | 0.5450 | 0.5520 | 0.5452 - 0.5547 |
| GBP / NZD | 1.8229 | 1.8116 | 1.8349 | 1.8027 - 1.8341 |
NZD/CAD
The New Zealand dollar has fallen against the Canadian dollar since our report on Friday. The move comes on the back of the strong bounce in the price of oil which has rallied on the back of the weaker USD and reports out yesterday of an agreement between Russia and Saudi Arabia to cooperate on promoting oil price stability. Look for oil and the BoC interest rate decision/statement (Wednesday) and Canadian employment data (Friday) to help drive this cross this week. We lack a bias, although note the inability of this cross to hold above .9550 on many occasions over the last two and a half years.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / CAD | 0.9444 | 0.9380 | 0.9575 | 0.9425 - 0.9572 |
NZD/EURO (EURO/NZD)
The New Zealand dollar has continued to rally against the Euro since our report on Friday. The move comes on the back of the relative outperformance of high yielding currencies in the wake of Friday’s weaker than expected US employment data. Focus for the cross this week will be on Thursday’s ECB meeting, whilst in NZ the overnight dairy auction will provide some interest. Momentum for now continues to favour the NZD upside with the July highs (~.6600/1.5129) now the target, although the ECB meeting complicates.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / EUR | 0.6553 | 0.6440 | 0.6610 | 0.6469 - 0.6569 |
| EUR / NZD | 1.5260 | 1.5129 | 1.5528 | 1.5222 - 1.5458 |
NZD/YEN
The New Zealand dollar has continued to advance in trade against the Japanese Yen since our report on Friday. The move represents a continuation of the recent momentum in this cross based on the recent stability in financial markets and current relative yield appeal of the NZD. This week looks to be a quiet one for this cross overall with just dairy prices (tonight for the NZD) and Japanese GDP on Thursday of any note. We don’t expect either to have a lasting impact and have little bias on the next move from here, although note the current upside momentum.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| NZD / YEN | 75.71 | 75.10 | 76.10 | 73.94 - 76.06 |
AUD/USD
The Australian dollar has rallied against the USD after Friday’s weaker than expected US employment data saw investors reduce the odds on Fed rate hikes for 2016. The move reflects the relative demand for those currencies with yield appeal (like the AUD) given the likely gradual tightening path of the Fed. Further direction on this relative yield appeal will come from this afternoon’s RBA interest rate statement (noting the very remote likelihood of a move today). Also look to tomorrow’s Australian GDP data for further direction. We have little bias from here for the time being.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / USD | 0.7604 | 0.7490 | 0.7700 | 0.7491 - 0.7609 |
AUD/GBP (GBP/AUD)
The Australian dollar has ticked higher against the UK pound since our report on Friday. The move comes despite two better than expected UK PMI releases in the interim and reflects the relative yield appeal of the AUD in the wake of the reduced expectations of Fed rate hikes after Friday’s weaker than expected US employment data. Look for today’s RBA statement for pivotal direction on the cross this week. Other indicators of interest will be tomorrow’s Australian GDP report and later UK manufacturing data and BoE inflation report hearings/speech from Governor Carney. We favour selling AUD rallies, although note the potential for higher volatility later today.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / GBP | 0.5711 | 0.5625 | 0.5810 | 0.5662 - 0.5791 |
| GBP / AUD | 1.7509 | 1.7212 | 1.7778 | 1.7267 - 1.7662 |
AUD/EURO (EURO/AUD)
The Australian dollar has rallied in trade against the Euro since our report on Friday. The move reflects the relative yield appeal of the AUD in the wake of Friday’s weaker than expected US employment data, although some concern over this Thursday’s ECB meeting may also be weighing on demand for the EUR. Look for a potentially volatile week in this cross given the respective monetary policy meetings from both the ECB and RBA (this afternoon). Look for potential divergence in signalling for maximum movement with key respective support and resistances lying at .6710 (1.4903 resistance) and in the .6930/50 (1.4430/1.4388 support) zone.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / EUR | 0.6820 | 0.6710 | 0.6875 | 0.6733 - 0.6826 |
| EUR / AUD | 1.4662 | 1.4545 | 1.4903 | 1.4651 - 1.4852 |
AUD/YEN
The Australian dollar has continued to advance against the Japanese Yen since our report on Friday. The continued positive momentum comes as demand for relatively high yielding currencies like the AUD remains strong after Friday’s weaker than expected US data pushed odds on expectations for Fed rate hikes lower (though only slightly). Direction this week will be provided by this afternoon’s RBA interest rate statement and Australian GDP data tomorrow. Expect Thursday’s Japanese GDP data to carry a much reduced weighting.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / YEN | 78.80 | 76.10 | 81.50 | 77.17 - 78.89 |
AUD/CAD
The Australian dollar has eased against the Canadian dollar since our commentary on Friday. The move comes on the back of the relative outperformance of the CAD primarily a result of the strong rally seen in the price of oil since our report. This comes on the back of both the weaker USD and reports of Saudi/Russian oil market cooperation. Expect a volatile week for the cross this week given that both countries have central bank meetings (Australia today and Canada on Wednesday). We favour selling AUD rallies above .9900 at present.
