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FX Update: Coalition negotiations set to kick off in NZ and Germany

Written by Howard Wilcox on September 26th, 2017.      0 comments

5:30pm (NZT)
Overview
Financial markets swung into a “risk-off” mood with US equity markets lower and  safe haven assets were higher including gold and US Treasuries. This came as North Korean tensions ratcheted higher, after US bombers ranged close to Nth Korea and the Nth Korean foreign minister accused President Trump of declaring war on North Korea, saying that Pyongyang reserves the right to take countermeasures including shooting down US strategic bombers even if they are not in the country's air space….expect Korean issues and the war of words to keep markets jumpy over the week. Politics remained to the forefront as Japanese PM Abe called an early snap election over a year before his government’s term is set to expire, with voting set for October 22. Abe also took the opportunity to announce a US$18 billion economic stimulus package which saw the JPY retreat. In the fallout from the German elections, Merkel has been returned but not with enough numbers to form a Government without coalition partners,  the anti-euro AfD party in  came in third with 12.6% behind Chancellor Merkel's CDU/CSU (33%) bloc and SPD (20.5%). a coalition is expected to take at least a month to form. In New Zealand the election result was a clear win for the incumbent National government being the largest party, but with several of its minor coalition partners being swept aside now faces the task of forming a coalition with NZ First. Expectations are that this will take until 12th October.    


Australia
With little in the way of domestic Australian data out this week look for USD moves, China news and metal prices to be the main drivers of Australian dollar direction this week. After falling through the benchmark 0.8000 level against the USD last week the AUD has opened the week recovering from last Thursday’s 3 week low of 0.7908 after the S+P sovereign rating downgrade of China. Currently the AUD/USD is around 0.7935 and looks to be struggling as demand for the risk sensitive AUD has been blunted on the heightened tensions between Nth Korea and the US. Also not helping are softer prices for metals, although gold recovered 1% back over the US$1300/oz mark, to US$1,310/oz. The firming gold price will to some extent help to underpin the AUD, but upside for the AUD/USD looks limited to 0.7960 and if geopolitical tensions continue to lead the market look for the AUD to sink back to last week’s 0.7908 low a break of which would then test support in the 0.7870 region.


New Zealand
New Zealand dollar trading has opened the week fairly subdued. Initially traded higher against the USD to around 0.7320/25 on the back National’s election result but then drifted lower as realisation set in that it would take some time for a coalition government to be created and it was possible that a Labour-Greens-NZ First coalition could eventuate. Expectations are a decision by the 12th October. The delay should be mildly NZD negative. Just released is the August trade deficit which has come in higher than expected. Due to the seasonal nature of our of agricultural exports the balance is normally negative at this time of year, however there was a large shift from a July surplus of $147 mio to a $211 deficit in August. Dairy export volumes  were lower, likely to be a timing difference given that they were high in the previous two months so this should be reflected in the September data. Import were 2.9% lower in seasonally adjusted terms. The NZD has shown little reaction to this data, likely drivers this week are coalition partner speculation and offshore moves in the USD along with Nth Korean tensions. NZD/USD should hold a 0.7230-0.7310/20 range over the next few days. No change to the RBNZ rate on Thursday, should stay at 1.75% repeating the neutral guideline however the accompanying rhetoric will be watched closely as always.


United States
The week opened with the increase in Nth Korean-US tensions seeing a flow into risk-averse assets, pushing Treasuries higher, while a selloff in technology stocks also helped drag down U.S. equities. The US dollar was stronger amid weakness in the euro following the German election and after ECB head Mario Draghi pointed to uncertainties about the medium-term outlook for inflation. Oil surged higher as Turkey threatened to shut down Kurdish oil exports through its territory. Although the Nth Korean issue is expected to garner more headlines,  the tax-package according to reports is still being worked on. Given that one of the props of this package was the repeal of Obamacare ( to achieve some government savings ) and this has not yet been attained the tax reduction package looks to be some time away, but any movement on this will be positive for the USD. Later tonight, US Fed Yellen is due to deliver a speech at the National Association for Business Economics Annual Meeting, in Cleveland, but it seems unlikely she would offer something that can surprise market players, especially after last week's statement.


United Kingdom
The UK PM Theresa May's key Brexit speech in Florence last Friday, was seen as a bit of a damp squib, failing to inspire UK pound trading after it was announced with the choppy pound drifting lower on the currency markets and sentiment split on the markets by an appearance notably high on rhetoric but short on detail. PM may commented that the UK will honour its financial commitments to the EU and is seeking a two-year transition period. She also reiterated the Government's stance that the UK will be leaving the single market and customs union but didn't mention the €20bn divorce offer referenced in press reports. The UK pound was initially lower then rebounded against the Greenback, now at 1.3478 it is gradually clawing back after GBP/USD dropped to a low of 1.3450 on Friday after ratings agency Moody's downgraded the UK to an Aa2 rating from Aa1; having removed its top level AAA rating in 2013. Technically, the 1.3440/50 level remains as the supporting area ahead of a deeper pullback to 1.3350. Conversely, a break of the 1.3580/90 resistance area opens up 1.3640/70 as a target and the 2014-2017 downtrend target.


Europe
German elections saw 4 time winner Angela Merkel voted back in as the largest party but losing 10% of her party's previous support. It was the worst result for her CDU/CSU bloc since 1949 and saw the EUR gap down 1.954 to 1.1915 yesterday. At the same time, the far-right AfD got 12.6%, making it to the Parliament for the first time since WWII which could complicate coalition proceedings. The immediate focus for both Merkel and the markets will be her coalition talks and she has already ruled out allowing the AfD to join in. The implication is that the next few years could be tough for Merkel.  Markets may also infer that the political backdrop in the Eurozone is still disjointed and continues to pose a threat to investment potential medium-term. The election relief boost for the EUR never came, as it was hit by the stronger USD and the run into safe-haven assets ...now at 1.1860 look for the EUR to trade in a 1.1820/30 - 1.1885 range over the next few days.


Japan
Political developments were to the fore for the JPY, with the surprise call by Japanese PM Abe for a snap election to be held on October 22nd. Also announced was an economic stimulus package to increase spending on childcare and education. This saw the JPY gain little benefit from the renewed risk-off tone on the increased Nth Korean tension with the USD/JPY climbing back over 112.50. It has now dropped back around the 111.65 level with immediate support at 111.40 and resistance at the 112.85 level. The downside is favoured given that domestic politics will create uncertainty around the JPY.

 
Canada
Canadian retail sales and CPI data, although both higher, were both below expectations. Key inflation figures in the Canadian economy showed headline consumer prices tracked by the CPI rising at an annualized 1.4% (vs. 1.5% forecasted), with monthly retail sales up 0.4% higher, but below previous surveys. This saw the USD/CAD bottom out in the 1.2260 region then surging over the 1.2300 mark. It now sits around 1.2370 with resistance at 1.2385 and support now at 1.2300.


Major Announcements
•    US Building permits 1.30m vs 1.22m expected
•    UK Retail Sales 1.0% vs 0.2% expected
•    FOMC leaves interest rates unchanged
•    NZ GDP 0.8% as expected
•    Bank of Japan leave interest rate unchanged
•    Canadian Inflation 0.1% vs 0.2% expected
•    Canadian Retail Sales 0.2% vs 0.4% expected
 

Economies of Note - 22th September 2017

Written by Howard Wilcox on September 22nd, 2017.      0 comments

3:45pm(NZT)
Overview
The big news for markets this week has been the Fed rate decision on Wednesday, which as expected left rates unchanged maintaining its target range at 1% to 1.25% and announcing that it would begin to withdraw some of the trillions of dollars it invested in the US economy after the 2008 GFC. The announcement reflected the Fed’s continued confidence in the economy growing, now in the 9th year of expansion. It also noted that the impact of the 3 recent hurricanes on US coastal regions but commented that the storms would only have a brief effect on the economy. In its statement the Fed pointed to continued job growth and to increases in household income and business spending. It also noted that inflation has weakened in recent months, but predicted a rebound next year approaching the target 2% annual pace, their expectations for employment are around 4% over the next 3 years. The Fed maintained its signal of one more additional hike this year and three hikes next year. Markets interpreted this mawkishly by sending EUR/USD lower and US Treasury yields higher. Markets are now pricing 60% probability of a December rate hike. Any dip in EUR/USD should prove shallow, short-lived and viewed as a buying opportunity. German elections are being held this weekend with current Chancellor Angela Merkel expected to win a 4th consecutive term. The new government’s appetite for deeper Eurozone integration will be critical in shaping ongoing investor expectations. Locally the focus has remained on the upcoming NZ election on Saturday with the NZ dollar moving up and down depending on which party is ahead in the polls. The last poll before Saturday shows the National party ahead enough to be able to form a Government, albeit with partners, but with the Brexit upset in mind, markets will remain nervous until the makeup of any coalition partners is known.


Australia
The Australian dollar had a choppy day yesterday after comments by RBA Governor Lowe, that there was little more that the RBA could do to boost the economy and that “other forces” were likely to be more important than Reserve Bank decisions about interest rates from here on.  The Australian dollar was on the back foot after his comments with the AUD/USD sliding lower to 0.7940. Later in overnight trading a downgrade by S&P of China’s sovereign credit rating, for the first time since 1999, to A+ from AA- and further dampened sentiment surrounding the China-proxy Australian Dollar. A drop of 5% in Iron ore prices saw the AUD/USD continue under pressure making a 0.7915 low. The AUD is currently trading at 0.7925 but the tone is negative with the next relevant support down at the 0.7870 level.


New Zealand
New Zealand dollar trading over the week has been dominated by political opinion polls and has ranged between 0.7432 -0.7246 against the USD. New Zealand economic data continues to be solid with this week's Global Dairy auction prices remaining firm and the Q2 GDP data posting gains. Next week will see the RBNZ OCR review, where we expect that the RBNZ is highly unlikely to alter the stance of monetary policy due to election uncertainty, fortunately the economic situation is such that the RBNZ can afford to sit on its hands. We expect no change in the OCR next week, and a repeat of previous monetary policy guidance. Overnight the NZD was knocked lower as better data saw the USD firm, it is currently now around 0.7286 and we expect very little change from current levels as we head into election weekend. Depending on the election result, next week could be choppy. If National win look for a relief rally in the NZD, but if the result is unclear or Labour and a selection of minor parties can form a coalition, look for an initial NZD sell-off come Monday morning.


United States
U.S. equity markets traded in one of the tightest ranges in history, with investors reluctant to add to bets that have pushed benchmark indexes to records. Money managers took some risk off the table in selling emerging-market stocks, which dropped in the wake of the Fed decision ahead of speeches by Federal Reserve officials that may offer further clues to the central bank’s thinking. Metals from copper to iron ore slumped. Gold was steady below $1,300 an ounce after dropping for two days. Investors are continuing to assess the China rating downgrade, along with the latest development with North Korea, after U.S. President Donald Trump ordered new sanctions on individuals, companies and banks doing business with the country. Economic data from the US has remained positive this week, with last night’s Philadelphia Fed Business Outlook coming in above expectations in September. Also back on the agenda is some progress on tax reform, a key plank of the Trump administration’s policies, with any move to implement these changes or other growth incentives seen as USD supportive. The USD ends the week well supported especially against the JPY where it has rallied up over the 112.00 level to currently sit at 112.10. Immediate resistance is at 119.86 a breach of which would open the way for 114.40 region.


United Kingdom
Positive talk from the Bank of England on the potential for rate increases has seen the UK Pound remain firm over the week with the GBP/USD currently at 1.3587. Economic data continues to be solid with yesterday’s August retail sales data showing a 1% surge in volumes for the month, beating expectations and July’s sales growth was revised up to 0.6%. Looking at the three months to August as a whole, sales growth versus the previous three months rose to 1.2% from a three-monthly rate of 0.7% in July. Later tonight British PM May will give a major speech in Florence on the Brexit process, which is seen as a key risk event. From tonight, there will be just 27 days to go until a crucial European Council vote on whether enough progress has been made on exit issues to move onto trade talks. So far, the UK and EU have made little headway on the key issue of financial liabilities, and the European Parliament is reportedly set to vote on a resolution in early October, noting there has not been 'sufficient progress' to justify moving negotiations forward. It is now thought that the UK is willing to make a net contribution of roughly €20 billion to ensure no other EU nation will need to make up a budget shortfall during a two-year transition. While PM May not quote a specific figure in the speech, the gesture may help to foster a slightly more constructive dialogue between both sides during the next round of talks on Monday. But it is unlikely to be enough to convince EU leaders that enough progress has been made.


Europe
Main event for the Eurozone are the upcoming elections on Sunday for Eurozone leader and Europe's “banker”, Germany. This is expected to provide a commanding win by the current Chancellor Angela Merkel’s Christian Democratic Union (CDU), if polls are any indication. Merkel’s party has continued to lead in polling by double-digits over its closest rival, Shulz’s Social Democratic Party (SDP). The real risk for the euro does not necessarily lie in the unlikely event of Shulz becoming the new Chancellor, but in the ascendance of the anti-immigration and anti-EU party, Alternative for Germany (AfD), which has recently taken third place in polling at around 12% to the CDU’s 37% and the SPD’s 20%. Though it is highly unlikely that the AfD will command enough votes to even be considered for any part in a new coalition government, the threat of the AfD performing well in the elections and potentially being represented in the Bundestag will be of primary concern with respect to the Euro. If the German elections turn out as widely expected, EUR/USD could see a boost as election risk is taken off the table. In this event, a rally back up to 1.2100 could occur, with any further rise above 1.2100 confirming a continuation of this year’s sharp bullish trend.


