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FX Update: No announcement yet from NZ First on a coalition government

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

Overview

Fridays US CPI and retail sales figures came in softer than expected which initially lengthened the odds of another Fed rate increase in December. However over the weekend at a banking seminar Fed Chair Yellen commented that the U.S. central bank expects to continue to raise interest rates gradually as solid growth, a strong labour market and a healthy global economy lift prices even as she recognized that inflation has been surprisingly low. ”My best guess is that these soft readings will not persist, and with the ongoing strengthening of labour markets, I expect inflation to move higher next year.” The USD opened higher on Monday after these comments. September US CPI rose 0.5% (0.6% expected), the core measure only 0.1% (0.2% expected) for an annual pace of 1.7%. This was despite a large gain in energy prices (hurricane related), with housing, medical costs and apparel all softer.  Retail sales rose 1.6% in Sep (1.7% expected), although the ex-food and energy core measure at 0.5% beat expectations (0.4%), and there were also positive back-revisions. This week is heavy with corporate results as reporting season gets underway in the US, with major financial firms including Morgan Stanley, Goldman Sachs posting results along with Netflix and General Electric. Later this week on Wednesday, the 19th Communist Party Congress in Beijing will begin with an opening speech by Chinese President Xi Jinping. This Congress will lay out China’s path for the next five years: appointments will be made to the Party’s powerful Central Committee (CC), Politburo, and Politburo Standing Committee (PSC), and the Party will decide on a five-year policy agenda. The Chinese Communist Party  (CCP) holds a Congress every five years, but they are not all equally important. Because of the political ambitions of CCP General Secretary Xi Jinping, this year’s Congress is shaping up to be the most important in recent memory as the occasion is expected to give Xi a chance to cement his power. While unlikely to be a market mover in the short term it will be closely watched for its longer term economic effect on the world's most populous country. Releases on Thursday of Chinese GDP, industrial production and retail sales have the potential to affect both the New Zealand and Australian dollar. North Korean events remain subdued however with large military exercises being undertaken by the South Korea and the US, North Korea may see this as a good time to launch another missile test. The main key domestic drivers for the New Zealand dollar during the week ahead will be the announcement of the makeup of our new Government, now looking more of a mid-week event.



Australia

The Australian dollar has drifted lower at the start of this week, now at 0.7854 against the USD after a high of 0.7895 on Friday. Traders seem to have largely ignored today's more upbeat Chinese inflation figures and even a strong rally in copper prices did little to lend any support to the commodity-linked Australian Dollar as buying interest favoured the USD. The Reserve Bank of Australia released the minutes from their latest meeting earlier today. There were no surprises with the bank largely upbeat about the outlook for the economy, yet not signalling any hurry to raise rates. They said the Increase in Q2 GD was consistent with forecasts for a gradual acceleration in growth, but that the labour market still has spare capacity and wage growth was likely to remain low for some time. Price pressures remain subdued across the economy. At the moment the AUD/USD looks comfortable around the 0.7850 level and should consolidate around current levels ahead of more data on Thursday, when Australia will release its September employment data and China will unveil Q3 GDP figures. The 0.7900 level provides psychological resistance, but 0.7920 needs to be broken for a steeper recovery to begin. Any pullback must hold the 0.7818 level to prevent a push on the 0.7800 level and below.


New Zealand

Why are we waiting …!! ...Politics and the uncertainty very much still driving the NZD. The NZD dollar has spiked to 0.7212 on release of this morning’s  September quarter CPI which came in higher than expected at 1.9% (year-on-year) against an expected 1.8%. The NZD/USD has now settled back below the 0.72 handle at around 0.7190 after the initial CPI spike to the aforementioned highs. The CPI data was for Q3 and arrived at 0.5% q/q vs the expected 0.4%. This was substantially higher than the RBNZ forecasts, but attention remains on the coalition government formation. Little change to the RBNZ’s view of rates remaining on hold well into next year is expected. The NZD needs to get through 0.7240 to confirm that a significant correction back to the 20th Sep highs is in place - a subsequent break of there could open doors towards 0.7315. Above this level 0.7370 (the 9th Aug high) would provide the next key hurdle on the upside. However we view this as unlikely given current political uncertainty and the softer tone of recent economic data. Downside support is now back at 0.7052 (a 19 week low) then 0.7000. Political surprises could see these threatened.


United States

International equity markets began the week supported by Fed chair Janet Yellen saying that she expects to continue raising rates gradually amid solid U.S. growth, even as inflation remains surprisingly low. Treasuries slid as John Taylor, a candidate for Fed chairman who is known for a monetary policy rule that would generally advocate higher interest rates, was said to have impressed President Donald Trump in an interview last week. Overnight manufacturing data out for the US showed the general business conditions index increased 5.8pp to 30.2, the highest reading since September 2014. The USD traded with a firmer tone and the EUR/USD is currently around 1.1778. Immediate resistance is at 1.1850 with downside supported around 1.1760 then 1.1720...we expect that after tonight's US industrial production and capacity utilisation September data that the EUR will come under further pressure.


United Kingdom

Brexit nerves continue to dominate trading in the UK pound with the GBP knocked lower after rumours that Brexit talks were stalling on trade. The whole process is now at risk of collapsing without the EU's concession on the current demands, while PM May doesn't seem to show any signs of budging on her EUR20b offer vs the EUR60b that Brussels is looking for - all eyes will be on the EU summit this week. Tonight there is raft of UK data markets will focus on, the retail price index, as well as PPI, and the CPI data. Consumer inflation is expected to increase to 3% on a yearly basis where much of the focus will be in respect to the speculation that the BoE will be in a position to hike interest rates as soon as next month. Coupled with the firmer USD the GBP is now back at 1.3245 with initial support at 1.3190/1.3200. The downside is favoured and only if tonight's CPI is higher than expected prompting BoE comments on rate hikes would the GBP see some pickup.


Europe

The EUR has traded in narrow ranges over the last few days. German wholesale prices and the trade balance were both better than expected. Geopolitical risks will also affect the euro this week as we watch the ongoing political crisis in Spain. The Spanish Prime Minister has given the Catalan government 8 days to drop their independence bid with a failure to do so resulting in a suspension of their autonomy. In his latest speech yesterday, Catalan leader Puigdemont failed to address the issue directly, choosing to appeal to the government by calling for a negotiation over the next 2 months.  If Madrid refuses to talk, then Thursday is D-day and it'll be interesting to see how both sides respond.  Meanwhile the German ZEW survey is scheduled for release tonight and these political troubles could weigh on investor sentiment.  ECB President Mario Draghi's speech on Wednesday will be one of the most important event risks for the euro this week. EUR short side looks the way to play it at the moment given the firmer USD. We look for a test of 1.1760/1.1720 over the next two days.




