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FX Update: The USD continues to struggle

Written by Ian Dobbs on July 25th, 2017.      0 comments

2:00pm(NZT)
Overview
Broad based USD weakness continued to be the main theme of last week. Political paralysis in Washington has weighed on the USD and until the market starts to believe the Trump administration can pass key legislation, it’s hard to see the United States dollar making a significant recovery. We do have the Fed Funds rate meeting this week, although it’s not expected to contain any surprises. While no change in interest rates is expected, we may get further clarity on impending balance sheet reductions from the central bank. Tighter monetary policy throughout much of the developed world is going to be the dominant trend over the coming years. The Bank of Canada recently raised interest rates for the first time in seven years, and the ECB are likely to decide later this year just when to scale back monthly bond purchases. The Bank of England too are expected to join the party and be forced to raise interest rate sometime next year due to rising inflation. Although the process of interest rate increases will be a very gradual one by any historical standard, at some stage asset market valuations are going to come under pressure as a result. Despite central bank's best efforts the process of interest rate normalization is unlikely to a smooth one.


Australia
After the Reserve Bank of Australia's (RBA’s) meeting minutes were released these helped to propel the Australian dollar higher early last week, the central bank went into damage control on Friday. Deputy Governor Guy Debelle was scheduled to speak and he used the opportunity to try and rein the currency in. He said a rising AUD is not welcome as it lessens the benefits of faster global growth for Australia and that Australian interest rates do not have to rise in line with global peers. He added that “no significance” should be read into the fact that the neutral rate was discussed at the July policy meeting. In the minutes it was revealed the bank believes the neutral rate is now around 3.5%. The discussion around the currently perceived neutral rate has no bearing on the current course of monetary policy, and the market may have got a little over excited when analysing that particular part of the minutes. These comments seemed to have helped in keeping something of a lid on the AUD’s gain, at least for now. Of interest this week will be the release of inflation data on Wednesday along with a speech from Governor Low later that same afternoon. We can expect him to try and talk the currency down as well.


New Zealand
Last Tuesday’s soft NZ inflation result only seemed to temporarily limit the New Zealand dollars gains. By late in the week the NZD was surging ahead once again, making across the board gains as the USD came under broad pressure. Strong migration and credit card spending data certainly didn’t hurt the NZD, and neither did Finance Minister Joyce’s comments that hit the wires on Friday. He was quoted as saying he’s unperturbed by New Zealand dollar strength, that it reflects a strong NZ economy, and that NZ firms are coping well with the currency at current levels. He added consumers are benefiting from low levels of imported inflation. The NZD finished the week on a very solid footing trading to a ten month high against the USD and recovering sharply against the AUD after losing significant ground earlier in the week. The economic calendar is very quiet this week with just the Trade Balance on Wednesday of any note.


United States
The United States dollar lost further ground last week still suffering the hangover from soft retail sales and inflation data earlier in the month. The currency was also weighed on by turmoil in Washington and the very real prospect that the Trump administration may struggle to pass any of its key legislation. Multiple failures to repeal and replace, or even just repeal, Obama care, despite a republican majority, raises questions about a whole host of other issues. Tax reform, the budget, and the debt ceiling all loom large as hurdles in the not too distant future. The debt ceiling is going to need to be sorted by late September or early October to avoid what would no doubt be a devastating government shut down for the Trump administration. Trump needs a policy win, and he needs one soon, to get the entire administration, and the USD, back on track. A credible tax reform package would certainly turn the USD around, but that could be a long way off. Other things that could see the USD stage a significant recovery would include inflation and wages finally breaking higher, or perhaps rising capex growth along with significant infrastructure spending. None of these things seem likely in the very near term, but all the market really needs to begin buying USD’s again, is a renewed belief in Trumps ability to enact his agenda. Until he gets a policy win under his belt, the USD is likely to continue to struggle. The main focus this week will be on the FOMC meeting, although it’s unlikely to deliver any major surprises.


United Kingdom
The UK Pound has struggled over the past week, weighed on by soft inflation data and Brexit concerns. Even better than forecast retails sales data late last week failed to turn the GBP around. The IMF just released their latest GDP forecasts and they have revised down UK growth for 2017 by 0.3% to 1.7%. They’ve left their 2018 forecast at 1.5%. Brexit concerns do seem now to be impacting consumers with the monthly Household Finance Index survey falling to its lowest level since July 2014. The survey showed household willingness to make big purchases fell to its lowest level in 4 years, reflecting an ongoing squeeze on incomes as inflation rises faster than wages. There are signs that this squeeze has started to spill over to consumer spending patterns. This week’s main focus will be on Preliminary GDP data set for release on Wednesday. The market is looking for a quarterly figure of 0.3%, up from the 0.2% prior.


Europe
The Euro had a positive week last week supported by expectation that the central bank will, in the not too distant future, be forced to scale back the ultra-easy monetary policy settings they currently have in place. ECB president Draghi tried hard to water down those expectations when he spoke in the wake of the bank's latest policy meeting, but the market wasn’t buying it. The Euro area economy is on the mend, albeit slowly. Overnight we have seen Manufacturing and Service sector PMI’s from both France and Germany with most of the data seeing small declines from the prior readings. The data has helped to take a little heat out of the EUR, but the PMI’s are still at healthy levels and they don’t materially impact the current positive economic outlook. The EUR may have just come a little too far too fast some consolidation, or even a corrective pullback, seems likely over the course of this week.


Japan
Last week’s Bank of Japan Monetary Policy Statement was only notable for the moving target that is the 2% inflation goal. The bank once again delayed the date they expect to achieve the target, with them now saying it will take until 2019. This week should prove interesting with a raft of data out on Friday. Household spending, unemployment, and retail sales data are all set for release along with the latest reading on inflation.


Canada
The Canadian dollar had a mostly positive week last week, although some heat did come out of it on Friday in the wake of soft retail sales data. All in all though, the earlier hawkish interest rate hike by the Bank of Canada is still broadly supporting the CAD. Friday’s data saw core retail sales come in at -0.1% vs a forecast of flat, while inflation came in as expected at -0.1%. Last night saw Wholesale Trade Sales data that came in at 0.9% vs 0.5% expected. This stronger than forecast release saw the CAD back on the front foot making gains again. Later this week we have monthly GDP data to draw focus, although if forecasts are correct it shouldn’t negatively impact the CAD.


Major Announcements
•    US Building Permits 1.25m vs 1.20 expected
•    Australian Employment Change 14.0k vs 14.4k expected
•    Australian Unemployment Rate 5.6% as expected
•    BOJ Leaves interest rates unchanged
•    UK Retail Sales 0.6% vs 0.4% expected
•    ECB Leave interest rates unchanged
•    Canadian CPI -0.1% as expected
•    Canadian Core Retails Sales -0.1% vs 0.0% expected
 

Economies of Note - 21st July 2017

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

1:00pm(NZT)
Australia
The Australian dollar has had another good week buoyed by upbeat minutes from the Reserve Bank of Australia, increasing gold and iron ore prices, and supportive local data. The RBA minutes had a definite positive tone to them noting economic data for the second quarter had generally been positive. The also highlighted improvements in the labour market and the fact that fiscal policy will be more expansionary in 2017/18 that previously thought. They said stronger infrastructure spending will have significant positive spill over to the economy. Yesterday’s employment data backed up their view with some solid figure. Although the headline gain of 14k was pretty much bang on expectation, digging into the detail showed full-time jobs grew by a whopping 62k, while part time employment declined 48k. The monthly numbers can be volatile so the trend numbers are a better indication of what’s really going on. That being said, over the past year trend employment has increased by 227,000 jobs, which is the right in line with the average year on year growth for the past two decades. The only release of note next week is inflation data which hits the wires on Wednesday.


New Zealand
The New Zealand dollar has struggled to gain much traction this week undermined by a soft inflation reading on Tuesday. The flat outcome for the June quarter was below expectations for a 2% gain and as such it immediately weighed on the local currency. The latest Global Dairy Trade auction on Tuesday night didn’t create any real waves with prices showing small gains in both the overall index and the key whole milk powder component. In the past couple of hours we have seen net migration data and once again annual migration has set a record high at 72,300 people. Expect this to be a key topic come September's election. Visitor numbers too set a new record over the past year, no doubt boosted by the Lions tour. Next week is a very quiet one in terms of economic data with only the trade balance on Wednesday of any note. Action in the wider market, and particularly the USD, will likely dictate direction for the NZD over the coming days.


United States
Economic data out of the United States this week has taken a backseat to developments on the political front. The big news was that the revised Republican health care bill was effectively dead in the water without the numbers to pass. This caused significant broad based selling of the United States dollar as the market questioned the ability of the Trump administration to be able to pass any of its key objectives. Most importantly, what does this mean for Trump’s proposed tax reform? There is a general consensus that without tax reform the GOP could lose their majority in the House, and that would mean even less chance of Trump being able to achieve anything during his term. Congress also has to agree to raise the debt ceiling again by September, or October at the latest, and that doesn’t look like it will be a walk in the park. The USD looks likely to remain on the back foot for the time being with political concerns front and centre. Next week along with the FOMC rate statement we have Durable Goods Order and Advance GDP data to digest.


United Kingdom
The UK Pound has seen some pressure this week weighed on by softer than forecast Inflation data. The Consumer Price Index (CPI) came in at 2.6% year on year, below the expectation of 2.9%. Month on month the result was flat vs a 0.2% increase. The main contributors to the fall in the rate was fuel and recreational goods and services. Although this particular result came in softer than forecast, the bigger picture remains the same, that is that the fall in the UK Pound over the past year is slowly pushing up prices. That looks set to continue over the coming months. Last night we got the latest reading on retail sales. Sales came in at +0.6% for the month of June against an expectation of +0.4%. That better data only provided a short term boost for the GBP that quickly found itself under pressure again. Brexit concerns seem to be weighing on the GBP with both parties seemingly miles apart on all fronts.


Europe
The main event out of Europe this week was last nights ECB meeting. No changes to the current policy settings were expected and that’s exactly what the central bank delivered. The Euro however has gained some ground in the wake of President Draghi’s press conference. Draghi tried hard to sound dovish talking about “substantial amounts of stimulus still needed” and “underlying inflation yet to show convincing signs of pick up”. His goal was clear however, he didn’t want to see the EUR rally strongly. But the market can see through his thinly veiled attempts to keep the EUR down, and the big picture is that of an improving Euro area economy. The central bank’s own assessment is that current information confirms the strengthening of the economy has been broadening. They say survey data points to solid, broad based growth in the period ahead. In the absence of some unforeseen economic shock, the next move from the ECB will be to start to wind back stimulus. That isn’t just around the corner, at least not if Draghi is to be believed, but the market is starting to price it in regardless.


Japan
The focus this week in Japan was on yesterday’s Bank of Japan (BOJ) Monetary Policy Statement. In recent years the BOJ have thrown absolutely everything, including the kitchen sink, into the task of trying to drive inflation up to 2%. So far they have been unsuccessful and they’ve once again decided to move the goalposts. They are now delaying the timing of reaching their 2% goal until 2019. It seems in Japan at least, monetary policy alone is not enough to raise inflation in a meaningful way. What is desperately needed is structural reform, something PM Abe has so far failed to deliver on. Aside from shifting the goalposts re the inflation target, there was nothing of interest in the release BOJ release. It went largely as expected with no change in monetary policy, and a slight upgrade to the economic outlook, while a slight downgrade to the inflation outlook. The Yen had almost no reaction.