Japan
USD/JPY has been the hardest hit on the back of the market's reaction to the FOMC announcement on Wednesday and dovish BoJ outcome. Despite Japan’s strong economic performance this year, the virtual absence of wage inflation and the stubbornly low levels of price pressures will ensure that the Bank of Japan will remain a laggard in terms of monetary policy normalisation. Theoretically this should disadvantage the yen. However, the performance of USD/JPY this year has been guided by the carry trade on one side and safe haven demand on the other.  This week’s rebuilding of risk appetite and yesterday’s hawkish Fed has pushed USD/JPY to its best levels since mid-July. After a high of 112.71 overnight the USD/AUD is back trading around 112.10 with support at 111.75 and immediate resistance at 112.85. These levels should hold into next week.

 
Canada
After recording its fifth straight daily gain yesterday, the USD/CAD has gone into a consolidation phase and traded in a narrow 40-pip channel yesterday. Currently the pair is around 1.2320. Now looks a little directionless after dropping back from 1.2388 earlier in the week with the lower crude oil price not helping. Later tonight Canadian the retail sales and the CPI data will be released. On a monthly basis, consumer inflation in Canada is expected to rise by 0.2% after staying unchanged in July. An upbeat CPI reading could help the CAD start correcting its losses against the greenback. However, with heightened expectations of a Fed December rate hike, the USD is likely to continue to be the primary driver of the pair's movements. Immediate support is at 1.2280 with resistance up at 1.2410, these levels should hold out into early next week.

 
 

Economies of Note - 15th September 2017

Written by Howard Wilcox on September 15th, 2017.      0 comments

3:30pm(NZT)
Australia
Australian August jobs data out yesterday was ahead of expectations showing a leap of 54,200. That’s the largest jump for 2 years and substantially higher than the 15-20,000 increase forecasted. This was the 11th straight month of gains, the longest streak in 23 years. Also of note was that the bulk of gains 40,100 were made up of full-time jobs with part-time jobs up by 14,100. The AUD/USD reversed an earlier dip to the 0.7970 level, spiking higher over the psychological 0.80 mark to 0.8015 the session high, breaking 3 days of losses after the jobs data release. However the AUD failed to hold onto its gains overnight as the release of the US CPI data was higher than expected, this saw the AUD reverse its AU jobs data gains, falling from 0.8010 to 0.7956 before retracing in New York to 0.7995. It is currently at 0.7997 with immediate resistance at 0.8025 which if broken would target 0.8050-55. On the downside (currently more favoured) support is back at 0.7970 then at 0.7940 region. Look for the 0.7970-0.8010 range to hold ahead of the US retail sales data later tonight. Any heightened tensions over the just launched North Korean missile will pressure downside.


New Zealand
New Zealand dollar trading continues to be choppy as the upcoming election has seen polls whipsawing this week over which party is ahead. Early in the week the NZD/USD was up at 0.7319 after a poll result showed National with a 10 point lead; it is now back at 0.7225 after a poll last night showed Labour ahead by 4 points. The election is just “too close to call” at the moment. Price action overnight was also affected by the better US CPI figures which saw the NZD/USD drop from 0.7250 to 0.7184, but then retracing back to 0.7210.Currently the NZD is trading around 0.7225 and given that Korean tensions are back to fore given another missile launch, hard to see much upside today especially ahead of the US retail sales data later tonight. Immediate strong support remains near the 0.7210-0.7200 region, below which the pair is likely to accelerate the fall towards the crucial support level near 0.7140-35 zone. On the upside momentum above 0.7285 may threatened the 0.7320/30 region, but this would require more good news in the polls for National...so perhaps next week’s story.


United States
The US dollar has enjoyed some solid gains this week led by renewed optimism over the US President Donald Trump's pro-growth economic policies. The news that a new US tax plan outline would be announced by the end of this month overshadowed disappointing US data, showing producer price inflation increased less than expected in August, and provided an additional boost to the greenback's ongoing recovery move. However last night's CPI data showed a rise 0.4%, higher than expected, and lifted the year-over-year rate to 1.9%.  The core rate increased by 0.2%. This result snapped a string of five core CPI reports below median expectations and provides the important takeaway that the risk of a December Fed hike is gradually increasing, with market odds now at 45% for a December hike, over double the 22% odds  this time last week. Although China data this week softened, the signals emanating from financial markets remain decidedly bullish. Bitcoin slumped after one of China’s largest online exchanges said it would stop handling trades by the end of the month amid a government crackdown on cryptocurrencies. Late this morning the Japanese Yen turned higher and South Korean stocks retreated after North Korea launched another missile over Japan on Friday morning in a retort to strengthened UN sanctions against Kim Jong Un’s regime. Markets are now showing signs of becoming conditioned to actions from North Korea, which has launched more than a dozen missiles this year and tested a nuclear device. Initial reactions have become short lived. Global equities climbed to a record high this week as earnings and faith in economic growth overshadow the escalation of tensions on the Korean Peninsula.  Next week will bring the US Fed meeting, no rate hike is expected but as always the focus will be on the statement and any references to timing of future rate hikes. Currently the EUR/USD is trading around 1.1904 and we expect trading to remain around this level ahead of retail sales data later tonight. Immediate resistance is at 1.1930 with downside at 1.1860. This range should hold barring surprises in tonight's data, out into the start of next week.


United Kingdom
The big mover of last night has been the GBP which surged to a new yearly high of 1.3405 after strong local data supported a move towards monetary tightening. UK CPI was up 2.9% with house prices climbing 5.1% easing tensions surrounding Brexit. Earlier in the day, the Bank of England decided to leave the rates unchanged with a 7-2 vote. The BoE minutes noted that “some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target”. Although there was no press conference today, the BoE Governor Mark Carney commented on their decision in an interview, saying that in order to return inflation to the 2% target rate in a sustainable manner, they may need to do some adjustments in interest rates in coming months. Importantly, Carney stated that he was one of the ones on the MPC that had changed views. The BoE now looks to have made it reasonably clear that it could be joining the Fed and Band of Canada in withdrawing policy stimulus shortly as inflation starts to supplant Brexit on its list of worries. The GBP is also gathering strength against the EUR, suggesting that the cable's upsurge is a product of the GBP strength rather than a USD weakness. The GBP is now at 1.3390 and after the big rally looks a little overbought...immediate support is  back around 1.3325/30, with resistance at 1.3405 then 1.3430/40.


Europe
The Euro took the back seat last night to US and GBP moves. There were comments from an ECB Board member official that although the decision to taper the QE programme has been postponed for the time being, although it is inevitable. He also added that the current strong level of the exchange rate is a reflection of strong growth in the region, while he added that further evidence is still needed before any decision on stimulus. Look for consolidation in the 1.1860-1.1930 range heading into next week.


Japan
With this morning’s North Korean missile launch the Japanese Yen has reduced its safe haven status with the USD/JPY initially falling from 110.22 at the open to 109.45, it is currently now back over the 110.00 level at 110.17. The latest missile, which was launched at 6:57 a.m. and flew over the northern island of Hokkaido before landing in the Pacific Ocean, comes after the UN Security Council on Monday approved harsher sanctions against North Korea as punishment for a nuclear bomb earlier this month. The fact that the USD/JPY retraced losses quickly after the missile scare tends to suggest the USD bullish tone remains. Immediate support is now at 109.70 then 109.35. Upside resistance is at 111.05 then 110.50. Trading within the 109.70-110.50 range should hold to next week's open.

 
Canada
The USD/CAD pair spiked to a fresh weekly high at 1.2240 as the first reaction to the higher-than-expected consumer inflation growth in the U.S. but quickly erased its gains to return to the 1.22 handle. Currently, the pair is trading at 1.2185 up 0.2% on the day. The USD/CAD tone remains bearish overall, and we continue to view the 1.22 area as offering resistance and feel that USD weakness below the current consolidation base of 1.2110 will trigger renewed downside pressure on the USD. The 1.2160-1.2210 range should hold leading into next week.

 
 

FX Update: NZD remains subdued ahead of the election

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

4:00pm(NZT)
Overview
U.S. stocks surged higher to begin the week as Hurricane Irma came ashore in Florida with a less catastrophic result than anticipated and the perceived threat of a North Korean missile test failed to materialize. As Florida dealt with one of the worst storms in its history, investors took a separate and distinct outlook away from the potential human toll. History shows that financial markets are not usually fazed by natural disasters partly due to the subsequent pickups in spending which in this case should begin to be reflected in Q4 data releases. The United Nations Security Council has just unanimously stepped up sanctions against North Korea over the country's sixth and most powerful nuclear test on September 3, imposing a ban on the country's textile exports and capping imports of crude oil. These new sanctions ratchet up to the pressure on North Korea, though they are far less sweeping than the US originally sought, as it had to drop several key demands, and toned down others, to keep China and Russia from exercising their veto over the measure. Generally the better risk environment to start the week has seen US Treasury yields move higher while the safe haven Japanese yen retreated. Focus for the week will centre on US retail sales and CPI data on Thursday/Friday as a precursor to next Thursday Fed interest rate decision. Locally, economic data which  largely continues to be positive, has been side-lined as the general election continues to dominate, however given the similar centre right agenda of both National and Labour, ultimately whoever wins there is likely to be  little in the way of major policy reversals which should not have too much lasting effect on New Zealand dollar levels.


Australia
The Australian dollar continues to hold firm above the key 0.8000 level against the USD and on Friday rallied to a two year high at 0.8125 as the USD sell-off gathered pace on fears that North Korea may fire another missile over the weekend. Chinese PPI and CPI data released over the weekend was better than expected which has also helped underpin the Australian dollar. The AUD opens a little easier for the week around 0.8030 as the more risk-off tone has benefited the USD and softer gold price also adds a small negative to the AUD. Locally, we have Australian employment data on Thursday to draw focus with the market expecting a gain in employment of around 19.2k and the unemployment rate to remain stable at 5.6%. Any break below 0.8000 against the USD would be negative and likely see further downside but this should be limited on approaches to the 0.7965 price zone, a strong static support.
 

New Zealand
The New Zealand dollar continues to react to the whims of offshore trading. It spiked to a high of 0.7336 on Friday and after opening at 0.7250 then it rose towards the 0.73 handle against the USD again in the first few trading hours of the week, amid an improved risk sentiment. However it failed to extend its gains over the rest of yesterday and turned flat around mid-0.72s. Currently, the NZD/USD is trading around 0.7260 after bouncing around a 0.7240-0.7293 range overnight. Economic growth continues to remain solid although yesterday the New Zealand Institute of Economic Research (NZIER) announced that it had revised its 2017/18 growth forecast lower to 2.9% from 3.1%. "Recent indicators have provided more evidence of how New Zealand’s economic growth has throttled back in the last year. However this is by no means a gloomy outlook for the economy – we look for continued moderate growth over the next few years. But the NZIER view stands in contrast with the Treasury and the Reserve Bank, whose views rest on a substantial acceleration in growth over the next couple of years. Overall the NZD looks a little on the back foot and this week’s US retail sales and CPI data have potential to push the NZD/USD back into the 0.7100 region if support at 0.7240 gives way. The NZD continues to struggle against the AUD, although the cross at 0.9045 currently is better than last week price action does not feel NZD positive. Election jitters are now also having an unsettling effect on NZD trading as the outcome becomes less certain, but it should be remembered that whoever wins, a more expansionary fiscal policy is likely, which would provide further support to economic growth, and by extension the currency.


United States
The sanctions just passed by the UN, setting limits on North Korea's oil imports and banning its textile exports in an effort to deprive the reclusive nation of the income it needs to maintain its nuclear and ballistic missile program, and increase the pressure to negotiate a way out of punishing sanctions, give the US international support and should help in toning down some of the rhetoric. US equity markets climbed to new highs overnight, as the weaker dollar and continuing ow long term borrowing costs, is a double act that is seen to keep the economy humming. Technology stocks were at the forefront of the rebound with gains in Apple and Tesla shares, providing an additional boost to the indexes. Apple rose nearly 2% as investors priced tomorrow's new iPhone launch while news about China looking to ban vehicles using traditional fuels lifted Tesla's shares more than 5% higher. However, sentiment toward the USD remains downbeat, and geopolitical and political news will continue to drive movements. But this week’s US CPI will also be watched. Given the market’s pricing for the Fed (with only ~8bps of hikes priced in for Dec), any signs of a firming in inflation will bring more confidence and USD strength. The EUR/USD is currently trading at 1.1960 after the stronger USD saw a retreat down from the 1.2028 high overnight. Immediate support is at 1.19215/20 level which if broken would see a move towards 1.1890 then 1.1820. Any EUR/USD upside should be limited to the 1.2030/50 region ahead of the crucial US retail sales/CPI data on Thursday /Friday.


United Kingdom
Overnight news was that UK PM May has won a vote on Brexit bill timetable and Parliament has passed a motion limiting scrutiny of the bill to 8 days. The GBP/USD rose to a session high of 1.3222 yesterday as the demand for the US dollar remains weak and the investors brace up for the data-heavy week ahead in the UK. The UK consumer price index out tonight, is seen rebounding 0.5% m/m in August, compared to a 0.1% drop in July. The annualized figure is likely to come in at 2.8%. Later in the week, UK wage growth numbers and the Bank of England rate decision will attract market attention. The GBP has now slipped below the 1.3200 level on the stronger US dollar and is at 1.3165, support is around 1.3120. Technical indicators are uncertain, but maintaining the risk towards the upside. Friday's high is the immediate resistance at 1.3223, ahead of the 1.3266 level for today, while below the mentioned 1.3120 low, the pair can extend its decline towards the 1.3100 region. In reality despite today's fluctuations, the pair is struggling to find clear direction and remains in a relatively tight 50-pip trading range. On one hand, the improved risk sentiment and some positive developments over the Brexit negotiations help the GBP stay resilient against the USD while on the other hand, the USD is preserving its bullish momentum as the robust performance of the US T-bond yields provide additional support. Major data for both USD and GBP due later in the week may clarify direction.