Japan

The JPY has weakened slightly against the USD as the risk appetite increases and tensions over North Korea stay on the back burner. The Japanese elections are fast approaching but polls remain consistent in predicting a victory for sitting PM Abe. There is widespread belief in the market that Abenomics weakened the Yen, thus a weak victory for Abe could put pressure on the USD/JPY (strengthen the Japanese Yen). Meanwhile, the new Kibo no To (Party of Hope) has said that it would work with the Bank of Japan (BOJ) on a smooth (QQE) exit strategy. There remains good support for the USD against the JPY and moves in the USD/JPY rate back to the support level at 111.60/70 would see buying interest. A break over 112.75 would target 113.00 then an extension to the 113.75 region.


Canada
 
The USD/CAD has traded up at 1.2558 yesterday after the release of the Bank of Canada (BoC) survey of managers. The Business Outlook Survey fell from 2.81 last quarter to 0.86. The anticipated slowdown in economic growth after it expanded at an accelerated growth was reflected in the reduced forecasts. The end result still points to a healthy economy, but not at the same pace that put the central bank into hiking rates twice. NAFTA talks continue between Mexico the US and Canada, but have not been smooth sailing as the US trade delegation has been pushing for more America First clauses that have not been taken well by the Canada and Mexico delegations. The USD/CAD is currently sitting at 1.2530 and we favour further upside to test resistance at the 1.2600 level over the current week.


4:30pm(NZT)
Overview
Fridays US CPI and retail sales figures came in softer than expected which initially lengthened the odds of another Fed rate increase in December. However over the weekend at a banking seminar Fed Chair Yellen commented that the U.S. central bank expects to continue to raise interest rates gradually as solid growth, a strong labour market and a healthy global economy lift prices even as she recognized that inflation has been surprisingly low. ”My best guess is that these soft readings will not persist, and with the ongoing strengthening of labour markets, I expect inflation to move higher next year.” The USD opened higher on Monday after these comments. September US CPI rose 0.5% (0.6% expected), the core measure only 0.1% (0.2% expected) for an annual pace of 1.7%. This was despite a large gain in energy prices (hurricane related), with housing, medical costs and apparel all softer.  Retail sales rose 1.6% in Sep (1.7% expected), although the ex-food and energy core measure at 0.5% beat expectations (0.4%), and there were also positive back-revisions. This week is heavy with corporate results as reporting season gets underway in the US, with major financial firms including Morgan Stanley, Goldman Sachs posting results along with Netflix and General Electric. Later this week on Wednesday, the 19th Communist Party Congress in Beijing will begin with an opening speech by Chinese President Xi Jinping. This Congress will lay out China’s path for the next five years: appointments will be made to the Party’s powerful Central Committee (CC), Politburo, and Politburo Standing Committee (PSC), and the Party will decide on a five-year policy agenda. The Chinese Communist Party  (CCP) holds a Congress every five years, but they are not all equally important. Because of the political ambitions of CCP General Secretary Xi Jinping, this year’s Congress is shaping up to be the most important in recent memory as the occasion is expected to give Xi a chance to cement his power. While unlikely to be a market mover in the short term it will be closely watched for its longer term economic effect on the world's most populous country. Releases on Thursday of Chinese GDP, industrial production and retail sales have the potential to affect both the New Zealand and Australian dollar. North Korean events remain subdued however with large military exercises being undertaken by the South Korea and the US, North Korea may see this as a good time to launch another missile test. The main key domestic drivers for the New Zealand dollar during the week ahead will be the announcement of the makeup of our new Government, now looking more of a mid-week event.


Australia
The Australian dollar has drifted lower at the start of this week, now at 0.7854 against the USD after a high of 0.7895 on Friday. Traders seem to have largely ignored today's more upbeat Chinese inflation figures and even a strong rally in copper prices did little to lend any support to the commodity-linked Australian Dollar as buying interest favoured the USD. The Reserve Bank of Australia released the minutes from their latest meeting earlier today. There were no surprises with the bank largely upbeat about the outlook for the economy, yet not signalling any hurry to raise rates. They said the Increase in Q2 GD was consistent with forecasts for a gradual acceleration in growth, but that the labour market still has spare capacity and wage growth was likely to remain low for some time. Price pressures remain subdued across the economy. At the moment the AUD/USD looks comfortable around the 0.7850 level and should consolidate around current levels ahead of more data on Thursday, when Australia will release its September employment data and China will unveil Q3 GDP figures. The 0.7900 level provides psychological resistance, but 0.7920 needs to be broken for a steeper recovery to begin. Any pullback must hold the 0.7818 level to prevent a push on the 0.7800 level and below.


New Zealand
Why are we waiting …!! ...Politics and the uncertainty very much still driving the NZD. The NZD dollar has spiked to 0.7212 on release of this morning’s  September quarter CPI which came in higher than expected at 1.9% (year-on-year) against an expected 1.8%. The NZD/USD has now settled back below the 0.72 handle at around 0.7190 after the initial CPI spike to the aforementioned highs. The CPI data was for Q3 and arrived at 0.5% q/q vs the expected 0.4%. This was substantially higher than the RBNZ forecasts, but attention remains on the coalition government formation. Little change to the RBNZ’s view of rates remaining on hold well into next year is expected. The NZD needs to get through 0.7240 to confirm that a significant correction back to the 20th Sep highs is in place - a subsequent break of there could open doors towards 0.7315. Above this level 0.7370 (the 9th Aug high) would provide the next key hurdle on the upside. However we view this as unlikely given current political uncertainty and the softer tone of recent economic data. Downside support is now back at 0.7052 (a 19 week low) then 0.7000. Political surprises could see these threatened.


United States
International equity markets began the week supported by Fed chair Janet Yellen saying that she expects to continue raising rates gradually amid solid U.S. growth, even as inflation remains surprisingly low. Treasuries slid as John Taylor, a candidate for Fed chairman who is known for a monetary policy rule that would generally advocate higher interest rates, was said to have impressed President Donald Trump in an interview last week. Overnight manufacturing data out for the US showed the general business conditions index increased 5.8pp to 30.2, the highest reading since September 2014. The USD traded with a firmer tone and the EUR/USD is currently around 1.1778. Immediate resistance is at 1.1850 with downside supported around 1.1760 then 1.1720...we expect that after tonight's US industrial production and capacity utilisation September data that the EUR will come under further pressure.


United Kingdom
Brexit nerves continue to dominate trading in the UK pound with the GBP knocked lower after rumours that Brexit talks were stalling on trade. The whole process is now at risk of collapsing without the EU's concession on the current demands, while PM May doesn't seem to show any signs of budging on her EUR20b offer vs the EUR60b that Brussels is looking for - all eyes will be on the EU summit this week. Tonight there is raft of UK data markets will focus on, the retail price index, as well as PPI, and the CPI data. Consumer inflation is expected to increase to 3% on a yearly basis where much of the focus will be in respect to the speculation that the BoE will be in a position to hike interest rates as soon as next month. Coupled with the firmer USD the GBP is now back at 1.3245 with initial support at 1.3190/1.3200. The downside is favoured and only if tonight's CPI is higher than expected prompting BoE comments on rate hikes would the GBP see some pickup.


