BoJ pledges to overshoot inflation target; US Fed kicks rate hike can down the road again; dovish RBNZ statement opens door for further easing

The New Zealand dollar again sits largely unchanged against the USD since our report on Friday. Further weakness has been seen this week, although so far buyers around .7220 have limited last week’s RBNZ and dairy price inspired losses. Support in the .7200/20 zone looks pivotal on the week, although with a quiet local data calendar and sentiment weakened after last week’s central bank commentary we would be surprised to see the topside extend much beyond the .7300/20 area.

NZD/AUD (AUD/NZD)

The New Zealand dollar is little changed against the Australian dollar since our commentary on Friday. Further falls were seen in the interim to around the .9485 (1.0543) level by the end of the day as the market continued to digest the additional divergence in monetary policy themes from the respective central banks. This week will be very quiet on the data front and looks likely to see the NZD consolidate after last week’s heavy falls. We continue to favour buying the AUD on rallies in this pair (dips on AUD/NZD) and expect levels around .9575 (1.0444) to cap on increased NZD demand.

NZD/GBP (GBP/NZD)

The New Zealand dollar has rallied against the UK pound since our commentary on Friday. The move comes on the back of the relative weakness in the GBP which has eased on the back of sentiment over the difficulty that the UK will have when it begins formal talks on an EU exit, especially over access to the European single market. Data considerations look relatively quiet for the pair this week, at least until Friday when we receive data on UK GDP. We continue to favour targeting present GBP weakness to cover short-term GBP requirements, although current momentum suggests last week’s highs could potentially again be revisited over coming weeks.

 NZD/CAD

The New Zealand dollar has rallied against the Canadian dollar on the back of Friday’s weaker than expected Canadian inflation and retail sales releases, which saw the CAD marked materially lower after their release. This week could see volatility remain high given the uncertainty over the outcome of the key oil nation producer talks presently being conducted in Algeria (set to conclude on the 28th). Canadian GDP data will be in focus on Friday. We have no bias this week given the highly unpredictable nature of the outcome of the key oil producer talks.

NZD/EURO (EURO/NZD)

The New Zealand dollar has slid further in trade against the Euro since Friday. The move comes on the back of the relative outperformance in the Euro in recent trade, in part on the back of strong German IFO data overnight. A marginal breach of support around .6440 (1.5528 resistance) was seen to lows near .6430 (1.5552 highs), although for now a partial rebound has been seen. This rejection has clouded the outlook somewhat for further downside although, we feel following last week’s RBNZ commentary that strength in the NZD will be somewhat more limited for now. This has us favouring the bounce to stall towards .6500 (1.5385). Data this week is limited with inflation numbers late in the week out of Europe looking to have the best chance of impacting.

NZD/YEN

The New Zealand dollar has continued to decline in trade against the Japanese Yen since Friday. The move represents a continuation of the theme set from last week after the respective BoJ and RBNZ central bank meetings. With little on the event calendar this week (watch for today’s BoJ minutes though) we see little reason for the cross to move materially against last week’s tide and hence favour selling towards resistance at 74.00 (if reached). Support is eyed at 72.20, a break of which should initially open 71.00/10 in time.

AUD/USD

The Australian dollar is unchanged against the USD since Friday. There has been little fresh impetus for the market since our commentary which has seen trade contained within a ~.7600/50 range. The week is quiet in Australia so look to US data later in the week to influence trade. We continue to lack a bias and expect quiet trade for most of the week with a positive tone while .7600 holds (weak support). Initial resistance is eyed at .7675 (weak), although the much higher .7735/60 zone which has capped rallies since May is far more critical.

AUD/GBP (GBP/AUD) 

The Australian dollar has continued to advance against the UK pound since our commentary on Friday. The move can be put down to the relative weakness seen in the GBP in recent days on the back of concern over the likely outcome of negotiations on UK access to the European single market (when Brexit discussions begin). Data considerations will take a back seat again this week, at least until Friday. We continue to favour buying dips in this cross targeting the August highs of .5980 (1.6722 lows).