Europe
Recent comments from an ECB board member suggested that persistent exogenous shocks to FX can cause unwarranted tightening of financial conditions with undesirable consequences for inflation. Further comments were that the policy-relevant horizon is likely to be longer given persistence of subdued inflationary pressures and compared with past demand shocks, policy will remain more accommodative for longer. These comments saw the EUR weaken against the USD. This week the EUR continues with the correction that started on Friday from 1.2091 (highest level since January 2015). EUR/USD remains under pressure amid a stronger US Dollar across the board. The pair broke below 1.1970 and fell to 1.1948, hitting the lowest level since Thursday. Data releases are light for the Eurozone this week with important data on the USD side and an upcoming fed rate decision next week...A break below 1.1940 for the EUR/USD could extend to 1.1890 then 1.1820.


Japan
Risk aversion has eased over the weekend and this has pressured the safe-haven JPY which has seen the USD/JPY rate move up from 107.32 on Friday to 109.42 currently. Looking ahead, the focus remains on the broader market sentiment, given the light data calendar in the US, however sellers of the JPY need to be cautious as risk sentiment may return as North Korea may respond to the latest UN sanctions with another misadventure.  Away from geopolitical considerations it is clear that the Bank of Japan remains committed to accommodative monetary policies for the foreseeable future given the only gradual momentum with which the economy is advancing. Currently the yoy pace of GDP growth is around 2%, driven by domestic demand another encouraging sign for a country that has at times relied on export growth to carry the burden. Faster growth has yet to translate into an uptick in inflation, which is hovering near zero percent. The next probable USD/JPY  target and the immediate resistance is at 109.70, with gains beyond the level probably resulting on an extension up to 110.25, where the pair also has an unfilled gap from two weeks ago.


Canada
The Canadian dollar continues to hold firm, with Friday's employment data coming in better than expected and the jobless rate dropping to 6.2%, an improvement on the 6.3% forecasted. The CAD was stronger on the release, with the USD/CAD dropping to just above support at the 1.2060 level. The CAD has softened on the USD bounce back and softer oil prices, with the USD/CAD now around 1.2120. Moves to 1.2155/60 would threaten 1.2200, but a break below 1.2060 would extend towards 1.2000 and below. However ahead of Thursdays US data look for consolidation at current levels.


Major Announcements
•    Canadian Trade Balance -3.0b vs -3.2b expected
•    Bank of Canada hikes interest rates 0.25% to 1.00%
•    US ISM manufacturing PMI 55.3 vs 55.8 expected
•    Australian Retails Sales flat vs 0.2% expected
•    Australian Trade Balance 0.46b vs 0.93b expected
•    ECB leaves interest rates unchanged
•    UK Manufacturing Production 0.5% vs 0.3% expected
•    Canadian Employment Change 22.2k vs 17.8k expected
 

Economies of Note - 8th September 2017

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

3:30pm(NZT)
Australia
Australian data this week has been a little mixed but the Australian dollar has now managed to hold over the 0.8000 level against the USD. On Tuesday the RBA keep interest rates on hold at 1.5% as widely expected but the accompanying statement was more hawkish than many expected and overnight price action saw the AUD break above 0.800 to an 0.8026 high. The AUD then dipped back below the 0.8000 level to a low of 0.7973 on weaker than expected retail sales data and a smaller than forecasted trade surplus. However overnight the USD has suffered on weaker data which has seen the AUD jump back over 0.8000 to currently trade around 0.8085, its highest level since the end of July. The AUD also continues to be helped by firmer metal prices especially the gold price which continues to rally as the Korean tensions remain to the fore. The RBA Governor is scheduled to speak later tonight and these comments will watched for any hints on timing interest rate moves. Upside at 0.8065 should hold over the day and lead into next ...downside is supportive at 0.8000 but unlikely to be tested today.
 

New Zealand
The New Zealand dollar has had a choppy week with a range of 0.7148 - 0.7262 vs the USD. Economic data has been mostly positive but the NZD is now in the grip of offshore drivers around Korean risk sentiment and locally the election that is now only two weeks away and looks too close to call. The Global Dairy result was not as positive as expected but in the end had relatively little effect on the currency. Currently the NZD is sitting around the 0.7238 level and should consolidate at these levels to close the week. Upside for the NZD is mainly down to USD weakness and downside is favoured as the election draws closer unsettling kiwi dollar bulls. Look for 0.7180-0.7255 to hold heading into next week.


United States
US equity markets were mostly flat overnight but the USD fell on weaker than expected jobless claims data and comments from the ECB head that he was concerned over the strength of the EUR. U.S. President Donald Trump’s surprise debt-ceiling deal with Democrats temporarily bolstered markets, but traders are alert to a potential escalation of North Korea risks amid concerns Pyongyang may fire another ballistic missile. Trump said that military action against the country wasn’t his first choice as South Korea moved to bolster its missile shield. Adding to the mix of US events was the news that another hurricane, Hurricane Irma was likely to make landfall in Florida with potential for the resultant widespread destruction. This could have more an effect on the USD, as after the grim aftermath of Hurricane Harvey and a sharp increase in jobless claims which are likely to rise further as Harvey shut down most of Houston the chances of a December rate hike are substantially lower. While it is a little soon to rule out a December rate hike, as several Fed officials have warned, the next few weeks of data will be storm influenced and a very swift recovery in economic activity will be needed to prompt the Fed to raise rates. We suspect the Fed Reserve may refrain from any hawkish views until they see a more positive upturn in U.S. data.   The EUR/USD has soared to a high of 1.2057 overnight , is now back around 1.2034 and should consolidate at current levels to end the week….support is at 1.1960 with topside at 1.2070.


United Kingdom
The UK pound has strengthened overnight against the USD, reaching a 1-month high of 1.3115 early in the US session, helped by the USD sell-off. It did however trim half of its daily gains ahead of the close to settle around the 1.3070 region, it is currently back around the 1.3103 level.  The UK will release its manufacturing and industrial production figures for July alongside with the trade balance tonight with a worse than expected result likely to see the GBP slide below the 1.3000 mark. The ongoing Brexit talks continue to take preoccupy UK headlines as British policymakers continue to debate on Theresa May’s key Brexit repeal bill. The opposition is solid and the opinion divergence is a major barrier to the smooth progress of the EU discussions. As long as the GBP/USD holds above crucial support at 1.3020 downside looks limited, immediate resistance is at 1.3140 which is unlikely to be seen over the next 24 hours.


Europe
The European Central Bank (ECB) decided to keep the policy and the deposit rate unchanged on Thursday and announced that the ECB was going to continue with the €60 billion asset purchases at least until December. During the press conference, Mario Draghi, President of the ECB, commented that growth in the euro area was robust and broad-based and added that they were likely to announce a decision on the future of the QE program in October. Although Draghi noted that the increasing volatility in the euro exchange rate was concerning, investors continued to price a possible tightening move before the end of the year which saw  the EUR surge against the USD. Currently the EUR is holding steady against the USD at 1.2035, after the 1.2057 high overnight. Upside for the EUR is at 1.2070 and support at 1.1960. We expect trading to remain within this range as we head into next week.


Japan
The Japanese Yen continued it weekly trend, firming against the USD bolstered by continued North Korean tensions and weaker US data releases. The USD/JPY hit a new yearly low of 108.04 overnight, is now back around 108.35. Japan will release a Q2 GDP revision during this afternoon's Asian session. This is expected to be unchanged at -0.4%. Given the continuing risk sentiment look for the USD/JPY to test lower, another break below 108.10 should see an extension to the 107.70 then 107.30 region. Resistance up at 108.65 unlikely to see any action today...downside is favoured heading into next week.


Canada
The Bank of Canada's monetary policy decision surprised markets this week raising key interest rates by 25 basis points. Markets were expecting another rate hike from the BoC but only later in the year. The BoC signalled that the decision to hike interest rates was a result of better than expected GDP numbers. However the BoC toned down its forward guidance noting that rate hikes were not on a pre-set course. This saw the CAD up 1.2% on the day against the USD. It continues to push higher against most of its trading partners also underpinned by higher commodity prices. The USDCAD made a 27 month low overnight at 1.2101 after the USD sell-off but currently back at 1.2117 ahead of tonight’s release of the August unemployment rate, which is expected remain steady at 6.3%. Downside in the USD/CAD is the favoured direction, with long term support at 1.2050 now looking possible out over next week, especially if US data weakness persists.

 
 

FX Update: What a difference a day makes

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

4:10pm(NZT)
Overview
What a “difference a day (or two) makes”. The disappointment from the weaker than expected US payroll figure on Friday was quickly forgotten by Sunday as news came through of an atomic bomb test by North Korea. As markets opened yesterday (a quiet start due to the US holiday) geopolitical issues were back to the fore over the North Korean hydrogen bomb test which is in a different league from previous tests as these types of warhead are more to be mounted to Intercontinental ballistic missiles. There is now a much stronger focus on China's trade relations with North Korea and whether there could be sanctions placed on China or any of North Korea's key trade partners. How would this affect global trade and the relationships of these nations involved? We would expect these increased geopolitical tensions to be one of the main market drivers over this week, with safe-haven assets attracting capital inflows. The other point is we have seen the White House brief the press using Defence Secretary James Mattis and General Joseph Dunford take the stage, so a strong military contingent which is perhaps a statement in itself. The result of the disappointing Non-farm payrolls figure of 153,000 jobs created in August, and a tick higher in the unemployment rate to 4.4%, and a poor hourly earnings print at 0.1% mom, was a sell-off in US fixed income and after initial weakness a slightly higher USD. Helping the USD were comments from White House Economic advisor (and potential new chair of the Fed), Gary Cohn, who again talked up the idea of tax reform getting passed. In New Zealand, with the election coming down to the wire, it looks as if the result will be very close and this is attracting sellers which are pressuring  New Zealand dollar downside as uncertainty around the outcome rises.


Australia
A data heavy week for the Australian dollar, kicking off today with the RBA rate statement, Q2 current account balance and later tonight a speech by the RBA Governor. The RBA is widely expected to leave interest rates unchanged at 1.5% with no surprises, but as always, it is the accompanying statement that will be studied for hints on future rate moves. The AUD/USD pair shed some ground on Monday in subdued trading, as despite gold prices soaring to new yearly highs, commodity linked currencies were dragged lower by weak equities in Asia and Europe. However overall the AUD has remained relatively steady over the last few days and opens around 0.7160 today. With the recent strength in ‘hard’ commodity prices, a better tone to economic data and perhaps even a mildly hawkish shift from the RBA the positive tone continues. Over the next few days in some shape or form we should get an update on those AUD-related factors. This afternoon’s Chinese PMI data determine short term direction but if support at 0.7935 remains intact, we look for a test of the 0.7970 immediate resistance level, then 0.8000 over the next couple of days. Any increase in risk-off sentiment would be negative for the AUD.
 

New Zealand
The New Zealand dollar is now in the grip of “election fever” as the uncertain outcome of result as evidenced by recent polls negatively influences NZD values. Also not helping is the increase of risk-off sentiment on the ratcheting higher of tensions on the Korean peninsula.
The NZD has been badly beaten up against the AUD, falling on Friday to 0.8968 a 16 month low. Today the NZD has opened around 0.7165 against the USD ahead of another Global Dairy auction tonight which is expected to produce a positive result, with futures markets already pricing a 3% rise in whole milk powder prices. Little in the way of NZ data this week, so political uncertainty and offshore events around risk sentiment and USD strength are likely to be the main drivers. A squeeze higher on the NZD/USD is possible on a good Global Dairy result later tonight but this should be limited to 0.7180/0.7200 with downside at 0.7130. In this climate upside looks limited and with the election overhang downside is favoured a break of 0.7130 targeting 0.7100 then 0.7050/60.


United States
With the USD closed on Monday for Labour Day trading was subdued. Stocks fell, while gold and the yen climbed as geopolitical tensions flared again, with U.S. President Donald Trump weighing new economic sanctions that could target China after a nuclear test Sunday by North Korea. The dollar was down for a third day. On the release of the jobs report on Friday the USD remained elevated, which is completely out of sync with fundamentals, as the slowdown in wage growth, uptick in the jobless rate, downward revisions to last month's labour data, and the significantly weaker non-farm payrolls report should have driven the dollar and yields sharply lower. The NFP report showed only 156K jobs were created in August, the unemployment rate increased to 4.4% and average hourly earnings growth slowed to 0.1%.  What made the report even worse was the fact that wages in July were revised down to 0.1% from 0.3% erasing one of the main reasons for last month's post NFP rally. However not all data was bad and while looking through the areas where jobs were actually created there were a solid 36,000 created in manufacturing. Also on this point, there was a strong pace of expansion in the ISM manufacturing report, with the index printing 58.8 and the strongest reading since April 2011. Hurricane Harvey rebuilding is expected to boost the number by early 2018. It looks as if the reason for the dollar's rise is that investors are hoping for hawkish comments from Fed officials later this week. Friday's disappointing labour market report gives Yellen more reasons to back-off on signalling that another rate hike is coming. For this reason, along with geopolitical risks and the ongoing debt ceiling debacle continuing to plague the currency, the U.S. dollar should be trading lower and not higher.  Looking ahead, there are not many U.S. economic reports on this week's calendar but what the Fed says next on September 20th will be on everyone's minds especially with Fed Presidents speaking throughout the week on relevant topics such as the U.S. economic outlook and monetary policy.
 