| DIRECT FX | Current level | Support | Resistance | Last wk range |
|---|---|---|---|---|
| AUD / CAD | 0.98.34 | 0.9720 | 0.9920 | 0.9793 - 0.9907 |
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Market commentary:
Friday’s weaker than expected August US Nonfarm payrolls report ,saw the addition of 151k jobs, has seen the market move to lower the odds on the expectations of Fed rate hikes this year. The move lower was only marginal however, from 24% to 21% in September and also 3% by December to around 50%. The meeting on September 21st will be an interesting one. The “breakeven” pace that Fed officials believe is consistent with unchanged labour market slack in the medium term is less than 100k per month, a number which has been easily outstripped given the 2016 year-to-date average gain of 182k. Comments from Fed Chair Yellen at Jackson Hole also may point to a potential underestimation by the market for a move this month given that her words “ in light of the continued solid performance of the labor market” and that the data must “continue to confirm” appear to indicate a predisposition that the outlook is on track, a view which Friday’s data looks unlikely to change.
Australia
The Australian dollar has started this week on a positive note after Friday’s weaker than expected US employment data drove the greenback lower in trade to end the week. Data last week included further numbers from the retail sector which pointed to a loss of momentum, partly on the back of weak price inflation- although the trend points to rising consumer concern over household debt and the economy in general. HIA new homes sales fell sharply in the latest read,although building approvals for July rose by the most in two and a half years on the back of a leap in new apartment plans. However, emerging oversupply and weakening conditions in the apartment market cast doubt on the number of projects that will proceed to completion. The decline in Private Capex numbers reported for the second quarter was driven by the mining driven engineering and construction slump and aligned closely with the quarter’s soft construction data. Numbers from the private sector showed credit rising in line with expectations, although housing credit growth showed a continued loss in momentum (led by investor finance). Focus for this week starts with today’s RBA decision (no change expected) and tomorrow’s Q2 GDP report. Other numbers include trade data for July, and numbers on home lending, whilst yesterday saw the release of stronger than expected company profit data for Q2.
New Zealand
Last week was a quiet one for the NZD which saw the market in limbo for much of the week ahead of Friday’s key US Nonfarm payrolls employment data. A lower than expected gain in jobs for the month and a decline in average hourly earnings growth saw the USD marked lower after the release and market pricing for a Fed rate hike later this month ease to 21% (from 24% prior). Data released locally last week started with the volatile building consents series which eased sharply from the month prior. ANZ business confidence was barely changed in August, although a notable rise in confidence in the agricultural sector was seen on the back of the recent gains in dairy prices. Terms of trade data for the second quarter which included the earlier prior slump in dairy prices were understandably soft although strong export volumes was a positive in the series. Attention for this week will start with eyes across the Tasman today as we look to the RBA cash rate decision. Dairy pricing will then be in focus overnight where current expectations are for another jump in pricing (WMP +7 to 9%). Other releases include numbers on sales from the manufacturing and retail sectors, although these won’t provide more than a passing interest.
