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Economies of Note - 26th May 2017

Written by Ian Dobbs on May 26th, 2017.      0 comments

12:45pm(NZT)
Australia
We have only had some minor second tier data released from Australia this week and it’s had little effect on the markets. The CB leading index increased 0.5% up from 0.4% prior, while construction work done disappointed printing at -0.7% vs -0.5% expected. The Australian dollar has struggled to maintain a firm footing this week undermined by Moody’s downgrade of China on Wednesday and soft commodity prices. It heads into the end of the week feeling a little soggy. Next week's data will be of more interest with building approvals, private capital expenditure and retails sales all set for release.
 
 
New Zealand
It’s been a very quiet week data wise from New Zealand. We did get the trade balance on Wednesday which came in much stronger than forecast and that helped to support the NZ dollar somewhat. NZ produced a trade surplus of 578m in April driven by dairy, wood and wine exports. This was the largest trade surplus since March 2015. Fonterra released their revised milk price forecasts lifting it 15 cents to $6.15/kg for the 2016/17 season. For 2017/18 they are forecasting a pay-out around $6.50/kg. These sorts of numbers will make pleasant reading dairy farmers and rural economies in general. Yesterday’s government budget release drew plenty of media attention, but there was little impact in the market. There are never any real surprises in the budget detail these days and yesterday was no different. In an election year the government was always going to what it feels is just enough to get re-elected, and that’s certainly what this budget felt like. The NZ dollar has had a relatively solid week making gains across the board. It is now however at reasonably healthy levels against a number of other currencies and any further potential gains will be much harder fought with key resistance levels not far away. Next week is another quiet one with only building consents, business confidence and the RBNZ Financial Stability Report of any note.
 
 
United States
The US dollar has seen some pressure this week weighed on by mixed data and the Federal Reserve minutes. The minutes showed the Fed believe another rate hike relatively soon would be appropriate, but that it would also be prudent to wait for evidence that the recent slowdown in economic activity is indeed transitory. So while a June interest rate hike is still well on the table, if we got a series of soft releases between now and then they may decide to hold off. Currently the market is pricing in around an 80% chance of a June hike. Tonight sees the release of some key data with Core Durable Goods Orders and Preliminary GDP set to hit the wires. Monday is a US holiday so next week will start off slowly, but later in the week we have consumer confidence numbers, manufacturing PMI and non-farm payrolls data.
 

United Kingdom
The tragic events in Manchester this week have been the main focus for the UK with economic releases taking a back seat. The GBP has struggled for direction and remained largely range bound against the USD. It has however underperformed against the NZD and AUD. Revised first quarter GDP for the United Kingdom was released last night and it came in a touch lower than forecast at +0.2%. Expectations were for a result of 0.3%. While election campaigning was suspended in the wake of the Manchester bombing, the latest YouGov poll show’s PM May’s lead down to 5 points with the Cons at 43 and Labs 38. The June 8 elections is likely a one horse race, but the margin of victory may not be as great as first thought. This could pressure the GBP somewhat. Next week is pretty quiet on the data front with just manufacturing and construction PMI’s of any note.
 
 
Europe
Europe economy continues to improve and PMI data this week has served to underscore that. Solid results from the manufacturing and service sectors have helped to support the Euro, as did the German IFO business climate survey which increased to 114.6 from 113.0 prior. ECB President Draghi spoke this week and he moved to pour cold water on any speculation that the central bank could change it current policy setting any time soon. The central bank is determined to fully implement its quantitative easing programme which involves 60bln of purchases each month through to the end of the year. Draghi also reinforced the view that although economic growth is finally progressing nicely, underlying inflation remains low and that allows them all the room they need to continue with QE. Next week's economic calendar contains a raft of second tier releases with the main focus likely to be the flash CPI estimate out on Wednesday. Draghi is also set to speak again, although the tone of his comments is unlikely to differentiate from this week.
 

FX Update: Commodity recovery helps drive NZD and AUD higher

Written by Howard Wilcox on May 23rd, 2017.      0 comments

4:00pm(NZT)
Overview
A quiet open to the week with little economic news and with President Trump “on-tour” the bad news eroding USD confidence has temporarily taken a back seat. US stocks rose for the third day boosted by President Trump’s trip to Saudi Arabia that saw trade deals announced across the defence, energy and infrastructure sectors, lifting industrial shares such as Boeing, Raytheon and 3M. Crude pushed to a one-month high before OPEC meets later this week.
A more “risk-on” tone is now evident in financial markets, returning after political turmoil on a daily basis in Washington rattled investors and saw stocks have some the biggest declines since last September. This week is light on major releases, there are several speeches by US Fed officials and ECB officials and of course the release on Thursday of the NZ Budget. Not much expected in this document to move markets as given that it is an election year, focus will be on “steady-as-she-does” with some social spending thrown in to give a feel-good election feeling.


Australia
The Australian dollar begins the week on a more positive note holding well over the pivotal 0.7400 level against the USD. Firmer oil prices, a rise in the gold price and taking a more positive view on risk have seen the AUD up at a 2 week high at 0.7486. A continued positive momentum in equities and commodities should be AUD supportive, with potential to push the AUD to target 0.7500 then beyond. There is little in the way of local data this week, so moves will be largely offshore driven. Any pullback should attract buying interest around the 0.7430/35 mark.


New Zealand
The New Zealand Dollar closed the week in a positive mood coming off its recent low of 0.6820 to close around 0.6920 levels. Risk appetite continues to drive the NZ Dollar higher, investors happy to take on further risk with chances increasing the Fed may not raise rates on June 15th With continued Trump administration diversions going on and weaker recent inflation figures this has rocked the boat somewhat, having said that the Fed will probably still press ahead with hiking. Weekly data locally is light except the Annual Budget release on Thursday. The kiwi traded through 0.7000 earlier in the day the monthly high and is firmly out of its recent trading range. Breaking upside on the 50 day moving average it looks to 0.7050 resistance for further gains.


United States
US markets have calmed with the President away “on tour”, as political turmoil has been dialled back, awaiting his return!  Investors have adopted a more risk -on tone as focus moves back to the economy and the chances of a Fed rate hike early next month. The weaker USD over the week or so has been a direct result of the “Trump trade” unwinding as the continual political scandals around his administration reduce the chances of his infrastructure and spending policies passing through Congress, rather than any deterioration of the US economy. Data figures continue to remain supportive. The EUR/USD continues to trade higher and after breaking resistance at 1.1170 rallied to a new high for the year at 1.1262 after German Chancellor Anglea Merkel commented that the ECB was responsible for EUR weakness after referring to the German trade surplus, it has since dropped back around the 1.1242 mark. Potential now exists for the EUR/USD to extend its advance to the 1.1300 level, last seen early November.  Further gains will likely see the pair reaching the 1.1340 region over the next day or so. Conversely a correction would take place on a break below 1.1160, with scope then to revisit the 1.1080 region.  


United Kingdom
The UK election campaign grinds on, dominating the news as the June 8th polling day approaches. Polling surveys still show the Conservatives holding a solid lead, however this lead has halved from 18% over the last week after the publication of the party’s manifesto last Thursday was seen to damage the Tories’ electoral prospects causing a drop in the GBP. This was later reversed as PM May, did a U-turn and back pedalled over potential social spending cuts in her party's election manifesto. The horrific news today of a terrorist bombing at a music concert in  Manchester that saw 19 fatalities is just 15 days away from the general election polling day  and the risk for the pound from here is whether this will delay the campaigning as the UK remains at the second highest level of security. The GBP/USD started the week with a negative tone, but persistent USD weakness helped the GBP/USD pair to regain the 1.3000 level, in spite of Brexit turmoil. The pair gapped lower overnight, knocked by Brexit's minister Davis, who said that the UK can leave the negotiation table should the EU insist on the payment of a Brexit bill of around €100 billion. The pair fell to 1.2965 before stabilizing, it is now back around 1.3000 . We anticipate sideways trading heading into election day holding within a 1.2960-1.3100 range.


Europe
Eurozone data continues to show improvement and this allied with continued USD weakness, mostly around political ructions, has seen the EUR continue to firm over the last week. That old chestnut Greece is back on the front burner for the Eurozone bloc with news that while Eurozone finance ministers may agree to release new loans to Greece, they are likely to struggle to convince the International Monetary Fund to join the bailout by keeping the prospect of debt relief for Athens highly conditional. Debt relief was one of the IMF conditions. Greece needs new cash from the euro zone to avoid a default in July when it has to repay some €7.3bn worth of maturing loans. To get the money, the Greek parliament approved pension cuts and tax hikes last Thursday. For the IMF to join the bailout it wants the euro zone to commit now, more firmly and in greater detail to debt relief for Athens, even if it were to happen only in 2018. This would be difficult to swallow for Germany, which faces elections in September, and several other countries, which all want to retain some leverage over the Greek government to make sure it delivers on all the promised reforms until 2018. Also in overnight trading, Germany's Chancellor Angela Merkel argued that the "too weak" EUR was to blame for the contracting trade surplus in Germany, boosting the demand for the shared currency. Some market analysts suggest that the narrowing Germany-U.S. yield spreads are helping to support the euro.


Japan
The Japanese yen has shown little movement in this week’s trading after gaining over 200 points on the US Dollar last week. The yen opened around the 111.00 area before giving up early gains and trading back at 111.50 after poorer than expected Trade Balance data.  The ministry of finance reported a surplus of 481.7 Billion from a surplus of 614.7 Billion as imported growth outstripped exports. The safe haven trade has been attractive recently with investors as the continuing troubles in the US remain.  With little Japanese data to be released this week direction will be driven by US, in particularly the Fed reserve speeches. With the USD still looking venerable price direction could be limited to resistance at 114.00 with prospects of support at 108.00 being tested.


Canada
The Canadian Dollar closed at 1.3510 for the week a big mover against the greenback picking up over 210 points. Canadian data was mixed with CPI and Core Retail Sales both missing expectations Friday, markets choosing to ignore the data the pair rallying to 1.3500 during late NY trading. The continued rally in Crude Oil played a large part, this morning’s price reaching $51.40 a barrel a long way from $47.00 the recent low. With continued Issues in the Trump administration weighing on markets we suspect the Canadian dollar may make a push for 1.3440 support, following this it may have a look at the prior low of 1.3280 of mid- April 2017. Bank of Canada will announce their cash rate announcement along with the statement Thursday with no move on the current 0.50% expected.


