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Economies of Note - 24th March 2017

Written by Howard Wilcox on March 24th, 2017.      0 comments

3:15pm(NZT)
Australia
The Australian dollar has been well supported over the last few weeks underpinned by the firm base metal price. However, with iron ore prices back again overnight and gold softer the AUD continues to slide, down substantially from the 0.7748 seen only 3 days ago, at 0.7628. With increasing doubts on the continuing demand for steel out of China and little in the way of economic data today, Australian dollar movements will be more reliant on iron ore price movements. Immediate support is at the 0.7600 level then around 7550 but unlikely either of these levels will be tested today. Now that the US Healthcare Bill vote has been delayed, look for consolidation around the 0.7615/35 level as we head into the weekend.


New Zealand
New Zealand interest rates remained unchanged at 1.75% as expected at the RBNZ announcement Thursday morning. The RBNZ commented that global inflation has increased partly due to rising commodity prices although we have seen a slump in oil prices, the long term inflation expectations remain well supported at 2 percent. Expectations are that CPI will be variable over the coming months along with further depreciation of the NZD to achieve further balanced growth. This week’s Global dairy trade auctions were overall surprisingly positive with a change of 1.7% over 7 March figures. Whole Milk Powder made a slight recovery from the recent slump in commodity prices, perhaps showing good support around pre-$2,750.00 levels. The New Zealand dollar is still well supported above 0.7000 with upside bias still intact. Short term resistance is still limited to 0.7100, a break above this level will indicate strong opportunities for buyers.


United States
Economic data flows continue to be positive, with February new home sales figures showing a 6.1% increase, well in excess of the 1.6% forecasted.
However the reflation rally in both equity markets and the USD sparked by Trump’s election continues to falter as the delivery of pro-growth policies such as tax cuts, and infrastructure spend remain far away. US equity markets and the USD were relatively flat last night as the Trump administration attempted to garner support for the healthcare Bill which has now become a bellwether for how well Trump can deliver on his big spending programmes. The health care vote has now been postponed, in a setback for Trump and Ryan, on doubts that they have enough votes to ensure a win. It may be voted on Friday morning US time, USD direction is very dependent on the outcome, so brace for volatility at the Monday opening.

                                                                          
United Kingdom
Figures out on Wednesday showed UK inflation at the highest level for 3 ½ years in February increasing speculation that the Bank of England may have to start looking at interest rate increases over the next few months. Prices were up by 2.3% yoy in February, exceeding the BoE’s target of 2% and above forecasts of 2.1%, driven by rises in food and fuel prices and the weaker GBP which also increased the costs of goods and services. However BoE meeting minutes note that an attempt to offset the effect of a weaker GBP on inflation by increasing interest rates would come at a cost of increased unemployment. This concern may be enough for the Bank to look through the current higher inflation levels and keep rates on hold at 0.25% for the majority of the year. The GBP jumped higher on the inflation data to 1.2492 against the USD and then pushing onto 1.2504. It is now up around 1.2522, after better than expected retail sales figures overnight but with the Brexit trigger to be pulled next Wednesday we expect the GBP to soften from current levels.


Europe
The EUR has remained firm over the last few days as the softer USD tone continues. Economic data for the Eurozone region continues to show gradual improvement, but with core inflation remaining persistently low there remains little rationale for a rate increase anytime soon and speculation around a deposit rate increase has now abated. Political risk remains the “elephant in the room” with the French elections fast approaching. Although the centre-right Macon performed well in the first televised debate and continues to lead in the poll’s, given that around 30% of voters are still undecided Marine Le Pen could still cause an upset. The EUR/USD uptrend has moderated, now sitting around 1.07829 after a high yesterday at 1.0823. A fall below 1.0765 would signal a downward correction with a break above 1.0830 targeting the December high at 1.0870. With the US health-care bill vote now postponed look for the EUR to consolidate at current levels to end the week.


Japan
The Japanese government this week  assessed its consumer spending on rising wages and consumer consumption, the economy is said to be gradually improving but small areas remain weak. This marks an upgrade to last month’s weaker assessment hoping consumers will continue to spend boosting further recovery. Tokyo and Osaka is now back in the world’s top 10 most expensive cities due to the recent surging Yen, Tokyo had been the world’s most expensive city for the most past of the last two decades despite a fall in the cost of living and a weaker JPY. The Japanese yen extended its  run against the US Dollar trading today just off the weekly low of 110.72 and the previous low of November 2017. Next week we have Retail trade figures and household spending with little other significant data releases.


Canada
The Canadian finance minister delivered up the Canadian budget this week, named the budget for everyday people. Starting with a large deficit of 28.6 billion this coming year he spoke about a changing world for Canadians based on rapid improvements to technology and a need for new skills and growing demands on time. 5.2 billion has been set aside for skills development with education and employment training at a time when the natural resources sector cannot be countered on to provide ongoing employment. Retail sales and inflation printed stronger than expected midweek pushing the Canadian Dollar higher across the board. USD/CAD support is still seen around the bottom of the recent short term trading band of 1.3300. With Core Durable Sales tomorrow to end the week, we may see a further push higher towards 1.3400 the weekly high if the figure is an improvement of 0.2%

 
 

FX Update: The USD loses ground post Fed hike

Written by Howard Wilcox on March 21st, 2017.      0 comments

4:00pm(NZT)
Overview
The USD tone has moderated over the last week as the US Fed failed to signal any acceleration of the pace of rate increases. The prospect of other central banks increasing rates has also added to the softer USD. The new US Administration still appears to be struggling for traction as the replacement bill for Obamacare is attracting widespread criticism and any “phenomenal” deal to substantially cut taxes looks some way off. In the UK the Brexit story rumbles on but with the Bill passed to trigger Article 50 now given Royal consent , PM May has indicated that this will be triggered next week, on the 29th of March. For the moment the 2nd Scottish referendum sideshow looks to now be on the backburner. Data out of the UK has been mixed, but better than expected, although we expect the GBP to be sold lower after the official Brexit announcement is made next week. Some interesting comments overnight on the subject from EU commission president Juncker, that no-one else will want to leave the EU after they see how harshly Britain is punished. His comments have largely been derided by UK officials.  The Brexit negotiations will no doubt be torturous, with the Brussels negotiators preparing to present the UK with a “divorce” bill of up to GBP50 bio to settle what they regard as the UK’s share of liabilities. However the UK government is expected to take a tough line after receiving legal advice that it has no obligation to pay any such sum. It will be an interesting 2 year period!  The Eurozone continues to see a slow improvement in economic data and inflation is now lifting towards the 2% ECB target level. The EUR has enjoyed a bounce back over the last few days as comments around the possible increase of the deposit rate as initial step towards a EUR rate hike start to fuel speculation that it may come relatively soon. However the biggest Eurozone risk remains political as attention shifts from the Dutch elections to France where the right wing party of Marine Le Pen continues to gain in the polls. New Zealand and Australia continue to be buffeted by the offshore breeze. The Australian dollar has rallied over the last few days and is now back above the 0.7700 level against the USD supported by the stronger commodity prices. Last week's jobs figures were an unpleasant surprise and the RBA will be on watch to ascertain if a trend is developing. The New Zealand dollar after being solidly supported by good fundamentals dropped last week on weaker Q4 GDP data which caught the market a little by surprise. This week will see the RBNZ OCR review on Thursday but expect rates to stay on hold at 1.75% with a neutral bias maintained  as although near term inflation is a little stronger, activity growth has fallen short of the RBNZ’s previous forecasts. There is also another GlobalDairy auction on Wednesday, after the last price drop, this week is expected to see more price stability.


Australia
The Australian dollar opens the week back over the 0.7700 level against the USD around 0.7720, buoyed by the softer USD tone and continued supportive commodity prices. There is little meaningful economic data for Australia this week, with only the release of the RBA March policy meeting minutes later today as the major event of the week. Close attention will be paid to any comments the RBA makes on their view around the housing and jobs market. The AUD has had real trouble maintaining gains above the 0.7720 level for nearly 18 months and given the paucity of supportive data this week a move back into the 0.7680/90 level looks possible, although as long as commodity price action is positive, AUD downside will be limited. 0.7660 is support which if broken would expose a move to 0.7600 a level that should see buying interest re-emerge. For the Australian dollar to hold a sustained up move there needs to be continued strength in base metal prices and no more surprises on the jobs data front. The Australian dollar is now trading at 0.7730 after a spike overnight to the 0.7748 level, breaking previous 0.7740 February highs, consolidation at current levels build a good base to push for a test of 0.7780 last seen in early November 2016.


New Zealand
The New Zealand dollar starts the week on a more positive note rising back above the 0.7000 mark to 0.7058. It has spiked to 0.7072 overnight but was unable to hold that level. Tomorrow there will be another GlobalDairy auction where prices are expected to again be down with future pricing in a fall of 5%. Migration figures released today again show the strong influx continues, with annual net migration at a record 71,333 in the 12 months ended February, up from 67,391 for the same period last year. The New Zealand dollar remains remarkably resistant to downside pressure and has bounced back well after last week’s tepid Q4 GDP result. A push over 0.7100 now looks likely over the next few days as the USD rally abates look for a test of resistance at 0.7130 by weeks end.


United States
Markets generally muted overnight with the both US equity markets and the USD lower, the S&P 500 was down for the 3rd day in a row, as the more dovish message delivered by the Fed continues to be evaluated. There has been little talk over the last week of the tax cut package and this has also contributed to the softer equity tone as it becomes apparent that any stimulus from this will be many months away before it flows into the economy at large. The Trump administration is largely concentrating on passing legislation for the repealing/replacement of Obamacare, with the tax-cut issues seemingly deferred.  The USD looks to be in corrective mode, but we expect this to be relatively short term as even if there are only two more Fed rate hikes, these are certainly likely to be more than other major central banks this year and if the economy continues to perform and jobs growth continues, the possibility for a 3rd hike will remain alive. The USD/JPY continues to remain under pressure and even with Japan closed yesterday, the USD after sinking  below the 113.00 mark on Friday, is now down at 112.52 after making a multi-week low of 112.45. The risk is to the downside next support at 112.10; upside at 113.05 looks far away. The USD/EUR  is currently around 1.0735 with risk remaining on the upside as talk of ECB hikes circulates,  a break of 1.0782 would then target major resistance at 1.0820 look a move to the 1.0750/75 level over the next day or so.


United Kingdom
With the Brexit trigger to be pulled by the UK government on 29th March, this has given some certainty to the market. However with German and French elections looming this may delay the start of meaningful negotiations and give rise to more weakness in the GBP. How negotiations will progress is difficult to predict, we know the UK will seek immigration controls so a “hard” Brexit is likely and the EU is pressing for a repayment of a GBP50 bio “bill”, the UK government refutes any payment obligations. However like any deal there will be give and take and it is likely that the UK will get a favourable trade deal on exit, but will have to pay a sum in return. We are still of the view that potential for GBP weakness in the short term remains.


Europe
Political risk is back to the fore again, as French polls show that Marine le Pen’s far right party is gaining ground. There is the first televised presidential debate tonight and Le Pen has commented that it is “absolutely urgent “ to defend  France’s sovereignty and that she does not want to be a Vice Chancellor for Madame Merkel (ouch..!). After her visit to the US and clashing with US President Trump on economic policy at their first White House meeting, Merkel has called for swift conclusion of a trade accord between Japan and the European Union. That followed a renewed German-Chinese commitment to open markets on the eve of her trip to Washington and Merkel’s backing for a free-trade accord between the EU and Mercosur, the South American economic bloc. The EUR has strengthened against the USD as the dollar rally lost momentum late last week and talk of potential ECB rate hikes surfaced. After initially trading higher against the JPY up to a month high at 122.88 it has slipped back to the 120.75 level. Data recently released shows wage growth increasing for the region, but a 1.6% increase for 2016 it remains disappointing and far removed from the 3% of the 2000’s. We remain of the view that although economic data is looking better for the Eurozone bloc, political risk will hold sway over the short term


Japan
After what are increasingly looking like unsatisfactory visits to the White House, Japanese Prime Minister Shinzo Abe and German Chancellor Angela Merkel have called for a concerted effort to defend free trade, expanding the list of economic powers joining together to counter the U.S. shift toward protectionism. Talks on an EU-Japan accord began in 2013 with the goal of lowering barriers to trade and investment on both sides. Japan and the EU jointly account for more than a third of global economic output. However given the time it has taken for the Canadian/EU trade agreement to conclude it still could take years to be settled.  The JPY has made good progress since last week’s Fed rate hike with the USD/JPY rate moving from knocking on the door of 115.00 at 114.87 dropping to its current level at 112.50. With Japan on holiday yesterday there have been no economic releases and trading appears to be largely driven by sentiment, the downside is favoured with a break below 112.50 targeting 112.00 with a possible extension to the 111.60 low seen several times over the last 12 months.


