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FX Update : US employment data in focus, Brexit headlines dent the GBP

Written by Sam Coxhead on October 4th, 2016.      0 comments

2:51PM (NZT)
Headlines out of the UK at the weekend have sent the GBP to within a whisker of its Brexit vote lows against the greenback in trade this week. The move comes as UK PM Theresa May indicated that the British government will look to invoke Article 50 of the Lisbon Treaty by March next year, and spoke of a strong stance on immigration in the coming EU talks. Tightened immigration control looks likely to invoke a strong counter response from the EU in regards to UK access to the single market, and hence it appears that the UK is on course for a ‘hard’ Brexit. In the US focus will be on Friday’s September Nonfarm payrolls release where economists expect 178k jobs to be created. Unemployment looks set to remain at 4.9%, although look to the wage reading for important information on inflation and interest rates.
Last week was a particularly quiet week for domestic events and this saw the AUD drift for much of the week. Some gains against the USD were seen after the OPEC oil production agreement, although they proved fleeting. Data releases of note came on Friday with HIA New Homes Sales for September and private sector credit data for July. New Home Sales rebounded strongly from the previous month’s falls largely thanks to the strong sales of ‘multi-unit’ housing. The credit data showed a further deceleration in part thanks to a continued slowdown in credit lent to property investors. Job vacancies which rose solidly in the three months to August are consistent with the recent message of solid jobs growth. In focus this week is today’s building approvals numbers and RBA interest rate statement (expect no change). Data from the retail sector comes tomorrow prior to trade data for August on Thursday.
New Zealand
The New Zealand dollar has continued to remain range-bound in recent trade against the greenback ahead of what looks to be a more interesting week this week, with key employment data due in the US on Friday. Last week locally saw the release of August trade numbers which fell short of expectations ($500M worse than expected) and new dwelling building consents which fell 1% m/m, although home permits were more reflective of the current housing shortage, rising by 4.4%. ANZ business confidence numbers rose strongly in the latest month to 27.9, the jump was more than expected and was led by confidence in the service sector. NZIER business confidence data this morning showed a net 26% of businesses expecting conditions to improve, the strongest reading in over three years. In focus locally for the remainder of this week will be a speech by current RBNZ Governor Wheeler this afternoon and the overnight GDT dairy auction, where current futures pricing points to a flat/small drop. FINISH
United States
This week has started positively for the dollar after the release of a better than expected ISM manufacturing report overnight. Particular strength was noted in new orders, and to a lesser extent production. Key data last week included a smaller than expected fall in new home sales and consumer confidence that reached nine year highs. Jobless claims were seen remaining low and durable goods orders were stronger than expected. Home prices continued to experience modest price growth and the latest good trade deficit was smaller than expected. The University of Michigan consumer confidence read come in above expectations whilst 79% of respondents to the Chicago PMI noted a negligible impact on business from the presidential election so far. Various Fed speakers were on the Fed circuit although theirs and Fed Chair Yellen’s comments offered little new, namely a majority that calls for a gradual increase in rates given the current environment. This week will be busy for data, particularly so towards the end of the week with key Non-farm payrolls employment due on Friday.
United Kingdom
The Sterling was in focus in trade overnight on the back headlines from PM Theresa May (out over the weekend) that the government would look to trigger Article 50 by the end of March next year. May’s call for preparatory talks on the Brexit before the formal resignation date was rejected by the European Commission. May suggested that there would be no deal on immigration to keep the UK in the European single market. Data released last week was second tier and included BBA mortgage approvals which printed near the consensus and further mortgage approvals data which showed lender approvals near two-year lows. Growth for the second quarter was revised up slightly from its previous estimate and marked the 14th consecutive quarter of expansion. This week has started with the September Manufacturing PMI which came in well above expectations (the highest since mid-2014).  This ranks higher than its corresponding European or US reads, although the data was overlooked in favour of the prevailing bearish Brexit sentiment. Focus for the remainder of the week will be on the remaining PMI reads and industrial/manufacturing production numbers on Friday.
It was a quiet week for the Euro last week which saw volatility suffer due to a lack of critical incoming economic data. Data started with the German IFO which saw business conditions rise to its highest level since May 2014. Overall economic confidence across the euro area rose to an eight month high, whilst German inflation at 0.5% y/y was at 16-month highs. Unemployment was seen edging higher across the euro-zone (10.1%) and core inflation remained flat at 0.8% y/y, well below the near 2% ECB target. Indicators this week have started with the German and euro area manufacturing PMI reads which both remained unchanged in expansion territory. Key regional prints were seen outperforming their consensus target although remain at lower levels overall. Focus for later in the week will be on the composite and services PMI reads, regional industrial production numbers and German factory order data.
Key data out of Japan last week included a raft of numbers that were released on Friday. The data was led by the latest inflation numbers which saw the key national ex-food & energy release print in line with its weak estimate at +0.2% y/y, well below the 2% BoJ target. The preliminary reading of industrial production for August came in higher than expectations at 4.6%, above that seen in the same month last year. Other releases included household spending and numbers from the retail sector which disappointed, whilst the unemployment rate which edged higher to 3.1% was also worse than expected (exp. flat at 3.0%). Yesterday’s Tankan Manufacturing index indicated that large manufacturers were more downbeat than expected about their business conditions over the last quarter. Confidence amongst these manufacturers was flat in Q3 whilst sentiment amongst the service sector respondents was seen falling to its lowest level in nearly two years. Look for a quiet week this week that will be dominated by US data and risk/safety flow in the Yen (should global equities decline sharply).
Trade last week was defined by positive developments in the energy markets which saw the CAD gain after the OPEC producers surprisingly agreed to limit production at their meeting in Algeria. Forecasts of another year of depressed prices in 2017 and excess supply is said to have swayed Saudi Arabia towards reaching for a deal in light of its huge budget deficits currently being experienced. Canadian data releases came on Friday and included a better than expected rise in GDP for July. The 0.5% gain came on the back of last month’s similar sized increase and marked the best two months of growth since mid 2011, although much of the jump is likely related to the resumption of oil production after the Alberta wildfires. Industrial product prices fell in August in a result that was worse than expectations due to declines in pricing for meat, dairy and fish. Data this week included the overnight RBC Manufacturing PMI indicator which came in under expectations and trade data on Wednesday. Building permits feature on Thursday although the main release of the week will be Friday’s employment numbers (and Ivey PMI).