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Economies of Note - 6th May

Written by Ian Dobbs on May 6th, 2016.      0 comments

The AUD has fallen heavily against the USD (up to 3.5%) during trade this week. The move began suddenly on Tuesday after the RBA moved rates lower for the first time in a year cutting the cash rate to fresh historical lows of 1.75%. The market had been evenly divided heading into the decision after expectations lifted post last week’s notable Q1 inflation miss. The RBA justified the move on the back of inflation which had been low for some time, and as subdued labour costs and low cost pressures globally point to a lower outlook for inflation than previously forecast. Pressure has continued to bear on the AUD over the week on the back of weaker key commodity prices and weakening global equities which have suppressed demand for the key risk currencies. Other data of interest during the week included better than expected Building Approvals numbers released just prior to the RBA decision. Retail sales data released yesterday showed a continuation of the recent subdued trend after the quarterly inflation adjusted number missed expectations. Trade data for March showed a lower than expected deficit, whilst HIA New Home Sales jumped sharply from the month prior. Attention to finish the week will now turn to the RBA Monetary Policy Statement this afternoon and the US employment numbers tonight.

New Zealand
The NZD strength seen at the start of the week proved temporary after the local unit fell quickly from its highs (again just above .7050) on Tuesday. The move began after the RBA cut its cash rate to new lows (1.75%) which saw the AUD and NZD (less so) fall heavily in the afternoon. Further declines have been noted during a week which has seen selling of commodity currencies (the broad CRB commodity index has declined over the week) and those with a risk link as key global equity bourses declined overall. Key local data events included the latest release of the GDT dairy auction pricing and NZ employment data on Wednesday. The dairy auction defied expectations of a small rise by falling 1.4% overall. The weak result comes during a time of on-going NZD strength and during the seasonal low point of GDT supply. These factors will likely pressure Fonterra’s opening milk price forecast at the end of the month. The labour market data released later in the morning was more positive however after employment rose 1.2% over Q1 (beating expectations). The rebound in the participation rate which eventuated was expected after the last quarter’s decline, this saw the unemployment rate lift to 5.7% overall (worse than expectations.) Look to tonight’s US employment data to set the tone of trade heading into next week.

United States
The USD has recoiled strongly this week to sit higher on the week so far in current trade. The move followed the sharp selloff which saw the USD (DXY index) trade to levels not seen since the start of 2015. The re-bound comes amid weakening risk sentiment. This change in momentum has no doubt been aided by weakness in the commodity currencies (most notably the CAD and AUD), and poor UK data and to a much less extent misses in many euro-zone numbers. Data out of the US during the week has been mixed after it started with ISM manufacturing and construction spending data, which both missed the consensus. The ADP employment report was disappointing, although both the Services PMI and ISM Non-Manufacturing data beat expectations. Comments from Fed members Lockhart and Williams both provided a moderately hawkish view on rates, although currently the markets prices a 10% chance of a Fed hike in June. Focus for today now turns to the all important non-farm payrolls employment release tonight. Expectations are for a 200k gain in jobs, although wages growth will also be closely examined for signs of reducing slack in the labour market.

United Kingdom
The GBP has reversed sharply in trade against the USD this week after threatening to challenge its 2016 New Year highs earlier in the week. PMI data reads have dominated the UK data calendar this week. The data for all three PMI releases was underwhelming after the overnight services read joined the earlier manufacturing and construction reads in missing expectations, all by decent margins. The rally to above 1.4750 ahead of the first in the trifecta of soft releases, set the GBP/USD up for a decent decline. The rally appears to be based on a weaker USD and shifting opinion polls (in favour of the UK remaining within the EU), rather than recent economic data which has been on the whole largely disappointing. Look for US data tonight to drive direction to end the week. Next week’s releases include UK Manufacturing and Industrial Production numbers on Wednesday which will be followed by the BoE central bank meeting on Thursday.

The EUR has fallen sharply against the USD from its earlier highs above 1.1600, which were set in the middle of this week. The weakness mimics that seen by the other currencies covered this week. The decline came after the USD reversed course on Wednesday amid positive comments from the Fed’s Lockhart on rates for the June US FOMC meeting. Adding to the move was a weakening in risk sentiment amid weakening oil pricing and an earlier RBA rate cut. Data released during the week out of Europe began with a small upside surprise in the latest euro-zone manufacturing PMI data. Further PMI data included marginal misses in the German/Euro-zone Services and German Composite PMI reads. Other events of interest in the holiday affected week included economic forecasts from the EU Commission. These echoed those published by the ECB in March. Forecasts included slightly reduced GDP, and public sector debt (as a % of GDP), and declining unemployment as easier monetary policy, lower oil prices and a more competitive exchange rate  supports growth across the euro-zone. Look for tonight’s US employment data to set sentiment to conclude the week.

The volatility in the JPY which has greatly reduced this week was to be expected after last week’s extremely busy trade that followed the latest BOJ meeting. Prices have eased slightly against the USD on the week overall, albeit after cycle highs were set against the USD.  Adding to quiet trade was the fact the Japanese market has been on Golden Week holiday break. The break has ensured a lack of incoming data, although the manufacturing PMI number released on Monday marginally topped expectations. Trade looks set to pick up today with the return of the Japanese market and release of the key US Non-farm payrolls numbers tonight. Market expectations centre on a gain of 200k jobs for April, look for further JPY gains should the headline data disappoint. Next week is set to be another quiet week with only low impact data scheduled for release. This should see risk sentiment and US data-flow return as key determinants for the JPY’s next move.

The CAD has fallen heavily against the USD since our report earlier in the week (~3.4% highs/lows). The move features as the sharpest plunge so far in 2016.This comes after stellar performance this year, which had seen the CAD appreciate over 15% against its US counterpart. The move this week came on the back of weaker commodity prices. A declining oil price occurred on the back of news from OPEC delegates that discussion to freeze production at the June OPEC meeting was now off the table. However, prices have recovered somewhat in recent trade on the back of supply concerns from conflict in Libya and a large wildfire in Canada. Trade data for March released on Wednesday saw the monthly trade deficit expand to its widest monthly number ever. This was brought about by the value of commodity exports declining heavily. The deficit was almost 2 1/2 times worse than expected and the data was made worse by revisions to the February numbers. The degree of the miss has held the CAD back from enjoying any oil price tailwind in recent trade. Other data of note included better than expected manufacturing PMI numbers and a sharp fall in March building permits. Focus for today turn’s to the simultaneous release of the US and Canadian employment data tonight. The Canadian Ivey PMI will be released shortly thereafter.