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Economies of Note - 22th September 2017

Written by Howard Wilcox on September 22nd, 2017.      0 comments

The big news for markets this week has been the Fed rate decision on Wednesday, which as expected left rates unchanged maintaining its target range at 1% to 1.25% and announcing that it would begin to withdraw some of the trillions of dollars it invested in the US economy after the 2008 GFC. The announcement reflected the Fed’s continued confidence in the economy growing, now in the 9th year of expansion. It also noted that the impact of the 3 recent hurricanes on US coastal regions but commented that the storms would only have a brief effect on the economy. In its statement the Fed pointed to continued job growth and to increases in household income and business spending. It also noted that inflation has weakened in recent months, but predicted a rebound next year approaching the target 2% annual pace, their expectations for employment are around 4% over the next 3 years. The Fed maintained its signal of one more additional hike this year and three hikes next year. Markets interpreted this mawkishly by sending EUR/USD lower and US Treasury yields higher. Markets are now pricing 60% probability of a December rate hike. Any dip in EUR/USD should prove shallow, short-lived and viewed as a buying opportunity. German elections are being held this weekend with current Chancellor Angela Merkel expected to win a 4th consecutive term. The new government’s appetite for deeper Eurozone integration will be critical in shaping ongoing investor expectations. Locally the focus has remained on the upcoming NZ election on Saturday with the NZ dollar moving up and down depending on which party is ahead in the polls. The last poll before Saturday shows the National party ahead enough to be able to form a Government, albeit with partners, but with the Brexit upset in mind, markets will remain nervous until the makeup of any coalition partners is known.

The Australian dollar had a choppy day yesterday after comments by RBA Governor Lowe, that there was little more that the RBA could do to boost the economy and that “other forces” were likely to be more important than Reserve Bank decisions about interest rates from here on.  The Australian dollar was on the back foot after his comments with the AUD/USD sliding lower to 0.7940. Later in overnight trading a downgrade by S&P of China’s sovereign credit rating, for the first time since 1999, to A+ from AA- and further dampened sentiment surrounding the China-proxy Australian Dollar. A drop of 5% in Iron ore prices saw the AUD/USD continue under pressure making a 0.7915 low. The AUD is currently trading at 0.7925 but the tone is negative with the next relevant support down at the 0.7870 level.

New Zealand
New Zealand dollar trading over the week has been dominated by political opinion polls and has ranged between 0.7432 -0.7246 against the USD. New Zealand economic data continues to be solid with this week's Global Dairy auction prices remaining firm and the Q2 GDP data posting gains. Next week will see the RBNZ OCR review, where we expect that the RBNZ is highly unlikely to alter the stance of monetary policy due to election uncertainty, fortunately the economic situation is such that the RBNZ can afford to sit on its hands. We expect no change in the OCR next week, and a repeat of previous monetary policy guidance. Overnight the NZD was knocked lower as better data saw the USD firm, it is currently now around 0.7286 and we expect very little change from current levels as we head into election weekend. Depending on the election result, next week could be choppy. If National win look for a relief rally in the NZD, but if the result is unclear or Labour and a selection of minor parties can form a coalition, look for an initial NZD sell-off come Monday morning.

United States
U.S. equity markets traded in one of the tightest ranges in history, with investors reluctant to add to bets that have pushed benchmark indexes to records. Money managers took some risk off the table in selling emerging-market stocks, which dropped in the wake of the Fed decision ahead of speeches by Federal Reserve officials that may offer further clues to the central bank’s thinking. Metals from copper to iron ore slumped. Gold was steady below $1,300 an ounce after dropping for two days. Investors are continuing to assess the China rating downgrade, along with the latest development with North Korea, after U.S. President Donald Trump ordered new sanctions on individuals, companies and banks doing business with the country. Economic data from the US has remained positive this week, with last night’s Philadelphia Fed Business Outlook coming in above expectations in September. Also back on the agenda is some progress on tax reform, a key plank of the Trump administration’s policies, with any move to implement these changes or other growth incentives seen as USD supportive. The USD ends the week well supported especially against the JPY where it has rallied up over the 112.00 level to currently sit at 112.10. Immediate resistance is at 119.86 a breach of which would open the way for 114.40 region.

