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Economies of Note - 17th March 2017

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

The Australian dollar rallied after the US Fed rate move yesterday, climbing back over the old 0.7700 resistance level to a 3 week high of 0.7717. These levels were short lived however after the release of disappointing Australian February employment data. Employment fell by 6,400 since January against an expected increase of 16,000, with the unemployment rate climbing to 5.9% the highest level since January 2016 against forecasts of 5.7%. The AUD was immediately sold down, failing back to below 0.7700 to 0.7678. Statistics show a split economy, Melbourne and Sydney property prices are booming, spurring housing construction and attracting people from other states, while local governments are investing in infrastructure. In the west and north where a mining investment boom is unwinding, property prices are falling, businesses are failing and people are leaving. Internal migration is the main factor containing unemployment in Western Australia and Queensland. The RBA will be concerned that yesterday’s jobs figure does not become a trend, as this could prompt another rate cut by the RBA especially if concerns around financial stability ease.

New Zealand
The Q4 GDP figure released yesterday was disappointing coming in at 0.4% for the December quarter, below market estimations of 0.7% and the Reserve Bank MPS forecast of 1%. Adding to the softer tone was the revision of Q3 growth down to 0.8% from the earlier 1.1% giving an overall weaker annual growth rate of 2.7%. This should give a softer start to Q1 GDP growth and less pressure on domestic inflation than forecast in the February MPS, adding more credence to the central bank keeping interest rates on hold for a longer period.  However despite this weaker result, the economy remains supported by strong tourism demand, high levels of immigration, construction activity, robust business confidence and continued healthy household demand. The New Zealand dollar dropped around from USD 0.7037 to 0.6992 after the release but then bounced back to the 0.7010/15 level fairly quickly. It has opened this morning around 0.6980 and looks to have found some support. Next major support is back at the old 0.6880/90 level. However if the NZD can consolidate around current levels a move back over 0.7010/20 is possible next week.

United States
As widely expected the Fed hiked rates by 0.25% to a range of 0.75%-1% at their meeting on Wednesday night. They commented that the labour market has continued to strengthen, economic activity continued to expand at a moderate pace, job gains remained solid and the unemployment rate was little changed in recent months. These factors have given rise to inflation increasing closer to the Fed’s 2% long run target objective and thus it felt that a gradual increase in rates was applicable. The comments from the Fed that rate increases would not be accelerated but “gradual” was taken by markets to rule out speculation that a fourth rate hike maybe on the cards before year end, with only another two rate moves now expected, potentially in June/July and December. This saw US equity markets rally, the S&P 500 up 0.84% and the Dow up over 0.5%. On currency markets it was very much a “buy the rumour-sell the fact” with the USD sold off against all its major partners. US equity markets were lower overnight as investors reflected upon the Feds comments after yesterday’s rate hike and decided that markets maybe a little over extended and looked to take some profit off the table. The USD remained soft overnight both against the JPY and EUR, as the BoJ left rates on hold and an ECB official commented that a deposit rate hike may not be far away. Also released overnight were some details of the 2018 Trump budget, which proposes deep cuts across a wide range of federal agencies and spending programmes, switching priorities to defence and security spending. It is expected that this will require significant modification to pass through Congress and the Senate.
United Kingdom
Brexit issues still rumble on, but with the Bill about to gain Royal consent, an announcement triggering Article 50 expected in the last week of March. Attention was focused back on the UK Budget and in particular the Chancellor Philip Hammond who is now fighting to save his career after being forced into the most humiliating U-turn in a generation. This is after PM Theresa May scrapped the Chancellor’s headline budget policy - a hike in National Insurance contributions for the self-employed – and a revolt by backbenchers over what amounted to a broken party manifesto pledge.  These issues along with the potential for another divisive Scottish referendum have unsettled the GBP which hit an 8 week low against the USD at 1.2109 earlier this week. However it rebounded on the Fed statement back to the 1.2307 level also boosted by better employment figures, showing the jobless rate fell to 4.7% for the 3 months to January, the lowest level since 2005, however this was somewhat tempered by slower wages growth. Even though weaker wages together with rising inflation are a worrisome mixture that policymakers cannot ignore for long, as expected the Bank of England at its policy meeting yesterday left rates on hold at 0.25%. However what was interesting was that the decision was split with one of the members voting for a rate increase. This dissent overnight saw the GBP rally further against the USD spiking to 1.2356, the highest level in two weeks. There is a risk that these gains may be unable to be sustained as a trigger of Brexit, Article 50 next week would initial see a GBP sell-off.

Political risk reduced a little for the Eurozone as the results of Wednesday’s Netherlands election. It showed that voters rejected the far-right party of Geert Wilders who was soundly beaten by the incumbent centre-right Dutch PM , Mark Rutte , whose VVD Party was on track to becoming the largest party in the Netherlands 150- seat parliament with 32 seats. Interestingly turnout was at 81% the highest level in 30 years. Attention will now shift to next month's upcoming French elections. The EUR was higher after the Fed statement, rallying to a high of 1.0745. It has held onto these gains overnight, helped by comments from an ECB official that a deposit rate hike was coming (we think unlikely in the short term). Final February inflation data for the Eurozone was released confirming an increase at 2% for the month compared with 1.8% for January The EUR is currently at 1.0765 and should consolidate at current levels to end the week. support is at 1.0720 resistance 1.0790 .

The US dollar collapsed from a session high of 114.48 after the somewhat dovish outlook by the Fed on Wednesday, falling to a low 113.15, and with the short term momentum indicators now pointing lower it would seem that further downside could lie ahead. Ground-hog day again as the Bank of Japan kept interest rates unchanged and maintained 10-year JGB yield target around zero percent, thus leaving the USD/JPY pair flat lining around 113.35 levels. The central bank kept its assessment of the economy unchanged as well. With BoJ Governor Kuroda commenting that an uptick in inflation towards 1% won't immediately trigger an interest rate hike, indicating that the Central Bank has no plans to modify the monetary status quo, and that the economy still needs massive stimulus to fight deflation. The USD/ JPY is currently trading around 113.30 and with the USD upward momentum cycle broken for now,  look for a test of immediate support at 112.90 over the next day or so.

Choppy week for the USD/CAD , ranging between 1.3494-1.3275 on the US Fed decision and slide in oil prices which knocked the CAD lower. An uptick in Canadian 10 year  bond yields  has failed to lend any support to a recovery.
Currently trading around 1.3315 the USD/CAD looks to have next support around 1.3165, but we expect consolidation at current levels to close the week. Next week we have retail sales and inflation data to digest.