Canada
The Canadian budget is due tomorrow with Canadian Finance minister Morneau signalling that he wants to reduce debt levels in relation to the size of the economy, which would show fiscal discipline. Canada’s low growth, combined with new spending on infrastructure has already forced the abandonment of other fiscal pledges. Several other challenges remain going forward; exports have been disappointing and business investment remains low over concern that the US may impose border taxes. Continued low borrowing costs have also fuelled a housing bubble in some of Canada’s metropolitan centres. After hitting a high of 1.3496 last week the USD/CAD then reversed directions and dropped to a low of 1.3275. It is currently trading at 1.3325 and we expect range trading at current levels ahead of the budget tomorrow.


Major Announcements
•    UK Average Earnings Index 2.2% vs 2.4% expected
•    UK Claimant Count -11.3k vs 3.2k expected
•    US Inflation 0.1% vs 0.0% expected
•    US Retail Sales 0.1% vs 0.2% expected
•    FOMC hikes interest rates 0.25% as expected
•    NZ GDP 0.4% vs 0.7% expected
•    Australian Employment Change -6.4K vs 16.3k expected
•    Australian Unemployment rate 5.9% vs 5.7% expected
•    Bank of Japan leaves rates unchanged
•    Bank of England leaves rates unchanged
•    US Consumer Sentiment 97.6 vs 97.1 expected
 

Economies of Note - 17th March 2017

Written by Howard Wilcox on March 17th, 2017.      0 comments

1:30pm(NZT)
Australia
The Australian dollar rallied after the US Fed rate move yesterday, climbing back over the old 0.7700 resistance level to a 3 week high of 0.7717. These levels were short lived however after the release of disappointing Australian February employment data. Employment fell by 6,400 since January against an expected increase of 16,000, with the unemployment rate climbing to 5.9% the highest level since January 2016 against forecasts of 5.7%. The AUD was immediately sold down, failing back to below 0.7700 to 0.7678. Statistics show a split economy, Melbourne and Sydney property prices are booming, spurring housing construction and attracting people from other states, while local governments are investing in infrastructure. In the west and north where a mining investment boom is unwinding, property prices are falling, businesses are failing and people are leaving. Internal migration is the main factor containing unemployment in Western Australia and Queensland. The RBA will be concerned that yesterday’s jobs figure does not become a trend, as this could prompt another rate cut by the RBA especially if concerns around financial stability ease.


New Zealand
The Q4 GDP figure released yesterday was disappointing coming in at 0.4% for the December quarter, below market estimations of 0.7% and the Reserve Bank MPS forecast of 1%. Adding to the softer tone was the revision of Q3 growth down to 0.8% from the earlier 1.1% giving an overall weaker annual growth rate of 2.7%. This should give a softer start to Q1 GDP growth and less pressure on domestic inflation than forecast in the February MPS, adding more credence to the central bank keeping interest rates on hold for a longer period.  However despite this weaker result, the economy remains supported by strong tourism demand, high levels of immigration, construction activity, robust business confidence and continued healthy household demand. The New Zealand dollar dropped around from USD 0.7037 to 0.6992 after the release but then bounced back to the 0.7010/15 level fairly quickly. It has opened this morning around 0.6980 and looks to have found some support. Next major support is back at the old 0.6880/90 level. However if the NZD can consolidate around current levels a move back over 0.7010/20 is possible next week.


United States
As widely expected the Fed hiked rates by 0.25% to a range of 0.75%-1% at their meeting on Wednesday night. They commented that the labour market has continued to strengthen, economic activity continued to expand at a moderate pace, job gains remained solid and the unemployment rate was little changed in recent months. These factors have given rise to inflation increasing closer to the Fed’s 2% long run target objective and thus it felt that a gradual increase in rates was applicable. The comments from the Fed that rate increases would not be accelerated but “gradual” was taken by markets to rule out speculation that a fourth rate hike maybe on the cards before year end, with only another two rate moves now expected, potentially in June/July and December. This saw US equity markets rally, the S&P 500 up 0.84% and the Dow up over 0.5%. On currency markets it was very much a “buy the rumour-sell the fact” with the USD sold off against all its major partners. US equity markets were lower overnight as investors reflected upon the Feds comments after yesterday’s rate hike and decided that markets maybe a little over extended and looked to take some profit off the table. The USD remained soft overnight both against the JPY and EUR, as the BoJ left rates on hold and an ECB official commented that a deposit rate hike may not be far away. Also released overnight were some details of the 2018 Trump budget, which proposes deep cuts across a wide range of federal agencies and spending programmes, switching priorities to defence and security spending. It is expected that this will require significant modification to pass through Congress and the Senate.
 
                                                                         
United Kingdom
Brexit issues still rumble on, but with the Bill about to gain Royal consent, an announcement triggering Article 50 expected in the last week of March. Attention was focused back on the UK Budget and in particular the Chancellor Philip Hammond who is now fighting to save his career after being forced into the most humiliating U-turn in a generation. This is after PM Theresa May scrapped the Chancellor’s headline budget policy - a hike in National Insurance contributions for the self-employed – and a revolt by backbenchers over what amounted to a broken party manifesto pledge.  These issues along with the potential for another divisive Scottish referendum have unsettled the GBP which hit an 8 week low against the USD at 1.2109 earlier this week. However it rebounded on the Fed statement back to the 1.2307 level also boosted by better employment figures, showing the jobless rate fell to 4.7% for the 3 months to January, the lowest level since 2005, however this was somewhat tempered by slower wages growth. Even though weaker wages together with rising inflation are a worrisome mixture that policymakers cannot ignore for long, as expected the Bank of England at its policy meeting yesterday left rates on hold at 0.25%. However what was interesting was that the decision was split with one of the members voting for a rate increase. This dissent overnight saw the GBP rally further against the USD spiking to 1.2356, the highest level in two weeks. There is a risk that these gains may be unable to be sustained as a trigger of Brexit, Article 50 next week would initial see a GBP sell-off.


Europe
Political risk reduced a little for the Eurozone as the results of Wednesday’s Netherlands election. It showed that voters rejected the far-right party of Geert Wilders who was soundly beaten by the incumbent centre-right Dutch PM , Mark Rutte , whose VVD Party was on track to becoming the largest party in the Netherlands 150- seat parliament with 32 seats. Interestingly turnout was at 81% the highest level in 30 years. Attention will now shift to next month's upcoming French elections. The EUR was higher after the Fed statement, rallying to a high of 1.0745. It has held onto these gains overnight, helped by comments from an ECB official that a deposit rate hike was coming (we think unlikely in the short term). Final February inflation data for the Eurozone was released confirming an increase at 2% for the month compared with 1.8% for January The EUR is currently at 1.0765 and should consolidate at current levels to end the week. support is at 1.0720 resistance 1.0790 .


Japan
The US dollar collapsed from a session high of 114.48 after the somewhat dovish outlook by the Fed on Wednesday, falling to a low 113.15, and with the short term momentum indicators now pointing lower it would seem that further downside could lie ahead. Ground-hog day again as the Bank of Japan kept interest rates unchanged and maintained 10-year JGB yield target around zero percent, thus leaving the USD/JPY pair flat lining around 113.35 levels. The central bank kept its assessment of the economy unchanged as well. With BoJ Governor Kuroda commenting that an uptick in inflation towards 1% won't immediately trigger an interest rate hike, indicating that the Central Bank has no plans to modify the monetary status quo, and that the economy still needs massive stimulus to fight deflation. The USD/ JPY is currently trading around 113.30 and with the USD upward momentum cycle broken for now,  look for a test of immediate support at 112.90 over the next day or so.


Canada
Choppy week for the USD/CAD , ranging between 1.3494-1.3275 on the US Fed decision and slide in oil prices which knocked the CAD lower. An uptick in Canadian 10 year  bond yields  has failed to lend any support to a recovery.
Currently trading around 1.3315 the USD/CAD looks to have next support around 1.3165, but we expect consolidation at current levels to close the week. Next week we have retail sales and inflation data to digest.

 
 

FX Update: FX Update: Markets tread water ahead of the Fed.

Written by Howard Wilcox on March 14th, 2017.      0 comments

3:45pm(NZT)
Overview
Stocks and the dollar have opened the week trading in tight ranges ahead of a week full of crucial central bank meetings, economic data releases and heightened political risk. In line with expectations created after the strong ADP jobs data on Wednesday, the Non-farm payroll figure was a good one, showing 235,000 additional jobs were created in February with a corresponding drop in the unemployment rate from 4.8% to 4.7%. This strong NFP result reaffirms the case for a Fed rate hike this week with  markets expecting three rate rise this year, the first in March, another probably around June/July then again in December. Yellen noted in her speech that four rate hikes would be one to many, as it would bring monetary policy back from accommodative to neutral and the Fed is still committed to supporting the economy through an accommodative monetary policy stance. Also by spreading out the hikes as well as allowing more economic data to emerge it will also allow the effects of Trumponomics to be seen on the economy. The FOMC meeting will be held Tuesday/Wednesday with the all-important statement coming out on Thursday morning NZ time.  In addition to the Fed, this week also contains meetings for the Bank of Japan and the Bank of England, both central banks are expected to keep rates unchanged. Also this week will see the Netherlands election, held on Wednesday, the right wing populist, anti-EU party led by Geert Wilders is now running in second place behind prime minister Mark Rutte’s party. It is however unlikely to be a clear-cut result due to Holland's proportional representation system and there is likely to be a messy process of trying to cobble together some sort of coalition that can govern effectively. However a negative outcome for markets seems unlikely as anti-EU candidate Geert Wilders will struggle to form any sort of alliance. Brexit developments continue to roll on for the UK, with one report suggesting that UK PM Theresa May, could trigger Article 50 to start Brexit divorce talks in the House of Commons on March 14, where she is scheduled to make a statement. It is felt that she will avoid further delays if the chance is there, as the next window of opportunity will not come until March 27, which some advisers feel is dangerously close to her deadline of the end of the month. Also overnight the Scottish First Minister Nicola Sturgeon announced her intention to hold a second referendum on Scottish independence to be held in the next two years.


Australia
Interesting comments out yesterday by Aussie Treasurer Scott Morrison, who said the biggest worry for the economy is low wage growth and that he was working to ease the pressure on house prices. Later today there are business confidence figures for February, tomorrow will bring Consumer confidence data and on Thursday, February employment data. The Australian dollar has slowly clawed back some the last two week’s previous losses and currently is trading around the 0.7272 level against the USD. This is not only largely due to a pause in the USD rally but also continued strong commodity prices, iron ore is up over 1.5% in the last two days. The Fed meeting is also crucial for future Australian dollar direction, but interest rate differentials still benefit the AUD as its 1.5% rate remains attractive over a US 0.50%-0.75% rate level. However the 0.7600 level is a tough nut to crack, initial support is now at 0.7535 but we expect the AUD to cycle in a 0.7550-0.7585 level for the next two days ahead of the FOMC statement.


New Zealand
There are several major data releases for New Zealand this week.  Q4 GDP is the main one out on Thursday with an expected 0.7% result, much below this may see more New Zealand dollar selling. There is Q4 current account data on Wednesday, and on Friday both manufacturing PMI and consumer confidence.  The New dollar has had a tough time losing over 5% against the USD over the last two weeks where it reached a low of 0.6890 (a 2month low) late last week on the back of the weaker GlaobalDairyTrade auction. It now looks to have established a base around the 0.6910/40 level, helped by the USD rally taking a breather. It is currently around 0.6924 as the market awaits the results of the 2 day FOMC meeting starting tonight. However the New Zealand dollar needs to trade back to and hold above the 0.6250 mark to indicate that a short term low is in place. The chances of a move to the 0.6860/65  lows, last seen in December although possible, have reduced in probability given the last few days of NZD consolidation at current levels that have taken place. Tightening by the Fed has already been built into the market, but if comments at the subsequent press release are more assertive on further rate tightening than expected, we could then see a test of the 0.6860/65 support.


United States
The USD rally has taken a pause, as markets await the Fed’s decision at the conclusion of its two day meeting on Wednesday. With markets fully pricing in a 0.25% rise, reaction will be muted unless the Fed disappoints, which would then see a slump in the USD and lower bond yields. Conversely if there is a hawkish tone in the press conference look for the USD rally to resume and bond yields to track higher. The meeting between President Trump and German Chancellor Angela Merkel has been postponed until Friday due to a severe snowstorm in Washington, but this meeting although important politically is unlikely to have any lasting effect on market direction. Look for consolidation around current levels for equity and currency markets, with the USD benefiting from superior rate differentials look for the EUR/USD to break below 1.0635 with an initial target of 1.0600 then 1.0565.