Major Announcements
•    US Building Permits 1.23m vs 1.27m expected
•    NZ PPI 0.8% vs 0.7% expected
•    UK Average Earnings Index 2.4% vs 2.4% expected
•    Canadian Manufacturing Sales 1.0% vs 1.1% expected
•    Australian Employment Change 37.4k vs 4.5k expected
•    UK Retail Sales 2.3% vs 1.2% expected
•    Canadian CPI 0.4% vs 0.5% expected
•    Canadian Core Retails Sales -0.2% vs 0.2% expected

 
 

Economies of Note - 19th May 2017

Written by Howard Wilcox on May 19th, 2017.      0 comments

4:00pm(NZT)
Australia
Data and news out later in the week was better for Australia and saw the Australian dollar rise over the old AUD/USD resistance level of 0.7400 soaring to a high of 0.7465 yesterday. On Wednesday, ratings agency Standard and Poor's confirmed Australia's AAA credit rating, however it continued to leave the nation on negative watch, and suggesting that  the Turnbull government may struggle to return to surplus by the forecasted date of 2020-21. Also positive and unexpected was yesterday’s fall in the April unemployment rate to 5.7% its lowest level in four months, expectations had been for a figure steady around 5.9%. However the increase in job numbers came from part-time employment, which soared 49,000 while full-time employment fell by 11,600. It was a mixed report that augurs poorly for a much-needed revival in wage growth and inflation. Poor fulltime employment figures continue to weigh on the AUD and the AUD was unable to hold the higher levels, selling off overnight against the rebound in the USD. Currently trading around 0.07420 and should hold above 0.7400 to end the week, but only a break of 0.7510 would indicate a bullish trend.


New Zealand
It’s been a positive week data wise for the New Zealand economy, although the NZD has really struggled to make significant gain on the back of the releases. Monday saw much better than forecast retail sales data which printed at 1.5% vs 1.1% expected. This was followed by another solid dairy auction on Tuesday night with prices up just over 3%. That’s the fifth consecutive rise. Many forecasters are now revising up their forecasted pay-outs for the 2017/18 season to $6.50 - $6.75/kg MS. Producer prices on Wednesday also came in a touch stronger than expected at 0.8% for the quarter. Earlier today we got another reminder about how attractive the NZ economy is with migration figures continuing to run at record levels. Net migration in the year to April was a gain of 71,885. The New Zealand dollar has been somewhat lethargic in the face of the strong economic releases and continues to trade within recent ranges.


United States
It has been a difficult week for the US where political turmoil has outweighed any economic data. The Trump trade reversed sharply on Wednesday as equity markets took fright over the possibility of Trump’s impeachment had increased, thus potentially derailing his tax and infrastructure spending policies that would lead to a boost for growth and inflation, selling off sharply on the biggest drop since last September. The USD followed suit and the EUR/USD reached 1.1170, the lowest level for the USD since early November. However overnight buyers emerged for the USD and US equities as data released showed  jobless claims and regional manufacturing figures beat forecasts, adding to signs economic growth is on firm footing and that the widely anticipated move by the Fed to increase rates next month remains on-track.  Politics should (hopefully !) take a back seat next week as President Trump heads overseas, also the appointment of a special counsel to head up the FBI's investigation into Russia's attempt to influence the US election, appears to have acted a circuit breaker of sorts. It may not be sufficient to boost confidence that the Trump Administration's economic program is back on track, but it looks to be is sufficient to stem the tide for the moment leaving markets to go back to be more data driven.


United Kingdom
Sold figures out yesterday for April retail sales, which were up 2.3% over March, double that expected and 4% higher year-on-year. This saw the GBP soar over 1.30 against the USD to the highest level in 8 months. However the FTSE100 extended losses after the retail sales news as the stronger GBP is negative for many of its listed corporates who earn USD denominated income. Commodity based stocks and financials led the downward move. Also adding to the positive tone was news that UK unemployment had fallen to its lowest level in 40 years, although this was tempered by the fact that wages in real terms were falling due to inflation and subdued wage growth. The GBP has failed to hold the higher levels and has now drifted back under 1.30 to 1.2950 on the stronger USD rebound. Support is at 1.2900 with resistance at 1.2995 then 1.3040..look for consolidation at current levels to begin next week.


Europe
The Eurozone economy continues to show signs of improvement, with German economic sentiment index results out this week showing that investors and analysts do not see an end to the current growth in the German economy anytime soon.The EUR/USD has had a good week, climbing to highs around 1.1170 on the US political turmoil however price action was choppy last night with the pair breaking back below 1.1100 and nearing 1.1080, on market talk, that there was no obstruction to justice in the Flynn case, therefore clearing US President Trump from a possible impeachment. There is apparently a video from May 3rd, in where former FBI director Comey said under oath and before the Senate Judiciary Committee, that "he has not been pressured to close an investigation for political purposes." The coming week should see less volatility on this cross given President Trump is “on tour” but further political ructions are likely and this should favour the EUR allied with continuation of positive Eurozone data…..1.1260 long term resistance is now in play over the coming weeks.

 
Japan
The Japanese yen has traded significantly higher against the US Dollar throughout the week as the carnage in Washington occupies the headlines. The Trump government remains on the back foot with the “Russian probe” fiasco expecting to last a while- perhaps months. JPY started the week at 113.20 but was soon falling like a stone through key support levels of 113.00 and 112.00 as risk appetite took hold, the pair reaching 110.50 during early morning trading. Japan’s economy continues to thrive with figures showing growth for the first quarter at 2.2%, the country has expanded for the 5th straight quarter, its longest run in over a decade.


 
 

FX Update - US data mixed, while equities trade like they don't have a care in the world

Written by Howard Wilcox on May 16th, 2017.      0 comments

4:00pm(NZT)
Overview
Markets traded sideways with little direction on Friday awaiting the US CPI and retail sales data. When released the results were mixed; CPI figures rebounded for April (up 0.2%) although year-on-year at 2.2% lower than an expected 2.3%. April retail sales were lower than forecasted, up 0.4% (expected 0.6%) raising some concerns that Q2 is not seeing continuing positive momentum.  With confidence knocked on the data release, US equities and the US dollar moved lower as speculation weakened around the odds of a June Fed rate hike. However it should be pointed out that the numbers weren't that bad, they just failed to be as good as anticipated and we believe that the Fed is still on course for a June rate hike. Housing starts and Industrial production data for April due out later tonight should reaffirm this track. Chinese data releases were also mixed, with retail sales coming in better than expected at 10.7% yoy but industrial production lower at 6.5% yoy against expectations of 7.1%. This was negative news for the Australian dollar, which yesterday again backed away from the AUD/USD 0.7400 level. Overnight has seen all major US equity markets rising to new highs as energy, financial and materials shares posted solid gains as crude oil prices jumped 2% as Russia and Saudi Arabia, two of the largest producers, announced that they would extend by 9 months, a production output cut deal already in place.


Australia
After last week’s budget consumer confidence has plunged to its lowest level in nearly two years. The ANZ-Roy Morgan Consumer Confidence Index for the week to May 16 has slumped 2.6 points to 109.4, which is its lowest level since September 2015, although the indicator still remains above the 100-point level separating optimism from pessimism. However wages data tomorrow is expected to provide little relief, with private sector wages growth expected to show record low wages growth of just 1.7 % in the year to the March quarter. The rise in crude oil and gold prices over the last 2 days has helped push the AUD/USD back over the 0.7400 level, but given the disappointing Chinese data regarding increasing iron ore stockpiles (up by nearly 2%)  and prices  continuing close to all-time lows , the Aussie dollar remains the worst performing of G-10 currencies for the quarter. RBA minutes just released, show that the RBA still has concerns over the housing and labour market, which they comment requires “careful monitoring”. However they were more optimistic around core inflation which they saw rising to the expected 2% level by early March 2018. The AUD/USD is currently around 0.7420 with solid resistance at 0.7455, a break of this level would target 0.7475 then 0.7500. Conversely , a pullback below 0.7400 would expose 0.7365.


New Zealand
The New Zealand dollar suffered in the wake of last Thursday’s Reserve Bank statement, but since then a consolidative tone has emerged. The RBNZ, it seems, are in no hurry at all to even talk about raising rates and they view the risks to the outlook as balanced. Most economists however feel the central bank will be forced into upgrading their economic outlook over the coming months, and they could well end up hiking interest rates as early as the first half of next year. That expectation was only underscored by yesterday’s retail sales data that came in much stronger than expected. Sales increased 1.5% on the quarter, up from 0.6% prior. The market had been expecting a gain of 1.1%. Tonight we have another Global Dairy Trade auction which will also be closely watched.  With the underlying strength of the NZ economy it’s hard to get too bearish on the NZD. At worst it’s likely to remain range bound as the RBNZ’s current neutral stance helps to limit any significant gains.


United States
Overnight data releases were mixed, but the market concentrated on the oil rebound as equities pushed to new record highs also helped by continued solid corporate earnings results. Industrial production figures for April out later tonight will have more import and are expected to show an increase of 0.4%, just below the 0.5% increase recorded for March. Politically with the Trump administration still reacting to the FBI Director Comey dismissal, the chances of tax reform and infrastructure appear to be more delayed as precious political capital is used up in other debates. The USD has been on the back foot over the last two days as last Friday’s disappointment over inflation and retail sales gathered momentum. Building permits and housing starts are due out in the US tonight, along with the industrial and manufacturing production figures which if solid, as expected, should give the USD a floor to rally from.  Although some data has been mixed, in our view none of it has been against the overall trend of an improving US economy and we remain confident that the Fed will look through such data to the general supportive trend for a rate increase in June.  


United Kingdom
The UK election campaign grinds on with all pointers indicating that the ruling Conservatives will retain power with an increased majority. After last week’s downgrade of growth by the BoE, UK markets have generally shrugged off this effect and the week has opened with the GBP back over 1.2900 against the USD and the equity markets rallying with the FTSE 100 at a new record high fuelled by a bounce in mining and oil stocks. This week will see the release of inflation data and April employment figures and it appears that the market is in wait-and-see mode ahead of this data, if good,, a push back over resistance at 1.2960 is likely towards GBP/USD 1.3000 a break of this level would trigger stops and see an extension to 1.30600 region. Conversely a fall below 1.2900 would target 1.2865.  


Europe
Not much data out for the Eurozone this week, apart from Q1 GDP figures tonight and ECB meeting minutes on Thursday so attention is swinging back to election activity and the retreating of political risk.  Germany is currently the focus with the success of Angela Merkel’s party in North Rhine-Westphalia would be positive for the Euro, as the chance that Merkel will retain her chancellorship should give the Euro and the Eurozone a confidence boost. A report published by the German economic ministry, out yesterday, struck an upbeat note. It commented that employment levels were continuing to rise, order levels in the industrial sector remained strong, the construction sector upturn remained solid, all pointing to solid economic growth over the next 3 months. The result of the French election looks to have been the turning point for the EUR as political risk in the Eurozone fades and turmoil in the US administration starts to affect the US fiscal agenda bringing a weaker tone to the USD.  The EUR/USD has traded up as high as 1.0988 over the last few days, is now at 1.0984 with a break of the 1.1020 level extending to 1.1060.


Japan
The Japanese Yen initially pushed through 113.80 after the weekly open but was soon back at 113.30 with risk appetite driving market movements. Japanese Producer figures posted a gain of 2.1% against the estimated 1.8% Monday showing improvement in 10 straight releases but oddly yen failed to respond. GDP numbers are released Thursday along with a slew of Japanese earnings. Support is still at 113.00 with short term resistance 114.00.