Europe
The EUR has traded in narrow ranges over the last few days. German wholesale prices and the trade balance were both better than expected. Geopolitical risks will also affect the euro this week as we watch the ongoing political crisis in Spain. The Spanish Prime Minister has given the Catalan government 8 days to drop their independence bid with a failure to do so resulting in a suspension of their autonomy. In his latest speech yesterday, Catalan leader Puigdemont failed to address the issue directly, choosing to appeal to the government by calling for a negotiation over the next 2 months.  If Madrid refuses to talk, then Thursday is D-day and it'll be interesting to see how both sides respond.  Meanwhile the German ZEW survey is scheduled for release tonight and these political troubles could weigh on investor sentiment.  ECB President Mario Draghi's speech on Wednesday will be one of the most important event risks for the euro this week. EUR short side looks the way to play it at the moment given the firmer USD. We look for a test of 1.1760/1.1720 over the next two days.


Japan
The JPY has weakened slightly against the USD as the risk appetite increases and tensions over North Korea stay on the back burner. The Japanese elections are fast approaching but polls remain consistent in predicting a victory for sitting PM Abe. There is widespread belief in the market that Abenomics weakened the Yen, thus a weak victory for Abe could put pressure on the USD/JPY (strengthen the Japanese Yen). Meanwhile, the new Kibo no To (Party of Hope) has said that it would work with the Bank of Japan (BOJ) on a smooth (QQE) exit strategy. There remains good support for the USD against the JPY and moves in the USD/JPY rate back to the support level at 111.60/70 would see buying interest. A break over 112.75 would target 113.00 then an extension to the 113.75 region.


Canada
The USD/CAD has traded up at 1.2558 yesterday after the release of the Bank of Canada (BoC) survey of managers. The Business Outlook Survey fell from 2.81 last quarter to 0.86. The anticipated slowdown in economic growth after it expanded at an accelerated growth was reflected in the reduced forecasts. The end result still points to a healthy economy, but not at the same pace that put the central bank into hiking rates twice. NAFTA talks continue between Mexico the US and Canada, but have not been smooth sailing as the US trade delegation has been pushing for more America First clauses that have not been taken well by the Canada and Mexico delegations. The USD/CAD is currently sitting at 1.2530 and we favour further upside to test resistance at the 1.2600 level over the current week.


Major Announcements
•    US PPI 0.4% as expected
•    US CPI 0.5% vs 0.6% expected
•    US Retail sales 1.6% vs 1.7% expected
•    US UoM Consumer Sentiment 101.1 vs 95.1 expected
•    NZ CPI 0.5% vs 0.4% expected
•    US PPI 0.4% as expected
•    US CPI 0.5% vs 0.6% expected
•    US Retail sales 1.6% vs 1.7% expected
•    US UoM Consumer Sentiment 101.1 vs 95.1 expected
•    NZ CPI 0.5% vs 0.4% expected
 

Economies of Note - 13th October 2017

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

3:00pm(NZT)
Australia
The Australian dollar has moved back over the 0.7800 handle against the USD over the last couple of days on better than expected domestic data releases. October consumer inflation expectations jumped to 4.3%, well above the 3.8% for September and home loan approvals for August came in at double market forecasts. This afternoon will see a swath of Chinese data releases including September trade balance and loans growth which have potential to move the AUD. Also later this afternoon the RBA Financial Stability Review will be released which will garner market attention especially their view on the commercial sector. Overnight the AUD rose from 0.7810 to 0.7835, a key resistance level, it has now retreated to the 0.7818 level but the short term tone is now mildly bullish, especially if the Chinese data is supportive. A break of 0.7835 would target the 0.7880-0.7900 region which should start to attract selling interest given the RBA’s interest rate divergence for the longer term.


New Zealand
The New Zealand dollar was the surprise outperformer overnight shrugging of the uncertain political climate to rise to 0.7145 against the USD. There was no apparent reason behind the shift other than a USD that has been marking time of a couple of days and holders of short NZD positions were squeezed. The dragging on by NZ First of the coalition decision well into next week is likely to continue to weigh on the NZD and prevent any major move higher. The US CPI and retail sales data tonight will also have a significant effect on the NZD/USD cross direction, outweighing the initial moves once the NZ Government composition is known. The NZD/USD is now back at 0.7130 but has potential to push back into the 0.7150-0.7200 level, but only a significant break higher over 0.7240 would confirm the bear trend seen since the 0.7430 September 20th high had been broken. We look for the NZD to trade in a 0.7085/0.7150 range ahead of the government formation decision, next Tuesday’s Q3 CPI data will pose event risk, but longer term USD direction will outweigh local considerations.


United States
U.S. equity markets were softer and the US dollar rose slightly, as investors weighed the prospects for tax reform and the Federal Reserve’s next policy move. The Trump administration’s tax plan at the moment remains nebulous, as the president has apparently voiced frustration with certain aspects of the existing framework. Some Congressional Republicans have aired concerns, while Treasury Secretary Steven Mnuchin reiterated his confidence that a plan will be passed this year which would be a boost for equity markets and the greenback. However in the short term, investors will look to consumer price data tonight for the latest clue on inflation in attempts to gauge the Fed’s next move. Yesterday’s US PPI data was consistent with the Fed’s moderate inflation view, which saw producer prices climb 0.4% in September on another sizable lift in the cost of energy goods (up 3.4%), Food prices were flat, while core goods rose 0.3% posing some upside risk to overall core CPI later tonight. The USD was softer against the JPY but marginally firmer on the EUR overnight as traders kept positions light ahead of tonight's CPI data. On the EUR/USD support is around 1.1810 with resistance at 1.1880 and we expect trading to hold around the 1.1820/50 level ahead of tonight's data which we expect to be USD supportive.


United Kingdom
We have seen choppy trading for the UK pound over the last couple of days as concerns continue to swirl around about British PM May’s leadership. Overnight the GBP/USD was on a rollercoaster, trading as high as 1.3264 at the beginning of the day, then plunging to 1.3121 on  pessimism initiated by reports that the European Union’s chief negotiator Michel Barnier had described Brexit talks as “deadlocked” over disagreement about how much the UK owes when it leaves. The GBP/USD cross then had a change of heart midway through US trading, surging to a 1.3290 high, on a German newspaper headline suggesting that the EU may offer the UK the two-year transition period during which the UK would remain a member of the EU’s interior market and customs union, subject to meeting all its financial EU member – and exit – obligations. As had been earlier sort by PM May. We believe that this sort of price action will only intensify as the EU deadline approaches and any clear exit plan continues to remain elusive. It is now back around 1.3260, immediate support is 1.3250 which must hold if another push to 1.3290 is to occur, a break of which would target 1.3330. A break of 1.3250 would quickly move to 1.3220 with an extension to 1.3180 possible. Additional gains from current levels are favoured in the short term but longer term factors of the political and Brexit nature will continue to weigh on the GBP.