United States
Holiday trade has ensured a quiet start for the USD this week due to a bank holiday Monday. This comes after Friday’s miss in the August Nonfarm payrolls employment data which led to a marginal reduction in the markets expectations for Fed rate hikes in 2016. Jobs were shed in manufacturing and construction, whilst earnings growth which was seen slowing down to 2.4% y/y (from 2.7%) points to little need for urgency from the Fed when they meet later this month. Data earlier in the week included numbers on personal income and spending which boded well for the momentum in Q3 and consumer confidence which lifted in August. Pending home sales rose by more than expected in July although both the Chicago PMI and ISM PMI indicators of manufacturing activity were seen underperforming their consensus expectation. The Fed’s preferred inflation gauge (the core private consumption deflator), which was stable at 1.6% y/y, remained at the level it has been for months and indicates little upwards pressure on inflation. Data this week will start with today’s ISM Non-manufacturing numbers and composite/services PMI reads in what should be a quieter week overall.
Europe
This week’s focus in Europe is on Thursday’s ECB interest rate decision which sees the market anticipating a move by the central bank in order to offset falling inflation expectations across the currency union. The prospect of a further cut to rates looks unlikely which will leave an extension to the current QE programme as the most feasible option. Included in the data last week were weak inflation numbers, which highlights the difficulty faced by the ECB. Other numbers included business climate and consumer confidence numbers that were soft, whilst PMI indicators from the manufacturing sector were mixed as weaker activity in France and Italy offset an unchanged positive 53.6 read in Germany. The data led to a marginal dip in the EU print which were followed by numbers yesterday which saw the EU composite PMI fall to 52.9, a result that was both 0.4 pts below expectations and the month prior. The fall was driven by weakness in the German services and composite reads and comes on the back of the weaker August German IFO data.
United Kingdom
The pound has continued to remain in demand this week after it built on the gains from last week yesterday after the release of the August services PMI which jumped by the largest amount on record from the month prior. The data easily beat expectations and added to Friday’s construction PMI read (that rose by the most since 2013) and Thursday’s manufacturing PMI read that rose by 5pts (to 53.3), which was the largest monthly gain in 25 years. Data on house prices that posted a moderate gain in August added to the positive sentiment and helped the sterling to top the G10 leader board during the week. The data overshadowed other numbers of less interest which included weaker than expected numbers on mortgage lending and mortgage approvals. Data to watch this week starts with tomorrow’s manufacturing and industrial production figures. Halifax house prices will also feature tomorrow, although the later speech from BoE Governor Carney and inflation report hearings look likely to be centre stage on the week.
Japan
The Yen has had a firm start to the week rising yesterday after a speech from BoJ Governor Kuroda which failed to offer hints on more easing later this month and was notable for its absence of the ‘2 year timeframe target’ for returning inflation to the 2% goal. Last week saw the Yen ease to five week lows against the greenback on the back of hawkish Fed leader commentary at Jackson Hole and on those comments of Governor Kuroda which spoke of a willingness in boosting stimulus if required. Data included releases on retail sales, household spending and unemployment- which all outperformed their estimates. Disappointments came from the latest industrial production and construction order data, although housing starts which jumped 8.9% y/y in July was well above expectations. Data this week has started with average cash earnings which were in line from the period prior although local focus will be on Thursday’s GDP and current account data (less so).
Canada
The Canadian dollar has strengthened in recent trade on the back a lower USD after Friday’s US data and on the back of oil prices which advanced in trade yesterday. Crude prices settled higher on the back of news out of the G20 that Russia and Saudi Arabia would set up a working group to monitor the oil market which would make recommendations aimed at promoting price stability. Data last week was led by numbers on growth which expanded in the latest monthly read on the back of resuming oil sands production. Current account data for the second quarter was again poor, although was marginally better than expected. Data on monthly Merchandise trade showed a contraction from June’s record deficit on the back of export volumes which increased 3.7%. Labour productivity numbers for Q2 which declined by the most this year reflected the temporary shutdown of several oil facilities during the Alberta wildfires. Interest this week will centre on the BoC interest rate decision on Wednesday (no change expected) and Friday’s August employment data.
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Ian Dobbs is a currency analyst with Direct FX You can contact him here »
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