Canada
The Canadian Dollar continues to strengthen across the board pushing off highs against the US Dollar on the weekly open to trade back at 1.3600 Monday. Risk has been to the upside during US trading sessions, with oil bouncing off the lows to trade back close to 50.00 per barrel based on discussions to cut global supply. The Canadian Dollar has taken advantage of risk appetite making a move towards 1.3550. Downside risk stands at 1.3520 with resistance at 1.3780 coming into Manufacturing Sales Thursday with Core monthly CPI later in the week.


Major Announcements
•    RBNZ leave rate unchanged at 1.75%
•    UK Manufacturing Production -0.6% vs -0.2% expected
•    Bank of England leaves rate unchanged at 0.25%
•    USD PPI 0.5% vs 0.2% expected
•    US CPI 0.2% vs 0.3% expected
•    US Core Retail Sales 0.3% vs 0.5% expected
•    NZ Retail Sales 1.5% vs 1.1% expected
•    Chinese Industrial Production 6.5% vs 7.0% expected
 

Economies of Note - 12th May 2017

Written by Howard Wilcox on May 12th, 2017.      0 comments

4:10pm(NZT)
Australia
As we expected there was little discernible market reaction to the Australian Federal Budget, other than the reduction in banking stocks suffered as news of the new tax leaked out earlier in the day. Rating agencies will now be casting an eye over the underlying cash balance projections to see how robust these projections are, it is equally unclear how they will see the new bank tax and what it means for growth and risk. Earlier today Moody’s rating agency noted that although the budget supported their assessment of Australia’s high fiscal strength, the deficit would likely to be wider than the Australian government expects. They also commented that they believed revenues would not rise as fast as the government forecasted and that expenditure would remain higher than that budgeted. March retail sales data released earlier this week, was weaker than expected showing a 0.1% fall, against expectations of a 0.3% increase, the third decline in the last 4 months. The Australian dollar was sold off to 0.7325 the lowest level since January on the disappointing result. The AUD/USD has made a minor recovery from these lower levels over the last couple of days and is now consolidating between 0.7350/80 tone is soft as  metal prices weighing and a generally stronger US unit. The risk remains to the downside, although a move and hold above 0.7400 could signal an extension higher.


New Zealand
The New Zealand Dollar was the weakest performing currency over the last 30 hours after the RBNZ left rates unchanged at 1.75% yesterday. The NZD dropped to a 6 month low of 0.6820 soon after the release a 12 month low. The long term inflation expectations seem to be well anchored around 2% with growth remaining positive amid population spikes, household spending and construction. Property prices have slowed but may continue to rise given the demand for properties from offshore buyers and immigration still outweighs supply. NZD Currency depreciation is encouraged with further drops expected which will no doubt boost the excitement for exporters. Support now seen at 0.6650, expect the NZD do drift lower through to the weekly close.


United States
The ongoing drama that is the Trump presidency continues to make headlines. Although the firing of FBI Director Comey saw a mild sell-off in the USD, markets soon re-focused back on economic data, with April producer prices showing a gain of 0.5% against an expected 0.2% and jobless claims continuing to stay down near 40 year lows. The better data reinforces the potential for a Fed rate hike next month and saw US equity markets come off record highs, but losses were pared back towards the close of the US session  on a rise in crude oil prices  above US$48/brl. The USD has strengthened over the last few days with the EUR/USD having dropped from a 1.1013 high earlier in the week to current levels at 1.0868. April CPI figures for the US will be released later tonight which if solid may see the EUR/USD break below 1.0820 which would confirm a leg lower into the 1.0750/70 region. This view would be negated by a move and hold above 1.10.
   
                                                 
United Kingdom
UK news continues to be dominated by the upcoming general election. The ruling Conservative party of Theresa may received a boost over the last few days as the Labour Party manifesto was leaked. It showed a far more socialist based policy than expected and according to some economists  Labour's plans for borrowing and tax rises will only raise GBP 60 billion, leaving a huge GBP 30 bio  gap in their  spending plans. The Bank of England was expected to forecast steady economic growth over the year ahead showing GDP bouncing back from a slow start to the year, upgrading growth and inflation expectations, in last night's inflation report. Instead, the BoE lowered its 2017 GDP forecast to 1.9% from 2% and attributed the entire recent pickup in inflation to the weak currency. Governor Carney focused on the weakness of household spending and GDP and emphasized that domestic costs and wages remain subdued. He indicated that while wage growth would most likely accelerate, the pickup is not expected to be exceptionally fast. However immediate losses in the GBP were limited as aside from their expectations for stronger wage growth, they also expect the output gap to close in time and for global demand to support trade activity. This may lead to a tightening in U.K. policy, more than the yield curve implies.  With that in mind, the BoE’s forecasts are based on a rate increase by Q4 of 2019. So while the central bank sees the improvements in the economy, they don't want to sound overly optimistic because everything hinges on a smooth Brexit.   On the more dovish BoE report and softer March industrial production data , the GBP/USD fell to 1.2848, the week low, overnight but has now recovered to the 1.28890 level  but resistance around 1.3000 looks solid and 1.2830 provides support on the downside.


Europe
With election fever at rest, until least until next month's French legislature elections, focus is back on things economic. Data on the whole continues to be EUR supportive with tonight bringing release of German GDP for Q1 and April inflation figures. With no change yet to the ECB stimulatory monetary policy we look for the EUR to continue its downward drift against the USD, although political ructions in the US they have given some temporary disruption to this trend. Political issues aside what remains clear is that the ECB and US Fed remain on divergent tracks and with the strong likelihood of a Fed rate increase next month, this divergence is set to widen, making significant gains above 1.1000 for the EUR/USD increasingly tougher.  


Japan
The Japanese Yen has come off its high of 114.35 Thursday posting losses after the North Korean ambassador to the UK said the country will proceed with its sixth nuclear test. The Japanese current account surplus fell to JPY 1.73 trillion, short of the estimate of JPY 1.75 trillion. It’s been a rough couple of weeks for the Yen with only one day in positive territory against the US dollar. The firing of the FBI Director Comey earlier in the week dropped the US Dollar out of favor, the yen rallying back below 113.70 before settling at 114.00. Limited Japanese data published next week with emphasis on US CPI and Retail figures tomorrow for further direction. 115.00 resistance and 108.00 support.


Canada
The Canadian Dollar traded through to a high of 1.3770 Thursday but has since settled around 1.3700 levels. Risk was to the downside with the Toronto Stock Exchange closing down almost 1% and Moody’s downgrade of the Baseline Credit Assessments and Counterparty Risk Assessments. This was the reflection of a more challenging environment for Canadian banks to the end of this year. Oil is back up above 47.00 per barrel also pushing the CAD lower. Locally we have Canadian Manufacturing monthly sales figures, based on recent month’s weak figures we may see the trend continue. Technically the CAD is still locked into the channel from the low of 1.2430 and may test 1.40 the figure.


 
 

FX Update: Europe breathes a sigh of relief after Macron’s win

Written by Howard Wilcox on May 9th, 2017.      0 comments

8:45pm(NZT)
Overview
There was an air of general relief by financial markets, with geopolitical risks easing, as polls for once were proved correct and the French Presidential election was won by centrist, pro-business, pro-European Emmanuel Macron in a convincing manner. Although this result was somewhat built into pricing, there was a rally in the EUR on Monday, but this was short lived as attention focused on whether Macron and his fledgling En Marche movement will be able to win a majority in the legislative elections in June. If he does not, this will limit any reforms that he has proposed to make the French economy more efficient and lower unemployment, curtailing his effectiveness as President. Other positive news was that the US Non-farm employment figures on Friday showed that the US economy was continuing its forward momentum, with an increase of 211k jobs for April, above expectations of 185K. The unemployment rate also had another drop to 4.4% a decade low. The chances of another Fed rate hike in June now appear stronger.


Australia
Today the main event will be the Australian Federal budget which is expected to show a 2017/18 deficit of around $27.7 bln and nominal GDP growth for the same period to be upgraded by 0.5% to 4.25% due to more favourable near term economic factors. With the budget expected to be long on spending pledges and short on savings there is some concern that Australia’s coveted AAA rating may come under pressure as being already on negative outlook by S&P Ratings. Australia is also the only triple A rated country to have increased debt over the past three years. However we do not see the budget as a big driver of volatility as markets focus on shorter term events and many of the budget details have already been absorbed by financial markets. Chinese data still continues to hold sway over the AUD and with Iron ore prices maintaining low levels as Chinese demand stays at lower levels we continue to look for risk to remain towards the downside….0.7300 beckons.


New Zealand
The new Zealand dollar traded higher Friday after US non-farm payroll figure published at 211,000 after 194,000 was expected. The unemployment figure also was lower to 4.4% bringing risk back to the table. NZD opened the week in a less than positive mood again after falling to an 11 month low mid last week but rebounded to 0.6945 in early NY trading. The RBNZ official cash rate is announced Thursday along with the monetary money statement to follow, markets have factored in no change but governor Graeme Wheeler may signal rate hikes earlier than 2019. A head and shoulder pattern is emerging showing the kiwi may continue through to 0.7000-0.7050 resistance.


United States
Solid payrolls figure of 211K jobs for April along with a drop to 4.4% in the unemployment rate shows that the economy continues to head down the recovery road. Although there are some soft spots, inflation and retail sales data will be among indicators to watch this week as well as April’s consumer price report which may show inflation cooling from a year earlier. We are still of the view that an interest rate hike is likely next month as it continues to look as if economic weakness in Q1 was transitory and the outlook is more positive. With political concerns reduced after the French election and the North Korean situation slightly less frenzied, investor focus can now shift back to reading the global economy for fresh signs that global growth is accelerating after better-than-forecast data on American jobs. US equity markets opened slightly lower, retracing from highs the previous week as the market seeks direction. With some of Trump’s key policies looking increasingly diluted and therefore unlikely to provide immediate USD support, the main driver of support will reside with the Fed and any signals it gives on the timing of reducing their balance sheet which expanded rapidly with quantitative easing. While the US economy continues to recover at faster rate than that of Europe, the French election result has shifted levels in the EUR/USD and we look for moves above the 1.10 level over the next month or so than tests of support at 1.7500 and below.

                                                    
United Kingdom
Sold results for the ruling Conservative party in the local elections, where they gained over 125 new seats. Polls now show the incumbent government led by Prime Minister Therese May seems to be on her way to an easy victory in the snap election that will be held on June 8. A recent poll by the Guardian newspaper revealed that May's Conservative Party is seen coming on top with 49% of the votes, 22 points ahead of the Labour party. This has helped the GBP move higher over the last few days, against the USD and most of its trading partners. However economic growth has been softer than anticipated in Q1, weighed down by softening in the service sector which suggests that consumer spending started the year on a weaker note. Also, CPI inflation has started to pick up, helped by the rebound in energy prices, and core CPI has moved higher as well. This increase in prices has started to erode real income growth and reduced growth in consumer spending, which is expected to continue to provide challenges ahead for the U.K. economy. There is a Bank of England’s meeting next week, but we expect the Monetary Policy Committee (MPC) to keep its bank rate unchanged at 0.25% and remain on hold through 2017 due to the slowing growth and rising inflationary pressures the economy is facing. Currently the GBP/USD is trading around 1.2947. 1.3000 provides the next resistance level but a break above this level would see 1.3050/55.


