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Economies of Note - 29th September 2017

Written by Howard Wilcox on September 29th, 2017.      0 comments

It has not been a great week for the Australian dollar. It has never recovered the 0.8000 benchmark, falling from 0.7972 earlier in the week through support at 0.7870 to a low of 0.7798 yesterday. It’s now back at 0.7845 with the still solid gold price providing some support. There is little in the way of economic data for the AUD today and we expect consolidation at current levels to see the week/month/quarter out, having lost nearly 3 cents against the USD since the start of the month. Given the likelihood of continuation of Nth Korean tensions the risk sensitive AUD remains vulnerable to more downside, allied with China data remaining soft (there will be no China data next week due to the China National Day holiday which lasts most of the week). Immediate support is at 0.7805/10 against the USD with upside resistance initially at 0.7930. We favour downside pressures remaining next week with a break of AUD/USD 0.7805 targeting 0.7740.

New Zealand
The RBNZ left the OCR rate on hold at 1.75% yesterday (much as expected), with its bottom-line guidance for monetary policy unchanged. The most important change was an apparent downgrade to the RBNZ’s GDP forecast, due to the stalled construction sector. The statement repeated the bottom line guidance that has been pretty much unchanged all year: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly." With the post-election environment uncertain, as per usual with all central banks when there is no clear direction the best decision is to play the safe course and do nothing. However, if the construction sector and housing market remain subdued but the exchange rate has not appreciatively fallen, look for the November MPS to downgrade the OCR forecast. The New Zealand dollar initially traded down to 0.7197 against the US unit after the OCR release, but it then managed a gradual recovery at the start of Asian trading to the 0.7920/25 level. Currently the NZD/USD is around 0.7230 marginally firmer after the USD was on the back foot overnight. Overall the NZD has shown good resilience this week and has managed to hold well against its major trading partners in the face of an uncertain election result and the “on hold” RBNZ statement. However risk remains to the downside as US data and comments from US Fed officials continue to point to the inevitability of higher interest rates, we foresee another test of 0.7130/50 in the week ahead.

United States
U.S. equities tracked higher to record levels overnight  heading for an eighth straight quarterly gain, while the dollar was on the back foot traders investors studied the implications of President Trump’s tax proposal. The S&P 500 has increased around 3.5% over the last 3 months and ended last night’s session at an all-time high. The final appearance of the long awaited  Trump tax plan, although short on details, is widely expected to be a boon for business and the wealthy, with specific tax cuts aimed at them. However the lack of detail leaves investors only able to speculate what parts of the tax package will be prioritised by the Trump administration and what trade-offs have to be conceded for  it to garner sufficient support to pass through the Congressional process. The key question is how you can fund an additional $1.5 trillion expenditure over a decade without materially increasing the deficit and blowing out the national debt. That alone sets up a huge battle in Congress. With the end of the week/month and 3rd quarter tonight and the lack of clarity around the tax package the USD was hit by profit taking as investors exited previous long USD positions and closed lower against most of its trading partners. However we believe any dollar weakness should be temporary, as the Nth Korean situation is likely to remain volatile, economic data continues to be overall supportive of a December Fed rate hike and details of the tax package will emerge over the next few weeks.

United Kingdom
The UK Pound, after falling to fresh two-week low of 1.3342 yesterday, saw a pickup in buying interest which saw it rally back over the 1.3400 against the USD to a 1.3455 high overnight.  It has since pulled back from this level currently sitting at 1.3420 between 1.3146 and 1.3653. Bank of England governor Carney commented overnight that the Central Bank has limits on what it can do to solve economic problems derived from Brexit. Later during the European session, the EU's chief Brexit negotiator Barnier said that it was a "constructive week" but progress achieved was limited, and that could take months to progress to the next phase. Tonight, the UK will finally release some local data, including Q2 GDP revisions and money figures for August. The tone for the GBP remains positive, with immediate resistance at the 1.3460 level which if broken on positive UK data tonight would target an extension to the 1.3510 level. Support is at the physiological 1.3400 level and then 1.3340. We favour the upside.

We have seen choppy trading over the week for the Euro after the German election. The EUR/USD has been consolidating in a range between 1.1804 and 1.1716 over the last 3 days, with rallies fading but although with higher lows, something not seen earlier this week, as month-end typically sees some profit taking and squaring up. Fundamentally there is little to support EUR upside in the short term, as traders look to see some action from the ECB, rather than just talk around timing of a reduction in their Quantitative Easing programme. German CPI will have little effect as there are only two states at or above the ECB’s 2% inflation target and ECB head Draghi confirmed that the ECB is not yet in a position to start cutting QE yet. Currently at 1.1780 immediate support for the EUR/USD is at 1.1765 with resistance at 1.1800 then 1.1850. The pair should consolidate around 1.1770/90 to end the week.

After a high of 113.25 on Wednesday the USD/JPY is back at 112.60 after mixed data for Japanese retail sales and industrial production yesterday. Japan August core consumer prices rose 0.7% y/y, marking an eighth consecutive month of yearly increases, according to Reuters. Retail sales increased 1.7% last month compared with the previous year, missing a median estimate for a 2.6% rise. Industrial production data, however, beat forecasts. August figures showed an increase of 2.1% compared with the previous month, above the 1.9% median forecast. The election race has kicked off, but the consensus is that current PM Abe should be returned for another term. Investors are more likely to focus on the fact that BOJ's call for more easing to stimulate domestic demand to counter the impact of the consumption tax hike scheduled in October 2019. This continues place the JPY in the crosshairs in the current rising global rate environment. Immediate support is at 112.25 with resistance at 112.90. We expect these ranges to hold to close the week tonight.

Comments from the BoC Governor on Wednesday struck a sobering tone listing a range of uncertainties casting shadows on the economic outlook. This poured cold water on market expectations for a relatively aggressive tightening path that had been pricing at least one 0.25% hike before year-end and another by March 2018. The USD/CAD ranged higher after these comments to 1.2517, it has since dropped back to trade around 1.2442 helped by the softer USD tone overnight. Immediate resistance is at 1.2520 with support back at 1.2415.