Europe
The Catalan situation continues to simmer away as Spain’s semi-autonomous Catalonia (20% of Spanish economy) continues to face off against the central government. A declaration of independence might be illegal, but could still trigger constitutional crises in Spain and EU. Catalonia would need to apply for EU membership and await entry into the Eurozone. More news on this is expected Monday. Overnight ECB head Draghi, at a conference speech, commented that the ECB negative rate policy had been a success, reinforced stimulus from QE and low rates and pledged to keep rates low well past the end of the current quantitative easing policy. The EUR/USD cross fell down to 1.1826, bouncing modestly from the level,  now at 1.1832 the EUR looks poised to extend its decline in the short-term, especially given the mantra from the ECB of “lower for longer” rates. If the price manages to break below the key support in the 1.1820/30 region next level will be 1.1810 then 1.1760....tonight's US CPI provides big event risk.


Japan
Lethargic trading in the Japanese Yen over the week as the pair has stayed within a 112.00-113.00 range against the US dollar. Japanese data released overnight came in-line with market expectations. The Corporate Goods Price Index rose by 0.3% on the month in September, posting also an annualized gain of 3%, both of which matched median analyst forecasts. There appears to be little election influence on the currency as Prime Minister Shinzo Abe is poised for a big victory in the Oct. 22 parliamentary elections, beating back a challenge by Tokyo Gov. Yuriko Koike, according to five polls published by major Japanese news organizations. The USD/JPY is now around 112.25 with immediate support at 112.10 then 111.85...upside is at 112.63 then the physiological  113.00 level extending to 113.45….tonight's US CPI data may provide the upside break-out.


Canada
The USD/CAD after dipping to two week lows around 1.2430 climbed back to daily highs at the 1.2485 level on positive US economic releases. Lower crude oil prices did little to help the CAD hold higher levels. Support is now in the 1.2450 region but upside is favoured , especially if tonight’s US  CPI is solid. A convincing move beyond the 1.25 level could get extended towards 1.2560 intermediate resistance before the pair eventually darts toward conquering the 1.2600 target.

 
 

FX Update: Political uncertainty keeps the NZD subdued

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

3:30pm(NZT)
Overview
It has been a subdued start to the week for currency markets, with the US, Japan and Canada all enjoying a long weekend. We look for the USD trend to remain positive this week after solid economic data and more hawkish Fed Reserve comments over the past week provided upward impetus. The highly anticipated US Non-farm payroll data on Friday was impacted more significantly by the two hurricanes than economists anticipated (they were looking for 80K job growth but instead saw -33K job losses), investors quickly discounted the headline number and instead focused on the upward revision in August, the strong 0.5% rise in average hourly earnings and the lowest unemployment rate since 2001 at 4.2%, down from 4.4%. These better than expected numbers reinforce the Fed's hawkishness and have driven up the odds for a year-end rate hike to 77% from 70% the previous week. Expectations are now that the September payrolls will be revised higher and rebound next month, as seen in 2005 after Hurricane Katrina. The coming week will be highlighted by growth, in the form of inflation and GDP numbers, in both the US and Europe. Trade data, from China and Europe, will is also likely to impact demand for commodity currencies. With the final New Zealand election count released in the weekend resulting in the Labour/Greens bloc gaining two seats at the expense of National, NZ First remains the king-maker, with major blocs National/Act (57 seats), on the centre right, and Labour/Green (54 seats), on the centre left, both shy of the 61 seat majority required to govern alone. NZ First leader Peters is expected to give a decision as to who he will side with by Thursday. Consequently election uncertainty persists hanging over the NZD but to some extent given the current lower New Zealand dollar level is already priced in by the market. North Korean events are still on the back burner as the week begins, which saw some retreat of the risk-averse sentiment last week, however the situation remains very fragile continuing to overhang markets, with any intensification having potential to ramp-up volatility substantially.  


Australia
After hitting a 3 month low last Friday at 0.7731 against the USD on the back of the dovish RBA monetary policy statement and mixed economic data, the AUD/USD opens the week flat at 0.7752, only trading around a 20 pip range overnight.  Today, business confidence and Thursday, consumer confidence, will provide the balance of economic data releases for the week with a focus on consumer confidence to help guide clarification on economic sentiments. A stronger reading could help AUD regain some of the lost ground as AUD/USD is trading near 2-month lows as the market woke up to the prospects of Fed hikes continuing unabated in December. A further slip of consumer confidence would align with the recent trend of weaker 'hard' data on economic activity, which could keep Australian dollar struggling. The strong positive correlation to Iron ore also looks to be a liability to the Aussie as the Chinese winter curbs are expected to provide a headwind to any bounces in the base metal.  The AUD/USD is now around 0.7055 after making an overnight low at 0.7746 and then rebounding modestly. The pair remains moving in a small range, between 0.7745 and 0.7765, but downside is favoured with a break of 0.7730 support targeting 0.7700.


New Zealand
The New Zealand dollar opens the week with a heavy tone, as ongoing USD strength and the continuing uncertainty of government coalition negotiations remain the main NZD drivers.
The overall feeling that the NZ economy has come off the boil a little appears to be gaining some traction as economic data reinforce a softening picture, today's electronic credit card sales being a case-in-point, below expectations at 2.9% in September down from 4.4% in August. An election result should be known on Thursday, according to NZ First leader Peters and we expect the NZD to hold around current levels ahead of this announcement. With the NZD/.USD now around 0.7062 a break of immediate support at 0.7050 would target 0.7000 with initial upside resistance at 0.7100. Although an upside move is not likely before Thursday’s election result is known. The downside is favoured.


United States
U.S. stocks retreated in light holiday trading, while the dollar held in a tight range as investors assessed the latest political developments in Washington before the earnings reporting season kicks-off. With rising expectations of a rate hike in December from the Federal Reserve, particularity after Friday’s NFP, along with the potential that the Trump tax reform proposal could pass the legislative process over the next few months, the USD remains well supported. With manufacturing and service sector activity accelerating and wage growth rising, we expect the dollar to extend its gains over the coming week. The FOMC minutes scheduled for release on Wednesday should have a hawkish tone and with gas prices rising and wage growth increasing, economists are also looking for a sharp recovery in retail sales that should be supportive of the US dollar. Later in the week will see retail sales and inflation (CPI) data, also expected to be USD supportive. Currently the EUR/USD is around 1.1742 with a break of the 1.1820/30 level required for further EUR gains. A more likely scenario is a test of the 1.1730 support level which if breached would see an extension to the 1.1695 level.