United Kingdom
Positive talk from the Bank of England on the potential for rate increases has seen the UK Pound remain firm over the week with the GBP/USD currently at 1.3587. Economic data continues to be solid with yesterday’s August retail sales data showing a 1% surge in volumes for the month, beating expectations and July’s sales growth was revised up to 0.6%. Looking at the three months to August as a whole, sales growth versus the previous three months rose to 1.2% from a three-monthly rate of 0.7% in July. Later tonight British PM May will give a major speech in Florence on the Brexit process, which is seen as a key risk event. From tonight, there will be just 27 days to go until a crucial European Council vote on whether enough progress has been made on exit issues to move onto trade talks. So far, the UK and EU have made little headway on the key issue of financial liabilities, and the European Parliament is reportedly set to vote on a resolution in early October, noting there has not been 'sufficient progress' to justify moving negotiations forward. It is now thought that the UK is willing to make a net contribution of roughly €20 billion to ensure no other EU nation will need to make up a budget shortfall during a two-year transition. While PM May not quote a specific figure in the speech, the gesture may help to foster a slightly more constructive dialogue between both sides during the next round of talks on Monday. But it is unlikely to be enough to convince EU leaders that enough progress has been made.

Main event for the Eurozone are the upcoming elections on Sunday for Eurozone leader and Europe's “banker”, Germany. This is expected to provide a commanding win by the current Chancellor Angela Merkel’s Christian Democratic Union (CDU), if polls are any indication. Merkel’s party has continued to lead in polling by double-digits over its closest rival, Shulz’s Social Democratic Party (SDP). The real risk for the euro does not necessarily lie in the unlikely event of Shulz becoming the new Chancellor, but in the ascendance of the anti-immigration and anti-EU party, Alternative for Germany (AfD), which has recently taken third place in polling at around 12% to the CDU’s 37% and the SPD’s 20%. Though it is highly unlikely that the AfD will command enough votes to even be considered for any part in a new coalition government, the threat of the AfD performing well in the elections and potentially being represented in the Bundestag will be of primary concern with respect to the Euro. If the German elections turn out as widely expected, EUR/USD could see a boost as election risk is taken off the table. In this event, a rally back up to 1.2100 could occur, with any further rise above 1.2100 confirming a continuation of this year’s sharp bullish trend.

USD/JPY has been the hardest hit on the back of the market's reaction to the FOMC announcement on Wednesday and dovish BoJ outcome. Despite Japan’s strong economic performance this year, the virtual absence of wage inflation and the stubbornly low levels of price pressures will ensure that the Bank of Japan will remain a laggard in terms of monetary policy normalisation. Theoretically this should disadvantage the yen. However, the performance of USD/JPY this year has been guided by the carry trade on one side and safe haven demand on the other.  This week’s rebuilding of risk appetite and yesterday’s hawkish Fed has pushed USD/JPY to its best levels since mid-July. After a high of 112.71 overnight the USD/AUD is back trading around 112.10 with support at 111.75 and immediate resistance at 112.85. These levels should hold into next week.

After recording its fifth straight daily gain yesterday, the USD/CAD has gone into a consolidation phase and traded in a narrow 40-pip channel yesterday. Currently the pair is around 1.2320. Now looks a little directionless after dropping back from 1.2388 earlier in the week with the lower crude oil price not helping. Later tonight Canadian the retail sales and the CPI data will be released. On a monthly basis, consumer inflation in Canada is expected to rise by 0.2% after staying unchanged in July. An upbeat CPI reading could help the CAD start correcting its losses against the greenback. However, with heightened expectations of a Fed December rate hike, the USD is likely to continue to be the primary driver of the pair's movements. Immediate support is at 1.2280 with resistance up at 1.2410, these levels should hold out into early next week.