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Economies of Note - 18th March

Written by Ian Dobbs on March 18th, 2016.      0 comments

US events and a sharply lower USD have driven the AUD sharply higher this week. The majority of the move came yesterday following the US FOMC interest rate meeting. This saw the Fed leave rates on hold as expected by most, although the dovish report included a lowering of the anticipated 2016 rate hike path from four further hikes to two only. Expectations had been for one to be removed, and in recent weeks the market rate curve had priced ~ 80 bps (0.8%) less rate hikes during 2016 than that suggested by Fed in December. The continued commodities pricing rebound has been the other key story for the AUD this week, this as oil prices moved through the $40 level overnight (WTI) for the first time since early Dec 2015. Oil was a key contributor to the 2% gain in the CRB commodity price index overnight, although gold prices also had a sharp rally yesterday after the FOMC announcement. Local events of note out of Australia this week included the RBA minutes on Tuesday. These passed without any fanfare as the RBA focussed on the transition of domestic growth into more non-mining investment and said that a 2% cash rate was the appropriate rate setting to help facilitate this shift. Employment data for February released yesterday showed a labour market that remains relatively healthy as the unemployment rate continued to trend lower (5.8% vs. 6.0% exp.).

New Zealand
Offshore factors have continued to have a key influence over the NZD towards the latter part of this week. These influences are seeing the NZD/USD finishing the week at levels last seen at the end of 2015. The main kicker for the strong rally has been the sharp selloff seen in the USD since yesterday’s US FOMC meeting. This saw the Fed leave rates unchanged (as expected by most) and lower their “dot plot” of rate forecasts to two in 2016 from the four suggested in December. Over recent weeks the market had consistently priced a lower rate path for 2016 than that anticipated by the Fed, although had expected only one hike to be removed at this week’s meeting. Downside risks to the global growth outlook were cited as a key reason behind the move. The NZD has also been the recipient of buying interest this week on the back of continued move higher seen in commodity currencies. Local events of interest this week included Wednesday morning’s GDT dairy auction. This provided yet another disappointment after prices fell 2.9% overall. Current account data released later in the day was marginally better than expected although once again it failed to garner any real interest. The NZ GDP report was the other key data release of note. This came in better than expectations for the fourth quarter yesterday. Strength in construction related investment was seen helping the result. Expect offshore events to dominate next week with the only local data of note being the low ranking February trade numbers due for release on Thursday.
United States
Trade in the USD this week was dominated by yesterday’s FOMC interest rate announcement. This saw the USD decline sharply after the Fed shifted their suggested path for interest rate hikes in 2016 lower, reducing their anticipated rate hikes from four to two. The risks posed by the recent global economic developments was a key driver behind the move, these risks had already led the market to price in a much lower path for interest rates in 2016 than that anticipated by the Fed. The Fed reduced its forecast for inflation and growth this year, 2017 growth estimates were also revised lower. Key data releases out of the US this week included retail sales (Feb) which disappointed after the key control number missed the forecast, the data also included a downwards revision to January’s number. The core producer price data continued to improve, whilst the NY Empire manufacturing index came in stronger than that expected. The latest inflation read came in higher than that expected as the core annual number rose to 2.3%, the highest number since May 2012. The data suggests an inflation rate that should return towards trend given the now improving oil prices. Other numbers of lesser interest included industrial production that came in lower than expectations, a miss in building permits and better than expected housing starts data. Tonight’s calendar will be dominated by speeches from various Fed members and March Michigan confidence numbers.

United Kingdom
The early declines seen by the GBP have reversed sharply in trade this week. The strong rebound has occurred on the back of a shift lower in the USD after yesterday’s more dovish than expected US FOMC interest rate meeting which saw the Fed lower their suggested interest rate path for 2016. The overnight BoE interest rate meeting added another kick to sentiment for the GBP, this came after the UK central bank stood strong in its view that the next move in interest rates would be up. Rates and the asset purchase target were left unchanged as expected. The recent volatility in global financial markets had many in the market thinking that the BoE may look to ease further over the months ahead. Earlier in the week saw the presentation of a mildly expansionary UK budget which included a reduction in the effective tax rate faced by individuals and corporates and an increase in government borrowing out to 2019/20. Labour market data (Feb.) released during the week was slightly better than expected and was backed by a larger than expected decline in jobless claims and better than expected average earnings. Inflation and retail sales are the key UK releases due next week.

The EUR reversed its early losses in trade this week. The move came yesterday after the US FOMC interest rate announcement which saw the USD shift lower as the market reacted to the Fed’s revised more dovish than expected 2016 forward interest rate path. The Fed reduced their anticipated hikes from four to two (1% to 0.5%), one more reduction than that which had been expected by the market. Downgrades to US inflation and growth forecasts were also given after the Fed was seen leaving current interest rates on hold. Data out of the euro-zone has been light this week with the only data points of note being an uptick in euro-zone employment and the final read of euro-zone inflation which printed 1/10th above expectations. Comments from ECB president Draghi overnight included one which said he sees rates at current or lower levels for an extended period. The comments failed to make any material impact on the EUR/USD which currently sits ~1.5% higher on the week and over 2.25% higher than yesterday’s lows. Expect a busier upcoming week for data. Releases include various PMI (purchasing managers’ index) reads and ZEW confidence data.

Trade in the JPY this week has been dominated by the aftermath of yesterday’s US FOMC interest rate meeting. This has seen the JPY rally on the back of broad USD sell-off after the Fed moved their 2016 anticipated interest rate path lower, and thus bringing their projections closer to that which had been already anticipated by the market this year. The key event out of Japan this week was the conclusion of the BOJ monetary policy meeting on Tuesday. This saw the BOJ keep their stimulus steady by maintaining their commitment to raise the monetary base by 80 trillion yen annually. Interest rates charged to commercial banks (on certain reserves) were left unchanged at 0.1%. Economists now expect further stimulus in July. It was widely anticipated by the market that the BOJ would pause this week to give them more time to assess the impact of their negative interest rate policy which had only been in effect for a month. Data out of Japan this week included core machinery numbers on Monday which exceeded expectations. The industrial production figures (Feb) matched consensus forecasts whilst the Tertiary industry activity index (an indicator of domestic activity) beat forecasts. Out of Japan next week we look forward to inflation data, today’s BOJ minutes will also be of interest.

The CAD has resumed its surge during trade this week after yesterday’s more dovish than expected US FOMC interest rate meeting. This saw the USD decline across the board after the Fed lowered their expectations for the number of further rate hikes in 2016. Global economic developments were seen as a primary reason behind the move, a risk that had seen the market move to discount the number of hikes expected this year from that suggested by the Fed in December. Canadian data of note this week is slated for release tonight. The inflation and retail sales numbers will be closely watched, although expect them to again take a back seat to news emerging from the energy markets. Oil prices have once again rallied strongly in recent hours helped by yesterday’s dovish US Fed which sent the USD tumbling (and hence USD$ priced commodities rallying) and news that OPEC and Russia will push ahead with a meeting in April to discuss a production freeze with or without Iran. A quiet week on the Canadian economic calendar next week will again mean that pricing is dictated by oil news and the sentiment shown towards the USD.