United Kingdom
After a shocker of a week where the GBP was down over 2% against the USD, the UK pound has managed to regain the 1.3100 critical support level and opens the week at 1.3150. The UK units recovery from its test towards 1.3000 before the weekend, was aided by a report suggesting the UK Prime Minister May is considering a cabinet reshuffle following the EU Summit on October 19-20. The over-riding two themes persist, that of Brexit and political leadership. Despite the 30 Tory MPs that are said to seek a leadership challenge, there seems to be a general recognition that ousting PM May could have disastrous consequences. In the first instance, it would deal a setback to Brexit negotiations. In the second, it would open the door to a Labour government, which according to recent surveys, enjoys greater popular support than the Conservatives. The fifth round of Brexit talks starts this week, with fading hopes that there will be “sufficient progress” in separation issues in time for the EU leaders’ meeting later this month. As such, the next stage of negotiations on the future relationship seems unlikely to start until December at the earliest. Domestic political uncertainties have raised concerns about the outcome of complex and time-limited Brexit negotiations. Data releases have not been GBP friendly, with household  spending falling by 0.3% annually in September, marking the fourth decline in the past five months as consumers continue to show signs of 'belt tightening' amid financial uncertainty. Also tonight there is a report out by the UK Office for Budget Responsibility. It is expected to show new research that shows how it over-estimated productivity growth for the past seven years. This latest rally could see the GBP/USD back over 1.3240, overnight high has been 1.3182, but given the Brexit/political problems we view this as likely a correction and look for another test of the 1.3100 level and extension towards 1.3000.


Europe
The EUR has opened marginally firmer against the USD, receiving a boost overnight, as protests in Spain against Catalonia’s bid for independence abated and German industrial output and investor confidence data releases came in ahead of expectations.  Reversing a 0.1% fall in July German industrial output grew 2.6% m/m in September, well ahead of the predicted 0.9% increase, while investor confidence in October strengthened to a 10-year high with the Sentix index unexpectedly rising to 29.7 up from 28.2 in September. Economists had expected the index to pull back to 28.0. The Catalonian issue has potential to be a “slow burner” for the EUR, with Spanish courts still trying to block the independence move and suspended an important meeting of Catalonia's regional parliament which was to be held on Monday. This would have been the Catalan President's first opportunity to formalize their declaration of independence under a referendum law that the Spanish Constitutional Courts have ruled as illegal. This back and forth will continue for some time and while the outcome will have a significant near and possibly long term impact on the EUR, for the time being investors have moved on. The next big focus will be the European Central Bank's monetary policy announcement after the ECB meeting at the end of the month where the ECB is widely expected to recalibrate policy. Later this week there are several speeches from ECB officials, including ECB head Draghi on Thursday,  which are likely to mention  previous concerns around the volatility and speed of the EUR rise and comments on the continued need for stimulus. Currently EUR/USD is at 1.1745, a break of the 1.1820/30 level required for further EUR gains. More likely scenario is a test of the 1.1730 support level which if breached would see an extension to the 1.1695 level.


Japan
The JPY has started the week around the 112.80 level against the USD, with the USD/JPY strengthening after comments from BoJ head Kuroda saying that monetary expansion will continue until they get inflation above their 2% target. His comments included;
-Japan's economy expanding moderately.
 -Bank of Japan will maintain QQE with yield curve control for as long as needed to achieve 2% inflation in stable manner.
-BOJ will adjust monetary policy as needed to maintain the economy's momentum to achieve its price target.
-Will continue expanding monetary base until consumer inflation stably exceeds 2%.
Given this stance, buying the USD on dips looks to be the preferred trade with the current USD/JPY range 112.00-113.00 over the next few days. A break of 113.00 should see an extension to the 113.45 area a breach of which would target 113.80 then beyond to 114.40...any move to risk-off would test support at 112.00.


Canada
The Canadian dollar remains resilient and the USD/CAD was unable to break through the 1.2600 level on Friday and is now back at 1.2540. Although net job growth in Sept was slightly less than anticipated (10K vs. 12K) and the participation rate fell slightly, full time jobs rose at its strongest pace on record. Canada has now experienced its 10th straight month of employment gains and its fastest pace of wage gains in 17 months. It is too early to say if these numbers will change the Bank of Canada’s mind on another rate hike especially after the larger trade deficit and decline in oil prices. USD/CAD direction is still uncertain, given USD strength another test of 1.2600 is possible over the next few days with support at 1.2500 likely to hold.


Major Announcements
•    UK Serviced PMI 53.6 vs 53.2 expected
•    US ISM Non-Manufacturing PMI 59.8 vs 55.5 expected
•    Australian Retail Sales -0.6% vs 0.3% expected
•    Australian Trade Balance 0.99b vs 0.88b expected
•    Canadian Trade Balance -3.4b vs -2.6b expected
•    Canadian Employment Change 10.0k vs 13.9k expected
•    Canadian Unemployment Rate 6.2% vs 6.3% expected
•    US Non-Farm Payrolls -33k vs 82k expected
•    US Unemployment Rate 4.2% vs 4.4% expected
•    US Average Hourly Earnings 0.5% vs 0.3% expected
 

Economies of Note - 6th October 2017

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

3:00pm(NZT)
Australia
We have seen some mixed results for the “lucky country” this week. As expected, the RBA left rates unchanged at 1.5% while the accompanying statement saw little change in the wording. RBA Governor Lowe maintained the upbeat note on the state of the local economy, also as usual for central bankers, voicing concerns about currency (AUD) strength, which could become a drag for the economy and inflation. There was also positive news on the trade balance outcome, as the surplus was larger-than-expected, up to 989M in August, while previous month's result was upwardly revised to 808M, with the advance attributed to rising exports of iron ore to China. However, weighing on the AUD were local Building permits for August, which tumbled 15.5% on a yearly basis, less than market’s estimates, but nevertheless in negative territory. Also adding to AUD selling pressure were yesterday’s retail sales figures; these came in well below expectations at -0.6% for August against forecasts of +0.3% along with the previous month revised down by -0.2%. This was actually the worst retail sales figure since mid-2012. The AUD traded up around 0.7840/60 against the USD for most of the day, but once the retail sales data showed the Aussie economy still has some wobbles, sellers pushed the AUD/USD into the 0.7820/30 region. Further selling overnight saw a 0.77988 low. Given that tonight's US Non-farm payroll data is expected to be USD positive, look for AUD/USD support at 0.7785 to be tested and if broken an extension to first 0.7750 then 0.7710 is likely.