                                                                          
United Kingdom
Brexit, Brexit and more Brexit. That continues to be the biggest volatility factor for the UK. Success for PM May overnight as the House of Commons defeated the House of Lords amendments to the Brexit bill. The bill has now passed back through the House of Lords in its original form and now gives a clear path for the government to trigger Article 50 and set in motion the negotiations for the UK’s exit from the EU. An announcement has been made that Article 50 will now not be invoked before March 27th. PM Theresa May has also ruled out Nicola Sturgeon’s plans for a new Scottish independence before the outcome of the Brexit negotiations are known which would make a late 2019 early 2020 date more likely. The GBP has rallied against the USD, currently at 1.2210 after making a high overnight of 1.2250, resistance is at 1.2260 a break of which should extend to the 1.2345 level, although unlikely ahead of the Fed announcement.  


Europe
The EUR held better than expected against the post Non Farm Payrolls USD, with the USD/EUR coming close to the 1.0700 level. It was boosted by a report from Bloomberg that ECB policy makers considered the question of whether interest rates could rise before their bond buying programme ended at year’s end. However the reality is that ECB policy normalization is a long way off whereas the Fed process is expected to take another big step forward on Wednesday. Later tonight will see the release of German inflation figures and the January EU Industrial Production data, this will give further pointers to the strength of the EU recovery.  EURUSD gains last night peaked around 1.0713 the highest level for almost a month , given the interest rate divergence of the two currencies we still think the EUR is a fundamental sell against the USD and a downward move towards the 1.0630/35 zone  looks likely, with a break of this level extending to 1.0600 then 1.0565...upside at 1.0755 looks distant


Japan
This week will see the BoJ Monetary policy statement which is expected to leave rates unchanged. The JPY could strengthen however, should the Bank give any indication of any reduction in its QE programme. Any JPY strength will be tempered by the FOMC and continuing mixed Japanese economic data. The Producer Price Index came in at 1.0% YoY in February, matching expectations, but above previous 0.5%, while machinery orders plunged at the beginning of the year, down by 3.2% in January from a 6.7% advance in December, and falling 8.2% yearly basis. There was increasing speculation about the BOJ reducing their facilities, after headlines suggesting that, given the decline in yields, the Central Bank would need to buy less than the 80 trillion yen per year. Clear direction for USD/JPY remains elusive, currently at 114.92 support is at 114.50 with resistance at 115.00/10 then 115.50. It’s hard to call but we favour a test of 115.50 over the rest of this week if the FOMC delivers.


Canada
Good data in the form job figures helped the Canadian dollar over the last few days. According to the latest figures from Statistics Canada, the labour market added 15,000 jobs in February, following January's increase of 48,300 and beating the estimate of 2,500. Also encouragingly, the unemployment rate fell to 6.6% from 6.8%, while the participation rate dropped to 65.8% from 65.9%. Other details of the report showed that Canada's full-time employment rose by 105,100 last month, while part-time employment fell by 89,800.  This  increase in full-time jobs may finally allow Bank of Canada to be a little more optimistic. The CAD has had a better couple of days with the USD/CAD rate dropping to 1.3429, there is support at 0.3420 but once the Fed meeting is out of the way the USD/CAD may push for a test of the 1.3365/70 level seen last week.


Major Announcements last week:
•    GDT Price Index -6.3%
•    ECB leaves interest rates unchanged
•    UK Manufacturing Production -0.9% vs -0.6% expected
•    Canadian Employment Change 15.3k vs 0.6k expected
•    Canadian Unemployment rate 6.6% vs 6.8% expected
•    US Non-Farm Payrolls 235k vs 196k expected
•    US unemployment rate 4.7% as expected
 

Economies of Note - 10th March 2017

Written by Howard Wilcox on March 10th, 2017.      0 comments

3:30pm(NZT)
Australia
As expected the RBA remained on hold, leaving the cash rate at 1.5% where it has been since last August. In the accompanying statement the RBA governor Philip Lowe said exports had risen strongly and non-mining business investment was increasing. Most measures of business and consumer confidence were at, or above, average. Consumption growth was strengthening, although household income growth remained low. The RBA remains in a difficult situation, as a drop in rates would add to the overheated house price inflation, but higher rates would stifle consumption and investment, and push already record high household debt levels higher as well as having potential to push the AUD higher. The market is not looking for any rate hikes until next year, although continued US rate hikes would give the RBA some leeway to raise rates earlier if required, lessening the impact on AUD values.  The Australian dollar is trading around 0.7502 after falling to a 0.7490, a 7 week low, overnight not helped by another batch of weaker Chinese data showing a surprise fall in inflation for February. Also adding to the weaker AUD tone were more falls in the price of gold and oil. Look for consolidation ahead of tonight's US payroll figure. Support is now at 0.7490 which if broken would see 0.7445 exposed. Any recovery must hold over the 0.7530 level to extend back towards the 0.7600 region, where selling interest would re-emerge.


New Zealand
The New Zealand dollar has taken a further hammering in the later part of this week as the USD continues to climb higher on better data and an almost certain Fed rate hike next week. Also not helping were the weaker than expected GlobalDairyTrade auction results which saw milk powder prices down overall by 6.3%,however whole milk powder prices were down 12.4%    and skim milk powder 15.5% lower. Increased supply was the main explanation for the fall which has seen a 23% drop in GDT WMP since December. However other fundamentals remain stable, but the New Zealand has been outmatched by the resurgent USD. The fall has been steep as on Monday we were trading at 0.7044 and current levels are 0.6900, next support is around the 0.6860 level, last seen on 23rd December, if this gives way next stop will be 0.6800. However the longer the New Zealand dollar can consolidate at current levels the shallower any further dips maybe, given the NF-payroll data is expected to be good and the rate hike priced in 0.6860 could hold the line.


United States
A very strong ADP jobs figure showed 298,000 jobs were added in February (expectations were for around 185,000), the largest figure in several years, with the January figure revised higher as well. This suggests that tonight’s pivotal Non-farm payroll figure will be well north of 200,000 (our pick is 210-220K) and the USD has continued to strengthen accordingly against all its trading partners. Even if the payrolls data is lower than expected (unlikely) any figure above 150,000 will keep the USD well supported and gold under selling pressure. US equity markets were softer, with a Fed 0.25% rate increase next week now fully priced into the market as a near-certainty, bond yields are also catching up with forecasts of increasing inflation. The drop in crude oil pulled stocks of energy producers lower, contributing to equities having the 3rd day in row of declines. The USD had a strong move higher against the JPY surging to 114.74 on release of the ADP report, the highest level since 15th February The 114.75 was a solid resistance level, but has now  broken and the USD is now around 115.10 against the JPY, next stop is 115.50. Tonight’s jobs data could well provide the catalyst for such a move.
                      
                                                    
United Kingdom
The GBP tumbled below the 1.2200 level to the USD earlier this week, its lowest level in 7 weeks as the House of Lords was successful in forcing the government to give Parliament a bigger say in terms of the Brexit deal and final approval of an eventual deal with the EU bloc. The Government is hoping that these amendments will be overturned next week when the Bill returns to the House of Commons. Investors were also nervous ahead of the UK budget released on Wednesday. Also encouraging for the UK ahead of the budget was a report from the OECD upgrading its 2017 growth forecast for the economy from 1.2% to 1.6%, this was after warning of a Brexit collapse last year. Borrowing is also expected to be GBP 12bio lower than previously expected.
Salient points for the actual UK Budget delivered by the Chancellor Philip Hammond on Wednesday;
•    UK debt remains high with productivity too low
•    2017 growth seen at 2.1% against November’s 1.4%, 2018 growth at 1.6% agst 1.7% forecast in November.
•    2019 growth now forecast at 1.7% agst 2.1% previously, 2020 growth at 1.9% agst November’s 2.1%
•    UK deficit at 2.6%  of GDP in 2016/2017
This was largely perceived as a steady-as-she goes budget.  The GBP has traded to 1.2137 and although back at 1.2162 is at risk of falling further. Expect some consolidation ahead of tonight's NF-payroll, but a break of 1.2130 would open the way to 1.2085 then 1.02040.


Europe
As expected the ECB left interest rates unchanged at its meeting overnight, commenting that there was better growth in the Eurozone region and that additional policy measures were not required. However ECB president Draghi acknowledged the political risks faced by the region this year. Growth and inflation forecasts for the region were upgraded 2017 1.3% to 1.7% and for 2018, 1.5% to 1.6%. Draghi also stated that he expected core inflation for the region to remain low. The ECB asset purchase programme will reduce to EUR60 bio monthly from April to December. The markets pushed the EUR higher after the meeting with the EUR/USD trading back above the 1.06 level to a high of 1.0614, but has failed to hold and is now back at the 1.0575 mark. The pair is seeking clear direction with breakout levels being 1.0635 on the topside, 1.0520 on the bottom side.  Given our view on the NFP tonight we favour a push through 1.0520.


Japan
GDP data earlier this week was positive, showing an increase for Q4 2016 as exports offset slower domestic consumer demand. Gross domestic product expanded 1.2% on an annualized basis from Q3 in the three months through to December, according to official data. Japan’s economy has expanded for four consecutive quarters, the longest run in more than three years. But the growth has been modest and mostly driven by exports, while private consumption at home remains soft. PM Abe commented that Japan was still not out of its deflation phase that has dogged the country for much of this decade. The JPY has weakened overnight with the USD/JPY breaking previously solid resistance at 114.75, it is now trading at 115.18 after a high last night of 115.24. Next stop is now 115.50 then 116.00 and above. Initial support is at 114.50 then 114.30 but a test of support is unlikely unless NFP surprises on the downside (also unlikely).


Canada
Canadian data continues to improve with latest figures showing an increase in exports of 0.5% to a record level of C$46.5 bio in January, with the US component rising 2.3% to C$34.6 bio, led by increases in cars and light trucks.
The report also showed that Canada’s merchandise trade balance posted a 3rd monthly surplus in a row widening from $447 million in December to $807 mio in January, also helping was a drop of 0.3% in imports. The CAD has weakened over the week against the USD from 1.3407 to 1.3509 currently. Even though Canadian data has been supportive, the more hawkish tone from the US Fed continues to drive this cross higher. Next level is 1.3560.

 
 

FX Update: The Fed gets ready to pull the trigger

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

3:30pm(NZT)
Overview
US markets continued to be buoyant last week with both the USD and equities trading higher as continuing solid economic data reinforced views that the US economy was starting to hit its straps. Helping the USD rally were a raft of comments over the week from various US Fed officials that an interest rate hike was now deemed necessary at the next FOMC meeting on March 14-15th. These views were reiterated by a speech on Friday by Fed Chair Yellen, where she left little doubt that a rate rise is forthcoming and even raised potential that the pace of increases may need to be accelerated, given the perceived danger of the Fed being too slow in boosting rates, “We realize that waiting too long to scale back some of our support could potentially require us to raise rates rapidly sometime down the road, which in turn could risk disrupting financial markets and pushing the economy into recession,” she said. Yellen all but declared that the Federal Open Market Committee would increase rates for the first time this year at its March 14-15 meeting, saying that such a move “would likely be appropriate” if the economy stays on its current track. She also suggested that would not be the last increase this year. US Equity markets after making new record highs earlier in the week came off towards week’s end as the realisation emerged that any Trump stimulus measures were likely to be many months away and more immediate rate rises would have a greater effect. The Eurozone area better economic results continue to be outweighed by the political situation, especially in France where the polls continue to show continued support for the anti-EU National Front party of Maine LePen. This week has opened with stocks in Tokyo and Seoul falling and the JPY strengthened after a North Korean intercontinental missile launch which saw three missiles fall into the sea inside Japan’s exclusive economic zone. Markets have also being cautious in weighing up news out of China, from the National People's Congress meeting that has seen GDP growth reset at a lower “6.5% level or higher if possible” and reiterated the pursuit of a neutral monetary this year. Later this week there are the ADP payroll data on Wednesday which should give a “heads-up” to Friday's crucial Non-farm payroll figure.