Canada
After last week’s fireworks in the wake of the BOC interest rate hike, the Canadian dollar has been somewhat more subdued this week. To be fair there hasn’t been a lot for the market to focus on the just foreign Securities Purchases and Manufacturing Sales data released so far. Both those came in a touch stronger than forecast. Tonight however there is plenty of potential for some further volatility with inflation data and retail sales figures set for release. Inflation is expected to come in at -0.1% month on month, while retail sales are forecast to be flat. Next week the market can look forward to Manufacturing Sales numbers along with GDP.

 
 

FX Update: The USD suffers badly as data dissappoints

Written by Ian Dobbs on July 18th, 2017.      0 comments

1:00pm(NZT)
Overview
The main theme of the past week has been broad based US dollar weakness. Dovish comments from Fed officials combined with soft US data have done the damage, but you can also add in the mix the continuation of Trump-Russia hysteria and its negative impact on the administration's ability to push on with its policy agenda. Will this week be any different? Probably not on the political front, although there is always the chance of a data surprise. During this period of USD weakness the NZD has largely underperformed and as a result it has declined on many other crosses. The Australian dollar on the other hand has made the most of the current environment with gains across the board.  Against the USD on Friday the AUD reached its best level in almost a year. Central bank meetings from the Bank of Japan and the European Central Bank this week will draw focus, although neither bank is likely to suggest they are ready yet to pull back from stimulus.


Australia
Last week’s data from Australia was mostly better than forecast although it was largely a second tier affair. This week however we have a couple of key releases to digest. The Reserve Bank of Australia’s (RBA) minutes hit the wires in the next couple of hours and then on Thursday employment data is set for release. With the economic outlook improving in Australia most forecasters expect the RBA to remain on hold for the foreseeable future, certainly well into 2018. The RBA minutes should affirm this neutral setting. Employment data on Thursday should also be very interesting. The last three months figure have all come in significantly stronger than forecast and another strong print this month would suggest a definite trend of improvement in the job sector. Expectations are for a gain of 15.3k in employment. The previous 3 months readings have been 61.1k, 37.8k and 42.5k.  


New Zealand
Last week was a very quiet one on the data front from NZ. The New Zealand dollar largely underperformed most other currencies during the bout of USD weakness we’ve seen. So while the NZD has gained against the USD, it lost ground on many other crosses. This morning we saw the key economic release of inflation data. It came in on the soft side printing at flat. The market was expecting a gain of 0.2%. The prior reading was +1.0%. The data weighed on the NZD which immediately lost half a cent or so against the USD. We expect the NZD to remain under some pressure over the coming days. Tonight we have another dairy auction to digest and then on Friday we get the latest migration data. That should prove interesting with the record high level of migration likely to be a key topic during the upcoming election.


United States
The United States dollar ended last week on a very soft footing hurt by a raft of disappointing data. Inflation came in at flat vs expectations of 0.1%, while retail sales fell 0.2% vs expectations of a 0.2% gain. On top of this we saw University of Michigan Consumer Sentiment fall from 95.1 to 93.1. The USD was already feeling a little vulnerable after somewhat dovish comments from Yellen earlier in the week and once the data hit the screens there was across the board dollar selling. Interest rate markets also reacted and the chance of another interest rate hike by the Fed by the end of this year fell to around 40%.  It would now be extremely unlikely we get another interest rate hike before December, and a hike in December at this stage is a coin toss. This week to draw focus we have data on Building Permits, Unemployment Claims, and Housing starts.


United Kingdom
Solid employment data released from the United Kingdom last week was in large part negated by soft wages data. It’s been a similar trend in many western economies in recent years. The Bank of England (BOE) certainly have a tightening bias at the moment, but there are big divisions within the Monetary Policy Committee (MPC) as to the timing of any potential interest rate hike. This week we hear from BOE Governor Carney and the market will be keen to get a better feel for his outlook. Ahead of that speech we have inflation data set for release on Tuesday, then on Thursday we get the latest reading of retails sales.


Europe
Data from Europe last week continued to suggest the European economy is slowly improving and it helped the Euro make significant gains. All eyes this week however will be on Thursday’s main event, the European Central Bank's (ECB) interest rate meeting. The market is starting to look forward to an eventual exit from the ECB’s quantitative easing policy and it’s hastily bid up the Euro over recent months in anticipation of such an announcement. The market may be getting well ahead of itself though and there is every chance ECB President Draghi will pour cold water on this expectation during his press conference after the meeting. He has stated previously the central bank will fully implement the QE programme and although he’s acknowledged the improving economic outlook, he’s given no hint that QE will be abandoned any time soon. If market expectations are disappointed on Thursday, the Euro could fall. Ahead of the ECB meeting we get Final CPI data and the German ZEW Economic Sentiment Index.


Japan
A Japanese holiday yesterday meant it’s been a quiet start to the week for the Yen. There is little on the calendar until Thursday’s main event being the Bank of Japan Monetary Policy Statement. The Japanese economy is slowly gaining momentum and the BOJ are expected to be somewhat optimistic about the economic outlook. It is however too early for them to make any significant changes to monetary policy at this stage with inflation still far from their 2% target.


Canada
Last week’s hawkish interest rate hike from the Bank of Canada (BOC) lit a fire under the already strengthening Canadian dollar and it ended the week in good shape. Friday then saw the release of the New Housing Price Index and it came in stronger than forecast at +0.7%. While that sounds positive, another metric on the Canadian housing market released last night paints a different picture. House prices nationally are now down nearly 10% from their peak in April. Prices are declining on slowing sales volumes with June activity down 11.4% year on year. It remains to be seen if this is the start of something much bigger for the housing market, which has long been a point of concern in Canada. Longer term there are big questions as to the viability of the current housing market valuations in light of increasing interest rates. Although that's likely to be a story for 2018 or 2019. Later this week we have inflation data and retail sales figures to draw focus.


Major Announcements
•    Bank of Canada hikes interest rates by 0.25%
•    US PPI 0.1% vs 0.0% expected
•    US Inflation 0.0% vis 0.1% expected
•    US Retail Sales -0.2% vs 0.2% expected
•    Chinese GDP 6.9% vs 6.8% expected
•    Chinese Industrial Production 7.6% vs 6.5% expected
•    NZ Inflation data 0.0% vs 0.2% expected
 

Economies of Note - 14th July 2017

Written by Ian Dobbs on July 14th, 2017.      0 comments

12:00pm(NZT)
Australia
The Australian dollar has made gains this week helped by some slightly better than expected second tier data. NAB business conditions and confidence both came in stronger than forecast, with business conditions now back to around pre-GFC levels and above the long run average. Westpac consumer confidence for July also improved printing at +0.4%. The index has a long way to go however as the three months prior to this saw consecutive declines. Overall the index isn’t giving great signals about the outlook for consumer spending. Yesterday we also saw the release of consumer inflation expectations from the Melbourne Institute which jumped from 3.6% to 4.4%. Next week should be more interesting with the RBA minutes set for release along with employment data.


New Zealand
It’s been a very quiet week on the data front from New Zealand this week with only the BNZ manufacturing index set for release later this morning of any real note. The New Zealand dollar has however seen some volatility with weakness during the middle of the week and a strong rebound over the past 12 hours. Next week we have inflation data to digest along with another dairy auction and visitor arrivals.


United States
There hasn’t been a lot to focus on data-wise so far this week out of the United States, although tonight sees the release of inflation and retail sales figures, both of which could impact the currency. The market has however had plenty to digest with a number of Fed speakers, Janet Yellen’s semi-annual testimony, and more Tump-Russia hysteria. Most of the above has been somewhat US dollar negative. The Trump-Russia witch hunt has once again taken the focus off the White House’s economic agenda and the more time the administration spend fighting fires on that front, the less they can actually achieve economically. In terms of Fed speakers we heard from Brainard and Harker this week both of whom seem to be on the same page as Janet Yellen who gave her semi-annual testimony to congress this week. There seems to be a clear message been put out there that although the Fed plans to continue to hike interest rates, it will be slow going and the “neutral rate” is probably not far away. The Fed also look set to start unwinding their balance sheet, which ballooned during quantitative easing, in the coming months. That process too, will be extremely gradual. It seems we may get an announcement on that at the September meeting, while the next interest rate hike is looking most likely for December. In her testimony Yellen said the Fed is not only uncertain about the outlook for inflation, but that the federal funds rate may “not have to rise all that much further go get to a neutral policy stance.” The USD declined in the wake of these comments.


United Kingdom
The United Kingdom released some decent employment data this week. The claimant count (unemployment claims) grew by 6k, less than the 10.5k expected. The unemployment rate also dropped to 4.5% from 4.6% prior. That’s the lowest unemployment rate since 1975! Unfortunately the low unemployment rate isn’t feeding through into massively higher wages. UK average earnings came in at +1.8%, that’s down from the +2.1% prior. Although the Bank of England now have a tightening bias, they probably don’t need to panic as inflation is hardly going to soar if wages are struggling to grow. There are however divisions within the central bank’s monetary policy committee and those were on full display this week with comments from Broadbent, who said he’s “not ready” to raise rates yet, while McCafferty said he will likely vote for a quarter point rate rise again next month. S&P released a report on the UK this week and they see the BoE holding off hiking interest rates until mid 2019. They say the decline in real wages will weigh on household spending and UK GDP will likely slow to 1.4% this year due to Brexit uncertainty. Next week we have inflation and retail sales data to digest.


Europe
We’ve seen only minor data out of the Eurozone this week and none of it has had any real impact on the economic outlook or the foreign exchange markets. The latest poll from Germany, ahead of their election in September, made good reading for Angela Merkel with her Conservative coalition having a 17 point lead. The Eurozone dodged a serious bullet with outcome of the French election and it looks like the German one could be EUR positive as well. Next week should be more interesting with inflation data, German ZEW Economic Sentiment and the ECB’s latest rate meeting.


Japan
The Japanese Yen saw pressure through the first half of the week helped in part by comments from the Bank of Japan’s Kuroda. He said the central bank will keep YCC (yield curve control) and maintain ultra-easy monetary policy as long as is needed to achieve 2% inflation in a stable manner. In terms of data this week we saw some disappointing results from Core Machinery Orders and the Current Account, while the Economies Watches Sentiment index increased a touch to 50, and Tertiary Industry Activity also came in better than forecast. Next week will start slowly with a Japanese Bank holiday on Monday, but later in the week we have the Bank of Japan’s Monetary Policy Statement to look forward to.


Canada
This week was all about the Bank of Canada’s (BoC) interest rate decision on Wednesday night, and they didn’t disappoint creating some real fireworks in the Canadian dollar. As widely expected they hiked interest rates by 0.25%, taking the overnight rate to 0.75%. That’s the first hike in seven years. What really drove the CAD however was the hawkish tone to the accompanying statement. The market is now confident we will see further interest rate hikes, the timing however remains open for debate. There is now a 70% chance of another hike by December priced into the market. Recent strength in Canadian data has driven this move by the BoC and in the near term the outlook for the economy remains good. Longer term however there are worrying signs about just how the economy will handle higher interest rates. The housing market in Canada has long been an area of concern with parts of the country seeing gains that could easily be described as a bubble. Household debt to income ratios are also around 50% higher in Canada than in the US, while Canadian wages are going at a much lower rate of around only 1.5%, compared to 2.5% in the States. As interest rates go up, the ability of Canadian’s to service all that debt is going to come into question.