New Zealand
The New Zealand dollar has had a tough old week, sliding lower after the drop in prices at Tuesday night’s Global Dairy auction went against the 6% rise expected by the market and forecasted in dairy futures pricing. Business confidence data earlier this week was weaker. Also negatively impacting the NZD has been the ongoing uncertainty over the formation of a new government. Some clarity should be provided tomorrow after 2pm, when the special vote count result will be announced. This will enable coalition talks to begin in earnest next week and we should see the shape of the new coalition towards the end of next week. Expectations are that the National government will continue with NZ First, however this is not certain and if the Labour block look likely to become the government, initial market reaction would be to sell the NZD lower. Although economic fundamentals on the whole remain positive, the sense now appears that the NZ economy has lost some of its lustre, at a time when the tone of US data is looking increasingly solid. After starting the week at 0.7200 against the USD, the NZD has sunk to 0.7112 - a four-month low. Now at 0.7115 any recovery ahead of tonight’s USD data looks remote. Support is down at 0.7090 which is likely to be tested on a solid US payrolls figure tonight. Upside resistance at 0.7160 is now far away. The next week could be volatile as politics takes the driver's seat.


United States
U.S. equity markets extended higher, with an eighth straight gain, the dollar strengthened  as the latest raft of economic data added to optimism in the American economy ahead of tonight’s Non-farm payroll report. The S&P 500 continued its streak of gains to the longest since 2013 after jobless claims and factory orders beat expectations, reinforcing the positive trend. The US dollar touched July levels as data showed the U.S. trade gap narrowed to an 11-month low. Also helping the positive mood were comments from US Fed officials who were upbeat on the outlook for the US economy and said roughly the same thing, that the outlook warranted one more hike this year (December) and another three to follow in 2018. Tonight’s September non-farm jobs report is forecasted to show somewhere between 80-100k jobs created for the month, with the unemployment rate holding around 4.4%. The wide range and below trend expectation is due to hurricanes Harvey and Irma. Although underlying strength of the labour market remains solid, job creation is usually negatively affected following major hurricanes. Our call is for a rise in employment of around 90,000 in September (although uncertainty is higher than usual) against a 12-month moving average of 175,000 and look for a broad-based slowdown in job creation. Given the lower expectations, there should not be a sharp market reaction to a weaker jobs report since the Fed has explicitly stated that it does not expect the impact of hurricanes Harvey and Irma to play a role in its monetary policy decisions, as it expects them to impact economic activity only in the short term. Expectations are now firmer for the Fed to hike once more this year in December due to the focus on the unemployment rate and easy financial conditions. The EUR/USD weakened to 1.1700 overnight down from 1.1814 at the start of the week. Now at 1.1710 immediate supports is at 1.1695 then 1.1660, short term risk is to the downside ahead of tonight's data.
 

United Kingdom
It has been a rocky road for the UK pound this week as persistent pound weakness allied with ongoing US dollar demand pushed the pair to its lowest level in nearly a month.
Political uncertainty problems were not helped when PM May’s bid to reassert her dwindling authority was ruined on Wednesday when her keynote speech to the Conservative Party conference was interrupted by repeated coughing fits, a prankster, and even letters of her slogan falling off the set behind her. After starting the week up at 1.3400, the GBP hit a wall of selling over the week as Brexit concerns and the persistent uncertainty in the UK politics keeps taking a toll on the sentiment surrounding GBP culminating in a fall overnight to 1.3106, the lowest level since the 8th August. Not even better PMI services data yesterday could stem the tide, as after a rally to the 1.3290 level sellers quickly overwhelmed buyers and the GBP retreat continued. Also adding to Sterling weakness was a warning from the Federation of German Industries, which said that local companies with presence in the UK should be planning for a "very hard Brexit." -ouch..! The GBP/USD 1.3100 level is now critical, a break of which would likely extend to 1.3070 then 1.3030. Tonight US jobs data may provide the impetus for such a move. Immediate upside resistance is at a distant 1.3145.


Europe
Minutes from the European Central Bank released on Thursday showed members discussed how to adjust monetary stimulus next year as policy makers raised concern over the volatility and the speed of the recent appreciation of the exchange rate, while at the same time agreed that the economy of the region still required substantial stimulus. The ECB has to balance solid growth with continuously disappointing inflation. So far there hasn't been much concern about the stronger EUR's impact on growth, although the EUR's impact on inflation is a source of debate at the ECB. Most ECB members seem to be of the view though that the positive impact from stronger demand will outweigh the drag on inflation from EUR appreciation. Risk for the EUR is to the downside with immediate support at 1.1695 then 1.1660.


Japan
As the week progressed and risk-off sentiment abated the Japanese Yen has gradually weakened against the USD as its safe haven appeal declined. Although the Japanese elections are later in the month the main focus remains on economic issues. Domestic growth trends remain weak and the Bank of Japan remains far from achieving its 2% inflation goal. This is likely to mean policy accommodation remaining in place for an extended period vis-a-vis other central banks preparing to exit extra-ordinary accommodation or nudge policy tighter. These accommodative monetary policy settings and relatively weaker growth will continue to weigh on the JPY whoever is in power. Currently the USD/JPY is sitting around 112.85 in directionless trading, but with potential to break higher depending on how investors take the US NFP report, and how it could affect odds for a Fed's rate hike for December, a good US jobs figure tonight would see a break of 113.25 target major upside at 114.40.


Canada
Data earlier this week showed Canada's merchandise trade deficit totalled $3.4 billion in August, widening from a $3.0 billion deficit in July. Exports decreased 1.0% on lower volumes, while imports were unchanged. Following two months of large decreases, exports were down a further 1.0% to $43.6 billion in August—despite increases in 6 of 11 sectors.
The CAD has weakened against the USD as the better US data has outweighed that of Canada with the USD/CAD rising last night to a high of 1.2582, continuing the bearish tone seen earlier in the week. It is now at 1.2571 immediate resistance is at 1.2605 and should be under pressure if tonight's US NFP is solid.

 
 

FX Update: US employment data to draw focus

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

4:30pm(NZT)
Overview
This week is a relatively big week for data releases, especially out of the US which culminates at the end of the week with the Non-farm payroll figure. Asian markets should be fairly subdued due to the Chinese National day holiday which lasts for most of the week. The week opens with risk-off sentiment abating over the Nth Korean situation after news over the last few days that the US was continuing to have dialog with Pyongyang, this saw Gold sliding in Asia after closing lower on Friday, while market concerns over the political fall-out in Spain over the Catalan independence referendum have so far been muted, however, investors remain concerned over any likelihood of the success of the Republican tax-cut proposals. The US dollar opens the week adding to gains from last week, when it benefited from some speculation President Donald Trump could opt for a new Fed chairman who might pursue a more aggressive schedule for policy tightening. Australia’s equity market headed higher after China, its top trading partner, reported an unexpectedly strong manufacturing data and announced plans to cut the amount of cash banks must hold as reserves for certain loans. Later today the reserve Bank of Australia at its policy meeting is widely expected to keep rates on hold at 1.5%.