Australia
Still retains a negative tone, after dropping to a low of 0.7542 on Friday the Australian dollar has managed to claw its way back to the 0.7581 level however in the face of the stronger USD it continues to have trouble regaining the 0.7600 handle. Economic data continues to show sluggish growth, with retail sales rebounding in January by 0.4%, up from a 0.1% fall in December 2016, but household consumption remains relatively flat as record low wages growth and higher household debt levels eat into spending power. However the positive figure will give some comfort to the RBA given that it was a pickup in household consumption that helped the economy dodge a recession in the Q4 last year. The RBA will release its rate decision later today after its monetary policy meeting, rates are expected to remain unchanged at 1.5%, but it is expected that the rhetoric from the RBA will indicate a more moderately hawkish stance and acknowledge the improvement in the global economic climate. The ongoing strength of commodity prices, especially iron ore, remains positive for the Australian economy although comments of a more moderate Chinese growth rate of 6.5% over the weekend from the Chinese Premier inject a hint of caution. We look for the Australian dollar to trade around current levels ahead of the RBA statement, upside resistance is at 0.7620, with support at 0.7570 if broken would open the way to 0.7530. Given the firm USD tone, AUD rallies look to be a selling opportunity.


New Zealand
The New Zealand dollar is again on the back foot this morning, opening around 0.6995 against the USD after slipping through the 0.7000 level overnight, the first time since January. Although New Zealand economic fundamentals remain solid , this move is all about USD strength especially given the clear message given by the US Fed over the last week that US interest rates are on the rise and that the pace of such moves may increase. This is in stark contrast to the RBNZ’s intentions that NZ rates are unlikely to move higher within the next 2 years. There is another Global Dairy auction late tonight with milk powder futures pricing in a drop of around 8% in prices, given the increased production and volume offered such a move would not be surprising. Given we are seeing a lot of US data this week culminating in the Non-farm payroll figure on Friday, we expect the New Zealand dollar to remain under pressure. Next support level against the US is at 0.6950/60 level which if broken, is likely to see a descent to the 0.6860/80 range. New Zealand’s underlying stable political environment and aforementioned solid fundamentals should eventually provide NZD support but given the current USD trend, the NZD tone remains negative and any buying interest will be at lower levels.


United States
US equity markets continued the softer tone, with the Dow dropping below the 21,000 level as Friday’s comments from Fed Chair Yellen that a rate increase next week was pretty much a “done deal” was digested by the market, introducing a dose of reality. Also adding a hint of caution was the rescaling of the Chinese GDP growth target to “6.5% or higher” over the weekend at the People's National Congress meeting, down from the previous 6.7%. The Trump administration gave no further indications on the “phenomenal tax” deal but this is now generally acknowledged to be several months away, with any effect l not be seen in the economy until well into the second half of the year giving more weight to ongoing economic data and potential Fed rate moves. US economic data continues to be positive with January factory orders up 1.2% (expected 1%) and durable goods orders for January revised higher from 1.8% to 2.0% , we expect the ADP jobs data on Wednesday to be good which should give an indication that Friday’s pivotal Non-farm payroll figure will again be a solid one.( estimates are for 185,000+) Look for continued USD strength against both the JPY and EUR as the later continues to be hit by political problems in France and the Netherlands as those elections draw close. The USD is currently trading around 1.0580 against the EUR after the EUR failed to hold the 1.0600 level, the USD tone remains positive with a likely test of the 1.0545 level which if broken would see a test of the March 2nd low of 1.0494.
          
                                                                
United Kingdom
The big news this week for the UK, will be the delivery of the Budget on Wednesday 8th March by Chancellor Hammond. It is expected to show the UK economy growing faster than expected since the Brexit vote, which has led the Government's own fiscal watchdog to state borrowing will probably be £12billion less than it forecast in the Autumn Statement last November. The latest borrowing figures showed stronger tax receipts from workers and businesses this fiscal year will provide Mr Hammond with a boost after massive upward revisions to borrowing over the next five years following the decision to leave the EU. UK equity markets continued to surge following on the “Trump- trade” but the GBP has slid lower as Brexit fears resurfaced, and UK Services PKI data fell below forecasts, falling to a 5 month low, trading back below the 1.2300 level. Although fundamentals continue to look solid , we look for continued weakness in the GBP against the USD, as PM May looks to pull the Article 50 exit trigger in late March  and the USD continues to strengthen on further rate hikes. Look for a move to the 1.1800 level over the next month, but this e move is unlikely to be linear and rebounds will present trading opportunities.
 

Europe
No change in the political scene driving most of the EUR negative tone. Another poll on Monday showed National front leader Maine Le Pen continuing to gain on her conservative opposition Macron, up another 1%. Later this week we will see industrial output for Germany, France and the UK along with German factory orders. These are expected to continue the more positive tone seen of late. There is an ECB meeting on Thursday but no change in rates is expected even after Eurozone inflation hit the 2% target level in February. Expect quantitative easing to continue until the end of the year as underlying price pressure remains muted as the stronger inflation figure appears to be driven by volatile energy and unprocessed food price inflation, factors the ECB has previously said it would disregard in looking to adjust monetary policy. Core inflation is what matters to the ECB , this would have to exceed 1% for several months before the ECB would start to taper its QE purchase programme and with core inflation set to track around 0.9% for most of this year it is unlikely any move will be forthcoming from the ECB until late Dec/early Jan 2018.
Look for continue pressure on the EUR, support is at 1.0520 the 1.0470, immediate resistance at 1.0635 unlikely to be tested over the next few days.


Japan
The Japanese economy continues to be lifted by capex, industrial output, exports, and fiscal support.  After the recent capex report, expectations are for Japan's Q4 GDP to be revised from 0.2% to 0.4% (from 1.0% on an annualized basis to 1.6%). Japan will also report its January current account later today.  Seasonal factors are dominant.  The current account and the trade balance tends to (has for 20 years) deteriorate in January compared with December (and improves in February).  Unlike Germany, Japan's trade balance does not drive the current account. Investment income is typically larger than the trade surplus. The JPY and Japanese equity market took a knock yesterday after the new of the North Korean missile launch hit the wires. The USD/JPY is now around 113.95 after hitting a high yesterday of 114.12 , but the trend for the USD remains positive and we look for a test of the 115.00  level and above  later this week. However near term price action is expected to be choppy around current levels ahead of jobs data release.


Canada
GDP data last week showing that week showing Canada’s economy is growing at the fastest pace since the collapse in oil prices two years ago maybe masking some other concerning issues , that of Canada’s business’s missing out on the rebound. Non-residential business investment has fallen in eight of the last nine quarters and is down 19% over that period. Investment in plant and machinery is now at 37% of GDP, the lowest level since 1981. On balance a rapid change in investment spending activity looks some way off with spending in the manufacturing sector falling again for the second year. However it appears that consumer spending is picking up the load, representing abnormally high proportion of total GDP. Given this scenario, the stance of the BoC to keep rates on hold looks set to continue for some time, with an accompanying softer CAD. The decision of the BoC to hold rates as opposed to the US Fed increasing signal, has seen the USD continue track higher against the CAD. After trading around 1.3163 a week ago the US unit is now trading at 1.3400 against the CAD, we look for the weaker tone to continue.


Major Announcements
•    US GDP 1.9% vs 2.1% expected
•    US CB Consumer Confidence 114.8 vs 111.3
•    Australian GDP 1.1% vs 0.7% expected
•    Chinese Manufacturing PMI 51.7 vs 50.9 expected
•    UK Manufacturing PMI 54.6 vs 55.7 expected
•    Bank of Canada leaves interest rates unchanged
•    ISM Manufacturing PMI 57.7 vs 56.2 expected
•    UK Construction PMI 52.5 vs 52.2 expected
•    Canadian GDP 0.3% as expected
•    UK Services PMI 53.3 vs 54.2 expected
•    Australian Retails Sales 0.4% a expected
 

Economies of Note - 3rd March 2017

Written by Howard Wilcox on March 3rd, 2017.      0 comments

3:00pm(NZT)
Australia
The Australian dollar after continuing to trade below the 0.7700 level for most of the week, dropped to a 0.7635 low on a stronger USD on increased speculation of a March rate hike, in spite of better than expected Australian GDP data on Wednesday. The GDP data was encouraging, showing that Australia avoided a second consecutive quarter of negative growth, with GDP for Q4 rising by 1.1%, exceeding market expectations of 0.7-0.8%. On an annualised basis the Australian economy grew by 2.4% in the 12 mths to December 2016. This result allied with the ongoing recovery in commodity prices boosts chances that the recovery will accelerate over the next 6 months and may attain the RBA’s growth target of 3% GDP growth later in the year. However, there may still be some issues around consumer spending as the data also showed wages growth was very subdued, falling 0.5% for Q4 which gave an annualised increase of just 1.5% for the 2016 year. Overnight amongst more comments from Fed Officials saw the market reset the chance of a Fed rate hike to around 90% probability which saw a surge in the USD knocking the Australian dollar hard down to the 0.7570 level. After such a big overnight move expect some consolidation around current levels, with next support level back at 0.7510. Expect a continuation of the negative tone. Next week will also see the RBA interest rate decision meeting on Tuesday and subsequent statement. No change is expected, but as always, interest will be around the accompanying statement.                                   


New Zealand
After holding well in the face of the stronger USD the New Zealand dollar succumbed to selling pressure overnight as the USD surged higher against all major currencies. The New Zealand dollar opens today around the 0.7063 level sharply lower from the 0.7150 region  where it spent most of yesterday….now at a 7 week low , next immediate support level is around the 0.6950/60 level . Fundamentally little has changed, the economy remains solid and ongoing economic figures should to some extent underpin the New Zealand dollar, but as usual the USD remains the main driver for both the NZD & AUD and the trend for higher US interest rates was  always going to make life difficult for the antipodean pair.


United States
US equity markets continued the massive bull-run, the Dow jumped to an all-time high of 21,166 on Wednesday after President Trumps address to Congress, that although light on detail struck the note most wanted to hear to reactivate the “Trump trade” of the past month. Extraordinary gains really, when the Fed is signalling rate rises (multiple) ahead and any tax cuts (“phenomenal” or otherwise) look to at least be several months away before implementation. Mid-week the ISM manufacturing index came in at a 2 ½ year high for February , with the surge in orders over the month suggesting activity is likely to remain solid over the next 6 months. Price pressures are continuing to rise which further reinforces action is overdue from the Fed. However overnight a dose of reality set in, as market expectations rose to around 90% for a Fed rate increase at the March meeting in 2 weeks, underpinned by further speeches by Fed governors this week commenting that inflation was now an increasing concern. The bullish tone evaporated on equity markets overnight, as investors reassessed the torrid run that has seen stocks making nearly daily all-time highs. The S&P 500 had the biggest drop for a month down 0.6%, the Dow was also lower but still managed to close above the 21,000 level. Next week will also give more data on the state of the US economy with the non-farm payroll data on Friday (this is released a week later this month) and Wednesday will see the ADP payrolls data which normally gives a “heads-up” on the Friday figure.  

                                                                              
United Kingdom
The GBP suffered at the hands of the surging USD overnight dropping to 1.2264 from the 1.2403 highs seen yesterday. UK data continues to be solid. A report out yesterday showed construction sector activity in the UK economy increased its pace of expansion and unexpectedly rose in the month of February, despite cost pressures hovering at an eight-month high. Also earlier this week a report showed that the UK’s manufacturing sector maintained a "solid" start to the year in February amid a sharp uptick in new export orders as the weaker GBP helped boost overseas orders for the 9th month in a row. Sales were led by markets in Europe, Asia and the US as the overall pace of growth slowed. An amendment to the Breixt bill in the House of Lords, affording protection to EU nationals living in Britain, is not expected to derail the process, the amended Bill is expected to return to the House of Commons on 13th/14th march for further debate. We expect the GBP to remain under pressure as the USD strengthens and although the GBP has been trading lower against the EUR, given the fragile political landscape in France, Italy  and The Netherlands with upcoming elections, look for the GBP to reassert control on the EUR/GBP cross.

 
Europe
Political news continues to dominate, although economic data has started to show some more positive signs. For the first time in over 4 years the Eurozone’s inflation rate has pushed above the ECB’s target of “below but close to 2%” with inflation in February hitting 2% after a jump in food and energy costs. This rise from 1.8% seen in January will increase debate as to when the ECB should exit from its stimulatory bond buying programme. It is already planned to reduce the pace of quantitative easing from EUR80 to EUR60 bio a month from April. German inflation data would also have been a contributory factor increasing from 1.9% to 2.2% in February. Solid manufacturing data earlier this week suggest that the Eurozone economy is starting to grow at a more robust place for Q1 this year, however unemployment across the region remains unchanged at 9.6%. Given the stronger USD overnight the EUR remains under pressure, now at 1.0505 with a negative tone, a break of 1.0490 would signal a deeper decline to the 1.0400 level then potential to retest the multi-year low at 1.0340 seen last January.