Europe
Project Europe got to live another day, breathing a collective sigh of relief on the French election result. A muted relief rally in EUR crosses finally sent EUR/USD above 1.10 following the election result. The Macron win should dampen Eurosceptic risks to the single currency for a while and thus help to sustain the move higher in ranges for EUR/USD in particular seen recently. With euro-area political risks now side-lined for a while, focus should return to the fact that Europe is looking surprisingly good cyclically, which will most likely lead the ECB to be somewhat hawkish in terms of communication on policy rates in June, i.e. remove the possibility for rates to go lower.


Japan
The Japanese Yen dropped to 113.30 early Monday to its worst level in 3 weeks as it continues to drift weaker against the US Dollar. Non -Farm payroll Friday boosted US fortunes with lower unemployment and broader nervousness for risk. The Nikkei is trading up over 2.3% to 19,895 and should boost yen selling if this continues. We have seen a bullish breakout through support of 112.50 suggesting the previous high of 115.00 of 10 March 2017 could be tested. Japan heads into a quiet week with economic data being thin locally and no significant data to be released to the markets.


Canada
The Canadian Dollar has opened on the back foot again after a stronger than expected unemployment figures out Friday in the US. The US Dollar was also boosted by investors taking profit on EUR positions after Macron won the presidency race in France, the CAD pushing aside 1.3700. Oil prices recovered slightly but have failed to create further buying interest in the Canadian Dollar after further falls this morning. Signs of further slowing economic growth are evident as the CAD remains sensitive to oil prices and housing pressures. The bullish channel towards 1.40 remains with building permits data released tomorrow.


Major Announcements last week:
•    NZ Employment Change 1.2% vs 0.8% expected
•    NZ Unemployment 4.9% vs 5.1% expected
•    UK Construction PMI 53.1 vs 52.1 expected
•    US ISM Non-Manufacturing PMI 57.5 vs 56.1 expected
•    FOMC leaves rates unchanged
•    UK Services PMI 55.8 vs 54.6 expected
•    Canadian Trade Balance -0.1b vs 0.3b expected
•    NZ inflation expectations 2.2%
•    Canadian employment change 3.2k vs 20k expected
•    US Non-farm Payrolls Change 211k vs 194k expected
•    Australian Retail Sales -0.1% vs 0.3% expected

 
 

Economies of Note - 5th May 2017

Written by Howard Wilcox on May 5th, 2017.      0 comments

3:45pm(NZT)
Australia
As expected the RBA left rates on hold at its Tuesday meeting. Rates have remained at a record low 1.5% since last August. Economic data continues to be mixed with unemployment stubbornly high at 5.9%, retail spending weaker and inflation remaining at near record lows. In a speech presented yesterday by the RBA Governor he commented that the key risk to the economy from any fall in house prices or rising interest rates, is what might happen to consumer spending. He warned that the  nation's plunge into record levels of debt and the associated property boom had created a new breed of risk which may lead to a sharp contraction in consumer spending should any property correction occur with a potential for flow on effects to other sectors of the economy. Overnight the AUD traded down close to 4 month lows, as commodity prices took a tumble with both iron ore and copper substantially lower and also undermined by weaker Chinese data.
The RBA will release SoMP (Statement on Monetary Policy) later this afternoon, but we expect little room for surprise on that front. Support is around current levels 0.7380/0.7400 with the potential for a good US payroll figure to drive the AUD down towards 0.7330.


New Zealand
The New Zealand Dollar pushed to a monthly high of 0.6970 Wednesday after data was released showing the unemployment rate dropping to 4.9% the equal lowest level since Feb 2009. A raft of positive US data followed, ISM Manufacturing published at 57.5 showing further expansion and the kiwi started to slide. US Federal Reserve rate decision came in unchanged at 1% yesterday the highlight being a possible hike in the June 15 announcement now 96% likely. The New Zealand Dollar fall all the way to my previously published support level of 0.6850 but looks likely to break lower in the near term with quarterly inflation expectations this afternoon and RBNZ cash rate announcement due next week probably to remain unchanged.


United States
As expected the US Fed kept rates on hold at its Wednesday meeting, downplaying the weaker first quarter economic growth while emphasising the stronger labour market in a sign that suggests there may be another rate hike as early as June. The statement was seen as bullish with the Fed commenting that consumer spending continued to be solid, business investment had firmed and inflation was running close to the Fed’s target. These factors outweighing sluggish GDP growth of 0.7% as consumer spending almost stalled for Q1 and slower job growth in march.
Also of note was that prior to the meeting most Fed policymakers had made it clear that unlike previous years the central bank was more confident of its forecasts for two more rate increases in 2017. As always, tonight's Non-Farm payroll data will be closely watched, with expectations for an increase of around 190K jobs for April and the jobless rate to edge up slightly, but remaining at levels that the Fed considers to be at or near full employment. Now that the Trump healthcare bill has finally passed Congress (it still faces a battle in the Senate) attention will turn back to the tax changes and some clarity around the size and scope of tax cuts, infrastructure spending and regulatory changes that the Trump administration will be able to push through Congress. Any successful stimulus package should speed up the pace of interest rate hikes. Overnight crude oil prices hit a 6 month low erasing gains sparked by OPEC’s November output agreement, as concerns over a supply glut mounted. Earnings kept U.S. stocks afloat, while Treasuries slid with the USD.

                                                    
United Kingdom
Although politics still dominates the UK headlines, new data out this week showed that although there was a small negative blip early in Q1, the UK economy is bouncing back with the expected slowdown failing to materialise. PMI (purchasing manager’s index) data for April, showed an increase to 55.8 with the dominant services sector grew last month at its fastest pace so far this year and outpacing much of the growth seen in 2016. Also positive was a pick-up in pace of manufacturing and construction in April, taking the combined PMI score to 56, also its highest level this year. For the economy as a whole, the employment index is at its joint-highest level since the start of 2016, as factories and building firms take on more staff. However this good news is tempered by price pressures that are squeezing household spending power and if this continues could threaten a slowdown later in the year. The GBP has maintained its strength over the last few days and extended its gains to a fresh daily high at 1.2924 against the USD. It looks to be in a consolidation phase, trading around a tight channel around 1.2920 and we expect little change ahead of tonight’s USD employment data.


Europe
It seems growth in the Eurozone picked up again as Italy and Spain joined the surging output seen in France and Germany. The Eurozone’s composite PMI - combining services and manufacturing - hit 56.8 last month, a fresh six-year high. Ireland led the way with an index score of 58.7, a three-month high, while Spain’s 57.3 represents the fastest expansion in almost two years, and Italy’s 56.8 indicates it is growing at the most rapid rate since 2008. After showing some encouraging signs following the FOMC statement yesterday, the USD suffered heavy losses against the EUR overnight. Investors seem to be taking advantage of the weak USD environment to increase their long EUR positions in anticipation of a Macron victory in this weekend's final round of French presidential election. According to the latest poll released by IFOP, pro-EU Macron is seen beating Le Pen to become the next president of France by 61% to 39%.Additionally, participants will keep an eye on crude oil prices, which dropped nearly 5% last night  and weighed on other commodities as well. The euro could gather further strength against the USD if the equity indexes react negatively to weak commodity prices.


Japan
The Japanese yen pushed through 112.00 USD yesterday on its way to 113.00 a 7 week high before falling back to 112.00 during late NY. The JPY has been declining since the beginning of the year. With the risk on rally in European equities and US Treasury yields this has boosted Investment interest in the USD Dollar this week amid slower than usual trade volumes because of Japan public holidays. With resistance at 112.50 I would expect the continuation of the bearish channel towards 108.00 the prior low of mid -April. Look for non-Farm Payroll early tomorrow for volatility with very little Japanese data next week.  


Canada
The Canadian Dollar has shown little resistance this week after USD support saw the pair trade to 1.3770 a 15 month high. Focus over the past day has been over the federal Reserve decision to leave interest rates on hold with speculation a rise in June seems almost inevitable. The CAD drifted back to 1.3600 after the Fed announcement and was short lived pushing past 1.3700. The drop in metal prices hit the Canadian Stock market mid- week, oil also added to CAD pressure trading down 4 cents lower this week to 45.50. Early this morning BOC governor Poloz spoke about geopolitical risks to the Canadian economy her outlook failed to affect the Canadian markets, trade figures however were positive and boosted the CAD momentarily. Canadian unemployment rate is announced early tomorrow expect around 6.7% preceding this US Non-farm payroll figures. 1.4000 still looks on the cards.

 
 

FX Update - NZ data this week should support the Kiwi dollar

Written by Howard Wilcox on May 2nd, 2017.      0 comments

4:30pm(NZT)
Overview
Geopolitical risks continue to outweigh economic factors as market drivers, with the French elections, North Korea and US political machinations all contribution to the mix. The final poll for the French Presidency will be this Sunday and although the centrist candidate Macron is now expected to win, there remain a large number of undecided votes and right wing, anti-Euro Marine LePen has run a solid campaign. Look for choppy European markets in the run-up to the weekend. We have continued to see softer US economic data over the last week and this gives weight to the argument that the health of the economy may have been overstated and that without bigger gains in productivity or labour force participation real GDP growth may only be marginally over the 2% level.  US Non-farm figures on Friday may clarify this. Expectations are for an increase of around 180K new jobs for April. Later tonight March unemployment data for the Eurozone will be released, expectations are for the improving trend to continue with a drop from 9.5% last month to 9.4%, after a confidence survey last week indicated firms had increased their employment expectations. The RBA policy decision later this afternoon is expected to keep interest rates on hold, with previous minutes indicating that the RBA’s attention remains on  labour and housing markets, stronger job gains in March have strengthened the Bank’s “on hold” view. For NZ, tonight’s GDT dairy auction should result in higher prices according to the dairy futures market.


Australia
Market focus is on the RBA statement later this afternoon, and although an “on hold” outcome is widely forecast the market will be looking for any change of view on the domestic economy given the stronger employment data last month and whether the RBA provides any new views on the exploding housing market. The better manufacturing activity reported for April saw the AUD recover back over the 0.7500 level against the USD yesterday and it has managed to hang onto gains currently around 0.7540. However, given an “on hold” decision by the RBA the path for the AUD is likely to see a continuation of the weakness seen over the last week as monetary policy diverges from that of the US Fed Reserve and more general economic data remains soft.