United Kingdom
The Brexit talks grind on and over the weekend UK Brexit Minister David Davis denied reports that the UK has agreed to pay a EUR 50 bln Brexit bill, while the EU and the UK continue to blame each other for a lack of progress. Latest reports have suggested that the UK is proposing to extend the next round of Brexit negotiations with the EU until a breakthrough on the UK’s “exit bill” is reached, to push the issue forward in time for the European Council meeting in October. Latest data out from the UK was disappointing with Construction PMI figures showing an unexpected  decline to 51.1 in August, yearly lows, down from previous month's 51.9 and worse than 52.0 expected. The GBP/USD slid from the 1.2990 level on Friday to 1.2926 currently. The tone is negative and we look for a test of 1.2890 which if broken would extend to the 1.2850 region. Any upside should be held at 1.2965 this week.


Europe
Market attention this week will centre around the outcome of the ECB meeting and monetary policy announcement on Thursday. The main focus at the ECB meeting is likely to be how big of a problem the current pace of euro appreciation is for the ECB. Expectations are for ECB head, Mario Draghi, to express concern about Euro strength and explicitly mention that the stronger euro is the main reason the ECB has lowered its inflation projection and that there is further downside risk. However, Draghi is also likely to maintain some hawkishness in his tone. This is because growth momentum remains strong, which has previously been one of his arguments for why inflation will rise eventually. But given that, as Draghi said in July, a financial tightening is ‘the last thing’ the ECB needs”, look for the ECB to continue its QE purchases but at a reduced pace of EUR 40 bln per month in H1 18. We look for this to be announced at the meeting in October but with some signalling of it at this week's September meeting. Any EUR advance ahead of Thursday’s meeting should be capped at the 1.2000 level.


Japan
With a more risk-off tone beginning the week as Korean tensions crank up, Japanese economic data has taken a back seat as safe haven concerns come to the fore. The USD/JPY has slid in the last two days of last week from 110.65 highs to its current 109.75 level, the downtrend exacerbated by the disappointing US jobs data. We look for the bearish tone to remain over this week with immediate support at 109.30, we expect a test of this over the next day or so a break of which targets 109.00 then 108.65. The upside level of 110.25 unlikely to be threatened given the current geopolitical pressures.


Canada
Solid Canadian dollar performance continues, USD/CAD has rallied above 1.2400, now at 1.2415, after making a 26-month low on Friday at 1.2339. The weak U.S. August jobs report weighed on the pair.  USD/CAD has fallen by over 6% year-to-date, reflecting a rebalancing of the Canadian economy as the drag from the oil price shock is phased out. At its policy meeting on Wednesday, the Bank of Canada is expected to leave monetary policy unchanged, but expectations are for it to make a second rate hike in October. There is a batch of Canadian data releases this week, culminating in the August employment report on Friday, which overall should leave BoC’s gradual course of monetary policy tightening on track. USD/CAD initial resistance is now at 1.2475, with support at 1.2340 …likely to remain inside this range ahead of Wednesday's BoC meeting.


Major Announcements
•    US Prelim GDP 3.0% vs 2.7% expected
•    Australian Private Capital Expenditure 0.8% vs 0.2% expected
•    Canadian GDP 0.3% vs 0.1% expected
•    UK Manufacturing PMI 56.9 vs 55.0 expected
•    US ISM Manufacturing PMI 58.8 vs 56.5 expected
•    US Non-Farm Employment Change 156k vs 180k expected
•    US Unemployment Rate 4.4% vs 4.3% expected
•    UK Construction PMI 51.1 vs 52.1 expected

 
 

Economies of Note - 1st September 2017

Written by Howard Wilcox on September 1st, 2017.      0 comments

4:00pm(NZT)
Australia
Australian dollar trading has been choppy over the last 24 hours ranging from 0.7871 to 0.7950, initially influenced by better-than-expected Chinese manufacturing PMI and Australian private capex figures. This uptick, however, turned out to be short-lived with a drop to 0.7871 a major support level. The AUD then bounced off this level helped by weak US housing and inflation data and resurgent oil and gold prices. The risk-off tone remains and we see any gains capped at 0.7965 over the day. Tonight's US jobs data provides major event risk. A break above this level opening doors for an advance up to 0.8000 and beyond, should US employment data disappoint.
 

New Zealand
The New Zealand dollar was knocked lower yesterday afternoon by disappointing business confidence numbers dropping below crucial support at 0.7180 against the USD. It then slid down to a 3 month low at 0.7132 as the risk of a change in government became more likely on a poll released last night showing that the opposition Labour party had made huge gains and was marginally ahead (for the first time in 1 years) of the National government. A pullback in the USD has seen the NZD recover some ground and it opens around 0.7175 this morning. Just released the terms of trade – the ratio of export prices to import prices – rose 1.5% in the June quarter, a little less than the market expected. Also, the March quarter increase was marked down from 5.1% to 3.9%, due to a revision to the price/volume split for forestry exports. As a result, the terms of trade fell slightly short of the record high that was anticipated. We look for the NZD to regain the 0.7180 level, but advances will be limited ahead of tonight’s US Non-farm payroll data and the more uncertain NZ political climate leading into the general election on 23rd of this month...0.7200 should cap advances, with downside at 0.7132 on the day.


United States
Positive economic news over the last few days for the both GDP and ADP employment data has seen the US dollar rally. On Wednesday the second estimate of US GDP data suggest momentum through Q2 was much firmer than expected at 3% annualised (expected 2.7%), driven almost entirely by domestic demand, with both consumption and investment revised higher. Even the net export picture remained positive, despite downward revisions – exports were up 3.7% (initial: 4.1%) with imports up 1.6% (initial: 2.1%). Also heartening was ADP private sector job gains exceeding expectations coming in at a healthy + 237k in August (vs 185k expected), posing upside risks to tonight’s broader non-farm payrolls report, (initial expectations were around 185K but 200K+ now looks possible) the Fed will have liked this data. Overnight there was some news on the long anticipated Trump tax plan with comments from US Treasury Secretary Steven Mnuchin, who was interviewed on CNBC and spoke optimistically of the Trump tax plan and again called for the corporate tax rate to be lowered to 15%. On the whole, there was not a whole lot of new information for the market to disgust, but comments that having a "weaker USD is somewhat better for trade" saw the USD/EUR weaken to 1.1920, although Mnuchin is of the belief that "a strong USD over the long term reflects confidence." Markets are likely to wait for more tax detail before taking a view.


United Kingdom
The third round of Brexit talks started badly this week, with negotiators on both sides barely able to conceal their frustration. This is ahead of the outcome of the October European Council, where EU leaders will decide in October whether “sufficient progress” has been made for trade negotiations to start. Brexit negotiations are not going at the pace expected and EC President Juncker has voiced his dissatisfaction with Britain for failing to prepare for Brexit talks. The U.K.’s bill is a major spanner in the works for the progress of these negotiations. While the U.K. has accepted it will pay something, Brexit Secretary David Davis appears determined not to tell the EU what it accepts it’s on the hook for. The GBP/USD is currently at 1.2945 after establishing a fresh weekly low overnight at 1.2852. This pair keeps posting lower lows on a daily basis, which favours a new leg lower later tonight, where the upcoming US employment report may see a fall in the pair to1.2773.


Europe
German CPI data surprised mildly to the upside (0.2% m/m, 1.9% y/y), for a third consecutive month of decent increases. With activity data firming and inflation looking slightly better the risk remains the ECB rhetoric gets more hawkish rather than dovish. However, the Eurozone’s preliminary figures for both headline and core inflation also came out higher than expected in August, but it would be a stretch to see a strong upward trend as inflation might even fall back again at the start of 2018. Other positive news showed that after June’s drop, the Eurozone unemployment rate stabilised at 9.1% in July. But given the current taper debate it is no surprise that markets rather focused on the preliminary inflation figures for August. Headline inflation actually rose to 1.5% in August, from 1.3% in July. This was slightly above the consensus estimate (1.4%), while core inflation remained stable at 1.3% (consensus at 1.2%). Look for continued EUR strength with the EUR/USD climbing above the 1.2000 level providing tonight’s US jobs data is not too bullish.


Japan
Later today Japan will release its Nikkei manufacturing PMI, expected unchanged at 52.8 and August consumer confidence, forecasted at 43.5 from previous 43.8. Yesterday saw Japan's industrial production July figures, which came below expected and previous in July, up for the year by 4.7%, but down for the month by 0.8%, doubling expectations of a 0.4% decline. The USD/JPY is now at 110.03 after 110.65 high overnight, the short trend is positive with immediate resistance around 110.25. An upward extension above this should favour a retest of the mentioned 110.65 high, but it will take a break above the August 16th 110.94 high, to confirm a steeper recovery in the days to come. More extreme North Korean flare-ups would negate this view.


Canada
Canada's current account deficit (on a seasonally adjusted basis) widened by $3.4 billion in the second quarter to $16.3 billion, as the deficit on international trade in goods expanded. However there was good news, GDP data showed Canada’s economy unexpectedly accelerated in Q2 to 4.5 % annualized pace, amid the biggest binge in household spending since the last recession. Economists had anticipated a 3.7% rise in GDP. This surge in growth should help cement the chances the Bank of Canada will continue raising interest rates in coming months as the nation’s economy nears full capacity. Conversely the Canadian dollar jumped nearly 90 pips against the USD with the USD/CAD now down at 1.2452, 324 pips lower than the August high of 1.2768.

 
 

FX Update: North Korean missiles fly over Japan!

Written by Howard Wilcox on August 29th, 2017.      0 comments

3:30pm(NZT)
Overview
The eagerly awaited Jackson Hole addresses by central bankers, Yellen and Draghi on Friday night failed to meet market expectations around supplying clues to the timing of tightening moves. Rate hike comments were side lined as they both appeared to work in parallel to deliver a clear message on a different (and perhaps slightly less market-sensitive) topic: financial system regulation. Both warned of the dangers of rolling back regulations put in place since the financial crisis. Yellen commented that “the balance of research suggest that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth.” In a follow up Draghi went on to state “When monetary policy is accommodative, lax regulation runs the risk of stoking financial imbalances. Regulators should be wary of rekindling the incentives that led to the crisis.” It certainly sounded as if they were both taking a jibe at the current US Administration’s policy suggesting that it may repeal large swathes of Dodd-Frank. Draghi also commented on the increased threat of protectionism. Given the comments by Yellen it would seem she is not angling for reappointment as Fed Chair when her term expires in February 2018. Market reaction saw U.S. stocks and Treasuries rise while the dollar sank after Janet Yellen’s speech didn’t take the hawkish tone some expected, with oil gaining as Hurricane Harvey churned up the energy-rich Texas coast. Conversely the euro touched the highest level in two and half years versus the dollar as traders showed signs of relief after Mario Draghi failed to talk down the value of the currency in his Jackson Hole speech. This week will bring some major data releases culminating in the US Non-farm payroll data for August on Friday (expt 170-185k increase) this is preceded by Q2 GDP estimates on Wednesday, as well as the ADP private payroll report (expected to show an increase of 200K). Just when geopolitical risks were abating, North Korea fired off more missiles, but market effect has been minimal at this stage, helped by Secretary of State Tillerson's comments that the U.S. will continue to push for negotiations to de-escalate nuclear tensions on the Korean peninsula. However this morning's missile launch across Japan may again ratchet-up risk-off trades, as already the JPY has increased sharply as safe haven trades regain favour.


Australia
The Australian dollar rebounded strongly on Friday against the USD, climbing quickly from around 0.7900 to 0.7962, its highest level since August 17 amid a decline of the US across the board. The greenback weakened after the release of Janet Yellen speech. The Fed’s Chair didn’t mention the economy, or signals about the path of monetary policy and this weakened the dollar. It again failed to hold levels above 0.7950 and opened yesterday down at 0.7935 around where it traded for most of the day, however overnight performance was impressive as it regained the 0.7950 level to make a 0.7972 4 week high against the USD. The news of the latest North Korean missile launch has seen the risk-off tone intensify and the AUD has been sold down to 0.7927 against the USD. This week will see some Aussie data, with building approvals (consensus -5% in July) and Q2 private sector CAPEX (+0.2%) in focus. Although the crucial Q2 GDP will be released to the market next week on 6 September, but we start getting the key inputs this week with Q2 inventories and operating profit as well as business confidence reads. The AUD/USD looked to be on track after the 0.7972 high to target the 0.8000 level but the sudden risk-off tone on the back of today’s Nth Korean missile launch has knocked the AUD on the back foot. If this week’s statistics are solid and more importantly the risk-off tone abates look for another attempted run to the 0.8000 level.  