Australia
After yesterday’s Labour Day holiday the main Australian news will centre around the RBA policy meeting and subsequent press release later this afternoon. The widely held view is that the RBA will keep rates on hold at 1.5%, but of interest are any indications when rate hikes will occur in 2018, or not. Markets are pricing in just over a 50% chance that rates will increase at the June 2018 meeting. Today’s expectations are that  the RBA statement comments will be unchanged from their recent comments, being that the Aussie economy is in a reasonable place, the labour market is tightening which should contribute towards higher wages growth  in 2018, thereby placing the RBA  on track to meet its inflation goals under the current accommodative monetary policy regime. After a brief period down around 0.7796 the AUD/USD is back above 0.7800 at 0.7820 after solid buying interest. The 0.7800 level is now crucial, with any sustained break below this level likely to extend to test 0.7740/50 levels. On the upside a push through resistance at 0.7910 would be required to attempt a retake of the 0.8000 level, we view this as unlikely in the short term.  


New Zealand
The week opened with the New Zealand dollar trading around the 0.7200 level against the USD, currently the NZD is at 0.7187 with a bias to the downside. Out earlier today, the NZIER Quarterly Survey of Business Opinion showed a drop in overall business sentiment, with a net 7% of firms positive about the outlook compared to 17% in the June quarter. However, indicators of firms' own activity held up quite well compared to last quarter. Given that this survey was conducted over September, general confidence may well have been affected by the uncertainty around the 23 September general election. A net 13% of firms reported growth in their own activity compared to 17% in June. This decline is consistent with the view that GDP growth in the September quarter may be slightly slower than the 0.8% rise recorded in June. In contrast, firms' expectations for the coming quarter picked up to the highest level in a year. Expectations of hiring, investment in capital and profits were all similar to last quarter. There is also another Global Dairy auction later tonight. This is expected to show around a 6% rise in the price of wholesale milk powder. The political situation remains unchanged with only preliminary coalition discussions talks being started later this week. Special vote results will not be known until 12th October. With the political outlook still unclear and better data from the US, it is hard to be bullish about the NZD even if fundamentals remain supportive. The downside remains favoured and we look for 0.7150 later in the week should upcoming US data remain solid.


United States
As the week/new quarter opens, U.S. equities are up to  new all-time highs and the US dollar stronger as factory data and the prospect for tax cuts boost optimism in the economy.
The S&P 500 Index closed at another record to start the fourth quarter and the dollar headed for the strongest level since July after ISM data showed U.S. manufacturing expanded at the fastest pace in 13 years. U.S. investors are also weighing up the prospects that Congress will enact a pro-growth tax plan and ongoing speculation that President Donald Trump may opt for a new Fed Reserve head who might pursue more aggressive stance on policy tightening. The beat of the US economy should be a little clearer at the end of the week with a slew of employment data out over the next few days culminating in the Non-farm payroll figure on Friday. Expectations are that the figures should remain on a positive track, however there may be a wildcard in the mix, the landfall of Hurricanes Harvey and Irma which has the potential to interrupt the 83 consecutive months of employment growth.
After hitting a high of 1.1814 overnight after comments from a Fed official that the Fed is responsible for lower inflation, and should not raise rates before inflation hits 2.0%, the EUR/USD weakened to currently trading around 1.1715. Immediate support is at 1.1690 then 1.1660, upside looks limited with 1.1780 likely to hold EUR advances over the next few days.


United Kingdom
The UK pound has lost the 1.3400 handle, falling to a low of 1.3255 overnight. It is now trading lower at 1.32441 after disappointing UK manufacturing PMI data last  night allied with increased political risk on the May leadership, that has potential to impact both Brexit negotiations and  domestic policies. The GBP is now trading with a more bearish tone, and despite the hawkish rhetoric from BoE Governor Carney towards rate hikes, this is being offset by concerns around the economic consequences of Brexit, and the absence of progress in negotiations, despite the latest speech from PM May.  Immediate support at 1.3250 looks to have broken, opening the way for an extension to the 1.3210 level which if broken would expose the 1.3150/70 region. The upside looks limited to 1.3300 over the next day or so and with more US data releases expected to be positive, a push though this level is doubtful.


Europe
Another rough start to the week for the EUR, as the common currency was affected by political jitters in Spain. The Catalonian referendum, which resulted in hundreds injured as the central police clashed with local voters, revived concerns over the fragility of the union, after Brexit. The unsought violence only deepened Spain’s political crisis, triggering the response of the UN High Commissioner for Human Rights, who called for "independent and impartial investigations into all acts of violence." This comes on the hard on the heels of a sour Merkel' victory the previous week in the German election. Despite the positive turn of the latest macroeconomic data indicating solid growth in the EU, such figures become meaningless when such political splits cast doubt of the ongoing viability union itself. Look for a move to 1.1690 then 1.1660. If US data is strong over the next few days 1.1660 will be under threat.


Japan
Yesterday, Japan’s quarterly Tankan business sentiment survey surged to its highest in a decade, with the main index for Q3 up to 22 from previous 17, citing strong employment, confidence and capital investment, a sign that the economic recovery is broadening. This will set the stage for a strong performance by incumbent PM Abe in the upcoming general election. With a more risk-off tone to start the week as Nth Korean tensions abate the USD/JPY looks to be in a more consolidative phase. Currently at 113.07, good US data over the next night or so could see a break of last week’s high at 113.25 which would then target major resistance at the 114.40 level.


Canada
The USD/CAD saw highs for the month on Friday up at 1.2531 but failed to hold these levels even with the price of oil lower the USD/CAD fell to 1.2466 yesterday. September data revealed a positive month overall for the Canadian manufacturing sector, with output and new business growth regaining momentum after August’s slowdown. However the CAD  starts week this with a bearish tone, with the USD/CAD now back at 1.2523 with a break of 1.2530 to target 1.2550 then the August high of 1.2605. Conversely 1.2460 provides immediate support, but given the positive US data expected over the next few days look for CAD bears to prevail.