Japan
The Japanese Yen took a tumble as the USD driven higher by interest rate hike speculation broke through resistance at the 114.00 level. It is now trading at 114.40 with a push onto 114.60 looking likely. A break of this level would threaten 114.95 then target 115.50, although not likely until next week, if US employment data is good. Some better data this week, showing an increase in capital spending of 3.8% year-on-year for the October to December period, a turnaround as company output was boosted. Business investment by all non-financial sectors for purposes such as building plants and introducing new equipment was up over 3% at ¥10.94 trillion ($97 billion). Pre-tax business profits across a wide range of sectors were also higher, up 16.9% from the previous year according to figures produced by Japan’s Finance Ministry. These results are encouraging for the economy going forward, and support the view that a moderate recovery is now underway, as capital spending has been a weak spot, as companies were reluctant to invest amid uncertainty around the economic


Canada
There was, as expected, no change in rates after the Bank of Canada meeting on Wednesday. The Canadian GDP data was released showing a 0.3% growth in the economy for December quarter, in line with expectations. On an annualised basis this gives a 2.6% growth rate for the economy in the October-December period. The Canadian dollar has been hit by the stronger USD, falling below the support level at 0.7500 to now trade at 0.7469. Look for further weakness heading into next week if US jobs data continues to be strong.

 
 

FX Update: Trump and Yellen the focus this week

Written by Howard Wilcox on February 28th, 2017.      0 comments

5:00pm(NZT)
Overview
Markets continue to lack direction with choppy trading for both equities and currencies albeit US equities continue to trade at elevated levels. This week will see new US president Trump speak before the US Congress, comments from Fed Chair Yellen on the economic outlook and continuing rumblings on the Eurozone political front, especially around the French elections that has the ability to create volatility. When President Trump addresses Congress on Tuesday night the market will be looking for more detail on his fiscal stimulus, especially around his spending plans and tax cuts to give the current “reflation” equity rally further “legs”. Overnight he has outlined large increases in defence spending and ear-marked infrastructure to attract increased funding. Likewise Fed Chair Yellen's speech on Friday will be combed for further clues as to the likelihood of a rate increase at the next Fed meeting on March 15th. The market now rates close to a 50% chance of a March increase up from 34% two weeks ago. The EUR and Eurozone equity markets should remain volatile as the French election approaches and the polling figures continue to show increasing support for the anti EU National Front party of Maine LePen. However her chances took a blow late last week as another French politician Francois Bayrou said he now won’t run in April’s presidential election, pledging support to fellow moderate candidate Marcron. This has seen a slight reduction in demand for safe-haven assets. We view political risk as the largest threat for the Euro over the next 3 months, even as economic data is starting to show “green shoots”.


Australia
Although the Australian dollar traded above 0.7700 for several days, it continues to struggle to extend gains and is now again back under this level at around 0.7685.  Current account data out today showed a sharp narrowing in the deficit to A$3.85 bio for the December quarter due mainly to the increase in value of commodity prices. This is largely in line with forecasts and down from a A$10.2 bio deficit in Q3 2016.  GDP is due tomorrow and is expected to show an increase of 0.7% for 2016 Q4, rebounding from the shock 0.5% contraction seem in Q3. Tomorrow also sees the release of Chinese PMIs which could easily impact the AUD.  With the Australian dollar still unable to sustain gains beyond the 0.7700 level, momentum is now looking negative, but the AUD needs to break below the 0.7660 level to confirm additional declines that could extend down to 07450, although we’re unlikely to see this type of move before Friday’s US results.


New Zealand
The New Zealand dollar continues to remain resilient even in the face of a firmer USD. Data releases continue to underpin the New Zealand dollar and yesterday’s strong immigration figures are a case in point. Business confidence figures for February out today showed a drop as the economy moved into “a mature stage of the economic expansion”. Also out today was January merchandise trade data which showed New Zealand’s trade balance deteriorated in January, with the monthly deficit widening to $285m. However, a significant contributor to the surprisingly large deficit was a jump higher in the volume of oil imports, which is likely to reverse next month. Excluding oil imports and exports, the monthly deficit was a more moderate $36m. There was little effect on New Zealand dollar levels from these releases. Currently the NZD is back around 0.7185 and given the events in the US this week we expect the NZD to mark time at current levels until Friday's US jobs figure and subsequent comments from Fed Chair Yellen.


United States
US equity markets continued to forge ahead overnight advancing again to create the longest run in almost 30 years. Markets were also encouraged by comments from the President that he would increase spending on infrastructure which saw the value of industrial stocks boosted. Trumps address later tonight before a joint session of Congress is expected to lay out plans for tax and health-care reform. It now appears details of the “phenomenal” tax package will not be clear until the costs of repealing “Obamacare” are better known. Friday will see the release of the important Non-farm-payroll data for February. This is expected to be solid and given the desire of the Fed to “get ahead of the curve” this should increase chances of a rate hike in two weeks at the March 15th Fed Reserve meeting. Fed Chair Yellen is giving a speech after the NFP figures which will be the last comment she makes heading into the lockdown period before the Fed meeting. We suspect that she may strike a more hawkish tone than expected. Given expectations are now evenly balanced for a rate hike we look for both US  equity markets and the USD  to remain firm over the next 2 weeks, but especially the USD.

                                                                              
United Kingdom
Sterling has traded lower over the last two days, seemingly knocked by two reports: (1) that Theresa May, UK Prime Minister, could trigger Article 50 as early as mid-March and (2) that Nicola Sturgeon, Scotland’s first minister, could potentially call another vote on Scottish independence in March and that the UK government is apparently preparing itself for that possibility.  We very much doubt another Scottish referendum will actually happen, and this has now had cold water poured over it by PM May, but the concerns will be there, which along with uncertainty about the timing and process of UK’s exit from the EU should keep the GBP under pressure for the time being. Consequently, with this uncertainty any potential gains for the GBP, even on the back of better economic data, short term should not be extended too far – most of the negativity on these issues has for all intent purposes been pretty much priced in so expect consolidation of the GBP around current levels until there is more clarity on the Brexit issues. This week will also see more data to help give a clearer picture of the economy, Wednesday will bring manufacturing PMI and lending data, Thursday construction PMI and on Friday key services sector PMI.

 
Europe
European news still centres around the ebb and flow of French politics and how the scenery may look for the EUR after the French election. Latest news has Japanese investors running scared by European political risk and looking to liquidate significant holdings of French debt if the situation deteriorates further. According to reports large Japanese life insurance and pension funds are owners of French treasury bonds bought aggressively when the ECB first undertook quantitative easing, now holding (according to BoJ figures) around 13% of the entire market. Reports suggest that they started trimming some of these holdings late last year, but if the political situation becomes volatile a full scale liquidation would create significant downside for the EUR. The EUR has firmed against the USD overnight and if Trumps message disappoints tonight, may strengthen further, but political issues will keep any large moves in check and the market will be wary of pushing the EUR too high against the USD ahead of the Fed speak on Friday.


Japan
With the popularity of risk-off trades faltering, the JPY has given ground to the USD and currently is sitting at the 112.55 level after the USD dropped to 111.90 overnight.  Further retracement could see the USD supported around the 111.60 level but given the events stateside this week it is unlikely that there will be significant USD weakness against the JPY. Industrial output data for Japan just released showed a decline in January (-0.8%) the first decline in 6 months. This unexpected weakness in industrial output indicates a potential risk to sustaining recent economic growth
However, although domestic consumption continues to show weakness in Japan, net exports added to growth in the second half of 2016, and shipments rose in January for a second straight month.


Canada
The Bank of Canada meets on Wednesday this week.  No change in policy is expected and economic forecasts should also remain unchanged. The slow recovery continues, with still plenty of slack in the economy.  Terms of trade have shown an improvement, with the chances of a trade disruption given the new US administration appears to have reduced, but non-energy exports have dropped (-4.1% in December). Canadian GDP figures will be released on Thursday a day after the BOC meeting.  The economy is expected to have grown 0.3% in December slightly lower than the 0.4% in November.  Growth appears to have accelerated to 2.0% on an annualized rate in Q4 after a 3.5% pace in Q3, which was the strongest in over 2 years.


Major Announcements
•    NZD Global Dairy Trade Price Index -3.2%
•    UK GDP second estimate 0.7% vs 0.6% expected
•    Canadian core retails sales -0.3% vs 0.8% expected
•    Australian Private Capital Expenditure -2.1% vs -0.4% expected
•    Canadian Inflation 0.9% vs 0.3% expected
•    US Core Durable Goods -0.2% vs 0.5% expected

 
 

Economies of Note - 24th February 2017

Written by Howard Wilcox on February 24th, 2017.      0 comments

2:45pm(NZT)
Australia
Capital expenditure data released yesterday was not as strong as expected, but nevertheless it did show that plant and equipment spending is likely to contribute to a rise in Q4 GDP due next week. Expectations are for around 0.7% Q4 GDP result. This data will be closely watched next week, but we also have the current account, building approvals and the trade balance to digest.  The AUD has had a tough week, where it has tried to push through and hold above the 0.7700 level against the USD. Continued firmness in commodity prices and the more upbeat RBA economic forecasts have also helped in underpinning the Aussie advance.


New Zealand
Little data of note this week, although the Global Dairy auction result on Wednesday showing a slight softening in prices had only a minor effect on the market.
The New Zealand dollar has been trading sideways for most of the week in a consolidation phase, but overnight on the back of the weaker USD, has moved back over the 0.7200 level, making a high of 0.7245. It is back around 0.7225 but if the USD weakness perseveres next stop is 0.7260 resistances. A break of this level would target the 0.7330 level but given the view for US interest rates NZD moves will remain USD subservient.


United States
US equity markets traded at record levels overnight, with the Dow having its 10th straight day of making new highs. However the USD sagged against most of its major counterparties after comments from the new US Treasury Secretary Mnuchin that any gains to GDP growth from the administration's new policies were likely to come over a number of years, hosing down (unreasonable..?) expectations that effects would be felt much sooner. The USD has had a mixed week, firming initially on release of the Fed Reserve minutes which showed that there was potential to raise rates “fairly soon”. The USD then adopted a weaker tone after comments that scope to raise rates would only need to be gradual as there was little perceived threat of near term inflation. We look for the USD to extend losses to end the week. US data releases continue to show an economy moving ahead, with housing data showing continued strength along with solid jobless claims figures. With economic data continuing to be positive and given comments from Yellen last week regarding not wanting to “get behind the curve” we now believe that a March rate hike is now around a 50% probability (market expectations are currently at 34%).

                                                                              
United Kingdom
Mixed news for the UK over the last few days.  The GBP has strengthened as concerns over the outcome of the April/May French elections increase, but Q4 GDP data was revised down. Yesterday’s data showed 2016 GDP was up 1.8% for the year, below the initial estimations of 2%. This meant that Germany not the UK was the fastest growing G7 economy last year.  However with the lower GBP helping export figures, continued low interest rates and upbeat consumer confidence most forecasts show UK economic growth rates should remain positive throughout the year with growth estimates ranging from 1.4%-1.8%.This  more positive outlook was also helped by data showing an increase in consumer spending of 1.2% and a rise in manufacturing output also of 1.2% for Q4 2016. The GBP continues to gain against the EUR currently around 1.1796, having been to 1.1903 2 days ago, as concerns mount over a victory for National Front leader Le Pen , in the first round of the  French election and the improvement in her chances in the second round. She made statements earlier this week that if in government, would seek to take France out of the EU.

 
Europe
The news from Europe continues to centre around the increasing political risk, although economic data from Germany this week has been positive. The EUR continues to struggle, spending its second day below the 1.06 level against the USD even after the weaker USD overnight. In the immediate term the EUR faces the twin risks of rising US interest rate expectations and growing political risks in the euro zone which will continue to pressure the unit. Now there appears to be a possibility of early new elections in Italy to match the mid-March Netherlands poll and April/May presidential elections for France. With the continued strong polling results for the anti-EU nationalist movements the EUR is attracting selling interest on any rally and we look for support at 1.0520 to give way next week.  


Japan
The JPY has strengthened against the USD over the last few days as the USD has weakened on the Fed minutes release and disappointment of US tax relief details. The USD has fallen to its lowest level against the JPY in 2 weeks at 112.54….currently at 112.70 next support is at 112.10 with immediate resistance up at 113.70 unlikely to be seen over the next few days. Not much in the way of data releases for the JPY this week, and with low volatility, the JPY strength has been in spite of the lack of risk flows. Next level for support is around 111.72 and we expect this to be tested over the early days of next week.


Canada
Retail sales data for Canada this week showed a drop of 0.5% for December, month-on-month the 5th consecutive yearly drop for that month. Although not positive for the economy, the seasonal pattern of sales and that it comes after a very strong run in retail sales doesn’t change the underlying story that that the economy is performing better than expected only a few months ago. Also on another positive note is the news that Canada may expect only “tweaks” of its NAFTA agreement with the US rather than wholesale changes, according to the Canadian trade minister.  The Canadian dollar continued to strengthen against the USD over the week, is now at 0.7630 with immediate resistance at 0.7645.