New Zealand
The New Zealand dollar after being on the back foot for most of this week has started on a more positive tone, climbing from 0.7230 to a high of 0.7263 over the last 24 hours...it is now back at 0.7240 after news broke of the Korean missile launch. The election cycle is now in full swing after the formal launch of the two main party’s election campaign last week. At the moment markets are taking little notice given the similar policy manifesto of both Labour and National, more importantly economic data continues to be solid although look for some decrease in market volumes in the final two weeks. We have terms of trade released on Friday for the Q2 which if coming in at 2.4% would show an annual gain of 12.6%, exceeding the peak last seen in 1973. Support at 0.7180 against the USD remains critical for the NZD, with a break below an indication that 0.7000 would be under threat, however we expect the NZD to consolidate around the current 0.7200-0.7250 range ahead of Friday’s US non-farm payroll data, the caveat being any substantive change in the Korean situation.


United States
Over the last few days attention has swung away from politics to the natural disaster that is enveloping Texas. Overnight U.S. stocks were mixed, oil declined and gold broke through $1,300 an ounce as investors weighed the damage from Tropical Storm Harvey. The euro held steady after rising to its strongest level since January 2015 against the dollar after the ECB president’s Jackson Hole comments. However politics are never far away, with President Trump’s threat to shut down the government over funding for a border wall focusing market attention on the issue of passing a spending measure and raising the debt ceiling. Although these are two separate issues, and it is unclear whether congressional leadership will try to tackle them separately, or combine them in a single bill. Given that the risk of a government shutdown appears material, the latter strategy would in our view be more likely to disrupt markets. If handled separately, we suspect that this September/October period will play out much like 2013, when the deadlines for passing a spending increase and raising the debt limit were somewhat similar. In that instance, risk assets experienced only modest declines, and recovered soon after. If it happened , this would be the first time in nearly 40 years that there could be a government shutdown when the same party is controlling both the legislative and the executive branches might lead to a further diminishment of hopes on the fiscal front, tax cuts, infrastructure spending —reinforcing yield declines and  potentially weaker US equities. Market data will also take centre stage over the week culminating in the US jobs data on Friday. It maybe that the headline non-farm payroll number, that is typically the focus is less important now, barring a significant surprise. This is because jobs growth has been notably steady. In 2016, the US created 187k jobs a month on average, this year the average is 184k.  In the past three months, US job growth accelerated a little (average 195k), and a reversion to the mean, which is what the median forecast anticipates (180k) is neither here nor there. The main point is that job growth remains impressive given the maturity of the business cycle. Look for the unemployment rate to remain pretty much unchanged around 4.3%. Currently the EUR/USD is trading around 1.1965 look for an extension to the 1.20 level and above over the next few days. Markets will be wary of pushing the USD too far ahead of Friday’s data.
 

United Kingdom
The UK pound staged a comeback on Friday after Fed Chair Yellen’s speech, rising above 1.2800 against the USD to 1.2857. It has built on those gains and is now at 1.2930. After weeks of relative weakness the more positive tone is due to the realization that a “hard” Brexit is increasingly unlikely, reinforced by comments from the Labour party, suggesting that the UK should remain in the EU for at least 4 years as Brexit terms are negotiated. The more general realization that a hard Brexit would have a devastating effect on the UK economy could well create a more conciliatory environment in negotiations with the EU. A new round of Brexit negotiations started yesterday. UK markets were closed yesterday for the last Bank holiday of the summer so GBP trading was subdued. With the GBP/USD currently at 1.2930 the tone remains positive but resistance is solid at 1.2965 which must be cleared for additional gains to 1.3000. We don’t expect significant gains beyond this level ahead of Fridays US jobs data. Conversely a break below 1.2910 would threaten 1.2875/50


Europe
After ECB head Draghi’s speech on Friday the EUR continued to build on the USD as the negative momentum triggered by central bankers on persisted, and US softer-than-expected data fuelled greenback's decline. The EUR/USD extended gains to 1.1982 on Monday as political jitters within the Trump administration continue. It opened at similar levels this morning and then made a new two year high at 1.1984 after the news of the North Korean missile launch hit the news. The EUR has now backed off to the 1.1970 level and we expect price action to be consolidative around current levels until tomorrow's revised US Q2 GDP figure and Fridays US payroll data.  
 

Japan
The Japanese economy continues to look in better shape as improved data suggests that all the pump-priming done by the Bank of japan is starting to take effect. BoJ head Kuroda commented that policy will stay accommodative for some time yet. After trading around the 109.20-109.50 level last week the USD/JPY broke through the 109.00 level as investors sort the JPY safe-haven status after the NK missile launch this morning. It is currently at 108.75. For a bearish extension to occur, the USD/JPY cross needs to break below 108.60, this month’s low, exposing  108.12, this year’s low set last April. The pair needs to break above 110.00, on the other hand, to be able to gather some upward momentum, quite unlikely on the current dollar-negative scenario. We favour a 108.60-109.50 range over the next few days. North Korean issues have potential to move this cross.


Canada
The Canadian dollar started the week in a tight range against the US dollar as hurricane Harvey continues to wreak havoc in Texas and has hit the energy sector, forcing refineries to close and has sent gasoline prices soaring. The CAD is currently around 1.2505 against the USD having fallen from 1.2532 earlier as the USD staged a comeback near the end of the Monday trading session and is looking ahead at the economic calendar release for further support. Trump also sent a tweet calling the NAFTA approach of Canada and Mexico as very difficult. While Canadian Prime Minister Justin Trudeau spoke about Trump’s comments yesterday saying there was nothing new and vowed to remain at the negotiating table to modernize the agreement. Trade talks start on 1st September in Mexico. The main Canadian data due this week is monthly GDP on Thursday which is expected to have slowed after a strong first half of the year.


Major Announcements
•    Canadian Core Retails Sales 0.7% vs 0.0% expected
•    UK GDP 0.3% as expected
•    German IFO Business Climate index 115.9 vs 115.5 expected
•    US Core Durable Goods Orders 0.5% vs 0.4% expected

 
 

Economies of Note - 25th August 2017

Written by Howard Wilcox on August 25th, 2017.      0 comments

3:30pm(NZT)
Australia
In a week of little domestic data releases, the Australian dollar has been driven by offshore moves and has drifted lower after breaking below the 0.7950 support level on Tuesday, currently sitting around 0.7900 against the US unit. Of interest is that Moody's reiterated Australia's AAA rating with "Australia’s very high [fiscal strength] score is driven by a moderate government debt burden relative to AAA-rated peers and low cost of debt.” The dearth of economic news has left the AUD very much swinging on the waxing and waning at the mercy of the risk-off mood over the week, but the general tone is down and it looks to be back grimly hanging on to the 0.7900 mark after a run down to the 0.7865 level overnight. Upside today looks limited to the 0.7915/20 level with immediate support at 0.7865, however solid levels in metal prices are Australian dollar supportive which should this prevent any larger depreciation in the AUD. We look for consolidation at current levels while traders await the outcome of the speeches from Yellen and Draghi tonight from the Jackson Hole Central bankers Symposium.


New Zealand
Not a good week for the New Zealand dollar, as a failure to regain the 0.7300 level early in the week has seen a conclusive break of support at the 0.7250 mark, after the fiscal update by Treasury was not as upbeat as expected. With only 29 days until the NZ election, political uncertainty is beginning to be a factor in New Zealand dollar values. A change in Government would not initially bring many big policy changes but given that Labour governments tend to be spending orientated any uptick in inflation may cause the RBNZ to change its interest rate forecasts bringing forward possible rate increases, but in reality this would be a mid-2018 issue. The NZD bounced from overnight lows around 0.7190 and has opened steady at the 0.7200 level but tonight's Jackson Hole speeches should set short term direction. Over the day we are unlikely to see the NZD above 0.7220, with downside at 0.7190, but if this breaks look for a move back to the 0.7150 region.


United States
Volumes were lower overnight with US equity markets drifting lower ahead of tonight's Jackson Hole central bank speeches and increased political posturing of the US debt ceiling. US existing home sales for July were 1.3% lower, but with little other data markets focused on upcoming events that have potential to be market-moving over the next few days. Tonight's speeches by the heads of the ECB and US Fed may give some clues on the timing of stimulus reduction and rate hikes. President Trump again used his Twitter feed to comment on legislation to keep the US government open and able to pay its bills next month, this has potential to have major repercussions to markets. The USD has remained steady against most of its major trading partners, rising marginally against both the JPY and EUR. We believe it unlikely that either ECB head Draghi or Fed Chair Yellen will give much away tonight and that of more import will be next Friday’s Non-farm payroll data for August which should give a clearer pointer to the track of Fed rate expectations. Expect consolidation of the USD/EUR over the day around current levels 1.1795, a break over 1.1860 is required to establish upward trajectory, with 1.1680/90 being the support to break for further downside.


United Kingdom
Data out yesterday showed that Q2 GDP growth was up by 0.3% pretty much in line with expectations and slightly ahead of the previous quarter. However household spending is slowing, up only 0.1%, the weakest performance since late 2014, leaving the services sector to underpin growth. In comparison to a year ago household consumption remains up by 2.8% but that spurt now appears to be grinding to a halt as rising prices allied with flat earnings growth chip away at household spending power with the weaker currency continuing to bolster export demand. However the economy is still at fairly anaemic growth levels and will have to show a marked improvement in Q3 and Q4, if it is to attain the 1.7% growth projection by the International Monetary Fund. Against the USD the UK pound is pretty much unchanged around 1.2800, The GBP/USD has run into selling resistance at 1.2830/35 with 1.2770 providing downside support. The tone remains GBP bearish and we favour a move to the 1.2700/25 level into next week. UK markets will be closed on Monday for a Bank holiday.


Europe
No data on the Eurozone saw the EUR trade sideways overnight, now around 1.1800 has barely moved over the morning as markets wait tonight’s Central bank talk-feast. The ECB minutes released earlier this month show that policymakers are not comfortable with the sharp appreciation in the EUR. Thus, it is unlikely that Draghi would say anything that could would lift the EUR. If anything, the risks are more skewed to the downside as market optimism that he could hint towards QE tapering plans may prove unfounded.


Japan
Better news for the Bank of Japan, as CPI data released yesterday showed that it is closer to gradually reaching it 2% inflation target. Tokyo core consumer prices rose 0.5% in July, while, nationwide core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, came in line with estimates and followed a 0.4% gain in June.
The JPY has been trading sideways over the last few days as the more risk-off tone has seen USD/JPY falls blunted at the 108.80 levels. It is now at 109.63 the tone looks bearish and we expect further falls to test back at 108.80 a break of which would target 108.45 then 108.10 we look for this lower level next week.


Canada
The Canadian dollar has ended the week on a stronger note helped by a weaker USD and a rally in oil prices which provided an additional boost to the commodity-linked currency. Now at 1.2515 we are starting to approach 3 week lows in the 1.2430/40 region. Given current US ructions the CAD is favoured against the US and if the Yellen speech tonight provides no upside look for the USD/CAD to test downside support. Resistance is at 1.2565 is unlikely to be reached this week.

 
 

FX Update: The United States Dollar continues to struggle.

Written by Howard Wilcox on August 22nd, 2017.      0 comments

3:30pm(NZT)
Overview
Geopolitical risks continue to abate as concerns over North Korea take a back seat to the latest spate of terrorist attacks in Spain which have a more localised effect on financial markets. The markets  although still on edge, with South Korean/US war games beginning Monday, ended last week with a more risk-on tone and have begun the week with commodity currencies holding onto last week's gains. U.S. stocks rallied on Friday from session lows -- though they still ended the day down -- after the White House released a statement that Steve Bannon would be leaving his job as chief strategist, capping a tumultuous week for the Trump administration. The rally that started after Trump’s election, the S&P 500 is still up 14% since early November -- was launched on the belief that the president would cut regulations and lower taxes, boosting profits. But the embrace of Trump by investors and, until recently, CEOs, has always flown in the face of some of his other commerce-averse tendencies. However given that corporate earnings have increased nearly 18% in the first quarter, (according to information service Bloomberg's adjusted numbers), the biggest jump in profits for S&P 500 companies in years, and continued in the second quarter, albeit at a slower pace. That has led some to believe that even if Trump doesn't come through with a tax cut, the stock market's recent run-up is justified. We are not so sure and expect earnings growth to retreat back into single digits if no tax-cut is forthcoming. Central bankers will gather at their annual “talkfest” at Jackson Hole Wyoming, this week, which will be this week’s main economic event. The main theme is reportedly “Fostering a Dynamic Global Economy”. But with Yellen and Draghi both due to speak (the former on financial stability), markets will be sensitive to any discussion on upcoming policy withdrawal and what it could mean for the global liquidity cycle. More dovish language and inflation misses have already seen markets pare back expectations for ongoing Fed hikes this year.


Australia
The Australian Dollar opens the week holding and building on last week's resurgence, it is now trading at 0.7324 against the USD. The recovery in AUD/USD gained extra legs, after a risk-off induced rally in the safe-haven gold bolstered the sentiment around the resource-linked AUD, while higher copper and oil prices also added to the Aussie gains. Next stop for the AUD is resistance around the 0.7950/55 level just below the 0.79620 two week high, seen last week. There is very little in the way of data releases for Australia this week and we look for the AUD to trade around the influences from offshore events and movements in commodity prices. Of course any change to a more risk adverse tone would likely see the AUD back testing the 0.7900 level.


New Zealand
The New Zealand dollar opens the week holding building on gains made at last week's end and is holding comfortably over 0.7300 against the USD, at 0.7325 this morning, although to be fair some of this move is down to a softer open for the USD as political uncertainty has an effect. There are few major data releases for New Zealand this week, but the economy remains positive although the housing markets statistics continue to point to a softening in prices….at least this will keep the RBNZ happy..!! The pace of electioneering is now heating up with and it looks as if the two main party’s, National and Labour, will fight it out as the smaller party’s continue to poll at the edges. With a strong showing for the new Labour leader, there is now a real chance that we may see change, but economically this should have little effect as Labour continues to support an independent Reserve Bank and their policies are normally fiscally expansive. The break of the NZD below support at 0.7250 now looks to have been a false break and we expect the NZD to consolidate around current levels with a push to 0.7350 possible if the USD remains soft.


