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Economies of Note - 20th May

Written by Ian Dobbs on May 20th, 2016.      0 comments

Trade in the AUD, like most of the majors covered, has been driven by the stronger USD sentiment this week. This has seen it reach lows not seen since early March under .7200 on the back of the USD gains. These gains came as the market reacted to a more hawkish Fed, which pointed to the real possibility of a June rate hike providing the data in coming weeks met their objectives on growth, labour market conditions and inflation. Key data out of Australia this week started with the release of the RBA minutes which hinted that May’s rate cut was a tighter call than the market had ascertained. This saw the AUD rally notably on Tuesday. Poor April new motor vehicle sales numbers passed unnoticed, whilst the Q1 wage price index met a similar fate after it marginally underperformed. Key employment data released yesterday was largely in line with expectations, although the fall in full time employment was disappointing. Next week is shaping up to be a quiet one in Australia so again look to US events and commodity moves for influence.

New Zealand
The NZD has fallen in trade this week against the USD on the back of events that have seen the USD gain during the week. There was little on the local data calendar to ignite interest. Releases included the latest RBNZ Inflation Expectations survey which saw a moderate lift in 1 year expectations and marginal gain in the 2 year expectations. The latest GDT dairy auction gained 2.6% ,whilst the Q1 producer price data fell unexpectedly. ANZ consumer confidence numbers were seen declining from the month prior. Next week is set to be another quiet one locally next week with just trade data due on Wednesday.

United States
The USD has enjoyed a strong week this week on the back of supportive key data, overnight Fed member comments and most importantly on the release of yesterday’s FOMC minutes. The minutes to the April meeting noted that it would be appropriate to lift rates in June if growth picked up in the second quarter , if labour market conditions continued to strengthen and if inflation continued to progress towards the 2% objective. Market pricing on the odds of a June hike has lifted considerably over the week (now 28%) and the employment report for May (released June 3) now looms as critical for the decision given the lift in Q1 inflation seen this week. Also adding to momentum was the strong Atlanta Fed forecast for Q2 GDP (2.5% at May 17), which is much stronger than the 0.5% Q1 out-turn. Overnight comments from Fed members Dudley and Lacker continued to send a hawkish message on rates and expressed surprise at the recent degree of market underestimation on the Fed delivering up on further rate hikes this year. The comments echoed those earlier of others expressed in the FOMC minutes. Data releases this week (amongst others) included firm Q1 inflation and April industrial production, a rise in small business optimism, a sharp fall in the volatile NY Empire manufacturing survey, a weak Philly Fed manufacturing index, and building permits which missed the consensus target.

United Kingdom
The GBP has enjoyed a very strong week against the USD despite the positive sentiment that the USD has enjoyed this week. The lift comes largely on the back of various polls which continue to show a shift in respondents favouring the UK to remain in the EU. These polls included one that put those in favour of remaining at 55%, vs. 40% against. Data releases this week were dominated by the latest inflation, retail and employment numbers. The inflation number disappointed after rising 0.1%, a third of that expected as lower airfares, and clothing prices pressured the out-turn. The labour market data was better than expected as jobs rose 44k in the three months to March (flat exp.) and average earnings rose to 2.0% y/y, although the data still points to subdued wage inflation overall. Retail sales numbers for April released overnight were very strong as the headline number easily beat expectations and the March data was also revised higher. The data calendar is quiet in the UK for the next few days until the Q1 GDP release on Thursday.

The EUR has continued its May decline against the USD during trade this week. The move accelerated after the release of the US FOMC minutes which lifted the market’s expectations of a June US rate hike. Comments from Fed members and the key Q1 US inflation data have also bolstered the sentiment shown towards the USD. Minutes to April’s ECB meeting suggested more optimism over the euro-zone economy, although contained continued concern over inflation and the effect of low oil prices on wages and other pricing. The ECB’s Coeure said yesterday that the ECB does not currently have any plan to trim its deposit rate further, although that a cut remained a possibility “in principle”. Data releases over the week have been scant so far. The euro-zone April revised inflation data remained unchanged showing headline inflation at -0.2% y/y, whilst today we will have the low impact euro-zone current account for March. Expect next week to be busier however, as various PMI indicators and the ZEW survey of economic confidence are released. German IFO business climate numbers will also feature amongst other data set for release.

The JPY sits lower in trade against the USD this week. The move is a reflection of the positive sentiment that the USD has enjoyed this week after better than expected US inflation data and a more hawkish than expected set of US FOMC minutes. Data out of Japan this week started with soft producer prices numbers on Monday, better than expected industrial production data  followed on Tuesday, although both releases caused little stir. Key Q1 GDP data on Wednesday has dominated the week. Although the data, which was much better than expected, failed to make any impact against the stronger USD. Core machinery orders numbers released yesterday rebounded well from the month prior. Continue to expect USD events to drive next week during a week that starts in Japan with trade numbers for April on Monday and concludes with the more important  inflation prints on Friday.

The correction lower in the CAD against the USD which started at the beginning of the month has continued this week. The move comes in what has been a quiet week for Canadian data points so far and occurs despite the price oil again advancing over the week. The move lower can therefore be put down to the overall USD strength that has derived from  a more hawkish set of FOMC minutes and improved inflation outlook. Oil prices briefly declined after the minutes as the market moved to re-price the USD and forward US interest rate path. Sentiment remains positive as the market continues to focus on the supply outages, falling US oil production and lifting estimates of global demand. Data released in Canada this week so far has included manufacturing sales numbers which fell less than expected and a wholesale sales fall which exceeded the decline forecast. Canadian data focus ramps up today as the latest inflation and retail numbers are released, but expect attention to again quickly revert to the price of oil and the prevailing USD sentiment.