 
 

FX Update: Groundhog Day for most New Zealand dollar pairings.

Written by Ian Dobbs on July 11th, 2017.      0 comments

12.45pm(NZT)
Overview
The G20 meeting over the weekend failed to have any dramatic impact on financial markets. The communique made it clear they are not all on the same page when it comes to climate change and trade, with the group issuing dissenting conclusions for the first time. Cracks between the US and the rest of the G20 could not be glossed over and the potential for a trade war on steel is certainly there. It looks like the US made very clear it’s concerns about the glut of Chinese steel and the final agreement mentioned “legitimate trade defence instruments”.  It also demanded concrete policy solutions by November from a G20 sub-body set up last year to examine steel market imbalances. US employment data on Friday highlighted the conundrum many western economies have found themselves in recently. That is that low unemployment hasn’t led to broad base wage gains, and as such, predictions of increasing inflation over the coming forecast horizon may well be optimistic. Central banks however are slowly starting to acknowledge the risks of overextended asset markets and we may find that becomes a key driver behind further interest rate hikes. Ultra-easy monetary policy settings, for what turned out to be much much longer than anyone originally thought, has likely sown the seeds for the next financial crises. It may not be just around the corner, but at some stage down the road increasing interest rates are going to put major pressure on extremely stretched valuations in bonds, equities, and real estate in many countries.


Australia
The Reserve Bank of Australia made it clear last week they remain very neutral and monetary policy is likely to remain on hold well into next year. Until recently there had been a big split in market expectations for the next move in interest rates, with some prediction a cut while other saw the next move as a hike. Recent economic data from Australia however is starting to see those who were predicting a cut in interest rates, re-asses their forecasts. Employment data has surprised on the strong side for three months in a row and last week’s key releases, those of retail sales and the trade balance, both came in better than forecast. The economic calendar is a lot lighter this week with only second tier data scheduled for release. Business confidence, consumer sentiment, and inflation expectations will hit the wires over the coming days but they are unlikely to elicit any significant market response.


New Zealand
There has been little data of significance from New Zealand over the past week. This coming week also looks very light on the economic calendar. It’s not so surprising then that the NZD remains largely range bound on many crosses at the moment. It’s starting to feel like Groundhog day with the NZDUSD trading in a sideways range for much of the past month. We’ve seen a little more volatility against the Australian dollar, but again overall prices are around the same level they were in early June. Against the GBP the NZD has been range bound for the past two weeks, while movements in the JPY, EUR and CAD have driven those particular crosses.


United States
Non-farm payrolls data on Friday came in better than forecast at 222k. The market had been expecting a gain of around 175k. Tempering any potential positive impact on the USD was the unemployment rate which actually ticked up to 4.4%, and the fact that wage gains disappointed again. Creating jobs is all well and good, but if wages aren't going up, it’s hard to imagine where all the expected inflation is going to come from down the road. Janet Yellen seems determined to continue tightening policy however with indications that the Fed is waking up to the risks of overvalued asset markets. Yellen is set to testify to the US Congress and Senate this week and we are likely to see her confirm that the gradual move higher in interest rates is set to continue. We also have inflation data and retails sales figures to digest later in the week.


United Kingdom
The UK Pound is struggling for direction at the moment, caught between opposing forces. On the one hand we have the Bank of England (BOE) who have indicated a tightening bias while on the other hand recent economic data has been less than stellar. Last week saw disappointing results from the Manufacturing and Service sector PMI’s, along with declines in Manufacturing and Industrial Production numbers. There has also been whispers of discontent with PM May which are not surprising really given what was effectively a disaster for her in the UK election. We have a couple of BOE speakers this week along with employment data to draw focus. As has been the case in the US recently, the market will likely focus more on the earnings figures than the actual jobs numbers.


Europe
The European economy remains on the gradual improve and this is helping to support the EUR. Last week saw largely positive numbers from the manufacturing and service sectors as well as strong French and German industrial production data. It does seem however there is a lack of consensus within the European Central Bank about just how long they should continue with the ultra-loose monetary policy. Governing Council member Klaas Knot said over the weekend “if we carry on with this policy for too long, that is absolutely a potential danger”. He added “I think that we have gotten very close to that moment”. His concerns have been echoed by a number of German officials. On the other side of the coin we have Peter Praet who is the ECB’s chief economist and Executive Board Member. He has recently been quoted as saying “underlying inflationary pressure remains subdued” and “the process of reflation is a long one that remains highly dependent on accommodative monetary policy”. The economic calendar this week looks pretty light so the market will pay particular attention to any further comments from ECB officials.


Japan
The Japanese economy does seem to be in the improve, but the Bank of Japan (BOJ) are far from even considering winding back stimulus. The BOJ released their quarterly Regional Economic Report yesterday and in it they raised their economic assessment for 5 of the 9 regions. It’s their most optimistic report for the past 12 years with momentum seen gaining in exports and consumption. A speech from Governor Kuroda over the weekend however, made it clear the bank will continue to expand the monetary base until consumer inflation is stable above the 2% target. The commitment to continue the aggressive stimulus has seen the Japanese Yen weaken across the board over recent days.


Canada
The Canadian dollar has been the top performing currency over the past two weeks, driven largely by expectations that the Bank of Canada will lift interest rates when they meet on Wednesday. Economic data out of Canada recently has been better than forecast and that trend continued on Friday with the release of the employment figures. Canada gained 45.3k jobs last month with the unemployment rate dropping to 6.5% from 6.6% pior. The central bank is nearly certain to raise interest rates and that expectation has now been largely priced into the market. The reaction in the Canadian dollar after the event will come down to the tone of the statement and just what signals the BOC send out re future hikes.


Major Announcements
•    UK Services PMI 53.4 vs 53.6 expected
•    Australian Trade Balance 2.47b vs 1.00b expected
•    US ISM Non-Manufacturing PMI 57.4 vs 56.5 expected
•    UK Manufacturing Production -0.2% vs 0.5% expected
•    Canadian Employment Change 45.3k vs 11.4k expected
•    Canadian Unemployment Rate 6.5% vs 6.6% expected
•    US Non-Farm Payrolls Change 222k vs 175k expected
•    US Unemployment Rate 6.5% vs 6.6% expected
 

Economies of Note - 7th July 2017

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

3:30pm(NZT)
Australia
The Australian dollar was aggressively sold lower to 0.7570 after a dovish  RBA on Tuesday, as expected , left rates unchanged  retaining its neutral monetary policy stance and reiterated risks associated with a rising AUD. However it enjoyed a brief rally a day later heading back to the 0.7630 region But for the last two days has resumed its southward track, not helped by some pretty average June services PMI data out of China.  The Aussie remains under pressure now trading around 0.7578, not far from the weekly low set on Wednesday at 0.7570, this is despite strong local data released at yesterday which showed the local trade balance for May recorded a surplus of 2.471 billion in seasonally adjusted terms, more than doubling market's forecast, helped by a sharp rebound in exports, up by 9% in the month. However, the AUD has been affected by the negative tone in equities, as worldwide indexes closed in the red, affecting the commodity-related currency. It should have reasonable support at the 0.7570 level ahead of tonight's Non-farm payroll figure. Major support is at 0.7535 which if breached would initially target 0.7500.


New Zealand
The New Zealand dollar has slid lower over the week from its high of 0.7344 on Monday to currently around 0.7286. The GDT auction was mixed on Tuesday night with milk powder prices marginally firmer, but this appeared to have little effect on the NZD. Fundamentals for the NZD still remain solid but the failure for the NZD to hold over 0.7300 is an issue, with the range now in the 0.7250-0.7300 region. We expect little movement ahead of tonight's US jobs data, but with Central banks now starting to mop up excess liquidity any upward  path ahead for the NZD will be a tough one. If tonight's US data is solid a fall to 0.7200/10 is likely.


United States
Mixed data throughout the week, with last night’s ADP payroll June increase coming in below expectations at 158k against 188K forecast. The majority of job gains were in the service sector, however services PMI data was more positive and above previous forecasts. The market is looking for an increase of 178K for the Non-farm payroll tonight, but given the weaker ADP figure we are of the view that tonight's US jobs data has the potential to disappoint. The G-20 is meeting in Hamburg over the next two days will bear watching but we do not expect any major market moving news to emerge. Normally this is a talk feast with a vague communique issued at the end, although this year will be more colourful with Trump and North Korea being the wildcards! The release of the June Fed minutes earlier in the week showed a Committee more divided than expected, but we still retain the view that the Fed will announce a launch of a new balance sheet policy in September with an additional hike in December of the Fed Funds target range. The EUR continues to gain on the USD and is now at 1.1420 after the EUR/USD trading down at 1.1335 earlier this week….upside looks to be 1.1440 and support at 1.1350, but if the jobs figure is an unexpected number look for ranges to be exceeded.


United Kingdom
The GBP dropped to a weekly low of 1.2892, after data this week showed June UK service sector growth slowed and business optimism fell to its lowest level since the Brexit vote last year. The GBP/USD is now back around 1.2966 ahead of the release of UK industrial and manufacturing May figures this Friday, together with the same month trade balance, which may set the tone for the pair, ahead of the US employment report.  With 1.3047 in May being the yearly high so far, the 1.3000 level is critical as gains above this level have not been able to be sustained. A break below 1.2890 would extend to 1.2860.  


Europe
Release of the ECB minutes last night confirmed that pressure to remove the easing bias had increased with positive survey data and the broadening and strengthening of Eurozone growth. Officials commented that the ECB's non-standard monetary policy was "not eternal" and QE is not a permanent policy tool. Other comments included reference to the fact that the economic recovery would “open the door” to normalisation now it appeared to be on a stronger footing. The EUR/USD pair trimmed most of its weekly losses and bounced back above the 1.1400 level, on the expected boost from the ECB's account of the monetary policy meeting, as the document showed that policymakers discussed removing the pledge to increase their bond-buying program if required. Currently at 1.1413 the EUR/USD ranges are 1.1380 - 1.1460 as we head into tonight’s US jobs data.


Japan
The Japanese Yen has had a softer tone over the week with the USD/JPY trading from 112.18 on Monday to 113.82 last night, after the BoJ boosted 10 year Japanese bond purchases. It is currently around 113.68, with a 112.90 -113.70 range ahead of the US data tonight. A break on the upside would then target 114.05.


Canada
Since the start of the week, crude oil performance has been the primary driver of the CAD’s price action as the commodity-linked CAD reacted to sharp fluctuations on changing oil market dynamics. After losing more than 4% on Wednesday, the barrel of West Texas Intermediate gained more than 2% on Thursday and reached its daily high at $46.50. Consequently the CAD has strengthened over the last two days and the USD/CAD is now at 1.2986 after being at 1.3013 on Wednesday. Support is seen at 1.2910 with upside at 1.3020.