United States
Generally US stock markets opened the week higher, while the US dollar softened against most of its trading partners on growing concerns around persistent low inflation and ahead of Central Bank speeches from the gathering at Jackson Hole beginning Thursday. Central banks in advanced economies continue to grapple with ending years of unprecedented monetary easing, even as stubbornly tepid inflation clouds the outlook. Optimism continues to fade over the US President Trump's pro-growth economic agenda, and this coupled with growing market consensus that the Fed might refrain from raising interest rates further in 2017 kept the US dollar on the back-foot. Another concern that will attract major focus in Sept/Oct once US lawmakers are back in Washington, is when two separate albeit interrelated issues converge – a need to raise the ever contentious US debt ceiling as well as pass a resolution to fund government operations and avert a shutdown from Oct 1st. Failure to raise the statutory debt limit will leave the US at risk of technical default. The closer to technical default, the more severe the market reaction, which would see risk assets such as equities take a big hit. The USD after consolidating for most of Monday weakened at the close of the US session with EUR/USD retaking its weekly high at 1.1828, it has backed off from this level and is now around 1.1812 but with weaker US data expected look for a push to 1.1840/45 which if broken would target 1.1905.


United Kingdom
The UK Pound opened the week extending its recovery from the 5 week low of 1.2830 against the USD seen on Friday and has moved back over the 1.2900 level to trade at a high of 1.2915. Now back around 1.2898 most of the rise can be attributed to the weaker USD, however the GBP received an additional boost from comments by PM May, that a clear structure was now in place for the Brexit negotiations and that the government was confident in making progress on Brexit talks by October. The task of sustaining and building on gains above 1.2900 is not easy after the recent dovish stance from the BoE which may limit future upside moves. Any break below 1.2840 is likely to extend to 1.2800 then target 1.2770, while advances to 1.2920/30 will attract selling interest, but for the moment the 1.2915 level looks to be the immediate resistance level.


Europe
Tonight economic sentiment for both the Eurozone and Germany will be released, both of which are expected to move lower. However, investors will probably refrain from taking large EUR positions ahead of the ECB President Draghi’s and Fed Chair Yellen's addresses at Jackson Hole later in the week. With another ECB policy meeting scheduled for Sept 7th, Draghi knows that any positive comment regarding the Eurozone's economy would boost the ECB hawks going into this meeting. He needs to contain the euro-bulls' enthusiasm if he wants to avoid the stronger euro's detrimental impact on inflation, which in turn, would hold him back from proceeding with the policy normalisation at the desired speed. Speculation of QE tapering should keep the euro bulls on top of the game.


Japan
Japanese yen levels remain elevated across most its trading partners as demand for the unit’s safe haven status continues amid  uncertainty stemming from the political crisis surrounding Trump and any potential conflict between North Korea and the US. Also helping the Japanese yen has been some solid data with the All Industries Activity Index in Japan increasing by 0.4% in July after declining by 0.8% in the previous month. Later this week on Friday we have national and Tokyo July CPI this should show the annual core reading rising modestly from 0% to 0.1%, suggesting a bottoming out of disinflation dynamics. But, with inflation still substantially below the 2% target, this is unlikely to prompt any Bank of Japan policy repricing. The USD/JPY is currently sitting over 109.00 at 109.25 above last week's 4 month low of 108.59. The next resistance level is up at 109.50 but we doubt whether the USD can hold over the 109.00 for long and favour a move back to test support at 108.60 which if broken would target 108.12, so far the low for the year.


Canada
The Canadian dollar opens the week stronger against the US unit with the USD/CAD rate falling below the 1.2600 level to trade now at 1.2558 on the softer USD tone and firmer commodity prices. Canadian inflation data at the end of last week came in bang on expectation at 0.0%, while last night’s Wholesale Sales data disappointed printing at -0.5%. Tonight we have retail sales figures to digest. With support at 1.2560/65 now broken look for a slide down to the 1.2500 region with immediate support around 1.2520/25. Investors will be a little wary of pushing the CAD too high given that a round of talks on the NAFTA trade agreement are about to start. We expect it to hold around l 1.2500-1.2550 range over the next few days.


Major Announcements

•    US Retail Sales 0.6% vs 0.3% expected
•    UK Average Earnings Index 2.1% vs 1.8% expected
•    NZ PPI 1.4% vs 0.9% expected
•    Australian Employment Change 27.9k vs 19.8k expected
•    Australian Unemployment Rate 5.6% as expected
•    UK Retail Sales 0.3% vs 0.2% expected
•    Canadian Inflation 0.0% as expected.

 
 

Economies of Note - 18th August 2017

Written by Howard Wilcox on August 18th, 2017.      0 comments

3:30pm(NZT)
Australia
Yesterday’s Australian July employment data was mildly positive, with unemployment steady at 5.6% although full time employment decreased by 20,000 on a seasonally adjusted basis. The Australian dollar has had a choppy couple of days ranging from 0.7806-0.7961against the USD. The employment figures pushed the AUD back over 0.7900 against the USD reaching highs in the 0.7950/60 level however it has had problems holding above the 0.7900 handle being hit overnight by the more the risk-off mood and falling equity market to drop back to 0.7880. The higher gold price has had little supportive effect. It has traded around the 0.7875/85 level for most of this morning but 0.7870 is immediate support and any break below that level will target 0.7830. Given the current risk tone we look for a test of lower levels next week.


New Zealand
It’s been a choppy trading week for the New Zealand dollar which has seen a range of 0.7222 to 0.7334 over the last two days. The weaker than expected Global Dairy auction prices did the New Zealand dollar no favours and we saw a dip to 0.7228 before softer US data and the US political conditions saw a rise back into the 0.7310-20 area. Overall data releases continue to show an economy that is showing solid progress, yesterday’s Producer output prices data was up 1.3% for the June quarter and meat and dairy product manufacturing rose 6.9% and 3.4% respectively for the same period. Overnight has seen markets move to a more risk adverse stance, as the Trump administration becomes increasingly bogged down in controversy over a racist rally in Virginia and news of a terrorist attack in Barcelona. Equity markets are lower, the S&P500 is down 1.5% and the DOW off 1.24% with gold up nearly US$5 an ounce. A new poll out last night also showed that a change of Government may also be likely with the Labour party and their new leader‘s popularity surging. We expect later polls to show further narrowing of the National government's lead. The New Zealand has been marked down along with other commodity currencies and has failed to hold over the 0.7300 level seen yesterday opening lower at 0.7286 against the USD and if the risk averse tone remains look for a test of 0.7250 then 0.7220.


United States
Financial markets were knocked by an increasing sense of unease as comments from President Trump continued to exacerbate the controversy over a racist rally over the weekend and Barcelona was hit by a terrorist attack. US equity markets were heavily lower, with the S&P 500 posting its second largest decline of the year as Trump’s polarising comments increase the uncertainty around any of his agenda getting actioned anytime soon. The terror attack was another reminder that geopolitical risks abound and remain a threat to global growth with markets still jumpy after last week’s escalation of tensions over North Korea. The Trump Administration continues to look more beleaguered by the day and with the resignation of many members of Presidential business advisory councils and then the subsequent disbandment of these councils, there are now real concerns that the President’s policy agenda on tax reform and infrastructure may have very little chance of being enacted in the coming year. However US data out last night was solid with the Philly Fed manufacturing survey showing coming in above expectations for August and weekly jobless claims figures were down 12K from the previous week. The USD was stronger against the EUR with the EUR/USD failing to climb over the 1.1800 level, it is now back at 1.1724 with immediate support is around 1.1685 a break of which would target 1.1650, however we expect consolidation around current levels to end the week.


United Kingdom
United Kingdom trade data out yesterday showed that the UK benefited from a surge in sales to the EU in the first half of the year as export growth outstripped import growth. However, overall the UK remains a net importer of goods with a goods deficit of EUR 53 bio for the 6 months to June in its trade with the EU. However, this is down from EUR 57.8 bio for the same period in the 2016 year. The weaker UK pound is starting to have some effect in making UK products more competitive abroad. In other data this week, July retails sales were better than expected, although June's figures were downwardly revised. According to official data, the volume of sales grew by 0.3% in the month against expectations of 0.2% and by 1.3% when compared to a year earlier, this last, below the 1.4% expected, whilst core readings beat expectations amid stronger spending on food. This more positive data has done little to halt the slide in the GBP which has moved lower over the course of the week from 1.3020 - 1.2840. It is now around 1.2870 and given ongoing Brexit woes and shaky majority of the May government, we look for support at 1.2840 to be tested heading into next week.
 

Europe
The Euro slid lower last night to 1.1661against the USD, after release of the ECB minutes for the July meeting showing some dovish remarks and concerns about the market overshooting in FX. The ECB minutes highlighted stronger growth but also noted that policy will need to remain expansionary for underlying inflation pressures to converge on 2%. The ECB further commented that “patience, persistence and prudence” were needed. This means getting inflation up is still contingent on a “very substantial degree of monetary accommodation”. The Governing Council also acknowledged the strength of the euro, “Regarding exchange rates, while it was remarked that the appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-à-vis the rest of the world, concerns were expressed about the risk of the exchange rate overshooting in the future”. This resulted in the EUR being sold lower to the 1.1660 level against the USD but it has opened higher this morning back over 1.1700 to the 1.1725 mark. The EUR although having recovered some of yesterday’s losses does carry a more negative tone, but countering this is the fact that the USD is far from strong. However failure for the EUR to regain the 1.1800 handle is not encouraging and if support at 1.1685 is broken 1.1607 will be targeted.


Japan
The Japanese yen has fared well against most of its trading partners on the renewed terrorism fears as the market seeks shelter in safe haven assets. From a high in the USD/JPY of 110.94 earlier in the week, the JPY has strengthened to 109.48 this morning. The USD/JPY is better offered in a risk-off environment as investors grow ever more concerned that yet another atrocity has taken place in the European market where terrorists have targeted innocent and holiday- making families along one of the Europe's most iconic tourist attractions. With the risk-averse tone now firmly in place look for the JPY to continue to strengthen with 108.80 being the next level for the USD/JPY which if broken would open the way towards the 108.00 area.


Canada
A mixed week for the Canadian dollar which has given up gains on the USD as the risk-off tone takes its toll. Following an expansion of 1.1% in June, manufacturing sales in Canada contracted by 1.8% in July amid decreasing sales in the petroleum and coal products.
Also not helping were crude oil prices remaining under pressure on Thursday, with the barrel of West Texas Intermediate trading at its lowest level since July 25 at $46.50, losing 0.6% on the day, making it difficult for the commodity-sensitive CAD to retrace its losses against its peers. The USD/CAD has broken through resistance at 1.2650 to currently sit around 1.2670; next stop is 1.2700, then 1.2770. Downside support is seen at 1.2858 but it’s unlikely to be tested over the next few days.


 
 

FX Update: Geopolitical tensions subside

Written by Howard Wilcox on August 15th, 2017.      0 comments

3:30pm(NZT)
Overview
Military tensions around the geopolitical situation on the Korean peninsula have not escalated over the weekend, as cooler heads call for the rhetoric to be dialled down. Market response continues to be rather low key as it becomes more apparent that the overwhelming belief is that the risk of a military face-off is highly unlikely and the week has opened with a more positive tone that has buoyed U.S. equities and diverted flows away from haven assets such as gold and the Japanese yen. However expect the market to remain on edge and risk-aversion to continue to have market moving potential, as North Korea will hold its annual Liberation Day celebrations in Pyongyang on Tuesday (a great excuse to launch a missile) then on 21st August the joint annual military exercises between South Korea and the US are scheduled to begin (always a contentious point with North Korea). The main news was the very tepid US CPI data released on Friday night which saw core inflation for July of only 0.1% against an expected 0.2%, which left the annual rate at 1.7% (v’s 1.8% expected). This saw speculation increase that the September rate hike maybe now off the table and there is now only a 40% chance of Fed rate hike in December. The USD softened on the release. Chinese data released yesterday was a little disappointing, showing July industrial production expanded at slower than forecasted pace and retail sales growth for the month was slower than expected. This may reflect that the recent government restrictions on property, excess borrowing and industrial overcapacity have begun to take effect. The softer data, while although not a major miss, do suggest that Chinese economic growth over the second half of 2017 may not be as robust as forecasted. The New Zealand dollar, after getting boxed around the ears by the RBNZ last week opens the week marginally higher but given the unsettling talk around intervention last week, upside may be limited especially as we head into the last 4 week countdown to the general election on the 23 September, now a much closer race is expected.  


Australia
The Australian dollar, unlike some other risk currencies, has resisted a sharp downward move, only to quietly drift lower this past week on the view that the threat of war is positive for gold and commodity prices which helps AUD. U.S. Treasury yields also fell more aggressively than Australian bond rates and this change in the yield spread helped to limit the slide in AUD/USD.  However, with that in mind, the Australian dollar is still seen as a high beta currency and for that reason it will not be able to escape the pressure of risk aversion. The reduced risk-averse tone as Korean tensions ease over the last few days has seen the AUD hold around the 0.7850/60 mark however upside looks limited, with the main hope Thursday’s Australian employment report, as according to the latest PMI numbers, solid job growth was seen in the manufacturing and service sectors. But prior to that, the RBA minutes will be released later this afternoon and given the central bank's downgrades, the tone isn't expected to be Australian dollar supportive.  With last night’s China data for July industrial production and retail sales growing below expectations the AUD/USD remains around the 0.7850 level at this morning's open, with a rebound to the 0.7900 level looking distant even on the slightly more risk-on market tone. A break of 0.7840 would expose 0.7810 then 0.7785.