 
 

FX Update - US holiday sees a quiet start to the week

Written by Howard Wilcox on February 21st, 2017.      0 comments

4:00pm(NZT)
Overview
Very quiet start to the week with US markets closed on Monday for the Presidents Day holiday, currency markets have traded on reduce volumes and are mostly unchanged from Friday's levels. European equity markets were mixed to lower, as the withdrawal of the Kraft takeover bid for Unilever saw Unilever shares drop, offsetting gains across industrial stocks. With the US out, investors’ attention has centred on European developments. Political risk remains in focus, outweighing economic developments, with anti EU candidate Maine Le Pen gaining ground on her rivals as she benefits from increasing concerns over security, in the race for the French presidential elections. Across in Germany a new poll showed a drop in support for Chancellor Angela Merkel’s governing party which fell behind the opposition Social Democrats for the first time under hear leadership. In the UK some members of the House of Lords, parliament’s upper house, will seek changes to the draft “Brexit” law allowing the triggering of Article 50 the departure from the EU when it comes before the Lords. Later this week the US  Federal Reserve minutes from its last meeting will be released Thursday, possibly providing some incite as to how members view the new US administration's policies. Also later tonight/tomorrow there will be several speeches by Fed members which will be watched closely for any pointers to the probability of an interest rate hike at the March meeting.


Australia
The Australian dollar has traded sideways since Friday and continues around the 0.7670/95 range vs the USD. Later today will see the release of the February RBA meeting minutes which are expected to reflect the more upbeat RBA commentary of late. Also of a positive note was a report released by Deutsche Bank suggesting that the increase in commodity prices would continue to reduce the current account deficit as an export led recovery got underway. The surging demand and higher price for iron ore and coal is estimated to see an increase in exports as a share of GDP from 21.2%  to 22% in the first quarter of this year and this would be reflected in an increase in the Australian dollar against the USD to the 0.80 level and above.  The Australian dollar has already enjoyed an increase of over 6.5% against the US unit since the beginning of the year. Certainly this positive view is also partly shared by the RBA in some of its comments last week and although we are positive on a rise for the Australian dollar, the 0.80 level is a way off and it has had considerable trouble staying above the 0.77 mark. We look for gradual appreciation over the next 3 months or so as economic data continues to improve. RBA policy meeting minutes released later today, will be inspected for any change in monetary policy stance.


New Zealand
The New Zealand dollar is largely unchanged from the end of last week, sitting in the 0.7175/95 zone vs the USD, remains underpinned by continuing solid local data. There is another Dairy auction on Wednesday morning which should continue with the trend of firm prices thus providing New Zealand dollar support. However if the US economy continues to improve, the Trump tax policy (cut) is positive and the Fed is more bullish on rate rises, this will apply pressure on the New Zealand dollar, especially with the RBNZ indicating at its last MPS that it saw no need for rate increases. Potential exists for a move back to the 0.7000 region over the next few weeks.


United States
US markets continue to be positive, with US equities making new highs and the US holding gains against most of its trading partners. Data continues to show an economy improving and if the Trump tax policy is as expected, should add further fuel to the recovery. A rate rise for March is still very much on the cards as indicated by the Yellen testimony before Congress last week and any further confirmation of this in speeches from Fed board members this week would rise the rate hike possibility to a 50/50 call and would push the USD higher. Although the first month of the new administration has been rocky, the political situation in the US is more settled than that of the Eurozone, as recent polls show a narrowing of the lead on incumbent governing parties in both France, Germany in the upcoming elections. This is not expected to change in the short term and we look for continuing USD strength.  
                   
                                                           
United Kingdom
The “Brexit” debate continues to grind its way through the system with it now passing through the House of Lords. Once this is passed the timetable is most likely a triggering of Article 50 by the end of next month and a two year process of exit negotiations with the EU from that date. The GBP has been holding firm after rallying last week to a high of 1.2481 on the USD. The BoE Governor Mark Carney has warned of his concerns around consumer spending and these were somewhat justified by last week's drop of 0.2% for January (December figures were revised down to -2.2%) retail sales. There may be further indications of the BoE Governors views on rates as he testifies before the UK Treasury Select Committee on the February inflation report later tonight.  The GBP continues to strengthen against the EUR climbing from a low last week of 1.1641 to around 1.1763 currently. Next resistance is at the 1.1828/30 level seen early last week.
 

Europe
The EUR has improved against the USD since last week but at currently 1.0609 is lower than the 1.0678 seen late last week as European political news continues to be negative for the EUR. The Greek problem continues to rumble on, with Eurozone finance ministers at a meeting on Monday declined to disburse further Greek aid payments quickly, with Athens and its creditors agreeing to more discussions over the coming week. As part of the deal the Greek government will legislate measures which are fiscally neutral, but will not institute any additional austerity measures. Bailout funds will not be released until a set of prior conditions are met. German PPI data released yesterday was better than expected at up 0.7% (expected 0.2%) and later this week will see Eurozone February consumer confidence and PMI data.


Japan
The JPY is holding steady against the USD , now around 113.40 and with little in the way of economic data looks set in a 111.50-115.62 range. A breakout on either side would give new direction but any such move is unlikely to come before the release of the FOMC minutes on Thursday. The JPY remains the currency of choice for safe-haven hunters but this awaits a further bout of volatility in Europe or US for these flows to reignite.


Canada
Little news from Canada over the last few days after the ratifying of the Canada/EU trade agreement. The Canadian dollar has weakened against the USD from 1.3080 last week to currently trading around the 1.3136 level. Value for the CAD will largely be determined by USD movements this week given the release of FOMC meeting minutes and potential for the new Trump tax policy.


Major Announcements last week
•    US Producer PPI 0.6% vs 0.3% expected
•    UK Average Earnings Index 2.6% vs 2.8% expected
•    UK Claimant Count Change -42.4k vs +1.1k expected
•    Canadian Manufacturing Sales 2.3% vs 1.4% expected
•    US CPI 0.6% vs 0.3% expected
•    US Core Retails Sales 0.8% vs 0.4% expected
•    Australian Employment Change 13.5k vs 9.7k expected
•    Australian Unemployment Rate 5.7% vs 5.8% expected
•    NZ Retail Sales 0.8% vs 1.1% expected
•    UK Retail Sales -0.3% vs 1.0% expected
•    NZD PPI 1.0% vs 0.9% expected

 
 

Economies of Note - 17th February 2017

Written by Howard Wilcox on February 17th, 2017.      0 comments

4:30pm(NZT)
Australia
The Australian dollar ends the week on a stronger note on the back of more solid data over the week. On Tuesday Chinese inflation data came in higher than expected at +2.5% for the year, with producer prices showing a large +6.9% jump this points to increasing growth and inflation in China which augers well for the Australian economy. Although the AUD traded higher it failed to break over the crucial 0.7700 level against the USD but continued strong prices in gold and Iron ore provided underpinning to the AUD. Price action yesterday was again one-way traffic with the AUD breaking convincingly over the 0.7700 level after January employment figures showed unemployment levels dropped to 5.7% in January from 5.8% in December, however this was tempered by a reduction in full-time jobs.  Overnight the AUD has slid back under the 0.7700 level but the improving domestic fundamentals and the more favourable external environment appear consistent with the RBA’s forecast for a return to above trend growth which should favour a stronger AUD over the next few weeks.


New Zealand
The New Zealand dollar has stabilised after several days of declines in what has been a week of light data releases. Yesterday consumer confidence data showed a small drop for the month, but still higher than average, with consumers more confident than they were a year ago. It appears that the New Zealand economy is still “in a happy place” underpinned by an expanding population, strong tourism, and a (still) buoyant property market stoking consumer spending, while the labour market has remained robust with new jobs being created for the inflow of migrants. House sales for the January period also showed a pullback, but given this is the holiday period, the next 2 months data will determine whether the housing market has turned.


United States
Equity markets have continued their bull run over the week setting new record highs as January CPI data showed a jump to 2.5% increasing at the fastest pace since 2012. This backed up comments from Fed Chair Yellen at her testimony before Congress that “a gradual rise in rates will be required” and “waiting too long to remove accommodation would be unwise”. These more bullish comments from Yellen and the inflation data have now shifted the chances for a Fed rate increase in March to 42% from the 30% level at the start of the week. With increasing evidence that inflation is taking hold on the US economy, speculation has increased that the economy can withstand higher interest rates as it waits for stimulus from the Trump administration, thus continuing to fuel a rally that is taking global equities toward records inducing a selloff in Treasuries. Overnight we have seen a pullback in US equities and the US dollar as investors, having pushed the market hard over the last two weeks, pause and wait for the promised details on the Trump administration’s “phenomenal” tax deal  and assess the timing and potential effect of the Fed’s next rate increase.
                
                                                                
United Kingdom
The UK economy continues to perform better than expected and ahead of most of its other European partners as evidenced by more upbeat employment data. Stats out this week showed a climb in employment of 37,000 to 31.84 mio in the 3 months to December, with unemployment steady at 1.6 mio, a figure which is down by 100,000 over the last 12 months. The unemployment rate remained at 4.8%, its joint lowest rate in nearly 11 years while the employment rate was up at a new record of 74.6%. These are all pointers that the labour market is moving towards a full employment situation. Rising inflation, up by 1.6% for the year to December, is reducing workers spending power and is now giving the BoE a problem of how to respond to rising inflation allied to slowing pay growth. On the Brexit front, it has been previously reported that the EU is looking to demand GBP45.5 bio exit bill as the loss of the UK, the second largest net contributor to the EU, has shredded future EU budgets. However it now appears that the UK will attempt to offset the cost of Brexit by claiming a large share of GBP 127.5 bio worth of European assets.  An independent think tank in Brussels has already estimated that Britain's assets could be worth almost £130bn. On balance with the UK economy shrugging off the Brexit effect and fundamental data continuing to improve, we favour the GBP against both the USD and EUR, but given the potential for the upcoming US tax plan to induce market volatility the GBP strength against the EUR looks to show more promise.


Europe
The EUR continues to slide against the USD making a 1.0520 low. It has subsequently recovered back above the 1.0600 level now around 1.06717 but news from the Eurozone bloc continues to be negative. Attention continues to focus on the twin problems of the upcoming European elections for France, Germany and The Netherlands and increasing support for populist anti- EU parties and heightened concerns around the Greek debt situation. One report out earlier this week  stated that plans were being made by the Greek government to switch to US dollars as the currency unit should Greece decide to break away from the Eurozone currency bloc! It’s unlikely at this stage but if no debt relief is forthcoming this could become a more realistic possibility. With the divergence increasing between the US and Eurozone economies both in economic performance and interest rate spreads, we look for the EUR to remain under pressure with any rallies in the Euro seen as a selling opportunity.


Japan
There has been little major news out from Japan after last weekend’s US/Japan summit, with the USD gradually moving higher to a 114.95 high on Wednesday. It has slipped a little over night as the JPY strengthened on the weaker USD following the pullback in US equity markets now sits around 113.24. Overall the Japanese economy is starting to cruise along and with real growth for 2016 coming in at 1%. Japan looks to be in the best position it’s been in in 4 years. Global demand has strengthened, with exports rising in December for the first time in over a year, Q4 industrial production having the biggest gain in 3 years and the previous year's consistent fiscal stimulus by the Bank of Japan now kicking in. However, short term growth is dependent on external demand and fiscal stimulus which does tend to constrain the upside and growth horizon. This is not to say that there are not storm clouds on the horizon, risks continue that Trump/Abe talks last week on Japanese trade get overtaken by protectionist trade policies being put into practice and the effects of last year’s stimulus fading going into next year.


Canada
Main news for Canada came out late on Wednesday, that the much delayed trade treaty between Canada and the EU has finally been ratified by the European Parliament, opening the door to eliminating 98% of tariffs between countries, a journey that has taken 7 years to achieve. Mixed data releases, saw a 6.7% fall in the number of house listings for the January month, but strong December manufacturing numbers. The CAD has maintained a strengthening tone over the week climbing form 0.7601 to 0.7690 against the USD.

 
 

FX Update: Fed Chair Yellen set to draw focus this week.