 
 

FX Update: The RBA to draw focus

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

4:20pm(NZT)
Overview
A short week this week and lighter trading is expected with US markets closed for the July 4th Independence Day holiday tonight. However we also have a raft of economic data being released over the next few days, culminating in the US Non-farm payroll figure for June out on Friday night.  Also of note are the Fed minutes for the June meeting released on Wednesday, then the private payroll figure (ADP jobs report) coming out on Thursday. Away from the US, the RBA has its rate decision later this afternoon and a monetary report will be released by the ECB on Thursday. There is plenty of information to drive volatility on currency and equity markets. While the US Fed started its tightening cycle back several months , a point to watch is the more hawkish tone now emerging from some of the other Central banks, as a greater focus on financial stability risks emerges. If this message becomes stronger it would indicate that the low interest rate Quantitative Easing climate is coming to an end.  Markets have pretty much traded within pre-existing ranges ahead of Friday's jobs data as they position themselves ahead of the releases, with the market questioning USD near-term direction and the data this week should give a clearer indication whether the Fed will hike again as early as September.

 
Australia
The more hawkish tone from other Central banks, throws the question as to whether the RBA will follow suit at this afternoon’s rate announcement. We think not, given the recovery in the Aussie economy only recently begun to emerge, but an increase in any hawkish rhetoric would be a future indicator. The AUD is currently sitting around 0.7668 against the US down from the 0.7694 high overnight. The tone is bearish on the firmer USD, but we expect 0.7645 support to hold ahead of the RBA this afternoon, with 0.7580/5 limiting upside moves. A dovish RBA statement could see further weakness, but 0.7575 would need to be broken to extend declines.
 
 
New Zealand
The New Zealand dollar was lower overnight, back below the 0.7300 level against the USD. It seems to have problems holding above the 0.7300 mark, with upside capped at 0.7345 and is increasingly looking over stretched at these levels. Continued good US data this week may set the NZD on course for a push towards the 0.7200 level, via immediate support at 0.7250.  With the tone of the major Central banks beginning to turn more hawkish this will put pressure on the NZD viz-a-vis its major trading partners, and although NZ fundamentals remain solid, todays NZIER Business confidence was up 1% to 18% for Q2 (Q to Q), look for the NZD to drift lower.
 
 
United States
Light volume in both US currency and equity markets last night, trading in shortened holiday hours. On the data front the June manufacturing ISM was better than expected, up at 57.8 against 54.9 which was the strongest reading since August 2014. Looking ahead to Friday's non-farm payroll figure, we expect the jobs increase to be around 170k for the month and the unemployment rate to be unchanged at 4.3% in June. Last month’s payroll gain of 138 k, while below consensus, was still above the level needed to absorb growth in the working-age population. Yet, as more previously discouraged job seekers re-enter the labor force, we may see a slight uptick in the labour force participation rate.  The USD has strengthened against its major trading partners, although traders are wary of the upcoming data releases and we do not expect major range breakouts ahead of Friday. The USD/JPY pair surged to its highest in two months, as a better inclination towards the greenback undermined the safe-haven yen. The pair traded as high as 113.45 early US session, but has drifted back to currently trade around the 113.25 level.
 
 
United Kingdom
The GBP reached a high against the USD of 1.3028 on Friday , buoyed the fresh hawkish stance from the BoE, with Governor Mark Carney recently suggesting that the central bank could remove some of the current stimulus.  However it has found trading above the 1.30 level tough going and was knocked lower from the 1.2975 level accelerated its downslide after the UK manufacturing activity slowed more than expected in June. In fact, the Markit’s UK manufacturing PMI retreated sharply to 54.3 in June, down from previous month’s 56.7 and well below consensus estimates pointing to a reading of 56.5. If more data continues to show a weaker trend, the BoE will have to re-evaluate tightening timetables. Now around 1.2940, continued selling interest has dragged the pair further towards 1.2925-20 horizontal support, which if broken would turn the pair vulnerable to extend the slide further below the 1.2900 handle towards testing its next support near 1.2860-55 region. On the upside, 1.3025-30 region remains immediate resistance, above which a fresh bout of short-covering could lift the pair beyond yearly high resistance near 1.3050 region and pave way for continuation of the near-term upwards trajectory towards reclaiming the 1.3100 handle...this is unlikely ahead of the US figures over the next few days.
 
 
Europe
The EUR has pulled back from the 12 month highs at 1.1445 made on Friday, dropping to a low of 1.1354 on the stronger USD tone. This pull back was despite some better data from the Eurozone. The final revision of the EU June Markit manufacturing PMIs showed that the sector's growth extended into the end of the second quarter, with the index up to 57.4, a fresh six-year high, and above flash estimate of 57.3. However across the region, readings were mixed with the German index up to 59.6, its highest in 74 months according to Markit, while Spain and French figures suffered modest downward revisions. Unemployment in the EU surged to 9.3% in May, above previous 9.25, but below from the 10.2% printed a year earlier. Overall a mixed picture , but has a bearish tone, the EUR/USD is currently at 1.1365 with  immediate support at 1.1340, then followed by Thursday's low of 1.1290. Resistance is first at 1.1380 then 1.1420.
 
 
Japan
The JPY suffered its biggest drop in two months as renewed enthusiasm for the USD saw the USD/JPY surge from 112.18 to a two month high of 113.46 as the safe-haven status lost some lustre. A surge in business confidence levels to a 3 year high had helped the JPY, but this gain was offset by the Tokyo election, as Abe´s Liberal Democratic Party suffered a large defeat, with the opposition Koike's Tokyo Citizens First party and its allies taking 79 seats in the 127-seat assembly. Currently the USD/JPY is back at 113.22 and as long as major support at 112.90 is not broken the JPY could rally back to threaten resistance at 114.05

 
Canada
The CAD remains strong to open this week, however the USD/CAD pair snapped five consecutive days of losing streak and staged a minor recovery to reverse major part of Friday's slide to 5-month lows a t 1.2945. A modest pick-up in the US demand remained key theme through early European session at the start of a new trading week and has been one of the key factors that could be attributed to the pair's recovery back closer to the key 1.30 psychological level. The sentiment surrounding the Canadian Dollar has turned very bullish in wake of the recent hawkish BoC rhetoric, pointing to a possibility of a rate hike sooner rather than later. Hence, it would be prudent to wait for a strong follow through buying interest before confirming that the pair might have bottomed out in the near-term. Another push back to the 1.2945/50 is likely, but US data this week market moving.


Major Announcements
•    US Final GDP 1.4% vs 1.2% expected
•    UK current Account -16.9b vs -17.2b expected
•    Chinese Manufacturing PMI 50.4 vs 49.9 expected
•    US ISM Manufacturing PMI 57.8 vs 55.0 expected
•    Australian Retail Sales 0.6% vs 0.2% expected
 

Economies of Note - 30th June 2017

Written by Howard Wilcox on June 30th, 2017.      0 comments

2:44pm(NZT)
Australia
The Australian dollar ends the week in better form than at the start. It is now trading around 0.7682, after a 3 month high of 0.7686 overnight, up considerably from the week's low of 0.7561, with the tone more positive and swinging to a “buy-the-dips” story helped by the firming iron price. Aussie fundamentals appear to be still a little mixed but jobs data released yesterday showed a further increase in vacancies, and this more positive tone should carry the AUD to threaten 0.7700 over the next few days. However US data next week will be critical to future direction and it will be hard for the AUD to extend much beyond the 0.7700 level ahead of the US Non-farm payroll figure next Friday. We still stand by our comment that in the longer term the higher projected US interest rate path will  chip away at AUD strength and look for a move  back around 0.7300-0.7350 in 3 months.


New Zealand
The New Zealand dollar has had a choppy week, ranging between 0.7342-0.7252, has managed to claw back over the 0.7300 level.  It’s currently sitting around 0.7306 but is making heavy work of advances above the 0.7295 level, look for consolidation around current levels to end the week. Next along with the July 4th holiday on Tuesday in the US will bring a major data dump of important US economic figures, culminating in the Non-farm payroll next Friday. If these figures are solid, showing the US economy continuing to recover, this will be supportive of the current Fed course to gradually increase rates and will therefore may keep the NZD on the defensive and a move back towards a test of the 0.7250 support  level is likely.


United States
US markets were volatile overnight as a shift in tone from central banks in Europe and the U.S. continued to drive financial markets, with stocks and bonds selling off. US equities suffered the largest drop in 7 weeks as technology stocks took a hit. In currency markets nearly all majors were higher against the USD. With the US Fed initially having taken the lead, there is now increasing evidence that other central banks, BoE and ECB in particular, seem intent on raising interest rates amid signs that the global economy is picking up steam, signalling the start of the end to nine years of stimulus.  US GDP data out last night saw Q1 revised upwards from 1.2% to 1.4%, but next week’s data will be crucial to continue the story of the US economic recovery remaining intact. We have June ISM manufacturing data, jobless claims, ADP employment change, factory orders and Non-farm payroll on Friday. Expectations are around 183K new jobs for June. The USD was lower against both the USD and EUR as acceptance by the heads of the UK and European central banks that tighter monetary policy may be appropriate in the not too distant future is once again supported those currencies this morning, with the euro having hit fresh 13-month highs against the dollar and the pound rising above 1.30 briefly, against the USD.


United Kingdom
The GBP ended the week on more positive note, shrugging off Brexit woes and political instability, buoyed by comments on Wednesday, from BOE Governor Carney who raised the prospect of rate hikes, warning that there’s a limit to the bank’s patience with above-trend inflation. The BoE Governor commented that higher interest rates will be "necessary" if the global recovery spurs an investment revival and leads to stronger wage growth and that there were signs that the recent period of weak investment growth was coming to an end. He said the global recovery had started to become "broad-based" creating "the possibility of a self-reinforcing revival in investment". The GBP broke through resistance at 1.2900 and is now at 1.3020, well up from the weekly low of 1.2706 seen on Monday. Resistance at 1.3047 should hold well into next week, immediate support is at 1.2950/55, a break of which would target 1.2910/20. Given the big moves over the last 2-3 days and the US data releases next week we look for consolidation around current levels over the next two days.


Europe
Choppy trading for the EUR this week, mainly initiated on comments from the central bank over the week. Initially the ECB comments were dovish and seen as dashing hopes of rate hike expectations which saw the EUR lower against the USD to 1.1171. However the EUR rallied strongly on Tuesday night breaking through the 1.1300 level after the ECB said its comments had been misinterpreted and further hawkish comments on rates by ECB President Draghi saw the EUR climb to 1.1435. The EUR was further boosted by last night's preliminary release of German CPI showing that prices are expected to rise at an annualized pace of 1.6% and 0.2% m-o-m, the EUR made fresh yearly highs around 1.1445. It now looks a little overbought given the level it has come from over a short time span, but immediate support at 1.1380  should hold going into next week.


Japan
The JPY has had a good week trading up from a low of 111.17 at the beginning of the week to a month and half high at 112.92. It is now back around 111.90. Data releases have been mixed with unemployment rate rise above expectations, but industrial production figures on target, but CPI data coming in flat against expectations of a rise. Support is currently around 111.60 and resistance at 112.45 we expect this range to hold as we head into next week.


Canada
The CAD has had a positive week, on slightly firmer oil prices and comments around interest rates by the Canadian central bank. The Bank of Canada (BoC) Deputy Governor Carolyn Wilkins on a routing speech put the end of easing firmly on the table. This was followed by Governor Stephen Poloz a day later to reiterate the message. The head of the BoC has hammered the message this week, that the rate cuts have done their job, but tried to not too much emphasis on a rate hike with the upcoming July monetary policy meeting. The USD/Cad rate has gone from 1.3259 at the beginning of the week to its current level around 1.2975.