New Zealand
The risk aversion created by U.S./North Korea tensions put significant pressure on commodity currencies. The New Zealand dollar has been the worst performer and more losses are likely in the coming week. Last week the RBNZ opened a can of worms over their intervention talk, but we believe that this is extremely unlikely and more reflection of RBNZ frustration at the continuing high NZD level. Immigration remains strong and yesterday’s retail sales data was solid, showing an increase for the June quarter of 2% in sales volumes across a wide sector range. Year to date , to June, spending volumes are up a solid 5.4% but there are doubts whether these will prove sustainable over the rest of the year, as the gains have been driven by low interest rates and the related rise in house prices. However in recent months we have seen a gradual rise in interest rates and house prices have pulled back. There is another Global Dairy auction tonight and prices are expect to show a 3-4% rise , this should be positive for the NZD. Downside pressure remains on the NZD/USD, but 0.7250 should hold over the next few days unless risk-aversion increases on a blowout of Korea tensions.


United States
Stocks gained and volatility receded as the prospect of war between the U.S. and North Korea cooled. Safe havens such as gold, Treasuries and the Japanese yen fell. Oil retreated while U.S. shares were broadly higher, with the S&P 500 Index gaining the most since April and the Dow Jones Industrial Average and Nasdaq Index rose. Fridays US CPI data was disappointing for dollar bulls as hopes for more Fed rate increases were scaled back and odds dropped to 40% that a December rate rise would be forthcoming. Politically there remains very little progress on tax reform or the infrastructure improvement plan advanced by the Trump administration and it is now difficult to see how these two keys policy items will be enacted by the end of the year by an increasingly embattled administration. July retail sales are out tonight and are expected to be much better than the June month. The EUR/USD rose to a high of 1.1850 on Friday after the US inflation number missed estimates, but improved risk sentiment at the beginning of this week sees it easing modestly to 1.1780., it would take at least a break below 1.1688, ( last week’s  low), to see the bearish pressure mounting. However, the pair remains near its recent highs and confined to a limited range, follow-through beyond the 1.1820 is required to confirm additional gains ahead, while on the other hand, dips towards 1.1735, will likely attract buying interest.


United Kingdom
Sterling also drifted lower this past week, but the losses have been limited with 1.2950 holding as support, which is surprising given the unambiguously dovish Bank of England monetary policy statement and Quarterly Inflation report. This week will be an important one for the British pound. Politics need to be considered this week, when the UK is expected to release its position papers on the future of the Irish border, the customs union, along with papers addressing the future relationship between the UK and the EU. We still believe the GBP is headed lower but the immediate direction of sterling now hinges on this week's slew of economic reports. Of all the G7 nations, the U.K. has the busiest data calendar.  Inflation, employment and retail sales numbers are due for release and while inflation and spending is likely to be weaker, labour market conditions appeared to have improved significantly according to the PMI reports. The levels to watch for GBP are 1.3060 (unlikely) on the upside and 1.2930 on the downside.
 

Europe
The Euro has been a solid performer over the last week, with no major news being good news for the euro. Of all the major currencies, the euro has been the most resilient. It outperformed the U.S. dollar, sterling and all the commodity currencies. With no major economic reports released, it was riding on the momentum of last month's stronger releases and the ECB's optimism but at times it also struggled under the pressure of risk aversion. Last night’s Eurozone industrial production was slightly below expectations at 2.6% (v’s 2.8%) and later in the week. GDP, trade and inflation numbers are due for release. German data has been relatively healthy but there's been weakness in France so the regional reports could be mixed. Aside from CPI, most of these reports are not expected to have a significant impact on the euro, however the release of the July ECB minutes on Thursday will be keenly watched; any comments on tighter euro area financial conditions - and what this means for the central bank's inflation and growth outlook - could implicitly be seen as a concern over recent market moves. Elsewhere, German 2Q GDP (Tue) should confirm the strong EZ economic recovery. Overall, we think solid US data - and what may be perceived as ECB "jawboning" - should hold EUR/USD gains over this week. As such we continue to look for the euro to outperform the USD, GBP and NZD but weaken against the JPY and possibly the CAD.


Japan
Japanese GDP data was positive, showing growth in the world’s third largest economy for Q2, was higher than expected, up 4% against an expected 2.5%. The result was mainly down to strong household spending driving the 6th straight quarter of growth under PM Abe. The good data offset a sell-off in Japanese equity markets that were down 1.1% as the market opened after a Japanese holiday on Friday, catching up to other global markets that had previously sold off on Korean geo-political tensions. The easing of Korean tensions has seen the USD/JPY retake the 110.00 level and is now around 110.15. Immediate resistance is at 110.45 to confirm additional gains into the 110.70 region. Support is at 109.25 then 108.80.


Canada
A solid week of recovery for USD/CAD, which experienced its first down day in 10 trading days on Friday. No major economic reports were released but for most of the week the pair was lifted by short covering, the sell-off in risk currencies and $50 resistance in oil. However fundamentals still support a stronger currency and we think there could be a recovery for the Canadian dollar and a sell-off in USD/CAD later this week. The only piece of Canadian data worth watching will be Canadian CPI on Thursday, with the data expected to be positive for the currency as the price component of latest IVEY PMI report increased sharply over the previous month. If inflation and employment conditions strengthen, Canadian dollar traders will start to argue for another Bank of Canada rate hike this year. Currently opens at 1.2728 after sliding as tensions eased over Korea, immediate resistance is at 1.2750 with support at 1.2700 (physiological)  then at the 12660/70  level.  


Major Announcements
•    RBNZ leaves the cash rate unchanged
•    UK Manufacturing Production 0.0% as expected
•    US PPI -0.1% vs 0.1% expected
•    US CPI 0.1% vs 0.2% expected
•    NZ Retail sales 2.0%
•    Chinese Industrial Production 6.4% vs 7.1% expected
 

Economies of Note - 11th August 2017

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

2:30pm(NZT)
Australia
The move into gold as the North Korean problem heats up has helped stem Australian dollar losses as investors move away from risk assets. However the Australian dollar has shifted lower slipping below the 0.7900 mark to a low of 0.7854 against the USD. There have also been a number of other factors weighing on the Aussie, China's July inflation was below expectations, as CPI rose 0.1%, above the previous -0.2% but below the 0.2% expected. Australian domestic data for home loans and consumer confidence were also below forecasts. 1.4% from 1.5%. With no immediate change expected on the North Korean problem we look for the safe-haven trend to remain intact at least for the next few days and the AUD will look to struggle to hold over the 0.7880 level. Immediate support is at 0.7855 then down at 0.7785.


New Zealand
As widely expected the RBNZ left rates on hold at 1.75% making few changes to its previous forecasts or its guidance on future monetary policy. The New Zealand dollar initially rose on release of the statement to a high of 0.7366 against the USD as the markets had expected a slightly softer tone from the RBNZ given the weaker balance of economic data over the last few months. While the RBNZ acknowledged the recent softer data, the projected OCR path was identical to the May Monetary Policy Statement, with a flat track for the next two years before a gentle upturn. With global inflation pressures weaker, the burden is on more domestically generated inflation to keep inflation on target .The RBNZ are of the view that the current low rates will achieve this but need more time to work.  Shortly after the rally on release of the statement the New Zealand dollar slid lower for most of the rest of the day, dipping sharply to a low of 0.7254 after comments later in the day from RBNZ Assistant Governor McDermott around NZD intervention”. The currency has opened this morning around 0.7275. The circumstances for any intervention by the RBNZ look distant to us, nonetheless, the damage has been done. The tone remains soft, as all risk currencies have been hit by the move towards safe-haven as the war of words over North Korea increases. Look for the NZD to consolidate around the 0.7250/85 level ahead of US CPI later tonight.


United States
Increasing geopolitical tension rattled financial markets worldwide overnight, sending US stock markets to their biggest drops since May and pushing up demand for safe-haven assets. Although the heightened geopolitical situation around the Korean peninsula may well have been the trigger for this latest bout of risk aversion, with global equity markets trading near record highs and premiums on high-yield creeping higher, several high profile commentators have already warned that valuations are stretched and profit taking would be prudent. Unsurprisingly Gold rose for the third day in a row and has posted its highest close since June 6, as it hovers around $1,285/oz (up 0.60%) amid risk aversion, soft US inflation data, and a weaker US dollar. Overnight, economic data from the US showed an unexpected drop for July in the Producer Price Index, which fell 0.1%, against expectations of a 0.1% rise. It was the first negative reading for the index in almost a year and goes in the opposite direction of another rate hike from the Federal Reserve during 2017. Tonight's inflation US CPI report is the most important risk event for the USD all week. There were also comments by Fed officials expressing unease about low inflation and suggestions that sluggish productivity could dampen wage growth despite job gains. As one of the main drivers of Fed policy, these cautious views confirm that the central bank is in no rush to raise interest rates especially after last night’s producer price report. The drop in PPI signals potential weakness in CPI but even if consumer prices tick higher, it may not be enough given the concern the Fed has around inflation and more importantly, as geopolitical tensions between the U.S. and North Korea continue to grow. So for the USD against its main trading currencies, until the threat of war reduces, USD/JPY now down at 109.12 could have a difficult time responding to positive data. With that in mind, stronger CPI could send pairs like EUR/USD to 1.1700 as it exacerbates the pressure on those currencies hit by the latest round of risk aversion.


United Kingdom
Latest releases of UK data were mixed but pointed to a slowing economy as UK exports were lower despite hopes of a boost from UK pound weakness. The UK goods trade balance report showed -GBP12.72 bio for June, against GBP11 bio expected and -GBP11.3 bio last, with the total trade balance at -GBP4.56 bio for June versus expectations of -GBP2.5 bio and -GBP 2.5 previous. Data showed growth slowing to 0.2% in the 3 months to July, down from the 0.3% seen in the June quarter. There also appeared to be a drop in service sector growth which was the main driver in the previous quarter. Although the weaker UK Pound should start to produce results in the second half of the year as world growth continues to increase there remains concern that UK domestic consumer spending will be held back by weak wage growth and delayed investment spending due to Brexit-related uncertainty. On a more positive note, UK industrial production returned to expansion in June, growing by a solid  0.3% in June, beating expectations of a -0.1% reading and against the previous -0.2% result. The UK pound has extended losses slipping below 1.30 against the USD over the last few days to trade currently around 1.2975. 1.3015 is resistance but unlikely to be tested, we favour a drift towards support at 1.2950 a break of which would likely lead to a steady slide towards the 1.2870 region, the next relevant static support.
 

Europe
After making a higher earlier in the week at 1.1822 against the USD the EUR/USD has been choppy seeing a low of 1.1688 and is now back at 1.1765 after the weaker US PPI data overnight. With little in the way of economic releases, event risk tonight centres around the US inflation figure and to a lesser extent, CPI data for France and Germany is also due tonight. Although the Euro has been affected by the Korean tensions it appears to have been quite resilient and barring no major surprises on the US CPI data later tonight. We maintain our view that next week should bring a return to the 1.1800 level with an initial target of 1.1850. The outlier for all markets at the moment being any escalation of the Korean tension to outright conflict.


Japan
The Japanese unit has continued to strengthen against the USD with the USD/JPY dropping to a new two-month low at 109.06 on risk aversion as geopolitical concerns heighten over the North Korean tensions. We look for the JPY/USD to remain under pressure as the JPY, as a safe-haven, continues to benefit from the North Korean situation pushing aside any Japanese economic or political issues. We are now targeting 108.95 over the day which if broken would target 108.10. Immediate resistance is up at 110.00 but little chance of this being seen over the next few days.


Canada
The Canadian dollar has had a better week as weaker US data has seen the CAD rise to 1.2743 against the USD. There has been little in the way of significant economic data released from Canada this week and as such offshore events have driven the currency. As for other currencies, tonight’s US CPI data will be crucial for CAD direction, but if weak, look for the USD/CAD to extend gains above 1.2770 and target 1.2800 early next week. Immediate support is down at 1.2670 then 1.2610.


 
 

FX Update: US jobs data helps the USD regain some composure

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

4:00pm(NZT)
Overview
Equity markets climbed higher, with Asian markets back at almost 10year highs and US indices remained at record levels after a stronger than expected US jobs number. The July Non-farm payrolls figure showed that hiring was increasing with 209,000 increase, above market expectations (183K).This result brings the 3 month average to 195,000, more than enough to provide for a growing population and 8 years after the last recession, returning to employment levels from before that period. Friday’s data also showed a small drop in the unemployment rate to 4.3%, showing an economy running close to full capacity. Gains were widespread across most sectors and average hourly earnings rose, which will please the Federal Reserve and lend more weight to their ongoing tightening bias. In currency markets the USD strengthened, with the EUR/USD dropping below the 1.1800 level for first time in several days. However with the USD now back around 1.1794 on the EUR, a stronger correction is required to change the still dominant USD weaker trend and unless there is an uptick in inflation, the dollar has little chance to advance sustainably, as the Fed will maintain its cautious stance. Although June German industrial production last night was weaker than expected, generally over these last few days, European data has also been solid, as despite the growth pace decelerating by the beginning of the third quarter PMI’s are still only slightly below multi-year highs reached in previous months. After yesterday’s RBNZ reduced inflation expectations the NZD is softer against all its major trading partners and we look for consolidation at these lower levels heading into what should be a “dovish” RBNZ statement on Thursday.   
 

