ECB in focus this week, key UK data also eyed; Draghi infers monetary policy may have reached limit of efficacy; market continues to digest divergent central bank monetary policies

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:

In focus this week will be Thursday’s ECB meeting which will see investor attention focus on signs that the central bank will be looking to trim its current EUR80Bn month bond-buying stimulus. Recent comments from President Draghi have inferred a belief that monetary policy may have reached the limit of its efficacy which has invited market perception of a tapering in the programme. Attention will once again be on the UK with key indicators due on inflation, the labour market and from the retail sector. It remains to be seen whether any of the data will stem the sterling’s sharp decline which has seen it loose ~19% against the both the greenback and Euro since the 23rd June EU referendum.

Australia

Last week was quiet for domestic data. Business and consumer confidence numbers were sound and are at levels which are above their long term average and consistent with moderate ongoing growth. Housing finance data was soft in August as approvals to owner occupiers fell 3% on the back of July’s 4.5% decline. The RBA’s Financial Stability Review pointed to a reduction in concern over household debt on the back of tighter lending standards and slowing credit growth, although concern was raised over the large increase in the supply of apartments. Interest this week starts with today’s RBA minutes and Thursday’s employment data for September where the market is looking for the addition of 15k jobs and a slight up-tick in the unemployment rate to 5.7%.

New Zealand

Dominating interest for this week locally was this morning’s September quarter inflation report which came in stronger than market expectations at 0.2% for both the quarter and year ended 30 September. The number was in line with the RBNZ’s expectations and has seen the NZD rally around 0.5% against the greenback on the news. Data last week was uninspiring and for most of the week the local unit fell on the back of a stronger USD. Electronic card retail sales rose by more than expected and the manufacturing PMI rose to its highest level since January. Comments from assistant RBNZ Governor pointed to a high likelihood of a rate cut when the central bank next meets in November. In focus for the remainder of the week will be tonight’s GDT auction (little move expected) and data from the US (inflation today) and Australia (employment Thursday).

United States

The USD has continued to propel higher in opening trade this week. This has seen it reach highs which last traded in March. The strength on Friday came after US bond yields rose on the back of comments from Fed Chair Janet Yellen. Yellen’s remarks included ones over letting the US economy run hot in an effort to reverse some of the “supply side” damage that has been evident since the GFC. The move up in rates likely reflected the market’s view that the Fed can lift inflation, in time. Market pricing for a December move remained unchanged at around 66% after the speech and was also little changed after last week’s FOMC minutes. Key data included Friday’s retail sales numbers which rose by 0.6% m/m. The number rebounded from the month prior’s revised 0.2% drop as 10 out of the 13 categories showed gains. Producer prices came in slightly above expectations in September, although the University of Michigan consumer confidence numbers were disappointing and long-term inflation expectations eased. JOLTs job openings fell sharply, although the latest weekly jobless claims remained flat. In focus this week is today’s inflation numbers, data on building/housing, the Philly Fed (manufacturing) and talk from various Fed speakers.

Europe

Last week was a relatively quiet one for the Euro which saw it fall mainly on the back of solid demand for the greenback. Data releases had little influence on trade. Numbers from Europe’s largest economy Germany included trade data which outstripped expectations on the back of a boost from exports, a better than expected ZEW indicator of economic sentiment and harmonised inflation, which highlighted the ECB inflation quandary after it rose just 0.5% year-on-year. Data from across the euro-zone included a strong ZEW, industrial production that easily beat forecasts in August and trade data for the same month which showed a surplus well above expectations. This week has started with numbers on inflation which showed prices rising by just 0.4% year-on-year across the euro-zone (data as expected). In focus this week is Thursday’s ECB rate decision. Attention will likely focus on signs that the ECB will trim its EUR80Bn a month bond-buying stimulus which is currently due to end in March.

United Kingdom

Sterling sentiment was again driven by the negative influence of discussions on the format of the Brexit negotiations last week. Some relief came after UK PM May accepted that the Parliament should have to vote on the EU exit plan (which could provide a block to the exit), although the rally proved only temporary. BoE Governor Carney spoke on Friday and indicated a tolerance for some overshoot in inflation in order to support growth. Carney noted that the BoE is not “indifferent to the level of the sterling” although the tone of the speech was one of flexibility in its mandate, this as the BoE’s Broadbent (in comments overnight) said he saw inflation as being above goal in the next couple of years. Data last week was scarce. Indicators included a better than expected BRC retail sales monitor and the RICS house price balance indicator which showed properties coming to market falling for the seventh month in a row. This week looks far more interesting as we get key leads on inflation (today), employment (tomorrow) and retail (Thursday).

Japan

Last week was a quiet one in Japan for fresh economic leads. Data releases included the current account for August which rose modestly from the month prior and machinery orders which experienced a smaller than expected decline in their latest month, although rose 11.6% year-on-year. Bank lending rose at the fastest pace since May, whilst the Tertiary Industry Index remained flat on the month prior. Data this week started with numbers on Industrial Production and Capacity Utilization yesterday. The former release maintained its pace of growth from the month prior, although the result was slightly less than that expected. Capacity Utilization lifted in August, although none of the mentioned data had any currency impact. Comments yesterday from the BoJ Governor Kuroda noted an economy on a moderate expansion path and core consumer prices which were slightly negative to flat. Kuroda added that the central bank would take further action to boost growth if it was required. With no data of interest coming out of Japan look for events in the US to influence, starting with numbers on inflation later today.

Canada

Last week was a quiet one in Canada that saw only data from the housing market come to market. News from the housing sector started with housing starts which easily beat forecasts for September. New house prices lifted moderately on the back of gains in the Toronto market, although the rise was marginally less than expected. Existing home sales increased in September after having fallen in each of the previous five months. Sales were up 4.2% year-on-year, although forecasts from TD Economics indicate that new housing regulations may lower sales by up to 10% next year. News from the energy market last week was dominated by the announcement from Russia that it was looking at joining OPEC in limiting production at the next OPEC meeting on November 30th. In focus this week is the BoC interest rate decision on Wednesday where the market expects rates to remain on hold at 0.5%. Inflation data and numbers from the retail sector on Friday are the other key indicators of interest.

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