Written by Howard Wilcox on February 14th, 2017.      0 comments

4:20pm(NZT)
Overview
Equity markets continue to rally on the back of the return of risk. US markets were at record highs overnight, following Trump’s U-turn last week on ‘One China’ policy and his more realistic approach in dealing with Japan’s Abe over the weekend summit meeting. Good data from China released last week and heightened odds of a “phenomenal” tax cut deal in the US have spurred renewed demand for more risk-on trades. In the weekend Japan/US summit talks exchange rate concerns previously espoused by President Trump were not discussed and he did not demand a bilateral trade deal. Trump’s talks with Canada’s PM Trudeau have also gone smoothly with supportive comments from both leaders around bilateral trade. So with all Trump related news flow this week being risk positive look for the equity market rally to continue over the next few days. Also of note this week are inflation expectations, with CPI numbers for the UK out later tonight and data from the US on Wednesday night. Fed Chair Yellen is giving her 2 day Humphrey-Hawkins testimony in front of the US Congress from tomorrow and any suggestion that a March rate increase is still in the mix, would see further USD advances.


Australia
A surge in iron ore prices of around 6.5% helped extend its rally on increasing demand from the Chinese market. The AUD failed to follow through as it has encountered strong resistance around the 0.7700 level against the USD and the market is perhaps a little nervous pushing the currency too far, ahead of Thursdays January employment data. The RBA forecasts released on Friday confirmed earlier expectations showing a bounce back in economic growth of 2% in the year to June 2017 to 3% in the year to December. One of the factors responsible for a large part of the boost is an increase in liquid natural gas exports as projects are completed and come into production. These have the ability alone to boost GDP growth by 0.5% in both 2017 and 2018 years.
The 0.5% drop in GDP in the September quarter was largely attributed to “temporary” factors, disruptions to coal supply and bad weather that caused a delay in construction. The chances of any further RBA rate cuts are starting to look even more remote, which will over the medium term be AUD supportive.


New Zealand
The New Zealand dollar has continued to drift lower over the last few days, a knock-on effect from the more dovish than expected RBNZ statement last week and reflection of the stronger US unit. The New Zealand economy is still solid and dairy prices on the uptrend, which to some extent will continue to underpin the New Zealand dollar. However the USD will hold sway over the Kiwi and at the moment all the news is positive for the US and any increase in the US Fed’s tightening profile will pressure the NZD. But, if President Trumps “Phenomenal” tax deal disappoints the New Zealand dollar may well regain its wings and head towards the 0.7500 level.


United States
The US market has opened the week on a very positive note with US equities again making record highs. This is still attributed to the promises of the “phenomenal” tax package by President Trump. The risk of course is that if this is further delayed or disappoints any market retracement could be sharp and brutal. Also adding to the positive sentiment were the outcomes of Trump’s meetings with both the Japanese PM Abe and Canadian PM Trudeau. Both of these meetings ended on a positive note with little mention of contentious trade or currency issues that were a feature of Trump’s campaign rhetoric. Markets will also be watching for any signs of a March date for another rate hike from the Fed when Fed Chair Yellen gives her semi-annual testimony before the US Congress starting from tomorrow. Any deviation from that previously advised would see a USD spike.


United Kingdom
A slew of economic data due on Tuesday night is expected to show higher petrol and food prices lifting inflation to 2% in January compared with a year earlier, up from 1.6% in December. This would be the first time consumer prices inflation has hit the Bank of England’s target of 2% since December 2013, with Office for National Statistics data predicted to show the rate of price growth has doubled in four months. Further price rises are expected to flow through given the substantial drop of the GBP after the Brexit result acts to push up import costs. The GBP was more resilient to a firmer USD as December data for Industrial and manufacturing production more than doubled forecasts with the first up 1.1% (yoy 4.3%) and the second 2.1% (yoy 4%) when compared to the previous month. Also encouraging was the goods trade balance for the same month which showed a smaller deficit than was expected. With this more resilient data, we may be starting to see the GBP’s overall decline at an end.

 
Europe
More confirmation over the weekend that Greece is back on the front burner with comments from EC President Jean-Claude Junker, that the Greek bailout program may fall apart. This helps to reaffirm recent IMF comments that more debt write-off for Greece was needed to restore debt sustainability. This will no doubt be one of the key subjects at this week’s Eurogroup finance ministers meeting, starting February 20th where the Greek bailout will be discussed. The IMF wants other eurozone countries to offer debt relief to Greece, writing off some of their loans in a bid to stop its debts running out of control once again. But there is a firm pushback from other EU members on this, with arguments from Germany’s finance minister that it violates the terms of the Lisbon Treaty. Greek PM Tsipras has rejected any suggestion of further austerity for Greece commenting that other EU nations need to be “more careful towards a country that has been pillaged and people who have made, and are continuing to make, so many sacrifices in the name of Europe".........so much for European unity..!!
In other news, IMF Christine Lagarde at a conference in Dubai warned that political instability also threatens the continent and that she was worried about the outcome of several of the upcoming European elections and the threat they pose to Eurozone unity. The EUR dropped to 1.0607 on Friday, the lowest level since mid-January and capping off a week of the worst declines since November. It has opened today even lower around the 1.0590 mark.


Japan
The Japan/US summit appeared to go well over the weekend with Japanese PM Abe commenting that he was optimistic that a good outcome could be achieved in later trade talks. Initially the USD rose against the JPY back over the 114.10 level as the leaders delegated the task of overseeing economic discussions to the vice president and deputy prime minister. Overshadowing the talks were heightened security concerns, after North Korea conducted a test missile firing, but this prompted a solid statement of support from the US president.
The latest release of Japanese GDP data for Q4 was slightly lower-than expected at 0.2% QoQ vs 0.3% exp and 0.3% previous. While annualized GDP (seasonally adjusted) YoY was 1% vs 1.1% exp and 1.3% previously. Although the headline data was disappointing, inflationary trends were marginally higher, which is encouraging given the efforts by the Bank of Japan and government to increase inflation.


Canada
News out for Canada that ratings company, Fitch Ratings, is warning that the country’s prized standing in the eyes of creditors may suffer because of protectionist measures proposed by U.S. President Donald Trump. In a report last Friday, a Fitch research team commented that nations with close ties to the world’s largest economy, such as Canada, are “most at risk” of damage to their credit fundamentals. Although most of Trump’s rhetoric has centred on Mexico, Canada’s reliance on US trade is huge, with around 75% of Canadian exports going to the US and concerns were mounting that Canada could end up as collateral damage in any trade action against NAFTA. Yesterday’s meeting between Trump and the Canadian PM Trudeau appear to have been positive, allaying Canada’s fears that they may be lumped into the same unfair trade assertions levelled at Mexico. The ending press conference was respectful and benign with nothing particularly negative or positive for the Canadian dollar.  Trump simply said in regards to NAFTA, they will tweak trade with Canada - commenting that it's a much less severe situation than on the Southern Border, which is an extremely unfair situation.
                                                                                                 

Major Announcements
•    RBNZ leaves rates unchanged
•    Chinese Trade Balance 355b vs 295b expected
•    UK Manufacturing Production 2.1% vs 0.3% expected
•    US Consumer Sentiment 95.7 vs 97.9 expected
•    Japanese GDP 0.2% vs 0.3% expected
•    Chinese GDP 2.5% vs 2.4% expected
 

Economies of Note - 10th February 2017

Written by Howard Wilcox on February 10th, 2017.      0 comments

4:30pm(NZT)
Australia
The RBA, as expected, left interest rates on hold at 1.50% on Tuesday. Rates have now remained unchanged since last year's August cut. The statement was more upbeat on the global economy but largely unchanged on the Australian economy with the jobless rate rising, planned construction and retail sales trends continuing to weaken and wages growth and inflation remaining at record lows. In a statement after the meeting Governor Lowe commented that economic growth was forecast to centre around 3% over the next couple of years well up from earlier predictions. Focus now shifts to the release of the MPS later today and the GDP forecasts. Inflation is expected to pick up, increasing from 1.5% to over 2%. Overall, the statement was viewed as more bullish than expected and with the odds now wider for another RBA easing, the Australian dollar tracked higher to the 0.7677 level. The Australian dollar also hit a 21 month high against the EUR at 0.7175 (1.3936)  not only helped by the more bullish RBA outlook but amid political uncertainty after French presidential candidate Marine Le Pen  commented that she would pull France out of the Eurozone if elected in the May poll. The continued strength in both gold and base metal prices is also helping underpin the Australian dollar and shore-up the underlying Australian economy.


New Zealand
In contrast to the RBA statement, The RBNZ release yesterday was unexpectedly dovish although rates were left unchanged at 1.75%. The RBNZ appeared to be more cautious and now looks to be on hold for longer than earlier anticipated, given global uncertainty, with expectation that the next rate hike may not be until 2019 or early 2020. We believe that inflation is hardly likely to stay benign for that length of time. The RBNZ said that continuing surplus capacity in the global economy and increasing geopolitical uncertainty remained major challenges. The RBNZ also continued to beat the drum of the New Zealand dollar exchange rate being too high, expressing concern that a decline was necessary….."The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector," Looking ahead, the Reserve Bank said: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly." The New Zealand dollar slid lower after the release, to a two week low of 0.7215 after a high at 0.7375 earlier in the week on the back of stronger dairy prices. Overnight, as the RBNZ statement has been digested, the New Zealand dollar has shifted lower into the 0.7180/90 region however given the still solid fundamentals we still believe any dips will be seen as buying opportunities.


United States
US equity markets have remained firm over the last few days, albeit in a holding pattern as the risk-off tone continues to hold sway, given the long awaited details for the new administration's pro-growth policies remained undelivered. The “Trump bump” effect continuing to fade, as markets awaited further detail on the timing and scope of the promised pro-growth policies from the new US.  However this changed overnight with U.S. stocks rising again to record highs, the US dollar surging higher  and US Treasuries falling, after President  Trump said long-awaited details on promised tax cuts would emerge within weeks, including a “phenomenal” tax deal, revitalizing markets that had begun to show signs of cracking. Also getting a boost were airline stocks after President Trump  U.S. airlines he would help them compete with foreign carriers that are aided by their governments, a crucial signal of White House support for an industry campaign that began in 2015. Whether the USD can maintain momentum at higher levels will be dependent on further statements by President Trump or Fed Chair Yellen, who is scheduled to address Congress next week (Feb 14-15) on the Fed’s view on the state of the economic outlook.         

                                                                            
United Kingdom
In the UK Brexit moved a step closer, as PM May defeated attempted amendments to her Article 50 bill in the Commons and having the law passed by a 494 votes to 122 in its unamended form. It now heads to the House of Lords, clearing the way for the two year exit process to begin probably towards the end of March. After more than 50 Labour MP’s voted against the motion in direct defiance of directions by Labour leader Jeremy Corbyn, rumours are now circulating that he may resign. The British pound has tracked higher against most of its trading partners after one its top officials commented that it was time to increase interest rates. These comments came only days after the BoE kept rates on hold and provided a neutral stance in its monetary policy statement

 
Europe
The EUR  continues to lack clear direction and given the light amount of economic data this week focus has shifted onto the upcoming French presidential election which has seen the question of leaving the EU over-riding other domestic issues. This is especially so since Marine LePen is openly suggesting such a course. Also not helping EUR sentiment were comments from ECB head Draghi, that monetary policy will remain accommodative until at least October 2019 when his mandate expires. However overnight, Eurozone equity markets rallied as the solid results from bank Societe Generale eased concerns about the region’s banks. Also back in the news again was Greek debt, with the IMF announcing that the country’s debt, at 179% of gross domestic product at the end of 2015, was “unsustainable.” and what was required was a substantial write-off of the debt. Greece must meet strict fiscal targets to unlock more financial aid and keep the International Monetary Fund, an important creditor, involved. The IMF says the country won’t meet those targets, potentially touching off yet another global spectacle over the fate of Greece, the future of the euro area and the viability of the single currency.


Japan
The Japanese currency maintained its strength for most of the week as investor flows continued to switch into the JPY on the continuing risk-off tone. However the JPY has weakened overnight on the Trump inspired US dollar rebound. Japanese PM Abe, heads to the US today to have his first summit meeting with President Trump. It should be interesting as over the last few weeks, Abe has pushed back against Trump’s accusations of currency manipulation and criticism over the difficulty in selling U.S.-made automobiles in Japan. He has said it’s inaccurate that Japan is devaluing its currency, and that American cars don’t sell well in Japan in part because of a lack of dealerships, promotion and advertising. Abe will be keen to emphasize the positives with Trump, that Japan is already the second-largest foreign investor in the U.S., and says it provides more jobs in the US than any other foreign country. It is also understood that Abe will present an  economic plan to Trump that has potential to  generate 700,000 jobs, including by investing in high-speed rail and power generation, joint development of infrastructure overseas and buying more shale gas to reduce the Japanese trade surplus.


Canada
Canadian PMI data released earlier in the weak showed a decrease for January to 57.2 from December’s 60.8. This was lower than the expected 58.3 and this movement closer towards the 50 threshold, that distinguishes between expansion from contraction in the manufacturing sector, would appear to be consistent with forecasts for a flat growth in industrial production over 2017. Housing start data released mid-week showed a seasonally-adjusted 207,400 units in January, this figure marked a mild 0.5% increase from December’s revised 206,300 units (previously reported: +207,000 units). This was stronger than the 200,000 units expected by the market.

