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Economies of Note - 15th January

Written by Ian Dobbs on January 15th, 2016.      0 comments

The focus for the AUD this week remained on offshore events and particularly developments in China and key commodity pricing. It has been another week which has seen heightened volatility and significant declines on the Chinese and global equity market bourses. The resultant spike in risk aversion and commodity price declines (which have seen the CRB index plumb fresh 14 year lows) saw the AUD trade heavily over the course of the week. The only instances of respite were in overnight trade on the back of consolidating offshore equity markets, and mid week after the release of better than expected Chinese trade data. Australian employment data for December released yesterday marginally beat the market consensus as the unemployment rate remained unchanged (5.8%) and the loss of jobs at only 1k both topped the markets expectations. Today will see the release of local home loan data, before tonight’s busy U.S. data schedule. Next week’s local data calendar is quiet which will mean AUD sentiment is again particularly vulnerable to swings in offshore investor risk sentiment and data flow.

New Zealand
The poor start already seen in 2016 for the NZD continued this week.  Against the USD it fell to lows not seen since early October last year, putting its peak losses since the post Xmas highs at over 7%. Nervous financial markets with a high focus on developments in China have continued to plague investor thinking over the course of the week. The rise in risk aversion seen on the back of the weakness in the Chinese equity and currency markets saw the CRB commodity index plumb fresh 14 year lows during the week. Local data took a back seat to the emerging offshore developments, but included a miss in the November building consents data and a decline in the latest ANZ commodity price index, which fell on the back of weak dairy export pricing. The release of better than expected Chinese trade data on Wednesday, which saw exports decline much less than the markets expectations, gave traders an opportunity to sell the NZD/USD ahead of the key .6600 level. U.S. data tonight forms the immediate focus for the markets today, while next week sees the release of local inflation data and the next GDT dairy auction.
United States
The USD has broadly firmed during the course of this week. This is largely from flows out of ‘risk’ currencies, which typically seek the safety of the USD (or JPY) during periods of heightened market volatility, like those experienced so far in 2016. Friday’s solid employment report must also be seen as a contributing factor. The strength of which, was noted overnight by voting FOMC member Bullard in his speech on oil pricing, inflation and U.S. monetary policy. Bullard noted the ‘net’ positive effects of the lower oil price on the U.S. economy, but also expressed his view that he didn’t expect the USD to rise further with the markets already having priced in the divergence in global monetary policies. Data flow during the week included a rise in U.S. JOLTs job openings and decline in NFIB small business optimism. The higher impact data will feature tonight however, and includes amongst others, the retail sales and industrial production releases. It is a relatively busy data schedule next week which will be dominated by the inflation data on Thursday morning.

United Kingdom
The GBP continued to move lower this week extending last week’s losses as the market focussed on a soft inflationary outlook and a large miss in the U.K. manufacturing and industrial production (IP) data early in the week. The decline seen in the IP data reflected a weak energy sector and reduced energy demand, a factor not helped by the recent warm weather. Manufacturing production shrank in November and sits at levels some 1.2% lower than a year ago. The U.K. central bank meeting overnight saw the BOE leave rates unchanged, the member vote was also unchanged as expected. The BOE noted; the market volatility underscoring downside risks to growth, the restraining effect of the earlier GBP strength, and the weakness in wages growth relative to the strong recovery in employment and declining unemployment rate. Next week’s calendar is dominated by the U.K. inflation and an employment data releases, the week is rounded out with retail sales data on Friday.

Trade in the Euro has been somewhat muted this week when viewed against the back-drop of the sharp moves seen in international equity markets and the commodity/risk currencies. The data calendar was light, but included a rise in French inflation and decline in euro-zone industrial production. The latter following last week’s soft German and French prints. The overnight release of the minutes of the December 3rd ECB meeting included reasoning that the small 10 bps cut in the deposit facility rate would give additional room for reductions should the need arise. This helped to place some pressure on the EUR during the session. The coming week is dominated by the ECB meeting on Friday morning and inflation data starting with the Spanish and Italian prints tonight.

Trade in the JPY this week has again been dominated by swings in risk sentiment and safe haven demand. This plays out as international markets grapple with the poor sentiment experienced since the meltdown in Chinese equities began last week. Concerns over Chinese growth and a stronger U.S. dollar have helped place severe pressure on the oil price in 2015/16. Oil price weakness has been a major contributor to the weak inflationary environment seen in Japan during 2015. BOJ Governor Kuroda this week said in a speech that the central bank was ready to take all steps necessary to achieve its 2% inflation target amid the heightened equity market volatility. This raised expectations that the central bank may implement additional stimulus measures later this month in response which placed some pressure on the Yen. Local data included a sharp decline in machinery tool orders for December and a decline in the latest (Nov.) current account surplus from the month prior. Next week’s Japanese data includes industrial production and capacity utilization data on Monday, the Reuters Tankan confidence survey on Wednesday and manufacturing PMI data on Friday.