 
 

FX Update: The NZD remains well supported

Written by Howard Wilcox on June 27th, 2017.      0 comments

4:00pm(NZT)
Overview
Markets have been mostly range bound at the start of the week, with little to cause any major changes in current trends. Although US data in the form of Durable goods data was soft overnight, raising some questions over the resilience of US growth, the Fed desire to normalise interest rate policy continues which has helped the USD to hold onto gains against its main trading partners especially the JPY and EUR. Commodity prices remain choppy but the overall negative trend for oil prices continues and both WTI and Brent oil are now in a bear market, prices having fallen over 20% from peaks earlier this year. With increases in production from Libya, the US and Nigeria, the oil market has now taken back all the gains seen after the OPEC agreement late last year to cut production. This trend is expected to remain in force for some time yet. In Europe the focus remains on the ongoing Brexit negotiations as the UK and EU square-off on their initial sparring stance. UK Prime Minister May had her hand marginally strengthened, on news last night that she had secured support for a minority government from the Irish Democratic Unionist Party, but this has come at a hefty GBP 1 billion cost to be spent for infrastructure, schools and hospitals in Northern Ireland. The distraction that is the Trump Presidency continues, with still no concrete steps forward on tax reform or increased infrastructure spending, as the repeal of Obamacare and the Russian investigation continue to absorb the administration’s energy.


Australia
The Australian dollar continues to consolidate around the 0.7560-0.7580 level having bounced back from the 0.7534 monthly low and looks to be attempting to re-establish upward momentum for a push back to the 0.7620/30 mark. News from China has been less helpful as the deleveraging trend continues and ratings agencies are predicting a rise in defaults, however the uptick in steel prices argues well for a potential recovery in iron ore prices. Also underpinning the AUD is a rebound in Aussie jobs creation which has kept the lid on any RBA rate cut, both of which is AUD supportive. However, longer term, the higher projected US interest rate path will chip away at AUD strength and we suspect that it will be back around 0.7300-0.7350 in 3 months.


New Zealand
The New Zealand Dollar maintained its bullish momentum during the NY session Monday posting a fresh 4 month high of 0.7260. Closing in on the previous high of 0.7360 of Feb 7th the kiwi against all predictions squeezed higher. The RBNZ kept the cash rate on hold Thursday at 1.75% siting major challenges still remain with political uncertainty. Inflation has increased over the past year in several countries but remain pressured with energy prices falling, monetary policy is expected to drop going forward. Longer term inflation expectations remain well anchored around 2%. May trade balance figures yesterday came in at 103M well under the expected 420M with a rise in imports and petroleum and vehicles tipping the balance. If ANZ Business confidence is positive tomorrow we could see the kiwi back trading around the late Feb 0.7360 lofty heights.


United States
US markets continue to trade at elevated levels, although off previous highs after data showing a steeper drop in durable goods than forecast raised concern about the pace of U.S. economic growth. Overnight comments from senior Fed officials intimated that although some recent economic data has been was weaker, the message of policy normalisation was unchanged. Attention will be focused on a speech by Fed Chair Yellen later tonight to see if she provides more clarification. The USD has dropped below the 1.1200 level against the EUR as the market eyes tomorrow’s consumer confidence report which is predicted to be softer. Next week will bring a raft of US economic data culminating in Friday’s Non-farm payroll figure. Currently the EUR/USD is trading around 1.1182 with major support at 1.1120 unlikely to be tested over the next few days. Topside resistance is 1.1220 but we look for consolidation at current levels ahead of Yellen's comments.


United Kingdom
UK news is more positive with the GBP higher against the USD on the weaker US durable goods data and also helped by the political news that PM May has managed to cobble together with the Irish DUP to create a minority government, albeit at a hefty price, a GBP 1 bio in spend-up on Northern Ireland infrastructure. Brexit negotiations continue, with headlines over the past few days centring on provisions for EU immigrants living in the UK, but more worrying economically are reports of the several large banking institutions looking to move Euro clearing business to Frankfurt which has potential to negatively impact the City of London and its associated economy. Time will tell if these moves come to pass. The GBP is currently around 1.2720 against the USD after a high of 1.2756 a week ago. Immediate support is at 1.2690 then 1.2665 ahead of the weeks low at 1.2588. It should hold in the 1.2665 /1.2760 range over the next few days.


Europe
The EUR was lower overnight after comments from ECB President Draghi that low interest rates helped increase jobs, benefit borrowers and encourage growth. His comments were seen as dialling down on any expectations for an early ending of the ECB monetary stimulus policy. On a EUR positive note the German IFO business sentiment out yesterday was positive, with the Index rising from 114.6 points last month to 115.1 points in June, breaking May’s record. Companies were significantly more satisfied with their current business situation this month. They also expect business to improve. Germany’s economy continues to perform very strongly. Look for range trading around the present 1.2700 level ahead of Yellen’s speech later tonight.


Japan
The Japanese Yen was light on data releases last week relying on offshore news for direction. JPY was generally flat across most of the week dropping to a low of 110.90 midweek before giving up ground to the greenback trading at the close around 111.25. The BOJ released its summary of opinions for the June policy meeting which was unchanged at 0.7%, bang on expectation, and created no fuss in the markets with policy makers suggesting inflation would remain low for extended periods. There seems to be “no show” they will increase rates until inflation reaches their target price of 2%. The JPY trades currently at the solid resistance level of 112.00 and targets 114.60 early May levels if the US releases are positive this week, no significant local Japanese data pending.


Canada
The Canadian Dollar ended the week on a positive note, the US Dollar weaker after less than positive economic news. Crude oil traded to a low of 42.20 but recovered slightly this morning to 43.44 to boost the CAD to low 1.32’s. This could all go south again with the release of the crude inventories published tomorrow. The OPEC cut in oil production has failed to work with US and other non-agreement oil producers increasing their production keeping an over- supply in place. Thursday BOC governor Poloz speaks in Portugal and monthly GDP is published Friday. The weekly high of 1.3340 could be tested again if oil prices drop sharply, BOC is sure to bring volatility to the table and put CAD under further pressure.


Major Announcements
•    RBNZ leaves the cash rate unchanged at 1.75%
•    Canadian retail Sales 1.5% vs 0.6% expected
•    Canadian Inflation 0.1% vs 0.2%
•    US Durable Goods Orders 0.1% vs 0.4% expected
 

FX Update: NZD range bound ahead of Thursday’s RBNZ meeting

Written by Howard Wilcox on June 20th, 2017.      0 comments

3:20pm(NZT)
Overview
A quiet start to the week with relatively little economic data overnight to influence markets. Overnight US equities continued to surge higher with both the S&P500 and Dow indices rising to new record highs. On commodity markets oil continued to weaken, with WTI crude down 1.2% to US$44.20/brl continuing a four week decline as US drillers add oil rigs, circumventing attempts by OPEC to rebalance an oversupplied market. Also making news last night was the long anticipated news of an Australian credit downgrade by rating agency Moody's, who dropped the credit rating of the four Australian banks, ANZ, Westpac, CBA and NAB on concerns over “elevated risks within the household sector due to high levels of indebtedness” i.e. Mortgages. In Europe, Brexit negotiations commenced with little fanfare. The French election is now over and has left new president Macron a large majority for his En Marche party which will give him a free hand in embarking on reforms on the moribund French economy. Perhaps at last there is a chance of some real reforms to spur growth and reform archaic labour laws. A future reinvigorated France would be very positive for the Eurozone but this will be long term “work-in-progress”.
 
 
Australia
The Moody’s downgrade for the 4 major Aussie banks to Aa3 (now in line with S&P ratings) , saw the AUD take a hit early overnight  to a low around 0.7585. This was short lived however and the AUD bounced back to the 0.7600 helped by a rally in the iron ore price which were up 1% and look to now be stabilising. Later today there will be the release of the RBA June meeting minutes which will be inspected for comments around any timing of interest rate movements. The market has fully priced in a' no-change' to rates for the rest of this year, any surprises in the language of the minutes, either way, could move the market significantly there is also the ANZ Consumer Confidence data later in the day . The AUD/USD has been in correction mode since the beginning of this month from lows of 0.7374. In recent trading, the pair broke up through the 0.7600 level. Any upside surprises from the meeting minutes could eye a break towards the 0.7640 resistance area, while on the flip side, a break below 0.7570 would expose 0.7520.
 
 
New Zealand
The New Zealand dollar was lower overnight, dropping in sympathy with the AUD, from 0.7280 to 0.7227. It opens around 0.7223 but continues to be well supported ahead of tonight's Global Dairy Auction, expectations are for a slight increase in prices and the RBNZ statement on Thursday. Hawkish comments from a US Fed official overnight helped accentuate the divergence between the Fed and RBNZ and along with last week's softer GDP data the NZD looks set to remain below the 0.7250 level at least until Thursday’s statement is out of the way. The NZD is currently trading around 0.7220 but a break of 0.7200 would target 0.7145, but expect consolidation around current levels for the next few days.  The NZD/AUD cross has drifted lower and is currently holding around 0.9505 but looks to hold in a 0.9480-0.9615/20 range over the next few days...downside looks more favoured.
 
 
United States
US equity markets continue to forge higher, even though last night saw comments from Fed official Dudley displayed his confidence in the FOMC’s rate hike path in addition to acknowledging continued growth in the economy. One of the FOMC’s important messages from the June meeting was that the Committee was not unnerved by recent downside surprises in inflation or underperformance of some economic indicators in recent months, this has unsettled some investors who remain concerned that potentially rate hikes may occur as inflation flat lines. However Dudley last night provided the markets with yet another vote of confidence that recently lagging inflation would pick up, justifying higher interest rates going forward. In his speech, Dudley asserted, "inflation is a little lower than what we would like, but we think that if the labour market continues to tighten, wages will gradually pick up, and with that, inflation will gradually get back to 2%." The USD was bolstered on the back of these comments and with the EUR/USD unable to break over the 1.1300 level a stronger USD looks to favour the downside targeting 1.1100 which if broken would expose 1.1000.
 
 
United Kingdom
Brexit negotiations began yesterday with little fanfare, however the UK’s negotiator, David Davis and the EU slammed the door on any prospect of a “soft” Brexit as formal negotiations on leaving the EU finally got underway in Brussels.  The Brexit Secretary confirmed Britain would be leaving the customs union and the single market, in a move designed to scupper any parliamentary plots to water down the terms of the UK’s withdrawal from Europe. His counterpart, Michel Barnier, the EU’s chief Brexit negotiator, also confirmed that Britain would leave the single market and the customs union. Such a unified public declaration of the intention to press ahead with a “hard” Brexit, sends a clear message to former Remain campaigners in Parliament who still hope membership of the customs union and the single market are up for grabs. Davis commented that he intends to seek a free trade and customs agreement with the EU during the course of the negotiations, this is likely to meet with some resistance from the EU. The GBP/USD traded higher, climbing to 1.2813 , but then dropped to 1.2722 after the Fed comments ...resistance at 1.2820 is now  distant, with a move to test immediate support at 1.2705 more likely over the next day or so.  
 
 
Europe
European equity markets were higher following the convincing parliamentary majority for President Macron. The victory is welcomed by investors and should bring political stability to one of the biggest countries of the EU, given that the French economy underperformed leading to stagnation and persistent high levels of unemployment (10%+) under Francois Hollande , investors are optimistic on future growth potential. In other news German Chancellor Merkel was reported as commenting that Europe had not yet made a full recovery from the GFC. The EUR/USD traded in a neutral 1.114-1.1265 range overnight with few notable data releases.
 
