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Economies of Note - 11th March

Written by Ian Dobbs on March 11th, 2016.      0 comments

The AUD remains on track for a solid showing this week which has been helped by the strong commodities gains seen at the start of the week. The gains have led to continued solid demand for the key commodity producing nation currencies like the AUD (and CAD). The light local event calendar ensured that risk sentiment and commodity prices were the key drivers for the AUD during the week. Data of interest included a decline in ANZ job ads on Monday, solid NAB business confidence numbers, and a drop in both the Westpac consumer sentiment and latest home loans data. Comments from the RBA’s Lowe struck some similar notes to those of NZ’s Governor Wheeler yesterday. The tone however, was much more relaxed over the outlook for the local economy. Deputy Lowe noted the scope for easing monetary policy, the wish for a lower currency and the risks posed to the local economy from offshore. The positive economic effects of lower interest rates and a lower currency were noted against the backdrop of a sharp decline in commodity prices and mining investment. Looking forward to next week key events to watch include the February employment data release on Thursday and minutes from the recent RBA meeting on Tuesday.

New Zealand
Yesterday’s RBNZ central bank monetary policy meeting has dominated the local event calendar this week. In a move that came as a surprise to nearly all in the market, the RBNZ cut interest rates to 2.25% (from 2.5%), citing the deterioration in outlook for global growth since the December MPS due to weaker growth in China, Europe and the emerging markets. The Governor noted the current difficulties that are being faced by the dairy sector, the moderating house price growth seen in Auckland and current low headline inflation and inflation expectations. The latter is seen as posing a real risk to consumer and business behaviour. Further reductions in the cash rate were seen as being possible to ensure the returning of inflation to the middle of the RBNZ’s target range. The move capped off a poor week for the NZD which had already eased earlier in the week. This was on the back of ‘risk off’ selling after weaker than expected trade figures out of China and after a downgrade of Fonterra’s latest milk price forecast, which came in at the bottom end of analyst expectations. From here interest will turn next week to the next auction in the GDT dairy schedule, and the NZ Q4 GDP and current account data.
United States
The USD has fallen sharply this week. This has largely been a result of the sharp overnight rally seen in the EUR following the ECB meeting. ECB President Draghi indicated that further cuts to the deposit rate were unlikely. Further pressure has come from the solid gains applied by the commodity currencies after the recent strong rally seen in commodity pricing. Data out of the US has been light during the week. Releases have included an unexpected rise in wholesale inventories, a pointer to probable headwinds in the manufacturing sector. Initial jobless claims data released overnight fell from 277k to 259k for the week to 5th March, continuing claims for the week prior also declined. The data suggests continued positive momentum in the US labour market. Expect a busier week next week. Data scheduled for release includes retail sales and inflation numbers and the FOMC interest rate meeting (Thursday morning NZ time).

United Kingdom
The GBP has edged higher against the USD this week. Much of the gains have occurred in overnight trade after the GBP was pulled higher by a sharply stronger EUR, which rallied after the ECB Q&A session. Earlier in the week it was the turn of BoE Governor Carney to speak on the subject of the upcoming UK referendum on EU membership. The speech focussed on the short term impact of a British exit and on the areas impacted such as inflation, foreign investment and financial stability amongst others. The central bank indicated that it would offer unlimited funds to commercial banks until the 8th of December in order to offset the threat of bank runs and risks to the funding markets. Data released during the week included industrial production numbers which rose less than expected on the back of a drag in energy and mining. Better than expected manufacturing numbers in the release boosted the result. The earlier release of the BRC retail sales monitor was underwhelming, but failed to make any impact. Looking out to next week we look forward to UK employment data on Wednesday and the BoE interest rate meeting on Thursday (UK time).

Trade in the EUR this week has been dominated by the overnight meeting of the ECB. The resulting policy decision brought about a sharp rise in volatility in the ensuing hours since the release. Initially the EUR fell sharply after the meeting on the back of an easing in policy which was larger than expected after the ECB cut the deposit rate by 10 bps (to -0.4%) and expanded their monthly asset purchase program by EUR 20bn to 80bn. Comments from President Draghi at the Q&A session afterwards saw the EUR rally sharply after he indicated that the ECB would not need to cut rates further with any further easing likely to come from other unconventional policy tools. Data releases earlier in the week included German factory orders and industrial production numbers which printed higher than the consensus forecasts. The second estimate of the euro-zone Q4 GDP showed a slowing in household spending growth, and an uptick in domestic demand which was led by government spending.

Trade in the JPY has remained well contained against the USD throughout the course of this week. Relative stability in global equities was notable during the week which has had the effect of reducing the amount of risk and safe haven flow in the JPY. Data out of Japan included a marginally better than expected final read of Japanese Q4 growth. The numbers show momentum is relatively weak and that more stimuli will likely be required, although comments from an Abe advisor yesterday eluded that such as easing is unlikely to come at next week’s central bank meeting. Consumer confidence numbers fell well short of expectations, this also points to muted economic growth and a consumer which is reluctant to spend. Data which shows higher savings amongst Japanese consumers points to a lack of impact from the latest stimulus package. Machine tool orders data which declined from the prior read failed to make any impact. Next week’s event calendar will be dominated by Tuesday’s BOJ meeting; industrial production data will follow in Wednesday.

The CAD has endured a week of consolidation against the USD this week. Oil market news has again been a key driver over the week. Pricing weakened in the middle of the week on the back of reports that Iran had yet to commit to attend a meeting slated for later in the month between the OPEC and non-OPEC oil producers. Prices have advanced over the course of the week however and sit significantly above their recent February lows as speculation continues that a plan to freeze output levels can be cemented at the meeting on March 20th. The central bank monetary policy meeting was the other highlight of the week in Canada, this saw the BoC leave rates on hold at 0.5% as expected. The tone of the statement was more upbeat than expected by many and noted a balanced outlook for inflation and a global economy that was progressed largely as expected at the previous meeting. Economic data releases included a sharp fall in the latest building permits numbers, housing starts data which exceeded forecasts, and a marginal miss in the new house price index. Key employment data is awaited tonight.