AUD/EURO (EURO/AUD)

The Australian dollar has eased in trade against the Euro since Friday. The slide can be put down to the outperformance of the EUR, in part on the back of the better than expected German IFO released overnight. Data considerations are again light for the cross this week with European inflation numbers being amongst those most likely to impact (likely low sensitivity). We lack any bias on the next move.

AUD/YEN

The Australian dollar has eased marginally against the Japanese Yen since our report on Friday. The easing comes on the back of lack-lustre trade in the AUD and as the JPY continues to gain against the greenback in the wake of last week’s BoJ meeting. This week looks quiet on the scheduled data front from both countries with Friday’s Japanese inflation numbers and today’s BoJ minutes of note. Positive momentum for the Yen has us now favouring downside in this cross, although ideally support at 76.00 would need to give way.

AUD/CAD

The Australian dollar has rallied against the Canadian dollar since our last report. The move comes on the back of the CAD sell-off after the weaker than expected Canadian data on Friday. Considerations from the energy markets look set to again return to the driving seat over coming days as the Algerian oil producer meeting concludes on the 28th. Immediate resistance is around August’s 1.0120 highs and then 1.0170, although expect the oil headlines to create significant volatility in the CAD. The uncertainty of the outcome of the producer meeting creates significant uncertainty on the next move- although the recent surge would appear to offer a sound short-term opportunity to cover CAD requirements.

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Market commentary:

With last week’s busy central bank calendar out of the way we look forward to a quieter week this week. Outcomes of the respective meetings last week were mixed. The first meeting from the BoJ saw rates left on hold at -0.1% and the central bank pledge to overshoot on its 2% inflation target, this as it expands its monetary base indefinitely. However, limits to the success and extent of what the central bank can do have continued to see investors buy the JPY in the interim. The US Fed again pushed a move for a rate hike out and once again reduced the ‘dot plot’ rate path lower towards that of the market, a theme prevalent through 2016. Recent differing comments over the need for a move shows that achieving a consensus amongst Fed members will be difficult. In NZ the RBNZ left rates on hold, although maintained an open door for further easing in a statement that was seen as mildly more dovish than that expected by the market.

Australia

It was a quiet week in Australia last week that saw most of the influence come from discussion around central bank monetary policy. The talk came after new RBA Governor Lowe recommitted to the 2-3% medium term inflation target and emphasised the flexibility around the target and the importance of guiding expectations. The flexibility means that the RBA would not have to mechanically keep cutting rates just because inflation is below the target. The RBA minutes were largely unremarkable and highlighted that rates look set to stay on hold for the foreseeable future. Data released during the week had little effect and included house price data which showed a further moderation in home price growth in the year to June of 4.1%. The quarterly read of 2% (8% p.a.) was below expectations, although the main state capital cities of Sydney and Melbourne continue to experience more heated conditions. Look for a quiet week locally which features private sector credit and HIA new home sales numbers on Friday.

New Zealand

There has been little fresh news since Friday for the local currency. This has seen it stabilize after it lost ground on key crosses after last week’s mildly more dovish than expected Reserve Bank (RBNZ) OCR statement. The move by the central bank to leave rates on hold was expected. However, the apparent impact of the recent property LVR changes has once again focussed the market on the increased flexibility of the RBNZ to adjust rates lower should they achieve their desired goal of taking the heat out of the property sector. Further selling pressure was noted after last week’s GDT dairy auction which failed to lift to the degree expected. Other recent data included strong visitor and immigration numbers for August. Also trade numbers for August showed a deficit of $500M ($1.256B deficit), greater than expectations, on the back of both weaker than expected exports and higher imports. Expect direction this week to come from offshore with just building consents and the ANZ business confidence survey due on Friday.

