25th January 2016 – Weekly Currency Market Report

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The Market in Brief:

      • AUD and NZD bounce
      • NZ inflation down
      • Chinese data continues to be poor
      • US data improves
      • UK Inflation up
      • Bk of Canada holds interest rates

      More stimuli on its way from the ECB

Market Events Due:

    • German Ifo (Monday)
    • ECB’s Draghi speech (Monday)
    • BoE’s Carney speech (Tuesday)
    • Australian Inflation (Wednesday)
    • UK GDP (Thursday)
    • US Fed FOMC meet (Thursday 6.00am Syd)
    • RBNZ meet (Thursday)
    • Bk of Japan meet (Thursday)

    EU Inflation (Friday)

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AUDUSD: The latter part of the week saw a reversal of fortunes for the local currency, due to a recovery in the equities and commodities markets. We are not too convinced the turnaround has legs and really need to see some continued positive local and Chinese data before believing the A$ can sustain these levels. The week ahead should be quiet as we have the national holiday tomorrow and await Thursdays first US Federal Reserve meeting of the year, although there will be a short bout of volatility on Wednesday with the release of domestic inflation data. That number is expected to be weaker than prior read’s and so should weigh on the currency. Looking to the charts and the upside should be capped 100 points above, being the 50% retracement of the 2 month long sell off. A break below last week’s lows could put the wheels in motion for a more substantial decline.  

AUDEUR: Comments from the European Central Bank Chief that they would ‘reconsider’ increasing its dosage of monetary stimulus to the 19-nation area at bankers’ next meeting in March have seen this pair reverse recent losses and we open at 2 week highs. There is a note of caution however, given we have heard those words before of course and remember too well the promised huge influx of stimulus to come and disappointment at the actual amount announced. Tonight’s German Ifo report, tomorrow mornings speech by President Draghi and Fridays EU inflation data will all be keenly watched and technically there does appear a case for a continuation of this push higher. We’d suggest another 1cent of upside until we get to the midpoint retracement of the selloff seen since early December. 

AUDGBP: Our favoured push high came to fruition although we fell just short of our actual target. A surprising pickup in UK inflation resulted in a bounce for Sterling across the board, (up 250 points in 24 hours against the US$), but a sudden dip in UK Retail Sales ensured the gains were stopped in their tracks. These mixed data releases highlight the uncertain direction of the UK economy and have pushed any thoughts of a UK rate interest out of the picture. A speech by the BoE’s Carney tomorrow and GDP data on Thursday are key; but neither of which seem to have the ability to break the pair out of this upward channel. We therefore have to keep with our target of 0.50 / 2.00 unless either center springs a surprise.

AUDNZD: Despite a pick-up in NZ Business Confidence the Tasman Cross has pushed higher, breaking the previous range as forecast. The move came about with the release of another fall in the dairy price and as quarterly inflation numbers printed at their lowest levels since April. Looking ahead and our sole focus will be on the RBNZ meet this Thursday and any signs of a preemptive interest rate cut. The market suggests the central bank may wait a while, however there is a growing belief Governor Wheeler and his team may surprise with a 0.25% cut given the global (and Chinese) economic picture. At the very least we expect a dovish report and this should ensure that the pair maintain these levels if not push on. The technical pictures supports this view as we hold in an upward channel targeting 1.10+ in the short term.

AUDCAD: The decision to keep interest rates on hold and the recovery in Crude Oil from 12 year lows has yet to come to the rescue of the Canadian Dollar in this pair. There are no major economic data releases due this week, so direction will be determined locally and in the commodity market. We favour a further fall with a target 150 points below this morning’s opening levels.

AUDZAR: Understandably the Rand has pulled back from its recent run to fresh lows; however the overall weaker tone is still very much prevalent. A recent IMF report that South Africa will struggle for most of 2016 with lower commodity prices supports the view and it will be interesting to hear the comments of the SARB at their meeting this week. Regardless of any attempts at reassuring the markets, we’ll stick with our 15.00 target in the medium term.

AUDCHF: Our favoured move actually came in the second half of the week; pushing the pair to 2 week highs as the market deemed it safe enough to buy back into the higher yielding currency. With no major data from the Swiss due this week, direction will again be determined by sentiment and given how fickle that is at the moment we’d suggest placing orders to take advantage of any push higher – as and when they occur.

 

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Jim Devonport

Corporate & HNW Client Manager 

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