New Zealand
The New Zealand dollar continued to drop in value late last week falling to a low of 0.6850 and closing the week out just shy of 200 points lower. Monday US personal spending and personal income date came out better than expected but PMI and construction spending was disappointing, this kept the kiwi bid pushing back above 0.6900. With the NZ dollar seen as a commodity currency we may see further weakness with speculation around the US government imposing restrictions on imported products into the United States, this may indicate tighter restrictions on NZ businesses exporting products. Tomorrow we have local employment figures to be released with expectations around the unemployment rate to be around 5.1%. Friday sees quarterly inflation expectations. Short term support 0.6850 and resistance 0.7060


United States
Politics continue to dominate the US markets with inaction continuing around the position of tax cuts, infrastructure spending, health care changes, trade agreements and of course that key Trump policy piece, “the wall”. Given all these uncertainties however US equity markets continue to hold firm and last night saw technology stocks make new highs amid optimism over corporate results, while major indexes ended mixed on tepid economic data and comments by President Donald Trump on banking structure. Markets also were jumpy after Trump’s interview with Bloomberg, as he suggested raising the gasoline tax to fund infrastructure and reintroducing rules that keep commercial and investment banking operations separate. Overall however the US economy appears to be continuing to recover and the Fed appears still to be on course for another rate hike at its June meeting. This expectation should continue to underpin longer term USD strength against most of its trading partners.  
 
                                                       
United Kingdom
The UK markets continue to be focused on the dual issues of the General election on June 8th and the frayed relationship with the EU as Brexit negotiations start to ramp up. These political fundamentals have been to the fore over the last few days, with a disputed version of the meeting held between PM May and EU Commission president Juncker last week. Brexit headlines will be moving the pound and cross from here on. The German press reported that Juncker told Chancellor Merkel that May showed no willingness to compromise and had “unrealistic expectations” about how Brexit negotiations would proceed. However, PM May’s office said it did not “recognize” this account of the meeting which it said were “constructive”. Look for more of these ‘fun & games” after the election when negotiations will begin in earnest. The GBP has risen substantially since the election was announced, on the assumption that the incumbent Conservative government will be re-elected with an increased majority and hence make Brexit negotiations more straightforward. Also helping the stronger GBP is the better performance of the UK economy, with figures out last week showing a fall in the UK deficit to 2.6% of GDP,  levels last seen at the start of the financial crisis in 2008. We remain positive on the GBP economic fundamentals dominate over its Eurozone neighbours.


Europe
All about the French elections this Sunday, the outcome of which will cement  the foundations for the EU, for the meanwhile that is, on a Macron win and is essential for stability in markets. The current polls are around 61% to 39% in favour of Macron. ...The EUR has enjoyed a solid rally after the results of the first poll and this has been helped by economic statistics showing better results across several of the Eurozone regions….The ECB kept rates on hold at last week's meeting….but more positive results are expected for the Euro area flash Q1 GDP (Wednesday): look for the first reading of euro area Q1 GDP to climb 0.6% q-o-q from 0.5% q-o-q in Q4. Domestic consumption is expected to maintain its recent strong momentum and exports to recover. If regional growth data continue to improve, we may not have to wait too long before the ECB indicates a change in its policy stance. We expect the ECB to announce a tapering of the QE programme at the September meeting for enactment at the start of next year….this should limit EUR downside.


Japan
The Japanese yen has shown broad weakness over the past week pushing through the 111.50 resistance level against the USD on Monday. Japanese Final Manufacturing PMI published weaker than expected at 52.7 yesterday adding to the slide- weakening further the past 5 out of 6 trading days. JPY Movement this week will be limited to US action as Japan have holidays Wednesday and Thursday this week with no major data announcements. Technically we see lower highs and lower lows based on the high of 118.50 and at 108.20 low showing the overall bearish trend is still in place. We have large resistance at 112.00 based on the 50% move of the recent high of 115.40 and the low of 108.40 suggesting JPY may make a potential reversal push back towards the low of 108.00


Canada
The Canadian dollar continues to loose support as it continues to trade above key level of 1.3650 to a 15 month low. Monday saw stronger manufacturing data released giving the CAD a boost but this was only temporary. With Oil prices still low down this week around 1% to 48.70 this continues to put strain on the Canadian Dollar as it has depreciated over 4 cents since mid- April. Later this week we have Trade Balance figures releasing which may give the CAD some much needed support leading into Bank of Canada Governor Polaz talks on Friday. On the chart we have very thin air post 1.3700 through to the previous high of 1.4650 of January 2016, unless we see a shift we may see 1.40 come into play.


Major Announcements
•    US Consumer Confidence 120.3 vs 123.7 expected
•    Australian CPI 0.5% vs 0.6% expected
•    Canadian Core Retail Sales -0.1% vs -0.2% expected
•    Bank of Japan leaves rates unchanged at -0.10%
•    ECB leave rates unchanged at 0.00%
•    US Core Durable Goods Orders -0.2% vs 0.4% expected
•    UK GDP 0.3% vs 0.4% expected
•    Canadian GDP 0.0% vs 0.1% expected
•    US GDP 0.7% vs 1.3% expected
•    US ISM 54.8 vs 56.6 expected
 

Economies of Note - 21st April 2017

Written by Ian Dobbs on April 21st, 2017.      0 comments

11:30AM(NZT)
Australia
The main focus this week in Australia was the release of the RBA’s minutes from its last meeting. The minutes were somewhat downbeat and they weighed on the Australian dollar to a degree. The central bank is concerned about the growth in housing credit that continues to outpace growth in household incomes. They are also worried that strength in labour market forward indicators doesn’t seem to be leading to an improvement in actual labour market conditions. The Australian dollar has also seen some pressure as the broader commodity complex has weakened in the second half of this week. Oil and gold have led the declines. Yesterday’s Quarterly Business Confidence number came in unchanged at 6 and had little impact on the currency. Next week the focus shifts to Wednesday’s inflation data.


New Zealand
A couple of positive results boosted the New Zealand dollar this week. The first was the dairy auction on Tuesday night that showed prices increases 3.1%. That marks the third rise in a row. Then yesterday we saw inflation for the March quarter come in much stronger than forecast. Quarter on quarter inflation jumped 1.0%, up from 0.4% prior. The market was expecting a strong result of 0.8%, but the actual outcome was even a step higher than that. Year on year inflation is now running at 2.2% which is the strongest in five years. The Reserve Bank of NZ was forecasting yearly inflation to only be running at 1.5%, so this is a big increase over that. The potential for a stronger result was always there and this one number shouldn’t get the central bank overly concerned, but if we were to see inflation stay strong over the coming months the bank’s current neutral policy setting may get closely looked at. The New Zealand dollar jumped higher in the wake of the data, although overnight it’s given back much of those gains. Next week we have mostly second tier data in the form of building consents, the trade balance and visitor arrivals.


United States
We have seen more mixed data from the United States this week along with plenty of comments from Fed officials. Industrial production and building permits were stronger than forecast while housing starts and capacity utilization disappointed. The Fed’s Beige Book was released yesterday morning and it suggested the economy continues to grow at a moderate pace. It also said prices rose modestly and wage hikes broadened. All in all it was largely supportive the Fed’s current stance which is that of very gradual interest rate increases. The Fed’s George said the US economy was on a solid footing, while Rosengren suggested the Fed could start shrinking its balance sheet ‘relatively soon’. He is however advocating only shedding a very small amount of maturing bonds, and not simply letting all maturities roll off. Next week's highlights will be durable goods orders and advance GDP.

                                                       
United Kingdom
The UK Pound has had a very strong week surging higher in the wake of PM May’s announcement of a snap election. That's not the sort of reaction we would normally see in a currency with the uncertainty of a surprise election now to deal with. But there are a couple of special reasons why the GBP has made significant ground. Firstly, it seems the market believes that PM May will gain a significant majority in the election and end up with an even stronger mandate. This is positive for PM May and her ability to negotiate with the EU in terms of their divorce. Secondly, over the past month or so we have seen a record short (sold) speculative position build up in the GBP. The move higher in the wake of May’s announcement was the trigger for a big short squeeze which will have cleaned out some of those speculative sold positions. It seems Brexit talks with the EU will now start sometime after the June 8 election. Next week we have GDP data to draw focus along with a number of second tier releases.


Europe
There hasn’t been much in the way of market moving data released from the Eurozone this week. Inflation for March came in bang on expectation at 1.5% and it therefore had little market impact. The ECB’s Hansson said inflation is jumpy and it’s too early to claim victory. He added it’s also too early to have a discussion on ECB policy. The German finance ministry seems to disagree saying Eurozone growth and inflation could encourage the ECB to start to normalise policy. The ECB has their regulate interest rate meeting late next week so we should get some further clarity on the issue. Tonight we get manufacturing and service sector PMI’s from both France and Germany to digest. The French Presidential Elections kick off on Sunday with the first round of voting. The two top candidates then go through to a second round of voting on May 7th. This looks to be one of the closest, and toughest to predict, French elections in decades. A key concern for the Euro will be how much support the far right candidate Marine Le Pen garners. If she makes it to the second round carrying some real momentum from this initial vote, the EUR will come under pressure.


Japan
Japanese trade data yesterday showed exports rose at the fastest pace since January 2015. March exports were up 12.0%, much stronger than the forecasted rise of 6.2%. Imports were also up strongly and the overall trade balance came in at 614.7bn Yen, vs expectation of 608.0bn Yen. The Japanese finance minister said improvements in the economy make a tax hike more feasible. The country had planned to raise its sale tax from 8% to 10% in October 2015, but then ended up delaying it and at this stage it’s set for 2019. Next week we have the Bank of Japan Monetary Policy Statement to digest on Thursday afternoon.


Canada
Foreign investment in Canadian securities hit a record high in February driven by cross-border acquisitions and mergers. Foreign Securities Purchases totalled 38.84bn up from just 6.35b prior and much strong than anyone had forecast. The Canadian housing market is also performing strongly with the MLS Home Price Index rising by a record 18.6% year on year. Most of those gains are driven by what’s going on in and around Toronto however, with other regions showing much slower growth. Weaker oil prices over recent days have pressured the Canadian dollar to a degree and tonight release of inflation data may well also impact. The market is looking for a month on month result of 0.4%, up from 0.2% prior. Next week we have retails sales and GDP numbers to draw focus.

 
 

FX Update: Geopolitical concerns continue to be the main market mover

Written by Ian Dobbs on April 19th, 2017.      0 comments

6:00am(NZT)
Market Overview:
Geopolitical concerns have been front and centre over the past week with Trump’s unleashing of the military in Syria and Afghanistan coinciding with heightened tensions around North Korea. US relations with Russia are also at a low point, despite the media having suggested to everyone for the past 3 or 4 months that Trumps some sort of Russian stooge! It seems the one thing Trump really is, is unpredictable and that should see risk aversion remain heightened to a degree. We also have the French elections looming large and the potential for some real volatility in the EUR if Le Pen comes out ahead in the first round of voting.