United States

Investor attention last week was on the US Fed’s interest rate decision on Wednesday. This saw the FOMC remain on hold as they deferred a potential move for the December meeting. The Fed’s dot plot on rates was once again lowered towards that of the market. This trend has become familiar as the Fed’s expectations on future rates have come closer to the markets with each passing quarter this year. Data released during the week included numbers on homebuilder confidence which reached 11 month highs and housing market data which included large misses in housing starts, existing home sales and building permits. Both the Chicago Fed and Friday’s manufacturing PMI numbers also disappointed. Positive’s have come from the weekly jobless claims which continued the trend of positive reads from the labour market. Overnight new home sales numbers, which despite dropping in August continued their positive trend as builders back-logs reached a nine year high. Focus for this week will be on various Fed speakers, whilst on the data front the confidence and PMI numbers feature along with durable goods and GDP.

Europe

A much stronger than expected German IFO has seen the Euro get off to a positive start in trade this week. The business climate index rebounded strongly in its latest read rising to the highest level since May 2014. Both the current and expectations series were seen posting gains on the month prior. Data on Friday included a weaker than expected German Services PMI which weighed on the overall euro area indicator. Other data last week included a drop in the EU current account for July and German producer prices which fell into deflationary territory, largely on the back of falling energy prices. Comments from ECB President Draghi overnight included talking tough on UK access to the EU single market in the coming Brexit negotiations. He also covered the profitability issues faced by the European banks, this as leading German Bank Deutsche fell by 7.4% as speculation increases over its capital requirements and the possibility that state support may be required. In focus this week is further talk ECB from President Draghi, and various regional confidence and inflation reads.

United Kingdom

Negative Brexit sentiment which has undermined trade in the pound sterling in recent days, comes as investors fear the imposition of tough conditions by the EU on the UK as it moves towards formal discussions on its exit from the EU. Comments from UK PM Theresa May and UK foreign secretary Boris Johnson indicate that the UK is looking in invoke Article 50 in early 2017, which would begin the formal exit process. Comments from ECB President Draghi overnight included one that the UK shouldn’t be granted any special favours on single-market access during the negotiations. This fear has been central to the weakness seen in the GBP over the last week. Data released last week was sparse. CBI Industrial trend numbers matched expectations whilst the Rightmove house price index of property coming to the market saw a rebound of 0.7% in September, after falling 2% over the previous two months. Data to feature this week will include mortgage numbers on Thursday and Q2 GDP data on Friday.

Japan

Investor attention last week in Japan was centred on Wednesday’s BoJ monetary policy announcement which saw the central bank commit to overshooting on its 2% inflation target and expanding its monetary base until the goal is achieved. The move to commit to indefinite quantitative easing was accompanied by a shift to prevent a flatter yield curve in an effort to help Japanese banks and pension funds. No move to the interest rate was made (-0.1%), although Governor Kuroda noted yesterday that the main tool for further easing was lowering the rate further and lowering the long-term target as he pledged no limit to monetary policy. Data released during the week was understandably overlooked. August trade data was seen missing its consensus expectation, whilst the flash Nikkei Manufacturing PMI for September at 50.3 was above expectations and the first expansionary reading in seven months. Focus for this week will be on today’s BoJ monetary policy meeting minutes and industrial production/inflation data due on Friday.

Canada

Weaker than expected key Canadian data helped pressure the CAD in trade at the end of last week. The numbers included the August inflation report which missed expectations and was the lowest read since October. Core inflation which remained stagnant for the third straight month highlights the inflation concern that has emanated from the BoC recently.  Data from the retail sector was extremely underwhelming after the -0.1% read for July missed the +0.5% expectation by a large margin. Data earlier in the week had little impact on the markets after wholesale sales (also for July) rose by more than expected. Focus for this week is on the key oil producer meeting which is currently being conducted in Algeria, which has seen oil jump in recent trade. Friday’s GDP report will also be in focus and also watch for any important commentary coming out of BoC Governor Poloz’s speech at Western Washington University today.

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