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Economies of Note - 22nd January

Written by Ian Dobbs on January 22nd, 2016.      0 comments

The AUD has had a volatile week’s trade based on the continued linked themes of changing global risk sentiment, Chinese growth concerns and commodity price/currency volatility. The local data calendar was light, but included a decline in Westpac consumer sentiment (Jan.) and HIA new home sales. New motor vehicle sales also fell moderately in December but the local data events took a back seat to developments offshore. This saw the AUD come under pressure mid-week as commodity currency selling continued to take its lead from declining oil prices. Headlines which showed that Chinese GDP growth had slowed to the weakest in 25 years (6.8% in 2015) contributed to the selling, although in reality the GDP and industrial production data for the latest quarter only marginally failed to meet the market’s expectations. The AUD is finishing the week on a strong note currently as market sentiment and oil prices improved overnight. Next week’s Australian data calendar will be dominated by the Q4 inflation release on Wednesday.

New Zealand
It has been another week of messy and volatile trade for the NZD this week. the price action led by the continued volatility in offshore equities, commodity price swings and to a lesser extent weak key local data releases. The domestic data calendar was dominated by the Q4 inflation print on Wednesday which showed the cost of living rising at its slowest pace since the late 1990s. The 0.5% decline in the final three months of 2015 was the largest quarterly fall since 2008 and was both well below the market and RBNZ’s expectations. The decline was led by falls in the price of petrol and food.  The fall brought the annual rate to just 0.1%, well below the RBNZ’s 1-3% target band mandate. This will increase pressure on the RBNZ to consider additional rate cuts, although current expectations for the next week’s meeting are for it to be held at the present 2.5%. The latest GDT dairy auction earlier in the day showed another small decline of 1.4% and backs up the 1.6% fall seen previously. The week has ended on a strong note however, helped by an improvement in offshore equity markets and lifting commodity currencies, solid local activity trend data released yesterday also helped the tone of trading.

United States
It has been another turbulent week for the USD which saw volatility in the USD index (DXY) gather pace during the week, especially so in trade overnight. The busy data calendar was dominated by the December inflation report on Thursday morning which gave evidence of an improvement in core inflation pressures in the U.S. economy after it posted a 2.1% annual gain, although the falling oil prices weighed on the headline number. Housing data released at the same time showed an easing in starts and permits from November’s strong prints. Data overnight included a better than expected Philly Fed survey result (-3.5), which came on the back of five previous negative results. Also initial jobless claims for the week to 16 January deteriorated to their worst level in six months. Despite recent comments from Fed officials who seem relaxed over the monetary policy implications of the recent financial and commodity market turmoil, the market remains concerned over their impact on the likelihood of future Fed rate hikes. Manufacturing and home sales data are due for release tomorrow morning, next week sees the release of various regional manufacturing surveys, GDP and durable goods data and the key employment cost index amongst others.

United Kingdom
The GBP has continued to fall against the USD this week, although a sharp late rally in the Euro. This couple with improvement in the prevailing market risk sentiment has seen it lift significantly from its lows in trade overnight. Losses early in the week accelerated on the back of a dovish speech from the BOE Governor Carney which highlighted the weakness in domestic inflation and slowing in wages growth. Carney said these when combined with the downside risks to the outlook meant that now is not the time to be raising interest rates. The comments echoed last week’s MPC minutes and had the market further pushing out the timing of BOE interest rate hikes. The comments overshadowed the earlier slightly better than expected U.K. inflation data. U.K. labour market data released the next day showed a continuation in the solid gains seen recently, although once again earnings growth remained soft. Falling unemployment and a high participation rate (the highest on record) are positives and should add to core inflation pressures going forward. U.K. retail sales data tonight forms the main focus for today; key data next week includes the Q4 GDP release on Thursday.

A quiet European data calendar meant trade in the Euro would largely be dominated by the overnight ECB meeting this week. This was indeed the case overnight as a large part of the EUR/USD range was seen after it initially plunged on the back of President Draghi flagging the potential for further easing at the next meeting in March. The deteriorating inflation back-drop dominated the central bank’s concerns, although the Euro recovered later in the session on the back of a weaker USD. Investors are also likely to more cautious given the disappointment over the easing measures announced at the recent December ECB meeting. Data earlier in the week included a better than expected German ZEW confidence reading, although the euro area read failed to meet the market’s expectations. The final read of the euro-area inflation (Dec.) was left unchanged (0.2% y/y). Manufacturing and Services PMI data releases will feature tonight; next week’s releases include German IFO business climate and euro-area inflation and confidence releases.

Safe haven flow and risk sentiment have again been the primary driver of the USD/JPY exchange rate this week. The JPY rallied well into the middle of the week on safe haven demand as global equities continued their recent sharp declines. This was in part on the back of Chinese data released on Tuesday which showed annual growth slipping to 6.8% in Q4. Extremely bearish commodity market sentiment led by plunging oil prices once again contributed to the markets unease. The JPY fell from its highs against the USD in part on the back of comments from Japanese government officials over the exchange rate which had the market re-assessing the degree of its recent gains. Comments in an article in the Wall Street Journal from a close PM Abe aide indicated that current conditions are ripe for more BOJ easing. Local data took a back seat to the prevailing risk sentiment but included a small decline in capacity utilization and 0.9% fall in industrial production. Next week will see the release of Japanese trade, unemployment, industrial production, retail sales and inflation data. All are likely to take a back seat to the prevailing market ‘risk’ sentiment at the time.

It has been another very busy week for the CAD this week. It finally saw gain it some reprieve against the USD after the heavy selling of recent weeks took it to lows last seen in April 2003. Gains of some 2.7% from the lows began after BOC Governor Poloz sounded relatively optimistic during comments at the BOC interest rate meeting. Rates were left unchanged (0.5%) at the meeting. Although Poloz said he was encouraged by the economy’s resilience and that “most of the oil shock was built into their October forecast”, he added that the weaker CAD would aid growth. The less dovish, CAD positive comments were helped by the release earlier in the day of better than expected wholesale and manufacturing sales data. The CAD is trading near its weekly highs in present trade and was bolstered in overnight trade after the price of crude rallied sharply from 12 year lows on short (sold position) covering. This occurred as global equities rallied on the back of comments from the ECB president Draghi that indicated the potential for further easing at the next ECB meeting in March. Investor focus for the CAD will now turn to the local inflation and retail sales data tomorrow morning although the energy market developments will likely continue to dominate.