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Economies of Note - 5th February

Written by Ian Dobbs on February 5th, 2016.      0 comments

A sharp downwards correction in the USD has seen the AUD lift sharply in trade this week. The gains have accelerated towards the latter part of the week as the USD suffered from extended positioning covering, further weak data flow. Adding to the move were cautionary comments from various Fed officials, which echoed those issued at the FOMC meeting last week. The RBA cash rate meeting on Tuesday passed without too much fuss after the RBA kept the cash rate at 2% as widely expected. The statement was a re-write of the previous statement and included the bank keeping its options open for further easing if deemed necessary. Data released so far this week has included better than expected building approvals numbers and a miss in the December trade balance. The NAB quarterly business confidence series was seen improving from the prior release. Focus for the AUD turns to the RBA Monetary Policy Statement and retail sales data this afternoon, U.S. employment data will feature tonight in offshore trade. A low weight local data calendar means the AUD will again take its cue from offshore events next week.
New Zealand
The NZD has put on a strong showing this week, it’s best so far in 2016. The rally comes on back of a number of factors, although a sharply lower USD in the last two days has been the primary driver of the move. This comes as the market took heed of overweight positioning, a more cautionary U.S. Fed last week, softer data and comments from the Fed’s Dudley (amongst others) this week. These comments noted the considerably tighter financial conditions since the last FOMC meeting.  Local data of note this week included the Q4 labour market figures on Wednesday which saw the unemployment rate fall to 5.3% in the three months to December, much lower than the 6.1% expectations. The number marked the lowest point since March 2009. The employment gain exceeded the forecasts, although the sharp fall in the unemployment rate was abetted by growth in the number of people not looking for work. Earlier on Wednesday the latest GDT dairy price data auction showed another sharp fall (-7.4%), although the print was less than the double digit losses feared from the futures market pricing. Comments from the RBNZ Governor also contributed to the strong trading tone, this after the market hitched on to the comment pertaining to an inappropriateness on the fixation with headline inflation. This a factor which has recently had many in the market hiking the probability for further rate cuts in 2016, especially after the recent weak Q4 inflation data. Focus for the NZD now turns to the key U.S. employment data due for release tonight, the data calendar locally for next week is quiet, this will ensure that the NZD again takes its cue from the overall USD sentiment.
United States
The USD (DXY) index has fallen heavily in recent trade, the move lower over the last 48 hours is the heaviest decline seen since late August 2015. The move comes on the back of a shift in the over-extended positioning which has seen many USD longs (bought positions) head for the exits. The shift gathered pace this week after further comments from Fed officials which point towards a raised level of caution from within the Fed’s ranks after the recent global financial market turmoil. The comments have echoed those which came out of last week’s FOMC meeting and come on the back of further data flow this week which has failed to inspire the USD bulls. The data included a miss in U.S. factory orders and jobless claims overnight, misses in the manufacturing PMI, ISM manufacturing PMI, ISM non-manufacturing PMI, and services PMI numbers earlier in the week. Durable goods data and the Q4 GDP release last week also failed to meet the consensus forecasts. Market attention will now turn to tonight’s important U.S. non-farm payrolls employment report, where a strong showing will be needed to stem the current tide of heavy USD selling.

United Kingdom
The GBP has continued to move higher in trade this week. The move has mirrored those seen in the other key currencies covered and comes amidst the large downwards correction seen in the USD which has accelerated in the last two trading days. Overweight USD positioning that has been extended for a significant period has caved this week. This comes under the weight of a further downturn in the U.S. data flow and an increase in the commentary emanating from Fed members which appears to acknowledge the increased global uncertainty. These factors have seen the market further discount the number of likely Fed rate hikes for 2016, especially after the similar more dovish notes struck at last week’s FOMC meeting. The local data calendar in the U.K. was dominated by the BOE interest rate meeting overnight. This saw the BOE leave rates on hold (0.5%) with the board moving to a unanimous 9-0 decision. The depressing effect on inflation of the low oil price and earlier GBP strength were seen as key reasons for the decision. The BOE also downgraded their growth forecast for 2016, although Governor Carney noted that the entire board believed the next move in rates would be up. Earlier in the week saw the release of Manufacturing and Services PMI data which beat the market’s expectations, the construction print which declined on the month prior failed to meet the consensus forecast. Of interest next week will be the release of the U.K. industrial and manufacturing production data on Wednesday.
The EUR has made solid gains during the latter part of this week. These gains have come on the back of the wholesale unwinding of over-extended long USD positioning , especially so over the last 48 hours. Comments from various Fed officials which have taken heed of the more uncertain global financial environment have helped fuel the reversal in the bullish USD sentiment, although a continued downturn in the data flow has also played a part this week. Data out of Europe this week included composite PMI data which marginally topped the consensus forecasts. Earlier in the week the manufacturing PMI print failed to meet the expectation. Labour market data for the euro-zone showed an unemployment rate at 4-year lows (10.4%), whilst in Germany the unemployment rate fell to 6.2%, multi-decade lows. Comments from ECB president Draghi overnight which reiterated the case for easier monetary policy failed to dent the sentiment which continued to reflect the disposition against the USD. Next week’s data calendar includes the euro-area GDP and industrial production prints. All eyes today will be on the release of the U.S. employment numbers tonight.

Losses in the JPY post the BOJ easing have quickly reversed in trade this week. This comes on the back of a large shift in USD sentiment which has seen the market move to unwind extended long positioning over the last three trading days. The prevailing USD sentiment has taken a significant step back in recent days and comes amidst a series of softer than expected recent U.S. data flow. This coupled with commentary from various Fed officials which have reiterated last week’s more cautionary message which emanated from the FOMC. The data calendar from Japan has been light this week, but included a decline in household confidence and slight miss in the manufacturing PMI data. The data came on the back of last Friday’s heavy release schedule which saw declines in industrial production and household spending and another weak inflation outturn. Inflation has continued to be a bug bear for the BOJ and was seen as one of the primary reasons for them moving to a negative deposit rate for the first time last week. Next week’s calendar whilst busier, is once again low impact in nature and should take a back-seat to the prevailing USD and risk sentiment.

The CAD has continued its march higher against the USD this week. This comes on the back of a firming oil price that has benefitted from continued rumours on a potential deal between Russia and OPEC to cut production. Other oil dependant countries are pressing for an emergency meeting between the OPEC and non-OPEC producers in order to reach an agreement to curtail production. This comes as other countries look to join Azerbaijan and Nigeria in asking for international financial help. However, the CAD gains moderated in overnight trade on the back of a retracement in oil after Saudi Arabia remained non-committal on an OPEC meeting. Canadian employment data and the Ivey PMI will garner market interest when it is released tonight, although they will likely take a back seat to the simultaneous release of U.S. employment data and further oil market developments.