Australia
Weaker than expected China export and import growth data has seen the Australian dollar stall around the 0.7930 level against the USD even though the NAB business confidence data was more upbeat. After a high last week of 0.8041 the AUD continues to struggle, having been at lows of 0.7890 over the last 4 days. The softer oil price along with other commodity price weakness is no helping the AUD and we look for a test of support down around the 0.7870 level over the next few days. Any push above 0.8000 would target last week highs of 0.8041 but overall we are mildly bearish on the Australian dollar and look for more downside in the short term as the USD holds onto Friday's gains. Recent data has been mixed from Australia with a disappointing trade balance result late last week, countered by better than forecast retails sales figures. Overall there has been nothing that will impact the RBA’s current neutral stance.


New Zealand
The New Zealand dollar broke through key support at 0.7400 against the US dollar last night, hitting a low of 0.7346 (two week low) as traders closed long New Zealand dollar trades ahead of the RBNZ  Monetary Policy Statement on Thursday which is now expected to be more dovish than previously expected given yesterday’s lower inflation forecasts. Also not helping the New Zealand dollar is the rebound of the USD which has been aided by better US employment dat. Although underlying NZ economic fundamentals remain solid we have over the last couple of months seen a run of softer data for GDP, inflation, building consents and the housing market appears to be cooling. At the same time, the exchange rate has risen (albeit helped by USD weakness) to levels that the RBNZ has expressed discomfort with. We do not expect any major policy change from the RBNZ on Thursday as the overall underlying economic position, for now, remains stable. There would have to be clearly identifiable broader inflation pressures before the RBNZ would even consider shifting from its ultra-neutral monetary stance.


United States
The week opens with US stocks gaining modestly last night with the S&P 500 Index and Dow Jones Industrial Average continuing their record runs, as strength in technology and consumer staples balanced out weakness in energy. Oil was lower on speculation that the increased supply situation will weigh on the market. The USD remains pressured by the EUR, as the USD has been unable to extend gains made against the Eurozone unit over the last few days. Investors show increasing confidence in European growth amid disappointment over U.S. President Trump’s failure get tax reform and infrastructure spending plans off the ground. After the major data dump for the US last week, the timetable is light this week, but Friday’s CPI figure will get close attention, especially given the Fed’s inflation forecasts. If the USD breaks back above 1.1820 a move back to the 1.1900 level is likely but we favour another probe lower for the EUR/USD cross to the 1.1715 level, before a push back to 1.1900, however if 1.1715 is broken this would open the way to target 1.1680.


United Kingdom
Consumer spending data for July, out yesterday, showed a fall for the third month in a row, highlighting how rising prices and a lack of pay rises are causing the public to curtail their spending. The data from Visa reflects all consumer spending and not just that on cards, giving a better picture of how Britons are being more careful with their money. It has four years since such a sustained drop has been seen in consumer spending, indicating how the pressure on consumers’ finances has intensified - and adding strength to the argument for the Bank of England holding the base rate at current historic 0.25% lows. The UK Pound continues to shift lower against the US dollar now at 1.3041 and as long as resistance at 1.3060 remains intact the downside is favoured. There was nothing positive in last week’s Bank of England Quarterly Inflation report and monetary policy announcement. Given how much GBP/USD rose in the last 4 months (from 1.24 to 1.3250), the tone of the central bank and the healthy U.S. non-farm payrolls report means 1.3270 seen last Thursday, is most likely the top in GBP/USD. With the ongoing political ructions over Brexit having potential to unsettle the markets further, we remain bearish for the UK pound. The next stop for GBP/USD should be 1.3000 and then 1.2920.


Europe
The stronger Euro looks to have started to cool the Eurozone’s boom this year, as it takes its toll on export related industries and the earlier ECB fiscal boost wanes. German industrial output fell by 1.1% in June from a month earlier – the first drop this year – and the latest Sentix gauge of investor expectations for the Eurozone fell sharply. The reading for Germany dropped from 12.5 to 5.8 in August amid deepening worries over the diesel scandal in the car industry. It is now becoming increasingly clear that economic momentum may have passed its high point. The EUR has jumped by 12% to $1.18 against the US dollar this year as the currency bloc enjoys the best growth since the global financial crisis. However we view any pullback in the EUR against the USD as corrective and we look for a move back to the 1.1615 region before another crack at the 1.1900 level targeting a move into 1.2000

 
Japan
The popularity of PM Abe continues to slide, with his support now below 30% (lower than President Trump’s!) in polls released last weekend. The Japanese economy is still entrenched in its “lost-decades” morass; and growing at just over one percent year over year in Q1 2017. Japan’s dramatic slowdown in growth, which averaged at an annual rate of 4.5% in the 1980s, fell to 1.5 % in the 1990s and never recovered. In addition to this, higher healthcare costs from an aging population have driven government healthcare spending to move from 4.5 % of GDP in 1990, to 9.5% in 2010, according to IMF estimates. For years Japanese savers have not only seen their yen denominated deposits garner a zero percent interest rate in the bank, but even worse, have lost purchasing power against foreign currencies. The yen has lost over 30% of its value against the US dollar since Abe regained power in 2012. It would now appear that the Japanese voters have had enough. After trading in a 111.84-109.83 range for the last 4 days the USD/JPY is sitting back around 110.60, political issues aside we still favour the JPY above the USD but the USD/JPY needs to hold support at 109.85 and break over the 111.05 level to resume the uptrend.


Canada
Canadian Jobs data for July released on Friday were below expectations, showing the country's labour market added 10.9K jobs in July, falling below expectations for a gain of 13.1K new positions. However, the unemployment rate fell to 6.3%, while economists anticipated an unchanged reading of 6.5%. The surprisingly lower unemployment supported the Bank of Canada's intention for one more rate hike in October. However this was balanced by, additionally reported trade figures, which were weaker than expected, meaning the BoC may be forced to wait for more signs of sustainable economic expansion before pulling the rate hike trigger. The Canadian dollar dropped against the US dollar to a low of 1.2590 after the data, but yesterday in choppy trading rallied back to 1.2713 , it is currently at 1.2668  with resistance  at 1.2710/15 then 1.2745 ...support 1.2625/30 them 1.2590


Major Announcements last week
•    ISM Manufacturing PMI 56.3 vs 56.4 expected
•    New Zealand Employment Change -0.2% vs 0.7% expected
•    NZ Unemployment Rate 4.8% as expected
•    UK Construction PMI 51.9 vs 54.3 expected
•    Australian Trade Balance 0.86b vs 1.78b expected
•    UK Services PMI 53.8 vs 53.6 expected
•    BOE leave rates unchanged as expected
•    ISM Non-Manufacturing PMI 53.9 vs 56.9 expected
•    Canadian Employment Change 10.9k vs 13.1k expected
•    Canadian Trade Balance -3.6b vs -1.3b expected
•    US Non-Farm Payrolls Change 209k vs 182k expected
•    US Unemployment Rate 4.3% as expected
•    NZ Inflation Expectations 2.1%
 

Economies of Note - 4th August 2017

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

3:00pm(NZT)
Australia
As expected the Reserve Bank of Australia left rates on hold at 1.5% on Tuesday but as expected the main interest was around the accompanying statement. The RBA noted "An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast". This suggests a stronger link between appreciation in the A$ and the RBA's economic forecasts. Further appreciation would no longer complicate; rather it "would be expected to result in a slower pick-up in economic activity and inflation than currently forecast".” We have thus seen a slide in the Australian dollar from a high on Tuesday at 0.8041 against the USD to a low for the week yesterday around 0.7912. It has rallied on weaker US overnight data to open at 0.7954 as the market awaits retail sales data and the RBA's statement on Monetary Policy later this afternoon. The Bank’s updated growth and inflation projections are likely to be scrutinised in light of the sharp appreciation in the AUD over the last few weeks. Buyers of the Australian dollar may get better levels after the RBA statement is released and the US Non-farm payrolls data is out later tonight.


New Zealand
New Zealand dollar trading has been choppy this week but the downside trend prevails. Yesterday saw the week's low of 0.7490 against the USD after the 0.7523 high on Tuesday. The weaker Global Dairy auction results were not supportive, the NZD has opened better at 0.7445 but a break over 0.7460 has to be seen before any chance of further advances beyond 07500. We expect the NZD to remain flat around current levels as all attention today is on tonight’s crucial US jobs figures. A solid figure would see the Kiwi back under pressure next week. Also next week see the RBNZ release its MPS statement, we expect the RBNZ will leave the OCR at 1.75% and reiterate that monetary policy is on hold for the foreseeable future. The press release will probably emphasise the softer tone to recent data, and the RBNZ’s discomfort with the high exchange rate. This should not be positive for holders of the NZD. "The press release will probably emphasise the softer tone to recent data, and the RBNZ’s discomfort with the high exchange rate.


United States
The train crash that is the Trump administration continues on with little respite. The latest news that special counsel Robert Mueller, who is probing Russia’s interference in 2016 U.S. elections as well as possible collusion with Trump campaign, has impanelled a grand jury, briefly rattled markets that have recently shown little reaction to the weeks of ongoing  turmoil in Washington. Stocks had traded little changed for most of the session with corporate earnings in focus before Friday’s jobs report. Tonight’s Non-farm payroll data remains crucial, as last night's ISM manufacturing data was disappointing, falling to 53.9 – its lowest reading since August last year, suggesting the service sector lost momentum into Q3. The ADP employment figure on Wednesday, usually seen as an indicator of the Friday jobs figure was also disappointing down to 178k from last month's 191K Expectations for tonight's  NFP, which will be accompanied by key related data on the unemployment rate and wage growth, are currently around 180,000 jobs added for the month of July. The July unemployment rate is expected to have dropped to 4.3% from the previous month’s 4.4%, while average hourly earnings are expected to have increased by 0.3% against the previous month’s 0.2% wage growth. A stronger than expected figure would help to steady the USD, signalling that the Fed’s rate hike policy remains on track.


United Kingdom
As expected the Bank of England left rates on hold at 0.25% last night but downgraded its GDP and wage growth forecasts. GDP forecasts were lowered, wage growth seen weaker (3% vs 3.5% next year) and uncertainty in regard to Brexit also acknowledged. This is not the backdrop to lift rates near term if you believe that the inflation rise is temporary and a result of sterling's post referendum weakness. In addition the Governor noted that Brexit is casting a big shadow over the outlook and confidence in an orderly exit is starting to fade with EU negotiations the most important factor for the outlook. Unsurprisingly the UK Pound was sold lower against nearly all its major trading partners. Sterling price action was volatile, starting the day on a strong footing, advancing to a fresh yearly high of 1.3266 against the USD following the release of the latest UK services PMI that beat expectations at 53.8, but the BOE was a game changer, which saw selling kick in pushing the pound to a low of 1.3110 against the dollar. It is has marginally recovered and is now around 1.3143 but the trend is bearish. Support is at 1.3110 then 1.3075 and if the USD stages a recovery on better jobs data look for sterling to knock on the door of 1.3000 next week.


Europe
Softer data in the Eurozone for services and composite PMI’s combined with weaker manufacturing figures earlier in the week saw the EUR trade down to a 1.1830 low. Other data was also weaker, showing that Germany’s services sector advanced at its slowest pace since September 2016, resulting at 53.1 from 53.5, with the composite figure at 54.7 from 55.1. For the whole region, growth posted a six-month low according to Markit. However, the EUR shrugged off the weaker economic tone rising back to 1.1880 where it currently sits. Despite the little intraday volatility, the EUR/USD retains its bullish stance ahead of tonight’s NFP report and it seems unlikely that, even with a strong reading, the trend will change course, however a downward corrective move can't be dismissed, particularly ahead of the weekend. Support is at 1.1830 then 1.1790...resistance at 1.1910.


Japan
The weaker US data has seen the USD continue to weaken against the JPY with the USD/JPY hitting a low of 109.94 back at Tuesday’s low. It has recovered slightly back above 110.00 at 110.05 but the JPY remains dominant on this cross. If 110.00 is broken again look for a slide towards 109.50. Politically PM Abe has just completed a cabinet reshuffle, suggesting that he still has a solid base in the LDP, now an early resignation of Prime Minister Abe, which could lead to a less dovish BOJ policy stance, is a much lower risk. However, there will be new opinion polls over the weekend that will be worth monitoring. As an early snap election remains a tail risk, two lower house by-elections on 22 October will also be crucial for judging the momentum of the Abe cabinet.


Canada
The U.S. is not the only country scheduled to release labour data tonight. We also get to see if labour market conditions eased in Canada after two strong months. If job growth slowed it could extend profit taking in USD/CAD but the amount of full time employment will be key.  If the net change increases by only 10-20K and full time work is strong, then USD/CAD could still resume its slide but if full time jobs are lost, any amount of part time job growth may not be enough to make up the difference.  Aside from the employment report, IVEY PMI is also on the docket and the pace of manufacturing growth will be just as important as investors scrutinize every piece of CAD data for weakness. Currently the CAD is trading around 1.2575 against the USD having come from 1.2430 at the start of the week. USD/CAD initial resistance is seen at 1.2650 with support at 1.2550 then 1.2500.