Australia
Australia produced some very strong employment numbers last Thursday which were much better than forecast. They were in fact so strong as to raise a few eyebrows as to the accuracy of the data. Employment change for March came in at +60.9k vs expectation of +20.0k. Full time employment was up a whopping 74.5k, with part time jobs down 13.6k.The unemployment rate remained unchanged at 5.9%. In recent years the Australian Statistics Bureau has had issues with employment numbers and these latest results would suggest things may still be somewhat amiss. The best approach is to look at the 3 month average to as to eliminate the monthly swings. That all being said, the data is very supportive of the economy going forward and it certainly boosted the Australian dollar in the latter stages of the week. Also on Thursday the RBA release their Financial Stability Review. In it they mentioned that vulnerabilities in housing and household debt have increased. They say those risks are more to the economic outlook than to financial institutions and that regulators are carefully watching bank lending and are ready to tighten rules further if needed.


New Zealand
Last week was a very quiet one in terms of economic data from New Zealand. We had the Business NZ Manufacturing Index which came in at 57.8, up from 55.7 prior. The impact on the currency was negligible. This week should prove a little more interesting with a dairy auction tonight and then inflation data tomorrow to draw focus. The New Zealand dollar has largely been driven by offshore events recently with swings in risk sentiment, geopolitical concerns and broad movements in the USD dominating. We expect more of the same over the coming weeks.


United States
The United States saw a mixed bag of data last week along with some Trump comments that added volatility. Positive data results were seen from weekly jobless claims, and consumer sentiment while retail sales and inflation data came in weaker than forecast. There has been a notable divergence in recent months with ‘soft data’ such as confidence surveys etc coming in strongly, while ‘hard data’ like retail sales, durable goods orders etc, largely disappointing. At some stage the soft and hard data will have to converge. Either confidence surveys will come back to economic reality, or the hard data will pick up to support the high levels of optimism. Our feeling is that the soft data is more likely to correct lower, but time will tell. Late last week President Trump caused the USD to come under pressure after he made comments that the USD was too strong and the he like low interest rate policies. The USD lost significant ground across the board. At this stage it’s just Trump making comments, but if the US actually moved away from the official “strong dollar” policy which has existed for a generation, the impact would much greater. So far there’s no indication of this but it’s something to be wary of.


Europe
Data out of Europe has been showing signs of improvement recently and that continued last week with better than expected outcomes for German ZEW Economic Sentiment and Italian Industrial Production. Unfortunately political uncertainty is going to limit any EUR gains for the time being. We have the French election kicking off next week with the first round of voting. The polls are tight and any combination of candidates could make it through to the second round in May. There is also a very large amount of undecided voters, around 30%, and they will prove key. As was the case with the US election, it may well be that many of those voters are simply too embarrassed to admit to pollsters that they are going to vote for the candidate the media like to attack, in this case Marine Le Pen. If that’s the case, her support could be significantly better than the polls suggest. The undercurrents that drove the Brexit vote and Trumps win in the US election are all prevalent in France. But added to this France, more than any other country, has suffered numerous devastating terrorist attacks over the past few years and that has help to drive Le Pen’s candidacy. She’s anti the Euro so if she does surprise with a win, the entire Euro project will start to look very shaky. Germany's Schaeuble said last week that if Le Pen and Melenchon were the finalists for the second round, it would be a ‘nightmare’. I would say there’s a very good chance this will in fact be the case.


United Kingdom
Data from the United Kingdom continues to suggest the UK economy is taking the whole Brext uncertainty thing in its stride. Last year there was talk that the economy would be in recession by now, but nothing could be further from the truth. The unemployment rate is currently at a very healthy 4.7%, inflation is running at 2.3% and even wage data is showing signs of strength. Uncertainty about how Brexit negotiations with the EU will go are obviously keep the GBP under some pressure, but the current economic data doesn’t support a dramatically weaker GBP. This week we have a speech from Bank of England Governor Carney to digest along with the latest retail sales figures.


Japan
The Japanese Yen has been strengthening lately driven by in part by risk aversion as the geopolitical situation creates nervousness. Economic data has also been reasonably supportive and late last week we saw Industrial Production revised up to +3.2% from 2.0% prior. This week we have the trade balance, manufacturing PMI and Tertiary Industry Activity data to digest. Expect the Yen to remain broadly supported as the geopolitical situation remains front and centre in terms of near term risks.


Canada
The bank of Canada had their rate meeting last week and they chose to leave interest rates unchanged at 0.50%. They did however boost their growth forecasts acknowledging that economic data has generally been stronger than expected. Governor Poloz did stress however that there is a lot of uncertainty and that’s it’s too soon to make any conclusion on interest rates. Declining oil prices have kept a lid on any potential CAD strength and we see that continuing over the coming week. In terms of economic data to keep an eye on we have inflation numbers on Friday. The market is expecting an uptick to 0.4% from the prior month's reading of 0.2%.


Major Announcements last week:
• UK Claimant Count Change +25.5k vs -10.2k expected
• UK Average Earnings Index +2.3% vs 2.1% expected
• BoC leaves interest rates unchanged at 0.5%
• Australian Employment Change 60.9k vs 20.3k expected
• Australian Unemployment rate 5.9% as expected
• Chinese Trade Balance 164b vs 76b expected
• Canadian Manufacturing Sales -0.2% vs -0.4% expected
• US UoM Consumer Sentiment 98.0 vs 97.1 expected
• US Inflation -0.3% vs 0.0% expected
• US Retail Sales -0.2% vs 0.1% expected
 

FX Update: Geopolitical concerns draw focus

Written by Howard Wilcox on April 11th, 2017.      0 comments

4:10pm(NZT)
Overview
The current main market theme continues to centre around a more risk averse sentiment, as tensions remain heightened around the Korean peninsula and Syrian situations. Last week’s missile strike against Syria saw a spike in the gold price and a flight to safe-haven assets and although these values remain higher, markets have now switched to a more reflective mood as they try to look at the longer term ramifications. The Tump/Xi summit appears to have gone well with no major immediate problems around the trade issue and with agreement to start cabinet-level talks between the two countries with an aim to reach a trade agreement in 100 days. We suspect that most of the talk centred around North Korea and how this could be diffused by more action by China and with a Chinese envoy heading to Korea this week this action may already be underway. Perhaps of more concern is the hardening of attitude over Russia and its continuing support of the Assad regime in Syria. With the US Secretary of State heading to Russia later this week and confusing signals coming from the US over its objectives on Syria, expect markets to remain volatile with sentiment favouring risk-off trades. The major economic news last week was the release of the US March Non-farm payroll data. This was lower than expected at 98,000 new jobs for March, but what was encouraging was a drop in the unemployment rate from 4.7% to 4.5% the lowest level in 10 years. The Fed won’t react to one month’s data, but next month’s NFP will be important as it will give a pointer to whether or not a rate rise is likely for June. The current market view is that there will be two more rate increases by year end.


Australia
Australian data continues to disappoint with the AIG performance of construction index easing to 51.2 in March from previous 53.1. This combined with a slide in base metals causing the AUD/USD slide from 0.7550 at the end of last week to its current level around 0.7505. The jobs data due on Thursday could add to the RBA’s problems if it continues to show a weakness in the labour market. With the housing market still on fire and calls for rates to at least stay on hold while ASIC and APRA try to cool housing demand, if data shows rising underemployment and weak wages growth the RBA will be in a dilemma. Continued weak employment data will also weigh on consumer confidence over the next few months and allied to any moderation in housing prices will adversely affect consumer confidence making the RBA’s job even more complex. We remain negative on the AUD and expect support at 0.7500 to break opening the way for a move to the 0.7450 level followed then by 0.7410. A move and hold over 0.7530 would negate this view but we consider this unlikely over the short term.


New Zealand
The New Zealand dollar closed lower last week down 80 points on the open to 0.6930 levels. Non- farm payrolls promised a “risk off” market when figures were disappointing at 98k dropping the value of the New Zealand dollar and sending it comfortably through support at 0.6950 to a low of 0.6930. This week we have seen a softening in retail sales figures falling 0.3% which has raised concerns locally with the slowdown in the housing market and pressure going on for higher interest rates. Support seen at 0.6900 and 0.6850 as the bearish trend continues from the high of 0.7360 7th February. Movement later in the week for the New Zealand dollar will be largely stipulated by offshore news.


United States
US data continues to be solid, underpinning the slow but steady economic recovery. The delay of the Trump tax reform and infrastructure spending policies appears to have been largely digested by the market as the current emphasis has switched to foreign policy, given the tensions in Syria and North Korea. Demand for safe haven assets has eased as financial markets attempt to shrug off Friday’s disappointing U.S. employment figures, however the ratcheting up of geopolitical tensions and Europe’s looming test of populism (French elections) curtailed any extension of optimism. Release of corporate results may provide the next fresh catalyst, with heavyweights JPMorgan Chase & Co, Tesco Plc and Prada SpA due to release earnings reports this week. At an address for the University of Michigan, Fed Chair Yellen said that inflation is still slight below the 2% target and added that it would be appropriate to gradually raise rates if the economy continues to perform well. On the other hand, she also reiterated that she doesn't want to have to raise rates rapidly. "We think a gradual path of rate hikes will get fed to neutral policy stance", Yellen stated. "We can't wait too long to tighten", she added. We look for continuing strength for the USD as the Fed interest rate divergence from that of other central banks continues.

                                                       
United Kingdom
An increase in exports and strong demand from households have been highlighted as crucial factors driving the UK forward, and now the Organisation for Economic Co-operation and Development believes there are “tentative signs of growth gaining momentum, although uncertainty related to Brexit remains”. Also adding to the more positive tone was a survey of economists which saw an increase in 2017 growth forecasts on the basis that exports would continue to rise on the combination of a weaker GBP and a strengthening global economy. Data for CPI and PPI will be released tonight. Consumer inflation in the UK has risen above the 2% mark for the first time in more than three years in February amid the weakening GBP since Brexit. Bank of England officials have been voicing their concerns over the rising inflation, and a higher reading could provide the pair with some fresh upside momentum as the markets could start expecting a tighter monetary policy from the BoE. Despite a pullback from an overnight high at 1.2430, the GBP/USD pair continues be resilient, holding onto its daily gains above the 1.24 level. Currently the pair is at 1.2415 with immediate resistance is at 1.2460 before 1.25 (psychological level) and 1.2560 (Mar. 31 high). To the downside, supports are aligned at 1.2400 (psychological level), then 1.2360. Given the failure to break lower last week look for consolidation at current levels with a grind higher over the week.


Europe
Concerns over the French Presidential election are still to the fore, with the first round to commence on 24th April. If Marine Le Pen’s achieves support higher than 30%, we expect financial markets to be more concerned ahead of the second round. The market currently expects Emmanuel Macron and Ms Le Pen to make the final runoff, but polls may shift considerably in the final two weeks. So there is a chance of a scenario, where one of the two favourites does not make it into the final runoff. After the first round, endorsements for the two candidates from the remaining candidates may be market moving if they are for Ms Le Pen. Later this week will see Eurozone industrial production and German CPI data. Currently the EUR/USD is trading around 1.0596 vs the USD after making a new 1 month low at 1.0570 overnight. It appears to be having a tough time holding above 1.0600. The tone is weak and only if the EUR can hold above 1.0620/25 would a more sustained recovery look more likely. We favour consolidation around the 1.0570-1.0600 range, with any break of 1.0570 targeting 1.0520/25.