 
Japan
Disappointing Japanese trade balance data and the more hawkish Fed comments saw the JPY weaken against the USD towards the 112.00 level with an overnight high of 111.58, it has opened weaker, now around 111.64 . The May Japanese trade balance, released yesterday, was well below that expected, posting a deficit of ¥203.4 billion, missing the expected surplus of ¥76.0B. Imports, however, were up by 17.8% when compared to a year earlier, while exports rose by 14.9%, doubling previous month's gain but slightly below expected. Immediate USD/JPY support is now at 111.25 with resistance at 112.00 and given the firm Fed stance a slow grind higher towards 112.45 once 112.00 if 112.00 gives way y over the next few days.
 
 
Canada
With WTI crude oil back under US$45/brl pressure is back on the CAD after ending the week at 18 month highs after comments from the Band of Canada Governor that he saw the potential to hike interest rates sooner than the market was expecting. The CAD dropped to 1.3190 overnight. It has now regained the 1.3200 handle trading around 1.3220. Immediate resistance remains 1.3300, then 1.3365. Last week’s low around 1.3165 is critical support, looks likely to be tested later in the week.


Major Announcements
•    UK Average Earnings Index 2.1% vs 2.4% expected
•    US CPI -0.1% vs 0.2% expected
•    US Core Retail Sales -0.3% vs 0.2% expected
•    FOMC hikes interest rates 0.25% as expected
•    NZ GDP 0.5% vs 0.7% expected
•    Australian Employment change 42.0k vs 9.7k expected
•    Australian Unemployment rate 5.5% vs 5.7% expected
•    UK Retail Sales -1.2% vs -0.9% expected
•    Bank of England vote 3-0-7 to leave rates unchanged at 0.25%
•    Bank of Japan leaves interest rates unchanged at -0.10%

 
 

Economies of Note - 19th June 2017

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

8:00am(NZT)
Australia
The AUD traded higher yesterday, hitting a two month high of 0.7631 against the USD on much better than expected jobs data. Figures showed that May unemployment fell to 5.5% exceeding expectations of 5.7%. The data was encouraging as it showed that the jobs growth was all in full time employment with 52,100 full-time positions added to the economy while 10,100 part-time ones fell away. This defied previous forecasts of an increase of only 10,000 new jobs. This  net 42,000 rise in May employment  marked the 3rd month in a row of strong job creation following on from March +53k , April +46k , there was also an increase in the participation rate which refers to the number of people either employed or actively looking for work, up to 64.9% from 69.4% in April. The AUD/USD is now around 0.7588, with solid support around the 0.7560 mark ...look for another push to the 0.7630 resistance level next week, although the ongoing USD strength will prove challenging.
 

New Zealand
After a high for the week on Wednesday at 0.7317 the New Zealand Dollar tracked lower yesterday, sinking to a low of 0.7184 after being knocked by the stronger USD on the hawkish Fed statement combined with a softer than expected quarterly GDP result. The domestic economy expanded at a slower pace than the 0.7% analysts predicted, growing just 0.5% through the first 3 months of 2017. Having enjoyed a run of strong gains throughout the last month the NZD is now perhaps due for a correction and a consolidated move back toward 0.71 and 0.70 are possible through the short to medium term. With a better result than expected the Australian employment data may just have been the straw that breaks the camels back of the NZDAUD cross. It has been sitting comfortably above the 0.9500 (below 1.0500) level for much of the past 2 weeks, but we now started to see it melt away. We suspect we will see further downside price action over the coming days.
 
 
United States
It was all about the Fed yesterday as the widely expected 0.25% rate hike came to pass, with rates now back at the 1-1.25% range, a level not seen since the Global Financial Crisis. Earlier in the day the market was disappointed by lacklustre US Retail sales figures and CPI data which showed a 0.1% fall in headline CPI and only a small 0.1% rise in core CPI. This gives an annualised core CPI reading of 1.7%, a drop from the previous 1.9%, this was the fourth fall in a row for the annualised figure. However the Fed shrugged this data off commenting that it was transitory in nature. Overall the Fed statement was more hawkish than expected as it maintained its view for a third hike in 2017 and aside from acknowledging the drop in inflation, which was downplayed Fed Chair Yellen, as being by attributable to one off factors, everything Yellen said was hawkish. She was bullish, talking up the improvements in the labour market and economy and shared the central bank's plans to reduce its balance sheet by unwinding asset purchases. The dollar traded sharply higher in response. The Fed also raised its GDP forecasts, lowered its unemployment rate estimates and cut its projection for inflation.  However there is some concern emerging that the Fed is tightening in an environment of falling inflation and economic data that may be taking a negative turn. Nonetheless, with the Fed looking beyond the recent weakness and seeing the need for another hike this year, dollar downside should be limited. In other US news the political situation of the Trump administration continues to be eroded by the “Russia” problem with little attention being paid to the implementation of policy. US equity markets were lower again for the fourth time in 5 days as the tech sector continued to sell-off and the Fed statement was further digested. The EUR/USD traded down to 1.1131 overnight , it is currently back around 1.1145 but a break of 1.1110 levels would extend to 1.1075 then 1.1030, we look for these levels next week.

 
United Kingdom
The political woes of the Conservatives forming a workable government continue to grind on and with Brexit negotiations scheduled to start on Monday adding further pressure. The Bank of England left rates on hold at 0.25% at yesterday’s Monetary Policy meeting, but what was surprising was a split vote as three BoE officials called for UK rates to rise, signalling that they are more concerned about rising inflation even though there are signs the economy is slowing. The GBP spiked up against both the USD and EUR after the meeting minutes were released. The MPC said inflation had picked up more quickly than expected in since its last economic forecast in May. It also commented that a further fall in the value of the pound since its last evaluation of the economy would also add to upward pressures on inflation. The minutes said there was a risk that inflation would rise "above 3% by the autumn", above the 2.8% peak the BoE had previously forecasted for the second half of the year. MPC officials noted that measures of domestically generated inflation were picking up even as economic growth slowed to 0.2% in Q1. However what was also of interest was the growth in employment was accompanied by continued weak wage growth, unemployment is now at its lowest level since 1975. The GBP/USD is currently trading lower, around 1.2781 following the release of softer-than-expected Retail Sales figures, down by 1.2% in May, following a revised gain of 2.5% in April, after a high of 1.2815 earlier this week. We expect little further action in the GBP ahead of Monday’s Brexit negotiations, next immediate support is away at 1.2750 then 1.2705...but that is next week's story.
 

Europe
The old Greece crisis was back on the table yesterday, as it avoided a summer default last night, securing EUR 8.5bio in bail-out funds even as creditors dashed Athens hopes for a more comprehensive debt relief deal. It follows a crunch meeting in Luxembourg that also paved the way for the International Monetary Fund's participation in the country's third rescue package. Eurozone officials said Greece would have to wait for “final decisions” on reducing its debt burden. However, creditors outlined a package linking relief to the country's economic performance amid tough fiscal targets for a country ravaged by recession. IMF head Christine Lagarde, said greater clarity on debt relief and efforts by the Greek authorities to implement reforms opened the door to an "approval in principle" for up to €2bn in IMF assistance, she   conceded that the agreement was a "second best solution", but ensured that the country had avoided another financial crisis. Surprisingly the Greek economy is now 27% smaller than it was in 2008. Choppy trading in the EUR/USD saw the EUR soaring to a new 2017 high at 1.1295 after the poor US inflation and retail sales data, then dropping sharply to 1.1131 after the upbeat Fed statement...we expect the EUR to continue to correct lower next week.  
 

Japan
The JPY saw choppy trading over the last 24 hours, hitting a low of 108.80 after the weaker US data releases then bouncing back to a 110.97 high last night after the Fed statement, is currently trading around 111.16 with the USD extending previous gains as the Bank of Japan kept rates on hold as widely expected. A press conference will be held later today by BoJ Governor Kuroda where he is likely to reiterate bank’s commitment to meet the 2% inflation target. Traders would want to hear from Kuroda about the QE exit strategy, with any comments about QE taper/balance sheet reduction seen to strengthening the bid tone around the Japanese Yen. A break of 111.27 would target resistance at 111.57….a break of downside support at 110.90 would expose 110.56 , but we favour consolidation at current levels to end the week.
 

Canada
USD/CAD movements have also been whippy over the last few days, after a 1.3468 high earlier in the week, it has traded down to the 1.3164 mark and is now back around the 1.3262 level. Most of this movement has been due to the heightened USD volatility, despite better manufacturing data the USD/CAD is struggling to find upward momentum and especially with the oil price (WTI) below US$45/brl the CAD will continue to make heavy work to make significant inroads on its recent losses. Immediate resistance is at 1.3300, then 1.3365. The week's low around 1.3165  is critical support, but unlikely to be tested until next week.

 
 

FX Update: Central banks in focus

Written by Howard Wilcox on June 13th, 2017.      0 comments

3:30pm(NZT)
Overview
Markets have opened the week with a more stable tone, with little in the way of major data releases, as they wait for this week’s main event, the Fed meeting on Thursday. Expectations are for a rate hike of 0.25%, but concentration will be on the accompanying rhetoric and if there is a pointer to another one or two rate increases later in the year. An indication of two further rate hikes would put the market on the back foot as while another hike is also widely expected a second hike is not currently priced-in and increased probability of such an event would likely see a jump in USD values. The fallout from the UK continues with the Conservative government looking at six-and-sevens as it struggles to create some order from the political chaos. The GBP continues to remain under pressure amid concerns that the government’s weakened position will leave it in a poor negotiating position for Brexit talks, which start next Monday. Also not helping were comments from Moody’s rating agency that the election outcome would complicate and most likely delay Brexit negotiations. The drama that is the Trump Presidency continues to roll on with lots of headlines, but little real work being done to implement policy to underpin the advancing of the US economy. Also of note is the increasing tension over the Qatar / Saudi split and subsequent Qatar boycott by several Middle Eastern states. This has had little effect on financial markets at this stage but any escalation has potential to cause market dislocation, a watching brief for the moment.
 
 
Australia
Quiet start to the week for the Australian dollar due to the holiday on Monday. After a high of 0.7565 is marginally lower now at 0.7557 but looks comfortable sitting above the 0.7500 level. This week will see Consumer confidence data tomorrow and May employment figures on Thursday which are expected to be AUD supportive. Steel prices have started to trend higher which should be reflected in the iron ore prices which would also help underpin the AUD. Solid support at the 0.7500 level which if broken would open the way for an extension to 0.7400, but we favour a range bound AUD between 0.7530-0.7585 ahead of Thursday’s Fed meeting.

