Greenback posts fresh 13½ year highs; USD direction to be driven by upcoming data; strong exporter interest in NZD/USD around 70c mark

The New Zealand dollar sits moderately higher in trade against the greenback since our report on Friday. Strong exporter interest which has been seen ahead and just below 70c has meant further falls have been hard to come by despite the continued strength in the US dollar. This week is very quiet from a local data standpoint which will have the market looking to the US for direction, especially Thursday morning’s (NZ time) FOMC minutes. The demand for the local unit under 70c when combined with the overall strength in the US dollar has us favouring consolidation this week.

NZD/AUD (AUD/NZD)

The New Zealand dollar has continued to rally in trade against the Australian dollar since Friday. The move up reflects the solid exporter demand in the NZD/USD around the 70c level and comes as talk of M&A flow pressures the AUD. The extent of the move of the last week has surprised somewhat and should offer solid short term AUD buying as the M&A flow subsides, especially should this move extend to .9645 resistance (1.0368 support.). Data looks unlikely to play a role this week.

NZD/GBP (GBP/NZD)

The New Zealand dollar is largely unchanged in trade against the UK pound since Friday. There has been very little for the cross to go on since our last report which has meant the cross has continued to trade within last week’s range, although a dip was seen overnight after the UK PM’s comments. With little in the way of important data we favour more range trading, especially while .5630 (1.7762 holds). Support beyond this level is seen at .5600/10 (1.7857/1.7825 resistance) so we would be surprised to see too much further in the way of falls this week should first support break.

 NZD/CAD

The New Zealand dollar has edged slightly lower in trade against the Canadian dollar since our commentary on Friday. There has been little in the way of fresh leads for either pair, although the CAD continues to find support in the form of gains in the price of oil. Energy markets should again hold the key for the next swing in the cross this week. We have little view on the next move and see the Vienna OPEC meeting next week as likely being the key determinant of the next major shift.

NZD/EURO (EURO/NZD)

The New Zealand dollar has lifted marginally in trade against the Euro since our commentary on Friday. Most of the gains can be put down to the solid performance of the NZD/USD on the back of the talk of strong exporter demand. With only second tier data scheduled from both regions this week we expect a relatively quiet week of trade within a .6575/.6700 (1.5209/1.4925) type range. The lack of momentum gives us little bias this week from here.

NZD/YEN

The New Zealand dollar has continued to move higher in trade against the Japanese Yen since Friday. The move reflects the relative outperformance of the NZD (which has benefitted from exporter demand in the NZD/USD pair) and strong fall in the Yen versus the US dollar. Momentum for this cross is positive at the moment, although the extended rally in the USD/JPY in the last fortnight elevates the prospect of a decent correction. Initial weak support is seen around 77.50 and then 77.00.

AUD/USD

The Australian dollar has continued to fall against the US dollar since our commentary on Friday. The pressure comes amidst talk of M&A selling in the AUD and an environment of a very strong USD. Declines were limited to ahead of 73c in trade yesterday and look extended to us in the short term. Look to US influences for direction this week (including the FOMC minutes on Thursday morning NZ time). Key support beyond the important .7280/.7310 zone is eyed at .7140/50.

AUD/GBP (GBP/AUD) 

The Australian dollar has continued to fall against the UK pound since our report on Friday. The move comes on the back of further falls in the AUD against the US dollar and after a jump in the sterling in trade overnight (on the back of UK PM May’s comments). Domestic drivers look unlikely to have a great deal of influence on the cross this week which means sentiment and flow will dictate the net move. First support is seen at .5850/60 (1.7094/1.7065 resistance), although better support lies much lower around .5620 (1.7794 resistance). Momentum continues to favour the GBP at present.

AUD/EURO (EURO/AUD)

The Australian dollar has continued to ease in trade against the Euro since our last report. The move reflects the underperformance of the AUD in the environment of a stronger US dollar as talk of M&A selling weighs on the AUD. Sentiment, commodity prices and transactional flow look likely to again set direction for the cross this week given the lack of key data from either region. Initial weak support lies at .6900 (1.4493 resistance). We lack a bias although AUD momentum remains soft at present.

AUD/YEN

The Australian dollar is trading largely unchanged in trade against the Japanese Yen since our commentary on Friday. There has been no fresh news to report since Friday which has meant the cross has failed to add to its recent gains (which have been based around the large losses by the Yen against the US dollar).  Momentum continues to favour the upside at present with initial buy targets being ahead of 81.10 and then around 80.25.

AUD/CAD

The Australian dollar has continued to move lower in trade against the Canadian dollar since Friday. The continued weakness reflects the support for the CAD on the back of rising oil prices and falls in the AUD which has been the notable commodity currency underperformer in recent days. Talk of M&A selling has also been a factor in the recent weakness. The recent move lower looks extended to us given that it has sliced 50% off the large upswing seen this year (May to November). Look to oil pricing and a shift in the supply/demand balance of the AUD for direction over the days ahead.

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Market commentary:

Interest this week will again be on the impressive performance of the greenback which has posted fresh highs this week that have not been seen in over 13 ½ years. The gains in the USD index have reached over 5.8% from the lows reached on US Election Day and reflect a growing consensus that the incoming Trump led government will usher in a period of notably higher interest rates on the back of fresh fiscal policy initiatives. This has helped expectations lift for a December rate hike from around 80% prior to the election to near 100% presently. Directives for the US dollar this week include the FOMC minutes on Wednesday and economic indicators which includes durable goods, existing home sales, PMI manufacturing and consumer sentiment.