Japan
The Japanese Yen traded as high as 111.45 Friday despite a poor Non-Farm Employment numbers out of the US. As tensions increase in Syria after an airbase was bombed by the US we have seen the USD taper off on the lack of risk appetite to drop back to fresh lows of 110.70 Tuesday. Reports of US aircraft moving closer to the Korean peninsula have increased the nervousness through the markets. Support is now 110.30 and 110.15 with long term support still 108.30 No significant Japanese Yen news announcements this week.


Canada
Weaker than expected non-farm payroll figures printed Friday sent the Canadian Dollar to 1.3340 and back to 1.3420 closing out the week higher. Canadian House starts for March came in 253k versus 215 adding further fuel to the already inflated housing market. The Canadian dollar has been supported with higher crude oil prices trading up 1.5% early this week to 53.15 a barrel. Higher risk appetite could see the Canadian Dollar trade to 1.3300 with a break below these levels opening up prospects of further downside to 1.3180 support. Monthly manufacturing figures print Thursday.


Major Announcements (Tuesday only)
•    Canadian Trade Balance -1.0b vs 0.7b expected
•    Global Dairy Trade Price Index +1.6%
•    US ISM Non-Manufacturing PMI 55.2 vs 57.0 expected
•    UK Manufacturing Production -0.1% vs +0.3% expected
•    Canadian Employment Change 19.4k vs 5.7k expected
•    US Non-Farm Payrolls Change 98k vs 174k expected
•    US Unemployment Rate 4.5% vs 4.7% expected

 
 

Economies of Note - 7th April 2017

Written by Howard Wilcox on April 7th, 2017.      0 comments

4.50:pm(NZT)
Australia
As expected the RBA kept interest rates on hold at 1.5%, amid pressure for an increase to hold soaring house prices. However the news from the economy continues to show a weak tone as underemployment increases as commodity prices have peaked and mining investment starts to wind down. The RBA has no easy choices as increasing rates to try and dampen down housing market gains would push inflation lower and the AUD higher, thus cancelling out some of the much needed stimulus that many sectors of the economy are benefiting from. Data continues to show a softening in the labour market with wages growth remaining subdued. The AUD has drifted lower over the last few days and has now broken through support at 0.7525 to now trade around 0.7517 Next stop is 0.7500 but given a strong US jobs figure expect a deeper move towards 0.7450


New Zealand
The New Zealand Dollar struggled to hold 0.7000 midweek falling away to a 3 week low of 0.6940 before consolidating around 0.6970 area. Global dairy auctions assisted the kiwi when another positive number was published on Tuesday with a 1.6% jump in prices, this suggests the world markets have found a base which could bode well for the next season starting on 1 June. Non-Farm payroll numbers are released tomorrow morning and will define the close of the week. With ADP employment change figures midweek showing good numbers of additional people joining the US labour market the expectation is for a good result for NFP which could push the New Zealand Dollar back above 0.7000


United States
US equity markets and the USD were higher with gold also rising, in financial markets nervous ahead of the US/China meeting and increasing geopolitical tensions over North Korea and Syria. Overnight there appeared to be a clear change in US policy over Syria, as US Secretary of State Tillerson said that he did not rule out military options to respond to an attack that he said violates international agreements and norms. The ADP jobs figure on Wednesday was higher than expected, showing an additional 263K new jobs for March well above forecasts of 187K. This has lifted expectations for tonight's Non-farm payroll to around 180K new jobs for March after 235K in February with the unemployment rate to stay steady at 4.7%. We are slightly more bullish and look for a figure close to 195K. USD trading has been choppy over the last few days with the Trump administration tax reform delayed and the Fed minutes release which indicated some form of tapering may occur later in the year. The USD headed lower but then tracked back on the increase in geopolitical risks and comments from a Fed official that whilst two more rate hikes were a “sensible starting point” a 3rd maybe necessary if inflation rose further. Expect markets to consolidate over the day heading into tonight's NFP figures with any move above the 200K mark to give a good USD bounce.

                                                         
United Kingdom
More positive news from the UK economy, as data this week showed that UK productivity had increased in the final quarter of last year to surpass hourly output levels last seen before the financial crisis. Also this week PMI data showed an uptick in the services sector, rising to 55 in March, up from 53.3 in April. This raises hopes that the slowdown in the previous month could be a blip. Stronger demand from the US and other countries indicates that the lower GBP is helping exports sell more goods and services abroad. Currently the GBP is trading around the 1.2458 level, marking time ahead of tonight's US jobs data. A break of 1.2450 would target moves to 1.2420 then 1.2360, resistance is at 1.2485 the 1.2500. Given our views on a stronger US payrolls figure, the downside is favoured.


Europe
Latest opinion polls continue to show Marine LePen running second in the race to be French President, but chances of her winning in the second round remain long odds, although the “undecided” voters still remain at high levels. Yesterday ECB head Draghi warned that the Eurozone recovery was largely driven by low interest rates and it was vital that the ECB did not tighten rates too soon. The ECB is still injecting EUR 60bio/ month under its quantitative easing programme and its key deposit rate is at -0.4%, meaning it costs money to lodge funds with the ECB. Draghi reiterated that the ECB would keep printing money “until the end of December 2017, or beyond, if necessary”. These comments saw the EUR/USD slip below support at 1.0650 to a low of 1.0628, is now back around 1.0640 and we look for flat trading at current levels ahead of tonight's US jobs data. Immediate support is at 1.0620 with a break below targeting 1.0590 then 1.0565, if the jobs data is strong. Upside resistance at 1.0710 is unlikely to be seen.


Japan
The Japanese yen initially weakened back to 111.50 USD yesterday but came back to trade in the 110’s after the fed minutes were released. The Japanese consumer confidence improved to 43.9 above the expected 43.5 points but consumers remain pessimistic about the economy even though manufacturing and export numbers are still trending higher. The yen still looks ready to break long term support of 110.15 and the March low going into Non-Farm Payroll tomorrow, 108.30 is the 200 day moving average which could be tested.


Canada
The Canadian dollar remained range bound over the week against the US Dollar trading at 1.3400. Brushing off the 1.3440 high during last night’s North America trading the loonie recovered towards the end of the day supported by solid equity moves and Crude Oil trading through 51.70 up 0.6% a barrel. Building permit figures printed terrible yesterday at -2.5% way down on expectations of 1.4% growth putting further pressure on the CAD. We see continued steady demand to buy USDCAD on dips around 1.3400 with Friday’s employment data key. The bullish trend remains in place overall but with a weak Canadian job number along with a strong NFP release we could see the Canadian Dollar push towards 1.3600


 
 

NZDUSD outlook

Written by Ian Dobbs on April 7th, 2017.      0 comments

9:30am(NZT)

For those looking to sell USD and buy NZD the recent price action will pleasing to see. The pair has been in a very gradual downtrend for the past two and a half weeks or so. At this stage there is nothing to indicate the recent downtrend is over, but we do have a key economic release tonight.

US employment data gets released just after midnight and that will dictate the trend as we head into next week. It's extremely hard to predict where some data will print, but if I had to make a call I suspect the risks are that it could come in stronger than the market is forecasting. That would boost the USD and help drive the NZD lower.  I think the risk is skewed that way because a couple of second tier employment indicators this week have come in much stronger than expected, but it seems the market hasn't yet revised up its forecast for tonight's release, which is a bit of a surprise.

If we do indeed get a good US employment number then a move down into the 0.68's is very likely over the course of next week. I am mindful however that at some stage the NZD will run into decent support. Our local economy is performing very well relative to the rest of the world and that means the NZD is not going to fall out of bed at all. In fact, any significant downside action in the NZDUSD has to come from USD strength, because you can't make any viable case for NZD weakness at this stage.

That's really the outlook for the near term. If we look longer term, say into the second half of the year, there is potential for a significant shift in Fed policy that could have a major impact on markets in general.

In the years after 2008 the Fed did massive amounts of quantitative easing. Basically printing money and using that to buy bonds. They even bought mortgage backed securities with it! This had the double impact of pumping cash into the financial system as well as driving down long term interest rates. The Fed now has an absolutely massive balance sheet and at some point they need to start to unwind that. To date their policy has been that any bond maturities get reinvested straight back, which has maintained the level of their balance sheet. But they are now openly talking about not reinvesting maturities and just letting the balance sheet normalise as maturities roll off. This would be a seismic shift in policy and would see long term interest rates move significantly higher. It would also support the USD to a large degree. If that announcement comes in the second half of the year the USD could easily embark on a major appreciation trend that would drive the NZDUSD down sub 0.6500.

As always however, any longer term forecast is fraught with danger as there are so many unknown variables that could impact. And we can't rule of the Trump factor! He's as unpredictable as anyone. His big impact on the level of the USD will be as a result of his tax policy. If he can get everything he wants in terms of tax passed into law it will be very stimulatory for the US economy and that will also support the USD. But, we've just seen him fail badly with healthcare so it's very hard to know how successful he will be on tax. A big failure to get significant tax reform would see the USD weaken. Again, it's likely to be the second half of the year before we know what's going to happen there.

 
 

FX Update: Markets tread water waiting for a lead

Written by Howard Wilcox on April 4th, 2017.      0 comments

7:30pm(NZT)
Overview
A slight risk-off tone has pervaded the markets, with gold and the JPY higher, equities lower overnight, given that economic data has been relatively solid, it would appear geopolitical concerns are more to the fore currently. Ffor example, the difficulties the US administration is having in getting fiscal promises enacted and the many questions that linger over the European political situation.  Although the Tax and infrastructure plans for the Trump administration have run into trouble, the USD has staged a recovery based on continued economic statistics which show a continued slow and steady recovery for the US economy. Given the ructions the Trump administration is experiencing, it now looks as if it will be many months (our read is Q3) before the widely anticipated tax cuts and increased infrastructure spending come into effect to further galvanise the economy. However this timeframe does not preclude the Fed from continuing to hike rates at its already well advertised timetable and as long as economic indicators remain solid, with ADP jobs data on Wednesday, a precursor to the Non-farm payroll on Friday just how on-track the US recovery remains will be clearer.  In Europe, attention is still mainly centred on the twists and turns of French politics and the extrication of the UK from the Eurozone as the reality of Brexit sinks in. Economic fundamentals continue to improve for the Euro bloc albeit at a slower pace than expected, but allied with core inflation still below the 2% ECB target any rate increase is unlikely to come this year. Also of note at the end of this week is the meeting between the US president Trump and Chinese President Xi Jinping which is expected to be contentious given the rhetoric from the US President on trade. Any press releases on the outcome will come over the weekend, so markets this week should remain largely unaffected.