 
 

FX Update: US Jobs growth gains, but wages lag

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

4:45pm(NZT)
Overview
Although the Non-farm payroll figure on Friday was much better at 227K jobs created for January than the 180k forecasted, the weaker wage growth component unsettled markets, casting doubt on the pace of the recovery and the inflationary outlook. The data suggests a slower path of interest rate increases by the Federal Reserve as the low unemployment rate, according to official data, failed to translate into salary growth. The unemployment rate ticked up to 4.8%, slightly higher than the previous reading and the median forecast of 4.7%, as the participation rate climbed to 62.9% from 62.7%. Similarly, the underemployment rate accelerated to 9.4% in January from 9.2% previously. This inflation outlook side of the Fed’s equation remains a threat to the signal given in December that 3 rate rises maybe necessary in 2017. Market sentiment has swung to a more risk-off stance on uncertainty surrounding the US future, allied with increasing political woes across Europe, sending  investors towards safe haven assets, placing pressure on the EUR but boosting values for gold and the JPY.


Australia
The AUD opens the week looking solid and at 0.7660 against the USD, only a tad lower from its multi-week high around 0.7695 posted last week. The Aussie economy is looking more positive with last week's stronger terms of trade data backed up by better local data and continued strength in base metal prices. Gold has also risen above US$1230 oz for the first time this year. The Melbourne institute inflation forecast released early yesterday showed that the CPI is expected to have risen by 0.6% during January, from December's 0.5%, while year-on-year inflation is seen rising by 2.1% against previous 1.8%. As well, job advertisements jumped 4% in January from a 2.2% decline in December, suggesting a rebound in the labour market. We are of the view that this stronger data should provide some comfort to the RBA ahead of today’s policy decision, and expect rates to stay  on hold at 1.50% although there may be some rhetoric around the strength of the AUD.


New Zealand
The NZD remains well supported and should hold close to current levels given the expected neutral tone of the RBNZ statement on Thursday. The economy continues to perform well and although there are risks abroad, with inflation data out later today expected to show a mild increase, the era of record low interest rates ending is fast approaching. The cost of borrowing is already creeping higher on the back of New Zealand banks paying more to source offshore funds, thus serving to tighten monetary conditions outside any action from the central bank.  It appears that PM English had a relatively warm, positive conversation with President Trump but whether this relationship will develop into something that will be enough to mitigate the impact of the new President's economic and trade policies on NZ remain to be seen. News that the RBNZ Governor Wheeler will retire at the end of his term in September had little effect on markets. His Deputy, Spencer will most likely be favoured for the job.


United States
With the more risk tone evident, equity markets traded lower as investors adopted a more cautious view, elevating the value of safe-haven assets gold and the JPY as they await further detail on the timing and scope of the promised pro-growth policies from the new US administration. The disappointing data for wages growth in Friday’s payroll figure saw the S&P500 retreat from near record highs as equity stocks that are tied to growth struggled, not helped by mixed retail sales results which increased concern around consumer confidence. The last few days has seen the initial Trump-fuelled rally in equities falter, as investors assess how the new administration will balance protectionist trade rhetoric with promised tax cuts and spending increases. Simultaneously, traders are assigning greater risk premiums to European countries France and Germany, where anti-establishment movements are gaining traction ahead of elections. Fed officials will be making their first public comments since last week’s policy meeting and jobs data, with the potential to provide insight on how the slowdown in wage growth factors into assessments for the path of inflation. Adding to the uncertainty were comments from US investment bank Goldman Sachs, that the benefits of the deregulation, corporate tax reform and new fiscal stimulus cuts at first thought to outweigh restrictions to trade and immigration may have been overstated.


United Kingdom
Brexit issues continue to dominate UK headlines with attention centred in the ongoing Parliament discussion over the Brexit bill. Policymakers are willing to make amendments to PM May's proposal, but the government said that they will not allow any Brexit legislation that attempts to keep Britain inside the EU. The House will vote next Wednesday, and in the meantime, tensions surrounding the matter will likely keep the Pound subdued. In some positive news for the UK, PWC has published a forecast contending the UK could have the fastest rate of growth in the G7 group to 2050 at 1.9%. A very optimistic assessment but perhaps confirming that many leading City companies are getting used to and even embracing the opportunities Brexit presents. Also providing a more positive tone to the UK economy was data out yesterday showing that new car registrations for January hit a 12 year high last month. Up 2.9%, the highest level since 2005.


Europe
The EUR has suffered over the last few days on the more risk adverse tone as political uncertainty comes to the fore. ECB President Draghi commented in an address to the European Parliament, that there was still need for accommodative monetary policy and that he did not view sustained inflation in the Eurozone as an issue. Also, over the weekend German finance minister Wolfgang Schaeuble said the euro exchange rate is "too low" for Germany. With inflation rising to 1.9% in January from 1.7% the month earlier, interest rates at zero and QE ongoing it is understandable that Draghi’s stance on monetary policy is no longer appropriate for the German economy. Political risk is increasing in the region with upcoming elections in France, the Netherlands, Germany and potentially Italy, as anti-establishment parties continue to gain traction. Over the weekend in fact, French presidential candidate Marine Le Pen said she would take France out of the European zone should she win the election, a so called “Frexit”! We expect more EUR weakness as the elections days’ approach.


Japan
The Japanese currency was higher as investor flows switched into the JPY as the more risk-off tone became evident. Data out in Japan showed that core consumer prices fell in 2016, the first annual decline since Kuroda took as head of the Bank of Japan with a mandate to end deflation. Adjusting for that drop meant that workers actually got a 0.7 % increase in income last year, which had fallen in real terms in the previous four years. This was seen as positive with the data coming ahead of annual spring wage negotiations between business management and labour leaders. Japan’s employment market is surprisingly tight, with the unemployment rate just a fraction over 3%. Key stumbling blocks here are unions and employees who’ve put job security above pay hikes, low productivity in areas of strong demand for workers, and a growing number of people in contract and part-time roles with little bargaining power.


Canada
The CAD has softened towards the end of last week, but comments from the Bank of Canada actually had little effect and the CAD weakness was more about USD strength and the move into assets seen for their safe-haven status. Weaker oil prices also were not CAD supportive. Although Canada’s economy continues to consolidate at higher levels, inflationary pressure remain subdued, suggesting that any monetary firming measures are a way off. On the data front later tonight there is the final trade report for 2016 previously exports were up by 4.3% m/m in dollar terms and 3.9% m/m in volume terms during November. Canadian housing starts for January will come out on Wednesday, and are susceptible to seasonal adjustment factors t this time of year.


Major Announcements

•    Canadian GDP 0.4% vs 0.3% expected
•    NZ employment Change 0.8% as expected
•    NZ unemployment rate 5.2% vs 4.8% expected
•    UK manufacturing PMI 55.9 as expected
•    ISM manufacturing index 56.0 vs 55.0 expected
•    FOMC leaves rates unchanged
•    Bank of England leave rates unchanged
•    US nonfarm payrolls 227k vs 170k expected
•    US average hourly earnings 0.1% vs 0.3% expected
•    Australian retails sales -0.1% vs 0.3% expected
 

Economies of Note - 3rd February 2017

Written by Howard Wilcox on February 3rd, 2017.      0 comments

4:45pm(NZT)
Australia
After looking decidedly softer earlier in the week the Australian dollar turned on Thursday after a much better terms of trade figure for December. The trade data saw a surge into a record surplus at +3.511 bln against an expected AUD 2 bln. Building approvals were also not as bad as expected. The Australian dollar spiked sharply on the trade figure release, trading up to around 0.7695 against the US dollar but softened overnight back to the mid 0.7650 level. Also now becoming evident is the return of the mining sector as iron ore prices continue to hold firm which will help to drive the economy if this trend continues over the year. This stronger data should provide some comfort to the RBA ahead of next week’s policy decision, where it  now appears more certain that they will  leave rates on hold at 1.50%.


New Zealand
New PM Bill English had nothing much new to say during his state of the nation address on Thursday. There was increased funding for the police, but some details of this had already been previously released by other government officials. Economically there were comments around increased infrastructure spending and the ongoing need for free trade but no specifics on these policies, but these are likely to be revealed closer to the May budget by new Finance Minister, Steven Joyce. The New Zealand dollar has continued to be well supported during this week, even after an unexpected  rise in the unemployment rate from 4.2% to 5.8% caused a short sell-off from the 0.7350 level against the USD. New car sales figures out today were again strong, up 16% for January, a new record and continuing the 3 years of constant gains….positive signs of the solid economy.


United States
If markets were looking for the Fed to provide direction on future rate increases, they were disappointed last night after rates were left unchanged. The decision to leave the target federal funds rate unchanged in a range of 0.5 % to 0.75 % was unanimous and widely expected by the market. Fed Chair Janet Yellen, who didn't have a press conference scheduled after the meeting, will have a chance to explain the decision further during her semi-annual monetary-policy testimony to Congress in mid-February. There was little direction provided by the Fed on when it may next increase borrowing costs, as Fed officials struggle with the uncertainty created by the new Trump administration. Indications given by officials back in December were for 3 rate hikes throughout 2017, FOMC members have differing views over assumptions regarding the extent to which tax cuts, spending and regulatory reductions proposed by the Trump administration and Republicans will add to growth and inflation. The statement also made comment that expectations were for a return to moderate economic growth, further labour market strength and a return to 2% inflation. The odds have now increased that the next rate rise will around the June period rather than March this year.  The FOMC next meets on March 14-15.The Fed comments around the economy and employment were reinforced by a some positive data releases on Thursday. The US Manufacturing ISM figure had its 5th consecutive monthly rise, to the highest reading since November 2014 and better ADP January jobs data earlier on Wednesday night which showed an increase of 246k against an expected 168k. The better than expected ADP jobs data now increases the likelihood of Friday's Non-farm payroll data coming in above  200k ahead of previous market forecasts of  175k.


United Kingdom
On Wednesday the UK Parliament voted 498 to 114 to authorize Prime Minister Theresa May to Trigger Article 50 and begin the United Kingdom's withdrawal from the European Union. The vote officiates the result of the June 23rd, 2016 "Brexit" Referendum where a majority of UK citizens indicated a desire to leave the EU. Although it still has to pass through the House of Lords, this vote now authorizes Theresa May to begin the withdrawal process, which she has indicated she will do by the end of March, 2017. The Bank of England has left rates on hold at its policy meeting yesterday, maintaining a neutral stance that gives it the ability to move in either direction. However it is unlikely that the BoE would tighten rates in the next 12 months given the “Brexit” situation and other political uncertainties. Conversely any easing moves would require some unemployment increase or economic slowdown.


Europe
The Eurozone has had an interesting week, with the President Trump accusing Germany of weakening the EUR! The EUR has strengthened gradually over the week from 1.0619 to the current 1.0760 mark, but tonight's US jobs data should be strong, which should push the EUR back to the 1.05-1.06 zone. Also this week ECB officials responded to calls, after January inflation figures jumped to 1.8% higher than expected, to end its ultra-easy monetary policy. ECB board members commented this increase was mainly attributable to higher oil prices and that ups and downs in monthly data were not relevant if they were temporary and had no implications for medium-term price stability. They also remarked that proposals from the new US administration on import tariffs and other protectionist measures were alarming and may impact the economic outlook.


Japan
Japan also felt the ire of the new US President, also being accused of currency manipulation earlier in the week! The Japanese economy appears to be stabilising, with the Bank of Japan maintaining its existing policy stance at its Tuesday meeting as expected by the market, but raising  its economic growth forecasts. The GDP forecast was increased to 1.4% for the current year (up from the October forecast of 1%) and for 2017 up to 1.5% (prev 1.3%) , for 2018 up to 1.1% (prev 0.9%). The BOJ said in a statement on Tuesday that it expected inflation to rise to around its target of 2 percent around fiscal 2018. It cited signs that medium-to-long term inflation expectations have stopped declining and were showing some indications of rising. It also remarked that the labour market was tightening and that the effects of commodity-price declines were set to reduce, with a pickup in international commodity prices set to push up consumer prices.


Canada
Although the Bank of Canada endeavoured to talk the Canadian dollar lower, this had little effect as the CAD continued to strengthen against most of its major partners over the week. Given the positive tone the market has taken from the approving of the two pipeline contracts by the new US administration any problems with NAFTA trade renegotiations are now seen as more as a Mexican problem than one that will alter the strength of the Canadian economy. It may prove a little early to take this view given the flaky nature of the new US government.