Australia

Strength in the US dollar, which reached highs not seen in over 13.5 years, helped pressure the Australian dollar to falls of around 2.8% in trade last week. Weakness in iron ore and gold were also contributors although the market was also unimpressed with labour market and wages data which failed to show any hard evidence of a reduction in slack in the labour market. Wages growth of 1.9% year-on-year in Q3 was a record low and despite a rebound in full-time job positions in October, the trend remains one of weakness and very high underemployment. Risks from this trend are a lower inflation out-turn than that expected by the RBA especially when viewed with a slowing in the housing sector (as rising bank funding costs pressure mortgage rates higher) and strong AUD. Minutes from the RBA and a speech from Governor Lowe indicated that the RBA is happy to remain on hold for now, although the labour market will continue to be keenly monitored. Looking ahead to later this week where we have CAPEX data on Thursday and RBA talk will be on the radar today.

New Zealand

Focus last week was again on the US dollar which reached highs not seen in over 13.5 years. This comes as the market continues to buy the story of higher US inflation under the incoming Trump government. Local interest included the assessment of the economic cost of the Kaikoura earthquakes, which experts now expect to top $NZ5 billion. GDT dairy prices rose again last week (+4.5%) and have now gained over 40% since August. The gains saw Fonterra lift its 2016/17 payout forecast to $6.00/Kg. The delayed retail sales release received yesterday saw seasonally adjusted retail sales lift 0.9% in the third quarter, down from the June quarters 2.2% rise. Motor vehicle and parts retailing posted the largest rise. Focus this week will again be largely on international developments including the FOMC minutes on Thursday morning (NZ time). Local trade data on Friday should garner little more than a passing interest.

United States

The US dollar continues to be in heavy demand in trade this week. Trade last week was heavily influenced by the prospect of higher inflation under the incoming Trump government. Further support has come from Fed official comments which are indicative of a rate hike next month and a Fed which is keenly awaiting the details of the Trump fiscal package. Data last week was largely solid. It included retail sales which were stronger than expected in October and revisions to September which were also positive. Housing starts were exceptionally strong, although industrial production and producer prices both disappointed. Headline inflation continued to lift as the impact of falling energy prices drops out of the calculation, although core inflation was weaker than expected. Fed Chair Yellen indicated that rates will rise “relatively soon” although continued to highlight that the process would be gradual. Focus this week will be on Wednesday’s FOMC minutes. Indicators of interest start with existing home sales (today) and a host of data tomorrow which includes durable goods, new home sales, and Michigan consumer sentiment (amongst others).

Europe

Sellers which dominated trade in the Euro last week continue to hold sway in trade this week. Demand for the US dollar, which was the driver last week, comes as investors eye the loose ECB monetary policy and increasing expectations of US rate hikes. Geopolitical focus is also high as the market eyes the upcoming Senate referendum in Italy and Austrian presidential election, both of which have been adding to the anxiety around their respective EU membership (especially the former). Data last week included a smaller than expected fall in industrial production and GDP numbers which were in line with expectations (1.6% year-on-year). Both the Eurozone and German ZEW index of economic sentiment improved. These when combined with the improving business conditions PMI’s should support a lift in growth down the track. Focus for this week will be on various PMI indicators tomorrow and the German IFO business climate index on Thursday.

United Kingdom

This week has started well for the sterling after it jumped in trade yesterday on the back of comments from PM Theresa May which spoke of a desire for a UK business friendly arrangement with the EU in the coming Brexit negotiations. Last week was a busy one for local data which included key indicators on employment, inflation and retail, although it was the strength in the US dollar which was the main driver of GBP trade. Numbers started with inflation data which disappointed, albeit were viewed as largely temporary. Unemployment fell to 11 year lows in the three months to September, although unemployment claims disappointed. Retail sales were strong and reached their highest levels since April 2002. This week is a relatively quiet one in the UK which starts with industrial trend orders numbers today. BBA mortgage approvals feature on Thursday, although most of the interest will lie with the third quarter GDP numbers on Friday.

Japan

The weakness that was seen in the Yen against the greenback has continued in trade this week. Losses from the beginning of last week have reached around 4% in trade overnight. Data last week included Q3 GDP growth that surprised on the upside which was helped by strength in exports, housing investment and public spending. Better than expected industrial production numbers did little to curb the losses against the US dollar. Trade data released yesterday which was disappointing was driven by a larger than expected decline in exports which fell 10.3% year-on-year. The decline was the 13th consecutive monthly drop, although the recent sharp falls in the Yen should help to reverse this trend. Other focus last week was on the Bank of Japan’s yield curve management operations which are aimed at capping JGB yields at zero, a directive which has amplified the recent downwards pressure on the Yen. Expect most of the direction this week to come from offshore. Local data of interest includes the manufacturing PMI indicator on Thursday and inflation data on Friday.

Canada

Demand for the Canadian dollar remained robust in trade last week, despite the considerable strength which was seen in the greenback. The rebound in the price of oil that was seen early in the week helped has continued in trade so far this week. The gains of over 14% since last week’s lows come as OPEC experts make progress in preliminary meetings ahead of the Vienna Nov 30th official meeting. Comments from Russian President Putin added to the air of confidence that an agreement could be reached. Putin added that Russia was ready to freeze output at the current level. Local influence on trade was lacking last week. Inflation numbers for October were largely in line with expectations although the decline in September manufacturing sales from August was less than expected. Wholesale sales which disappointed in trade overnight had no impact on trade. Focus for today is on data from the retail sector although look to oil and Wednesday’s FOMC minutes for direction.

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