Australia
Today will see the RBA rate decision later this afternoon.  No change is widely expected to the current 1.5% rate, but expect comments around concern over the household income, debt levels and labour market conditions. Concerns around the build up of risks associated with the housing market effectively rule out any further rate cuts. The RBA is also likely to be keeping a wary eye out on iron ore prices, as although iron ore exports to China are likely to have continued unabated in March, it now looks  increasingly likely that the first quarter of 2017 may prove to be as good as it gets this year. With spot iron ore prices slipping below US$80/tonne overnight, 15% down from the February peak, it looks like a market that has realised it got a little ahead of itself. The spot price is now virtually flat from the $US 78.87 at the end of last year, showing that the rally from December 2015 to February, which resulted in prices more than doubling, is starting to unwind. Much of the focus on why the price gains were unsustainable has been on the rapid build up of iron ore stocks at Chinese ports. The AUD is currently at 0.7505 against the USD after dropping from 0.7750 2 weeks ago. Weakening economic data is continuing to pressure the AUD and the latest weaker retail sales add to the story that the Aussie economy is currently more about deterioration than improvement. If the RBA is downbeat the AUD could extend into the  0.7550 region.


New Zealand
The New Zealand dollar is still trading within a narrow range based on weaker commodity prices over the past fortnight. Closing the week around the 0.70 the figure it dipped briefly to 0.6985 before reversing to 0.7020 the high Monday. Later in the week we have Dairy Auctions and US Payrolls, currently the NZD looks for direction and could be tested to the downside based on current venerability. Short term resistance is 0.7100 with support at 0.6890


United States
US equity markets opened the new quarter lower as the auto sector was sold off after reports of lower sales. The USD held steady as investors await a raft of data later this week, kicking off with a solid result for the ISM manufacturing PMI last night, that will  give further pointers to the health of the US economic recovery. Expectations are for the US ADP figures, Wednesday and Non-farm payroll data on Friday to come in toward the high side.  The stunning surge in consumer confidence last week and healthy regional PMIs together with the expected strong payrolls data will be welcomed by Fed officials as they talk up the case for more rate hikes. Markets are now pricing in a 60% chance of a June rate hike. However there are some threats on the horizon, as markets are likely to switch their focus to debt ceiling/govt shutdown risks in mid-to-late April, jeopardising continued USD strength. The US/China meeting starting on Thursday between the two Presidents is not expected to initially be market moving, but the press release will be watched closely for comments around trade and geopolitics which have the ability to affect longer term trends.
Overall we expect the USD trend to remain positive as economic data remains supportive and firming inflation, in excess of its trading partners, keeps Fed rate hikes on the front burner.                                                                     


United Kingdom
Brexit continues to overshadow most other issues although UK economic data continues to show modest strength. UK manufacturers are set to make a “solid” contribution to growth in the first quarter, even signs emerged that cost pressures were starting to weigh on activity, according to the latest IHS markit survey. Future outlook among manufacturers also remained “positive”, which encourages firms to take on more staff. Employment was higher for the eighth month running, with the rate of growth rising at the fastest pace in almost 18 months. The UK economy grew by 0.7% in the first 3 months of the year, exceeding most economists’ expectations of growth to slow to around 0.5% for the period. Similar surveys of the construction and dominant services sectors for March, released later this week are also expected to show robust growth.
However the GBP has drifted lower to currently sit around the 1.2490 level under support at 1.2500. A move above 1.2540 would target 1.2590 unlikely this week. A break below 1.2480 would signal a move towards 1.2430/40. It’s hard to see major moves on the GBP ahead of the US jobs data Friday.


Europe
Main market drivers continue to be around political developments, with the latest opinion polls more consistently showing that right wing, anti-EU Marine Le Pen is unlikely to win the presidential election in France, however there still remains a large percentage of “undecided” voters. Data releases were generally positive with seasonally adjusted unemployment rate falling to 9.5% in February from 9.6% in January,  the lowest since May 2009, The final Markit manufacturing PMIs for March, confirmed the region grew at its fastest pace in nearly six years as the final revision of the index matched the preliminary estimate of 56.2. However on a negative note, the EU PPI for February came in flat, after advancing 1.1% in February, while the year-on-year price index grew by 4.5%, above estimates of 4.4. US data releases over the week will drive this currency pair, but the EUR needs to surpass the 1.0710 region to be able to recover further, whilst below 1.0620 the bearish momentum will likely accelerate with a target of 1.0565. Support is now at 1.0620, with resistance at 1.0710.


Japan
The Japanese yen continued its run lower on the weekly open down to 110.50 early Tuesday. The JPY slowly picking up pace against the US Dollar as the general risk averse mood spreads through markets. 110.13 the last week’s low may be tested this week, if key support is broken we can expect to see a larger pullback and a possible freefall to 105.00 in the medium term. Running up to the US Payroll numbers at the end of the week investor appetite will stay mellow as caution remains.


Canada
The Canadian Dollar expanded by 0.6% in January beating the forecast of 0.3% Friday, this is the highest GDP figure since August 2016. The CAD opened the week on the back foot across the board and remains above 1.3300 against the US Dollar with oil prices having a negative impact on the economy. Later this week we see Canadian Employment change which is expected to be positive and boost sentiment running into US Non-Farm Payroll figures. This week we may see a run up to the post high mark of 1.3500 with volatility on the table.


Major Announcements

•    US GDP 2.1% vs 2.0% expected
•    US unemployment claims 258k vs 244k expected
•    UK Current Account -12.1b vs -16.3b expected
•    Canadian GDP 0.6% vs 0.3% expected
•    Australian Retail Sales -0.1% vs 0.3% expected
•    UK Manufacturing PMI 54.2 vs 55.1 expected
•    US ISM Manufacturing PMI 57.2 as expected
 

Economies of Note - 31st March 2017

Written by Ian Dobbs on March 31st, 2017.      0 comments

1:00pm(NZT)
Australia
It has been a light data week for Australia. The Aussie got a boost yesterday afternoon in Asian trading, as new Aussie home sales edged slightly higher in February according to the HIA, up by 0.2% following a drop of 2.2% the previous month. Today will see release of the private sector credit, but more attention will be paid to the Chinese Manufacturing & Non-manufacturing PMI data for March out later this afternoon. These are expected to be ahead of the February figures, however lower numbers could send the AUD towards the support level at 0.7600. A break of 0.7600 could extend to 0.7570, this level if broken would signal a more established bear trend. We favour trading above the 0.7600 to finish the week.


New Zealand
The New Zealand dollar has seen little action this week with fundamental news thin and movement restricted. Commodities prices pushed higher this week including a gain of over 3% in oil which has gone a long way to easing credit worries among traders. This kept the New Zealand dollar above 0.7000 for a majority of the week with the high seen at 0.7070. Next week we have Global Dairy Auctions and US Non-Farm Payroll figures, both will be key to the New Zealand dollar remaining buoyant in the short term.


United States
Equity markets and the US dollar end the week higher. Comments from various Fed officials suggesting that rates may need to rise faster than the market anticipates saw a good bounce in the USD overnight also helped by the final revision of US Q4 GDP came in at 2.1% from previous estimate of 2.0%. After what has been a very turbulent 3 months for US equities,  the S+P 500 is now heading for a gain over  this quarter of around  5.7%. Politics aside, the US economy continues to move ahead with most data continuing to reinforce the moderate growth picture. With latest USD move higher, the EUR/USD has broken below the critical support level of 1.0700 and looks vulnerable to an extension initially to 1.0660 then 1.0620 early next week.
 
                                                                    
United Kingdom
After all the talk in the lead up to the event, the formal triggering of Brexit on Wednesday 29th ended up being a little ho-hum, with no major moves. The unemotional, rational tone in PM May’s letter triggering Article 50 to Donald Tusk, the EU Council President, helped minimise volatility on currency markets, at the beginning of what is sure to be a torturous  2 years of negotiations. At the crux of the matter is whether the UK will be penalised by the EU with a “hard” Brexit so as to provide an example and so discourage growing anti- EU sentiment in other parts of the EU. However this, “hard Brexit “ would not be helpful to the either side, as trade with the UK contributes 17% of the EU GDP and is a major consumer of EU products. The UK is one of the biggest markets for German cars, so a “hard” Brexit appears unlikely as it is in the interests of both parties to remain pragmatic. A further point to consider is if the 2 year negotiation period will be long enough, as given the size of the UK economy and its complexity, this timeframe may have to be extended. On UK equity markets the immediate reaction was a fall of 0.4% by the FTSE100, but it then rallied back to close at 0.41% higher. The GBP dropped below the 1.2400 USD level to an 8 day low of 1.2375 but recovered back to the 1.2436 level yesterday and is now at 1.2473. Initial moves downward have proved to be shallow and a hold over 1.2470 targets 1.2535 then 1.2580. Conversely, on the downside a break of 1.2375 would expose 1.2330 on the way to 1.2260.


Europe
Overnight data showed March consumer inflation for Germany and Spain slowing more sharply than expected as oil prices dropped. German inflation was at 1.5% against an expected 1.9%, Spanish inflation eased from 3% to 2.1%. This data provides backup for the ECB‘s view that the surge in inflation in February over the their target of 2% was an aberration and lessens pressure to wind down its monetary stimulus. The overall inflation rate for the Eurozone due out later tonight is now expected to drop from 2% seen last month to 1.8%. It is unlikely, given inflation pressures easing, that the ECB will move to increase rates or withdraw stimulus anytime soon, especially with the French elections over the April/May period. This outlook should keep a lid on any periods of EUR strength. On the political front things were a little more positive, with the latest poll on the French Presidential elections showing an uptick in popularity of the more centrist Macron against his closest rival, right-wing Le Pen. Macron/ Le Pen now 64/36 in 2nd round versus 62/38 previously. The EUR was lower after the official Brexit announcement, dropping from 1.0825 to 1.0766. Overnight the stronger USD has knocked the EUR back to the 1.0684 level. Immediate support is at 1.0680 then 1.6830. Upside resistance is at 1.0705 then 1.0725. Downside price action is favoured heading to week end.


Japan
The Japanese Yen continued its run through to 110.10 mid- week bouncing off key support.
With FOMC officials still seeing scope this year to raise rates 3-4 times this may fuel a rebound in the Japanese Yen. With the Nikkei trading back above 19000 throughout the week we have seen the near term support above 111.00, this may have triggered further investor interest to the topside, resistance of 112.50 could be tested in the near term. Overnight saw the unemployment rate down to 2.8% from 3% and household spending post negatively at 3.8%. Monday sees important Manufacturing data, watch for movement around current levels with a potential for fresh highs on positive data.



Canada
The Canadian dollar continues to trade in narrow band this week. Commodities initially boosted the CAD earlier in the week after prices continue to rise, oil up over 3%. The bank of Canada governor Stephen Poloz said Tuesday they had room to improve the North American Free Trade Agreement, he vowed to re-negotiate the free trade agreement as many Canadians fear job losses and possible loss of their healthcare system. The CAD dropped to a low yesterday of 1.3275 but has since recovered to 1.3350. A break below 1.3250 will be crucial support in the coming week as this would indicate an end to the current range.