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FX Update: Geopolitical tensions subside

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

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


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


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


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


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

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


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


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


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

Economies of Note - 11th August 2017

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

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


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


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


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

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


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


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


 
 

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

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

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

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


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


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


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


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

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


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


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

Economies of Note - 4th August 2017

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

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


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


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


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


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


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


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

 
 

Economies of Note - 28th July 2017

Written by Ian Dobbs on July 28th, 2017.      0 comments

11:00am(NZT)
Australia
We’ve seen some mixed data from Australia this week. Consumer Confidence made a good jump from 112.50 to 115.10, with the positive employment report of the previous week sighed as a factor. On the other hand we saw some soft inflation figures for the second quarter. Headline inflation came in at just 0.2% vs the expectation of 0.4%. The negative impact of the headline result was tempered by the RBA’s preferred inflation measure, the trimmed mean, which came in on expectation at 0.5%. Reserve Bank Governor Lowe was on the wires this week saying the central scenario remains for a gradual rise in underlying inflation. He added that stability of unemployment has allowed the bank to be patient and that the slow rate of wage growth is likely to remain for a while. The Australian dollar has made gains this week, driven largely on the back of broad based USD weakness however. Next week we have the RBA rate meeting to digest along with the trade balance and retails sales data.


New Zealand
The RBNZ Assistant Governor John McDermott gave a speech this week which seemed to suggest the central bank will be on hold for some time yet. He said the RBNZ’s estimate of core inflation is running at about 1.4% and has broadly tracked sideways over the past year. He also said that NZ’s neutral rate has been falling and is now estimated at 3.5%. The ‘neutral rate’ is the interest rate which the bank believes is neither stimulatory nor constraining to the economy. Before the global financial crisis, the neutral rate would have been around 4.5%. If the neutral rate is falling, that means that current policy settings are less stimulatory than previously, meaning there’s less urgency to hike rates anytime soon. Some forecasters are now suggesting the RBNZ will be on hold until well into 2019. McDermott also said a lower New Zealand dollar would help with rebalancing in the economy, but by the price action this week, no one paid attention to that particular comment. In other news, NZ’s trade balance for June came in much better than forecast at 242m. Expectation was for a 150m surplus. We also had Fonterra lift its farm-gate milk price forecast up a couple of cents to NZ$6.75/kgms. They also announced a forecast earnings per share in the range of 45 to 55 cents. Next week to draw focus we have ANZ Business Confidence, another dairy auction, and NZ employment data.


United States
It’s been another week of broad based USD losses. This time most of the blame will be put on the Fed as the United States dollar got sold heavily in the wake of their meeting. The move seemed a little drastic considering there was no significant change in tone from the central bank. Sure, they acknowledged recent inflation weakness, but they also gave the best signal yet that balance sheet normalisation is likely to begin after the September meeting. Overall the statement was pretty balanced. The reality is the Fed are attempting to normalize policy as a strong labour market and roaring financial assets give it a window to do so. They are not normalizing policy because inflation is soaring, we’ve all known this and yesterday’s meeting doesn’t change that. In this context the USD weakness seems a little undeserved. But markets can act irrationally at times and with the recent trend toward a declining USD, there wasn’t anything in the statement to turn that trend around. The Trump administration had a small win this week with a motion to proceed with the health care debate passing in the Senate. It’s largely just a procedural vote however and no one is overly confident of any bills actually getting passed in relation to health care any time soon. Last night we got the latest reading of Durable Goods orders. While the headline result came in at the strongest reading since June 2014, at +6.5%, the core reading was only up +0.2%. That’s because the headline result includes aircraft orders which can really screw the monthly numbers. Tonight we have more data to digest with the advance GDP number set for release. The market has revised up its forecasts for GDP in the wake to the strong Durable Goods result and they are now expecting and annualised result of around 3.0% for the quarter.


United Kingdom
Data from the United Kingdom hasn’t had much impact this week. We did see the Preliminary reading of GDP for the second quarter, and that came in bang on expectation at 0.3%. That is an increase over the previous quarters 0.2% with growth driven by the service sector, most notably retail distribution, hotels and restaurants. Countering this to a degree was a decline in construction and manufacturing activity. The Bank of England (BOE) meet next week and they are expected to leave interest rates unchanged. We also have the trifecta of PMI’s from the manufacturing, construction and service sectors to digest.


Europe
Broad based USD weakness has dominated the market this week and the largely second tier data from Europe hasn’t had much impact. We did see manufacturing and service PMI’s from France and Germany mostly decline a touch, while the German IFO Business Climate index increased again to even healthier levels at 116.00. The ECB’s Mersch was on the wires quoted as saying the ongoing expansion in the euro area provides confidence, that euro area growth has improved but inflation is lagging, and that the ECB must reconsider policy settings with deflation risk now gone. He added he agrees with Germany’s Weidmann who said it’s time to slowly get off the gas. His comments only served to help support the Euro.


Japan
There has been little data of note so far this week from Japan. In the next hour or so however we will get a raft of releases including household spending, inflation, unemployment and retail sales. The Bank of Japan Deputy Governor Nakaso was on the wires quoted as saying there is still a long way to go to meet the 2% inflation target. He added that the bank will pursue the current monetary easing until they meet the price stability target and that Japan’s economy is expanding moderately, supported by overseas economies and increasing domestic demand. All of this is pretty much the standard stuff we hear from Governor Kuroda.


Canada
It’s been a quiet week on the economic data front from Canada this week. The only result of note so far has been Wholesale Sales data which came in much better than forecast at 0.9%. The market had been expecting a result around 0.5%. Tonight we get the monthly GDP data and expectations are for a gain of 0.2%. Broadly speaking the Canadian dollar has had a solid week supported by the Bank of Canada’s hawkish stance, improving oil prices and a very weak USD.

 
 

FX Update: The USD continues to struggle

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

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


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


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


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


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


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


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


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


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

Economies of Note - 21st July 2017

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

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


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


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


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


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


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


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

 
 

FX Update: The USD suffers badly as data dissappoints

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

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


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


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


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


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


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


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


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


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

Economies of Note - 14th July 2017

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

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


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


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


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


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


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


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

 
 

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

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

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


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


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


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


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


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


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


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


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

Economies of Note - 7th July 2017

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

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


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


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


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


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


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


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

 
 

FX Update: The RBA to draw focus

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

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

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

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


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

Economies of Note - 30th June 2017

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

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


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


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


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


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


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


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

 
 

FX Update: The NZD remains well supported

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

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


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


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


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


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


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


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


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


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

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

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

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


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