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Economies of Note - 10th March 2017

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

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

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

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

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

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

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