Major Announcements
•    US Consumer Confidence 119.8 vs 119.9 expected
•    US Core Durable Goods Orders 0.2% as expected
•    RBNZ leaves interest rate unchanged
•    UD Final GDP 3.1% vs 3.0% expected
•    UK Current Account -23.2b vs -15.8b expected
•    Canadian GDP 0.0% vs 0.1% expected
•    UK Manufacturing PMI 55.9 vs 56.3 expected
•    US ISM Manufacturing PMI 60.8 vs 57.9 expected
 

Economies of Note - 29th September 2017

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

4:30pm(NZT)
Australia
It has not been a great week for the Australian dollar. It has never recovered the 0.8000 benchmark, falling from 0.7972 earlier in the week through support at 0.7870 to a low of 0.7798 yesterday. It’s now back at 0.7845 with the still solid gold price providing some support. There is little in the way of economic data for the AUD today and we expect consolidation at current levels to see the week/month/quarter out, having lost nearly 3 cents against the USD since the start of the month. Given the likelihood of continuation of Nth Korean tensions the risk sensitive AUD remains vulnerable to more downside, allied with China data remaining soft (there will be no China data next week due to the China National Day holiday which lasts most of the week). Immediate support is at 0.7805/10 against the USD with upside resistance initially at 0.7930. We favour downside pressures remaining next week with a break of AUD/USD 0.7805 targeting 0.7740.


New Zealand
The RBNZ left the OCR rate on hold at 1.75% yesterday (much as expected), with its bottom-line guidance for monetary policy unchanged. The most important change was an apparent downgrade to the RBNZ’s GDP forecast, due to the stalled construction sector. The statement repeated the bottom line guidance that has been pretty much unchanged all year: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly." With the post-election environment uncertain, as per usual with all central banks when there is no clear direction the best decision is to play the safe course and do nothing. However, if the construction sector and housing market remain subdued but the exchange rate has not appreciatively fallen, look for the November MPS to downgrade the OCR forecast. The New Zealand dollar initially traded down to 0.7197 against the US unit after the OCR release, but it then managed a gradual recovery at the start of Asian trading to the 0.7920/25 level. Currently the NZD/USD is around 0.7230 marginally firmer after the USD was on the back foot overnight. Overall the NZD has shown good resilience this week and has managed to hold well against its major trading partners in the face of an uncertain election result and the “on hold” RBNZ statement. However risk remains to the downside as US data and comments from US Fed officials continue to point to the inevitability of higher interest rates, we foresee another test of 0.7130/50 in the week ahead.


United States
U.S. equities tracked higher to record levels overnight  heading for an eighth straight quarterly gain, while the dollar was on the back foot traders investors studied the implications of President Trump’s tax proposal. The S&P 500 has increased around 3.5% over the last 3 months and ended last night’s session at an all-time high. The final appearance of the long awaited  Trump tax plan, although short on details, is widely expected to be a boon for business and the wealthy, with specific tax cuts aimed at them. However the lack of detail leaves investors only able to speculate what parts of the tax package will be prioritised by the Trump administration and what trade-offs have to be conceded for  it to garner sufficient support to pass through the Congressional process. The key question is how you can fund an additional $1.5 trillion expenditure over a decade without materially increasing the deficit and blowing out the national debt. That alone sets up a huge battle in Congress. With the end of the week/month and 3rd quarter tonight and the lack of clarity around the tax package the USD was hit by profit taking as investors exited previous long USD positions and closed lower against most of its trading partners. However we believe any dollar weakness should be temporary, as the Nth Korean situation is likely to remain volatile, economic data continues to be overall supportive of a December Fed rate hike and details of the tax package will emerge over the next few weeks.
 

United Kingdom
The UK Pound, after falling to fresh two-week low of 1.3342 yesterday, saw a pickup in buying interest which saw it rally back over the 1.3400 against the USD to a 1.3455 high overnight.  It has since pulled back from this level currently sitting at 1.3420 between 1.3146 and 1.3653. Bank of England governor Carney commented overnight that the Central Bank has limits on what it can do to solve economic problems derived from Brexit. Later during the European session, the EU's chief Brexit negotiator Barnier said that it was a "constructive week" but progress achieved was limited, and that could take months to progress to the next phase. Tonight, the UK will finally release some local data, including Q2 GDP revisions and money figures for August. The tone for the GBP remains positive, with immediate resistance at the 1.3460 level which if broken on positive UK data tonight would target an extension to the 1.3510 level. Support is at the physiological 1.3400 level and then 1.3340. We favour the upside.


Europe
We have seen choppy trading over the week for the Euro after the German election. The EUR/USD has been consolidating in a range between 1.1804 and 1.1716 over the last 3 days, with rallies fading but although with higher lows, something not seen earlier this week, as month-end typically sees some profit taking and squaring up. Fundamentally there is little to support EUR upside in the short term, as traders look to see some action from the ECB, rather than just talk around timing of a reduction in their Quantitative Easing programme. German CPI will have little effect as there are only two states at or above the ECB’s 2% inflation target and ECB head Draghi confirmed that the ECB is not yet in a position to start cutting QE yet. Currently at 1.1780 immediate support for the EUR/USD is at 1.1765 with resistance at 1.1800 then 1.1850. The pair should consolidate around 1.1770/90 to end the week.


Japan
After a high of 113.25 on Wednesday the USD/JPY is back at 112.60 after mixed data for Japanese retail sales and industrial production yesterday. Japan August core consumer prices rose 0.7% y/y, marking an eighth consecutive month of yearly increases, according to Reuters. Retail sales increased 1.7% last month compared with the previous year, missing a median estimate for a 2.6% rise. Industrial production data, however, beat forecasts. August figures showed an increase of 2.1% compared with the previous month, above the 1.9% median forecast. The election race has kicked off, but the consensus is that current PM Abe should be returned for another term. Investors are more likely to focus on the fact that BOJ's call for more easing to stimulate domestic demand to counter the impact of the consumption tax hike scheduled in October 2019. This continues place the JPY in the crosshairs in the current rising global rate environment. Immediate support is at 112.25 with resistance at 112.90. We expect these ranges to hold to close the week tonight.


Canada
Comments from the BoC Governor on Wednesday struck a sobering tone listing a range of uncertainties casting shadows on the economic outlook. This poured cold water on market expectations for a relatively aggressive tightening path that had been pricing at least one 0.25% hike before year-end and another by March 2018. The USD/CAD ranged higher after these comments to 1.2517, it has since dropped back to trade around 1.2442 helped by the softer USD tone overnight. Immediate resistance is at 1.2520 with support back at 1.2415.


 
 

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

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

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


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


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


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


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


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


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

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


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

Economies of Note - 22th September 2017

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

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


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


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


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


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


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


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

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

 
 

Economies of Note - 15th September 2017

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

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


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


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


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


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


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

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

 
 

FX Update: NZD remains subdued ahead of the election

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

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


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

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


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


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


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


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


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


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

Economies of Note - 8th September 2017

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

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

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


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


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


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


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


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

 
 

FX Update: What a difference a day makes

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

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


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

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


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

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


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


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


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


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

 
 

Economies of Note - 1st September 2017

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

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

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


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


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


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


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


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

 
 

FX Update: North Korean missiles fly over Japan!

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

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


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


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


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

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


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

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


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


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

 
 

Economies of Note - 25th August 2017

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

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


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


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


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


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


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


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