 
New Zealand
The New Zealand Dollar continues to appreciate against the major currencies. With the greenback still under pressure the NZD has risen to just shy of a 4 month high trading currently around 0.7220 levels. A 0.25% rate hike is expected Thursday by the Federal Reserve and the markets have largely price this in already. Attention will be on the Fed’s comments going forward with further hikes on the horizon, With GDP data constantly being revised lower we may not see any rate excitement until  2018. Locally we have quarterly GDP data published Thursday morning with figures expected to be around 0.7% growth, if this figure is positive we may see further upside for the NZD, the next resistance level is 0.7250 and 0.7400 with support seen around 0.7050  
 
 
United States
Plenty of political news, with the fallout from the Comey testimony continuing and speculation as to what will come out of the Attorney General Jeff Sessions appearance before the  Senate Intelligence Committee tonight. It is unlikely that Sessions will divulge any explosive new details, especially since the attorney general could assert executive privilege regarding any questions about conversations with President Trump. Markets are still more interested in Thursday’s FOMC statement and how soon/whether the Trump administration’s taxation and infrastructure agenda can get back on track.
On Wednesday the May CPI report will be released. Iit is expected to remain pretty much unchanged for May with the year-on-year decreasing to 1.9%, which although marginally weaker than expected the  overall economic growth outlook remains positive and  the recent soft inflation prints should not deter Fed officials from raising rates at the Thursday meeting.
 
 
United Kingdom
The fallout continues after the shambolic election result (for the Conservatives that is…!) and Prime Minister May continues to try and form a government. The GBP as expected dropped sharply last week as soon as exit polls showed that a “hung” parliament was possible, it hit a low of 1.2633 against the USD last week, is now marginally better currently at 1.2665 but the tone remains negative and we expect this to last until a more certain political outcome is evident but this could take most of this week. The final outcome of the UK general election turned out to be that the Conservatives won 318 seats, Labour 262, the SNP 35, the Lib Dems 12 and the DUP 10. Given that none of the parties won more than 326 seats, indicating a Hung Parliament. The Conservatives lost their majority, now having even less seats than they had before the election. Conversely, the Labour Party saw an increase of around 30 seats, Labour’s dominance in the House of Commons is now expanded. Latest surveys suggest business sentiment has weakened in reaction to the election and consumer spending appears to be weakening in response to rising inflation and low wage growth; according to IHS/Visa, consumer spending fell an annual 0.8% in May, the first drop since late 2013. This is putting pressure on the PM to mitigate her “hard Brexit” approach but given her tenuous hold on power, she may have little choice. Over the next two days we have UK employment and inflation data along with May retail sales on Thursday which will provide a snapshot of how the underlying  fundamentals are tracking. There is also a Bank of England meeting on Thursday. Given that the BoE is dealing with rising inflation rates and, although they are unlikely to lift rates, there could be some relatively hawkish rhetoric following the event. Look for the GBP to suffer some bouts of volatility. Support is at 1.2630 a break of which would target 1.2550, resistance at 1.2705 unlikely to threatened over the next few days.
 

Europe
Quiet offshore trading as markets watch political developments ahead of the Central bank meetings later in the week. Overnight comments from ECB officials suggested the central bank is in data watch mode – “we are very much data-driven. We’ll discuss tapering whenever we’ll see the economic situation and the prospects of inflation ripe for discussion”. Political news centred mainly around the British election and consequent ramifications for the Brexit negotiations, but also of note was a very strong showing in the French elections for Macron’s  La Republique En Marche party which won  a huge majority in the French Parliament's  first round of voting, expected to get between 415-455 seats out of 577, a majority which will give him the mandate to force through change in the French economy. The EUR/USD remains lacklustre around the 1.1200 level with Investors looking at tomorrow's ZEW Survey results for some short-term trading direction. Economic Sentiment from Germany and the EU and the Current Situation surveys are all expected to show improvements in June, Thursday will see data for industrial production released. Better than expected readings could allow the EUR to recover some of the losses it recorded against the USD on Thursday but it may have a difficult time gathering a sustainable momentum ahead of the Fed statement. Currently the EUR/USD is around 1.1194 and unless support at 1.1080 is broken, downside looks limited, resistance is at 1.1210 then 1.1250. We expect a 1.1170-1.1210 range ahead of the US FOMC statement Thursday.
 
 
Japan
The Japanese yen was unharmed Friday after Comey testified in front of congress, the occasion turned out to be a non-event for markets. JPY posted small gains Monday against the greenback trading around the 110.00 area with producer Price Index figures published bang on expectation of 2.1%. Later in the day Japan releases the Business Survey Manufacturing Index which is a leading indicator of optimism. The economy has posted growth in the last 5 quarters, this is the first time this has happened in over a decade as Japan benefit from a strong Manufacturing sector. JPY awaits the fed announcement Thursday for further direction, we may see USD strength towards week end, we would expect support of 108.25 to be safe for now.
 
 
Canada
The Canadian Dollar made a good start to the week against the greenback pushing through 1.3400 soon after the open. Oil inventories have improved this week after supply limits last week from Saudi Arabia took crude to new lows with expectations that levels would drop by 3.1M Barrels but instead increased by 3.3M barrels . Back at 46.10 this morning has put the US Dollar under pressure, the CAD on the verge of breaking new support of 1.3250 if we see Oil prices improve further. The Bank of Canada is expected to hike rates sometime towards the end of the year as the governor of the BOC said as growth continues we can expect further consideration as to whether monetary policy stimulus is still required.
 

Major Announcements
•    Australian Trade Balance 0.56b vs 1.91b expected
•    ECB leaves interest rates unchanged
•    UK Manufacturing Production 0.2% vs 0.8% expected
•    Canadian Employment Change 54.5k vs 11.5k expected
•    Canadian Unemployment Rate 6.6% as expected

 
 

Economies of Note - 8th June 2017

Written by Howard Wilcox on June 8th, 2017.      0 comments

4:00pm(NZT)
Australia
After Tuesday’s meeting where the RBA kept rates on hold as expected at 1.5% the AUD has rallied back over 0.7500 against the USD supported by a better than expected GDP result for the March quarter. Data released showed that the economy grew by an anaemic 0.3% in the first quarter, but this was better than suggested after the poor balance of payments figure released on Tuesday. After breaking through 0.7500 the AUD extended gains to a month high at 0.7565, has now consolidated around the 0.7540 level. The RBA reaffirmed its expectations of ongoing strengthening economic growth in its Tuesday statement even though year-on-year growth has slowed from 2.4% to 1.7%, placing GDP growth close towards the bottom of the 2-3%  RBA target range That’s not a sterling result but still in positive territory giving the RBA potential for a rate cut later in the year (Q3..?). Also helping the AUD was a small 0.2% lift in the iron ore price. We expect the AUD to consolidate around current levels over the next few days but another push towards 0.7600 cannot be discounted and should attract selling interest given the Fed rate hike expected next week.
 
 
New Zealand
The New Zealand Dollar continues to strengthen Thursday reaching a high of 0.7205 during early morning NY trading. Now trading at 3 month highs the kiwi surged ahead on global risk appetite and a softening US Dollar. Global Dairy Actions Monday showed an increase of 0.6% overall the 6th consecutive rise – federated farmers chairman Haggard suggested prices should remain stable in the near future. The news boosted the New Zealand Dollar demand. James Comey testifies before congress tomorrow morning, expect the markets to hang off every word. The bearish NZD outlook remains leading into the second half of the year based on higher expected US interest rates and a stronger US Dollar overall. Resistance is 0.7250 then 0.7350 the high of 26th January 2017, 0.7050 support.  
 
 
United States
Expect trading to be choppy ahead of events for “super” Thursday, the Comey testimony, ECB meeting and UK election. There is plenty here for USD volatility! The Comey testimony is already generating headlines after the publication of his statement on the Senate website, more negative news for President Trump from Comey’s  verbal answers tonight will cause markets to negatively reassess the potential for continuation of the Trump policy agenda on taxation reform and infrastructure spending. US equity markets closed higher, as the risk-off tone seen earlier this week abated, reversing a two day price slide and oil was sharply lower, falling over 4% as an unexpected increase in US stockpiles heightened concerns that the global supply glut will continue.
Trading in the EUR/USD has been choppy trading in a 1.1282-1.1204 range overnight, currently sitting around 1.1255 and we expect USD to trade around current levels until some of tonight's news hits the wires.
 
 
United Kingdom
It’s all about the election tonight with polls continuing to show the Conservatives with a narrow lead. The GBP has continued to trade in a narrow range although trending higher and we expect a break out either way depending on the result, which should be known after early exit polls around midday NZ time tomorrow. The GBP traded up to a 10 day high of 1.2970 against the USD last night as markets punted that Theresa May’s Conservatives will win tomorrow’s election. The FTSE was lower, having its biggest fall in 6 weeks, as multinational company stocks who benefit from a weaker GBP came under selling pressure.  However the polls continue to be conflicting with six polls published on Wednesday, of which two showed the Conservatives widening their lead over Labour, two showed a narrowing and two were unchanged. If there is an increased majority for the Conservatives we could see a GBP breakout to the 1.3200 level against the USD…..tomorrow will tell..!!

 
Europe
Along with the ECB meeting, the EU will release a revision of its Q1 GDP figures tonight. This is expected to confirm that the economy grew by 0.5%  in the three months to March. A disappointing figure may affect the EUR, but a larger reaction will be triggered by the ECB decision and comments. Currently the Market has been largely pricing in a hawkish stance coming from Draghi, but such sentiment was tempered by latest flash CPI figure, down to 1.4% in May from 1.9% in April, and recent rumours of an inflation forecast downgrade. Unless Draghi mentions the end of QE being at sight, there appears to be little room for advances, particularly if the inflation forecast is actually downgraded. EUR/USD overnight trading was solid making a high of 1.1282, despite disappointing German new orders data for April, which fell 2.1%  compared to March’s 3.5% increase, but this was shrugged off as being attributable to a seasonal decline. Immediate support resistance levels are 1.1200- 1.1300, we favour continued EUR strength around the top of the range to see the week out.

 
 

FX Update: Buckle up for an eventful week

Written by Howard Wilcox on June 6th, 2017.      0 comments

3:45pm(NZT)
Overview
US equity markets opened the week off last week's all-time highs, with the USD slumping with crude oil as risk trades took a back seat and markets opened a week full of events on a cautious tone. This week will be dominated by 3 main events all occurring on Thursday, the UK election (we should know the outcome by Friday midday), the European Central Bank (ECB)  meeting and the former head of the FBI James Comey is scheduled to testify before the Senate Intelligence Committee on Thursday morning in the US. Hopefully in the UK the Conservatives will win with an increased majority, giving some certainty to Brexit negotiations. The ECB will continue with a “steady-as-she goes” policy statement (expected by the market) and Comey’s testimony will not have a “smoking gun” that destabilises (further) the Trump administration. As any one of these events have potential to add a large dose of volatility to financial markets. The US Non-farm payroll data on Friday was a major disappointment well below expectations of 180-185K coming in at 138K jobs created in May, although the unemployment rate dropped to 4.3% from the previous 4.4%. However consensus remains that the Fed will go ahead with a 0.25% rate hike next week, although the probability for another hike in  September is now much more data dependent.
 

Australia
After Friday’s lacklustre US jobs report the Australian dollar staged a comeback rising to a high of 0.7497, it opens this morning around 0.7486 in a consolidative mode ahead of this afternoon’s RBA statement. Also helping the Aussie dollar were better Chinese PMI results yesterday that allowed the AUD to consolidate the moves higher made on Friday. Market expectations are for the RBA to keep rates unchanged at 1.50% as reports since the RBA's last meeting show strong employment gains and a surprise rebound in retail sales. However the counter to this has seen construction has being softer and wage growth remaining stagnant. Also the first signs in 18 months in May of a cooling off in house prices make a rate cut more likely in the September quarter as the RBA has more time to gather further data over the intervening period. Given the moves over the last two days 0.7500 is the immediate resistance level which if broken would likely see some short covering which should push the AUD into the 0.7540/50 region with next resistance level up at 0.7485. On the downside a pullback below 0.7460 would target support around 0.7430/35 which if broken could extend down to the 0.7400/0.7390 mark. Just released is news that the Aussie current balance is much worse than expected at -3.1bln against an expected -0.5bln, net exports were also substantially lower suggesting a potential downgrade of around 0.7% for tomorrow's March quarter GDP. The AUD has sold off around 35 pips to 0.7455 on this news.

 
New Zealand
The New Zealand dollar pushed back through 0.7130 during early morning trading back in favour with investors again after weaker US data was published. We need to go back to early February to view NZD interest at these levels, the bullish channel from the low of 0.6815 still remains in place. Non-Farm Payroll and Manufacturing numbers were both weaker than expected Friday. The main focus over the next few days will be on the Fed Rate announcement, with good gains in employment and wage growth this supports a June 15th hike but hardly gives them any long term excitement and urgency with inflation lower than the targeted 2%.  Global Dairy Trade Auctions are held overnight with expectations of continuing recent momentum in prices to the 9 dairy products. NZD remains solid over 0.7100 with view of possibly returning to 0.7250 resistance in the short term..   
 
 
United States
The disappointing NFP jobs data on Friday was slightly tempered by the small drop in the unemployment rate from 4.4% to 4.3%, however this could not prevent the US dollar dropping against all its major trading partners. Although significantly below market expectations the payrolls report has not derailed expectations of a 0.25% Fed rate hike next week but it has cast doubt over the extent of any further tightening going into the 3rd and 4th quarters of this year.
The testimony by ex FBI Director Comey will hopefully for the Trump administration, not contain any major revelations as this would continue to further divert attention away from the administrations next policy thrust of increased infrastructure spend which has been one of the pillars of the “Trump bump” equity rally over the last few months. Other US data releases for ISM non-manufacturing, factory and durable goods orders were also softer but had little immediate effect on the market. The USD opens at lower levels against both the JPY and EUR and we would expect little major movement ahead of Thursday as markets await results of the UK election, ECB meeting and the Comey testimony. Look for the EUR/USD to trade  around 1.1250 over the day with risk  towards the upside,  a break beyond 1.1300 is still required to confirm a new leg higher, while a break below 1.1180 will probably see a downward corrective extension  to the 1.1120 region.

 
United Kingdom
A mixed start to the week with the FTSE equity index tracking lower yesterday ahead of a critical week in the UK, Eurozone and US. UK services sector growth was lower on Brexit fears  and another significant poll was released alongside the disappointing PMI services figures. After strong manufacturing and construction PMI readings last week, yesterday's  sharp deterioration in the services reading highlights what could be the new norm as services firms shift their emphasis away from the UK in the wake of article 50. While firms may not be laying off workers, there is a feeling that we will see banks begin to build out their regional offices in response to the UK’s impending departure from the EU. Another poll result, this time YouGov, speculating that despite a likely Tory victory, they could fall short of the 326 required to for a majority government. Given the wide range of poll results, it is clear that the industry is coming under pressure once more in the wake of failures in both the EU referendum and US election. After the weekend’s attack around London Bridge, the main political parties are clearly seeing this renewed focus upon security as an opportunity to prove their mettle, with Corbyn calling out May’s policing record as home secretary. While Theresa May seems to have adopted a more steely resolve than before, this seems a like too little too late given her track record of cutting police numbers over the years…
Possible UK election scenarios;
•    May wins ; if a majority over 125 seats this would be positive for Brexit negotiations and likely spur a rally of the GBP over the 1.30 against the USD….stock market would move lower as the higher GBP impacted UK corporate returns….majority 70-125 seats little change as already priced in….majority under 70 seats, drop in GBP .
•    Corbyn wins; sharp sell-off in the GBP probably down to the 1.25 level, stock market would rise as corporate earnings would initially increase with a lower GBP.
 

Europe
The ECB meeting on Thursday is expected to have an outcome of rates staying on hold, but there are expectations that comments will feature around the projected time frame for tapering stimulus measures as the Eurozone economy gradually continues to improve. The EUR was the main benefactor of the weaker than forecast US NFP on Friday, trading up to multi-month highs at 1.1284. It is now sitting around 1.1268 but risk remains towards the upside, with a break above 1.1300  required to confirm a new leg higher, while a move below 1.1180 will probably see a downward corrective extension down to the 1.1120 region. There are retail sales data for May due tonight, but we expect consolidation at around current levels ahead of Thursday’s ECB meeting.
 
 
Japan
The Japanese yen charged ahead against the USD Dollar Friday on weaker than expected non-farm payroll data . Markets were expecting a solid figure but with numbers showing an increase of 131k jobs in May this was well short of expectations and dropped the US across the board. ISM Non- Manufacturing figures also pointed to a slowdown in the services sector falling to 56.9 points based on an estimated 57.1 The Yen rallied off the back into territory not seen since late April blowing aside resistance of 110.60 to post a low of 110.30 late during NY session. JPY should continue to strengthen this week with investors moving back into the safe-haven trade with US Trump political issues still to be settled with Russia. Support still around the 109.80 and 108.120 with resistance at 112.10 and 114.35
 
Canada
The Canadian dollar weakened last week against the Greenback closing the week just shy of the 1.35 area. Oil has not helped Canadian Dollar prospects coming from 49.50 late May to weaken off 2% to trade at 47.50 this morning. The CAD continues to trade in a tight range as it waits for testimony from James Comey this week around Russia/ Trump links. Toronto real-estate is cooling if you read into the latest figures which show less sales, Toronto growing at 14.9% year on year, further housing data is due this Friday with New Home Sales. This week could see a push for the late May low of 1.3400 a continuation of the bearish trend from the high of 1.3800 late April. Friday sees Bank of Canada Stephen Poloz speak about the Canadian Financial System.
 

Major Announcements
•    Canadian GDP 0.5% vs 0.3% expected
•    Australian Private Capital Expenditure 0.3% vs 0.4% expected
•    Australian Retail Sales 1.0% vs 0.3% expected
•    UK Manufacturing PMI 56.7 vs 56.5
•    US ISM Manufacturing PMI 54.9 vs 54.7 expected
•    UK Construction PMI 56.0 vs 52.7 expected
•    US Non-farm Payrolls 138k vs 181k expected
•    US Unemployment rate 4.3% vs 4.4% expected
•    UK Services PMI 53.8 vs 55.1 expected
 

Economies of Note - 2nd June 2017

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

4:20pm(NZT)
Australia
The Australian dollar had a good and bad day yesterday with choppy trading in a day dominated by data. The release of Australian April retail sales which were better than expected, showing a 1% growth for the month saw the AUD climb to 0.7453, but then was battered down to 0.7372 after Chinese manufacturing PMI figures came in at 11 month lows and iron ore prices continued to fall hitting an 8 month low. Next week will see the RBA rate decision on Tuesday, expectations are for no change but as always the wording around the statement and any forward guidance given by the RBA will be closely analysed. Currently the AUD is trading around 0.7378 and should trade sideways at current levels ahead of tonight's US jobs figure. Next major support is 0.7340 a break of which would then probe the sub 0.7300 level to test 0.7280. The downside is favoured for moves next week.
 
 
New Zealand
The New Zealand dollar ends the week in a strong position having rallied solidly against the Australian dollar after it fell into the Chinese data hole yesterday. The NZD made a high of 0.9574, the highest level since February, it is currently trading around 0.9560 and with underlying fundamentals continuing to be NZD supportive on this cross a move to 0.9600 cannot be discounted. However we are getting close to previous historic highs and at these levels there is value in buying AUD as further NZD upside will be tougher at these rarefied levels. From a NZD/USD perspective gains over the week have also been solid, but the NZD has eased back as the good US ADP jobs figure overnight boosted expectations for tonight's NFP jobs data, although the NZD will come under pressure if the jobs figure is better than expected, hard to see too much downside in the Kiwi in the short term.
 
 
United States
Solid data releases this week showed that the US economy continues to power up and a rate hike from the Fed at its June 14th meeting is almost assured. US equity markets rose to fresh new highs overnight as the ADP jobs report showed private sector employment in the U.S. increased by 253,000 jobs in May, well above market consensus of 185,000, increasing expectations for a strong NFP reading tonight, this may now be in excess of 200,000, the unemployment rate is expected to remain at 4.4%, which would confirm a 0.25% Fed rate hike in June. Also released last night was the US ISM manufacturing index for May, which beat April’s reading, rising to 54.9 from 54.8 better than expectations which had been for the index to hold steady. This data from the US manufacturing also points to continuing solid growth.
The USD  strengthened after the ADP data with the EUR/USD falling back to 1.1250 , if tonight’s NFP is 185k +,  look for a more pronounced USD bump higher, with the EUR/USD falling to the 1.1160 level which if broken could see an extension to 1.1080.
 
 
United Kingdom
The news for Theresa may continue to get worse as Opinion polls show continuing erosion of the Conservative lead as the Labour party gains support, her lead is now into low single digits after being 22 points ahead only 2 weeks ago. The GBP has endured choppy trading dropping to a low around 1.2829 against the USD on election jitters then bouncing back to 1.2901 after release of robust UK manufacturing PMI data. Markets are in a quandary, caught between a temptation to panic at the tightening election polls and the knowledge that polls have proven to be fairly inaccurate in both the last US and UK elections. The GBP is now trading around the 1.2890 level and with the UK election  now under a week away (next Thursday) and although tonight's US NFP  data will have an influence, we expect sideways trading within the 1.2800-1.2920 range, with a clear break below 1.2760 required to confirm a bearish move lower.  As long as the 1.2800/1.2920 range persists, little could be expected ahead of elections, with a clear break below 1.2760 required to confirm a bearish extension.
 
 
Europe
Eurozone economies continue on the gradual improvement track although inflation is still subdued. Next week's April retail sales and GDP Q1 for the Eurozone region will give a better pointer as how the recovery is going. The release of May Eurozone inflation data disappointed expectations, with core CPI coming in around 0.9% y-o-y down from the 1.2% seen in April. The ECB may waver on dropping forward guidance at its meeting next Thursday, but interest rates are expected to be left on hold. Tonight’s US jobs data will provide direction for the EUR and we expect the pressure to come on the 1.1080 level if a good result.
 
 
Japan
In comments from the Bank of Japan, “ the Japanese economy continues to expand and maintain growth at a pace above its potential, mainly through fiscal 2018, on the back of highly accommodative financial conditions and the effects of the government's large-scale stimulus measures, with the growth rates in overseas economies increasing moderately.” With this in mind there is little likelihood that the BoJ will exit its stimulus policy anytime soon as projections are for the economy to continue to expand over 2019 although  the growth pace  is projected to decelerate due to a cyclical slowdown in business fixed investment and the effects of the scheduled consumption tax hike.  The USD/JPY has squeezed higher to 111.60 and a break of 111.85/95 would target 112.15.
 

Canada
Canadian data released yesterday saw solid growth in manufacturing output , new orders and employment. This buoyed the CAD also helped by higher oil prices. The USD/CAD rose to a high of 1.3516 then pulled back around 40 pips to the 1.3470 level and is currently pushing back towards last night's highs around 1.3514. Look for consolidation at current levels as we head into tonight’s U jobs figures.